Price/Pricing Strategy One of the 4Ps

MarketingSuccessful companies are due to Customer focusHeavy commitments to marketingShare absolute dedication to sensing, servicing and satisfying needs of customers in a well defined target market Marketing is delivery of customer satisfaction at a profitGoal of marketing is to attract new customers by offering superior value and keep current customers by delivering satisfactionMarketing is not only telling and selling but satisfying customers needsSelling occurs only after the product is producedBut marketing starts long before a company has a product It does its home work to assess needs, volumes, longevity, and how profitable it will beIt continues throughout products life

Marketing Mix (4 Ps)

The marketing mix principles are controllable variables which have to be carefully managed and must meet the needs of the defined target group. All elements of the mix are Linked and must support each other.ProductPricePromotionPlace

Marketing Mix Strategy/Role of Price in itIt is the only mix, which generates a turnover for the organization. It is also flexible unlike product features and channel communication

The remaining 3ps are the variable cost for the organization. It costs to produce and design a product, it costs to distribute a productIt costs to promote it.

Price decisions must be coordinated with other marketing mix tools like product design, distribution, promotion to form a package

Pricing is difficult and must reflect supply and demand relationship. Pricing a product too high or too low could mean a loss of sales for the organization.

ProblemsCut prices Too cost oriented rather than customer- value oriented Not revised often enough to reflect market changes

Marketing Mix strategy/Role of Price in itCompanies often decide pricing and then have other marketing mix decisions Best strategy is not to charge the lowest price but rather to differentiate marketing offer to make it worth a higher priceArrow ,Guess, Nike, Adidas, Mango (premium brands)Park Avenue, Spykar, STOP, Bata, Cambridge,Perfumes- Hugo Boss, Issey miyake, Gucci,

TrendHistorically, it was negotiation- the barterThen fixed price policiesBut influence of internet is now resulting in dynamic pricingAirlines, hotels, purchase of any item can be negotiated on the netAuctions of airline tickets, and various consumer products

How Price affectsFierce and fast changing pricing environmentDifficult to raise prices and often pressure to slash pricesIt is affecting everything from Consumer durables, autos, hotels, phone services, banking services, chemicals, steel, aluminum etc.Cutting prices not always the best answerLost profits and damaging price warsSignals to customers that price is more important than brandCompanies should sell value not price by convincing customers that paying a higher price for the companys brand is justified by the greater value it deliversThe challenge is to find the price that will let the company make a fair profit by harvesting the customer value it creates

Different Names for Prices in ServicesPrice all around usRent for propertyFees for education or consultancyFare for Airlines, Railways, TaxiInterest rates in Bank or other loansSalary for ExecutivesWages for WorkersPremium in insuranceCommission in advertisingToll in road or bridge useAdmission ticket in museums, or cinema halls

How do you define Price

In simple words, Price is amount of money charged for product/ services

Comprehensively, sum of all values that Consumers exchange for the benefits of having or using product/ services

Factors to consider when setting pricesPricing decisionsInternal FactorsMarketing objectivesMarketing Mix strategyCostsExternal FactorsNature of market anddemandCompetitionOther environmental factors

Internal FactorsMarketing objectivesDecide strategy for the productHow are you positioning your product in the market? Is pricing going to be a key part of that positioning? If you're running a discount store (Dollar Store), you're always going to be trying to keep your prices as low as possible (or at least lower than your competitors). Also Low cost Airlines. Low price examples- Zenith computers vs HP or Sony

On the other hand, if you're positioning your product as an exclusive luxury product, a price that's too low may actually hurt your image. ( Mont Blanc Pens)Positioning-(Toyota-Lexus), Plasma TV( Sony)

PRICE & POSITIONING-Internal FactorsPrice is a crucial product positioning factorStarts with deciding target cost and work back to designing productThis is called Target costingExample Swatch- buyers wanted low-cost fashion accessory that also keeps time. Reliability, precision, durability were expectations and low costsIt developed a revolutionary automated process for mass producing new watchesThe pricing has to be consistent with the positioning. People really do hold strongly to the idea that you get what you pay for.

COSTSCalculate the fixed and variable costs associated with your product or service. How much is the "cost of goods", i.e., a cost associated with each item sold or service delivered, and how much is "fixed overhead", i.e., it doesn't change unless your company changes dramatically in size. Costs at different levels of productionRemember that your gross margin (price minus cost of goods) has to amply cover your fixed overhead in order for you to turn a profit. Many under-estimate this and it gets them into trouble. Airlines fixed cost dominate, Flight crew (7%), Fuel(15%), maintenance (10%) are fixed costs. If they fly with few passengers, they can only save the above, but what about the rest?

Demand Curve- The external factorHow will your pricing affect demand? You're going to have to do some basic market research to find this out, even if it's informal. Get 10 people to answer a simple questionnaire, asking them, "Would you buy this product/service at X price? Y price? Z price?" For a larger venture, you'll want to do something more formal, of course -- perhaps hire a market research firm. But even a sole practitioner can chart a basic curve that says that at X price, X' percentage will buy, at Y price, Y' will buy, and at Z price Z' will buy.

Pricing in different types of market- the external factor- Pure Competition marketMany buyers and sellers. No single buyer or seller has much effect on the going market priceSeller cannot charge more than the going price because buyers can get as much as they want from another source. Nor sellers will charge lessIn such a market, marketing, marketing research, product development, pricing advertising and sales promotion play little or no role( gold, steel, wheat, sugar etc)

Monopolistic competition

Many buyers and sellersRange of prices rather than a single priceThis due to sellers can differentiate their offers to buyersPhysical products vary in quality, features, styles or serviceSellers create quasi-monopoly for its productsOffers to different segments and freely use branding, availability, advertising, and personal selling

Oligopolistic competition

Few sellers that are highly sensitive to each others pricing and marketing strategiesSteel/aluminium or cars/computersDifficult for new sellers to enter the marketEach seller is alert to competitors strategies and moves.Never sure whether it will gain anything permanent through price cut

Pure monopoly

Market is of one sellerMay be government or a power company or a company like Microsoft selling WindowsPricing handled differentlyCan keep prices below cost (social cause)Petrol or diesel prices

Competition- an external factorTheir costs, prices and offersCannon camera, and hosts of choices like Minolta, Nikon, Pentax are considered by the customerIf Canon follows high-price, high margin strategy, it may attract competitionNeed to benchmark its costs against competitors costs to learn whether it is operating at a cost advantage or a disadvantageNeed to learn the price and quality of each competitor

ENVIRONMENTAL FACTORSAre there any legal or other constraints on pricing? For example, recent ruling on builders about rate per carpet area should be charged and not on super-built area Also, what possible actions might your competitors take? Will too low a price from you trigger a price war? Find out what external factors may affect your pricingEconomic factors like the interest rates, income tax rates, import duties, local charges can impact prices

Common Company ObjectivesSurvival excess capacityCurrent profit maximizationMarket share maximizationProduct quality leadership

Canon/Sharp for low priced faxesXerox for high-end Ford with Limited editionRetail chain sometimes set prices to prevent competition from entering market or set prices at competitors levels to stabilize marketPrices are also kept for loyalty and support of resellersCan be reduced temporarily to create excitement for a product or draw more customers into retail stores( Big Bazar sales for 2 days? Also barter old items.So pricing may play an important role in helping accomplish companys objectives at many levels

Main goals in pricingProfit oriented toTo achieve target return on investment or net salesMaximize profitSales oriented toIncrease salesMaintain or increase market shareStatus oriented toStablize pricesMeet competition

Pricing ObjectivesShort-term profit maximization cash flow is the overriding consideration. It's also common among smaller companies hoping to attract venture funding by demonstrating profitability as soon as possible.

Pricing Objectives. Short-term revenue maximization Maximize long-term profits by increasing market share and lowering costs through economy of scale. Examplenewly public company, revenues are considered more important than profits in building investor confidence. Higher revenues at a slim profit, or even a loss, show that the company is building market share and will likely reach profitability. Amazon.com, for example, posted record-breaking revenues for several years before ever showing a profit, and its market capitalization reflected the high investor confidence those revenues generated. Opportunities exist during festival season, marriage season, holiday season

Pricing ObjectivesMaximize quantity May be to focus on reducing long-term costs by achieving economies of scale. Maximize market penetration - particularly appropriate when you expect to have a lot repeat customers. Examples are when old car/mobile models are to be discontinued and new models introduced

Pricing Objectives Maximize profit margin This strategy is most appropriate when the number of sales is either expected to be very low or sporadic and unpredictable.

Examples include custom jewelry, art, hand-made automobiles and other luxury items.

Pricing Objectives DifferentiationAt one extreme, being the low-cost leader is a form of differentiation from the competition.

At the other end, a high price signals high quality and/or a high level of service.

Some people really do order lobster just because it's the most expensive thing on the menu.

Pricing ObjectivesSurvival such as a price warmarket decline or market saturation

you must temporarily set a price that will cover costs and allow you to continue operations.

Models for calculating Price Cost-plus pricing Production cost, including both cost of goods and fixed costs at your current volume, plus a certain profit margin.

You decide that you want to operate at a 20% markup, so you add $10 (20% x $50) to the cost and come up with a price of $60 per unit.

So long as you have your costs calculated correctly and have accurately predicted your sales volume, you will always be operating at a profit.

Calculating price- Target return pricing Set your price to achieve a target return-on-investment (ROI). For example, let's use the same situation as above, and assume that you have $10,000 invested in the company. Your expected sales volume is 1,000 units in the first year. You want to recoup all your investment in the first year, so you need to make $10,000 profit on 1,000 units, or $10 profit per unit, giving you again a price of $60 per unit.

Calculating price- Value-based pricing Price your product based on the value it creates for the customer. Usually the most profitable form of pricing, if you can achieve it. The most extreme variation on this is "pay for performance" pricing for services, in which you charge on a variable scale according to the results you achieve.Saves the typical customer $1,000 a year in, say, energy costs. In that case, $60 seems like a bargain - maybe even too cheap. H

Calculating Price- Popular price points aka psychological pricingThere are certain "price points" (specific prices) at which people become much more willing to buy a certain type of product. For example, "under Rs100" is a popular price point. Rs.49, Rs.99 (notice how many fast-food places have a "value menu"). BATA famous for Rs.499/ Rs.999

Calculating Price - Fair pricing - Sometimes it simply doesn't matter what the value of the product is, even if you don't have any direct competition. There is simply a limit to what consumers perceive as "fair". If it's obvious that your product only cost $20 to manufacture, even if it delivered $10,000 in value, you'd have a hard time charging two or three thousand dollars for it -- people would just feel like they were being gouged.

Pricing Strategy Matrix

Marketing Mix- The PricePricing StrategiesPenetrationSkimmingCompetition Product lineBundlePsychologicalPricing is the only mix which generates a turnover for the organization.The remaining 3ps are the variable cost for the organization. It costs to produce and design a product, it costs to distribute a product and costs to promote it.Price must support these elements of the mix. Pricing is difficult and must reflect supply and demand relationship.

Premium/Penetration/EconomyPRICINGPremium Pricing.Use a high price where there is a uniqueness about the product or service. This approach is used where a a substantial competitive advantage exists. Such high prices are charge for luxuries such as Gucci, Raybans Savoy Hotel rooms, and Concorde flights.Penetration Pricing.The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased. This approach was used by Mobile Companies (Tata Indicom or Reliance) or Introductory prices and offers like personal care products- Lux Body wash/Maggi sauces Economy Pricing.This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. Supermarkets often have economy brands for soups, spaghetti, etc.

Skimming Price Skimming.Early stages of a product life cycleCharge a high price because you have a substantial competitive advantage. However, the advantage is not sustainable. The high price tends to attract new competitors into the market, and the price inevitably falls due to increased supply. Manufacturers of digital watches used a skimming approach in the 1970s. Once other manufacturers were tempted into the market and the watches were produced at a lower unit cost, other marketing strategies and pricing approaches are implemented.Premium pricing, penetration pricing, economy pricing, and price skimming are the four main pricing policies/strategies.

Psychological/ Product LinePsychological Pricing.This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis. For example 'price point perspective' 99 cents not one dollar.Product Line Pricing.Where there is a range of product or services the pricing reflect the benefits of parts of the range. For example car washes. Basic wash could be $2, wash and wax $4, and the whole package $6.

Optional/Captive/Product Bundle PricingOptional Product Pricing.Companies will attempt to increase the amount customer spend once they start to buy. Optional 'extras' increase the overall price of the product or service. For example airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.Captive Product PricingWhere products have complements, companies will charge a premium price where the consumer is captured. For example a razor manufacturer will charge a low price and recoup its margin (and more) from the sale of the only design of blades which fit the razor.Product Bundle Pricing.Here sellers combine several products in the same package. This also serves to move old stock. Videos and CDs are often sold using the bundle approach

Promotional/Geographical/Value PricingPromotional Pricing.Pricing to promote a product is a very common application. There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free).Geographical Pricing.Geographical pricing is evident where there are variations in price in different parts of the world. For example rarity value, or where shipping costs increase price.Value Pricing.This approach is used where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales e.g. value meals at McDonalds.

*Pricing Strategies PenetrationSkimmingCompetitionProduct LineBundlePsychological