Q: When you set the price for your products or service, what factors influenced you? Pricing decisions are influenced by various factors: Cost of the product Economic conditions Competition Customer needs and characteristics (age, taste, geography) Company objectives NEXT SLIDE
This chapter, the second of four on the marketing function, gives you a close look at two elements of the marketing mix: product and price. The exploration of price starts with a rundown of the major types of products, the life cycle that most products progress through from introduction to the point at which they’re removed from the market, and the process companies use to create new products. Following that, you’ll learn about the techniques used to identify products: branding, packaging, and labeling. The final product discussion involves the decisions companies make when managing multiple families of products. The chapter wraps up with a look at pricing strategies.
Most manufacturers design a product, then try to figure out how to make it for a price. But recent thinking holds that cost should be the last item analyzed in the pricing formula, not the first. Companies that use priced-based pricing can maximize their profit by first establishing an optimal price for a product or service. The product's price is based on an analysis of a product's competitive advantages, the users' perception of the item, and the market being targeted. Once the desired price has been established, the firm focuses its energies on keeping costs at a level that will allow a healthy profit. Optimal pricing uses computer software to generate the ideal price for every item, at each individual store, at any given time. Research shows that many retailers routinely underprice or overprice the merchandise of their shelves. They generally set a price by marking up from cost, or by benchmarking against the competition’s prices, or simply by hunch. A product's price seldom remains constant and will vary depending on the product's stage in its life cycle. During the introductory phase, for example, the objective might be to recover product development costs as quickly as possible. To achieve this goal, the manufacturer might charge a high initial price — a practice known as skimming — and then drop the price later, when the product is no longer a novelty and competition heats up. Rather than setting a high initial price to skim off a small but profitable market segment, a company might try to build sales volume by charging a low initial price, a practice known as penetration pricing. This approach has the added advantage of discouraging competition, because the low price (which competitors would be pressured to match) limits the profit potential for everyone.
Once a company has set a products’ price, it may choose to adjust that price from time to time to account for changing market situations or changing customer preferences. Three common price adjustment strategies are price discounts, bundling, and dynamic pricing. When you use discount pricing, you offer various types of temporary price reductions, depending on the type of customer being targeted and the type of item being offered. Sometimes sellers combine several of their products and sell them at one reduced price. This practice, called bundling, can promote sales of products consumers might not otherwise buy — especially when the combined price is low enough to entice them to purchase the bundle. Dynamic pricing is the opposite of fixed pricing. Using Internet technology, companies continually reprice their products and services to meet supply and demand. Dynamic pricing not only enables companies to move slow selling merchandise instantly but also allows companies to experiment with different pricing levels. Because price changes are immediately posted to electronic catalogs or websites, customers always have the most current price information.
Pricing Strategies and Tactics Khaja Hammad uddin
Deliberate price cutting or offer of ‘free gifts/products’ to force rivals (normally smaller and weaker) out of business or prevent new entrants
Anti-competitive and illegal if it can be proved
Typical of oligopoly with collusion
Microsoft – have been accused of predatory pricing strategies in offering ‘free’ software as part of their operating system – Internet Explorer and Windows Media Player - forcing competitors like Netscape and Real Player out of the market
Predatory Pricing The practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market.
Marginal cost – the cost of producing ONE extra or ONE fewer item of production
MC pricing – allows flexibility
Particularly relevant in transport where fixed costs may be relatively high
Allows variable pricing structure – e.g. on a flight from London to New York – providing the cost of the extra passenger is covered, the price could be varied, a good deal to attract customers and fill the aircraft.