1. To indicate the importance and complexity ofprice decisions for marketing managers.2. To consider what is „price‟.3. To identify factors internal to the firm thatinfluence price decisions.4. To identify the factors external to the firm thatinfluence price decisions.5. To know when to cut price, when to increase, andwhen to sell below cost.
PRICE -It is the amountof money charged for“something”. PRICING- It is thetwin brother of productquality which whencombined make up of whatis called product value.
It can be defines as“reasoned choice” from aset of alternative pricesthat aim at profitmaximization within aplanning period inresponse to a givenscenario.
Pricing has the dual marketingfunction:•Making products affordable to itstarget market•Reflecting the value of theproduct
To make the price of a productaffordable and attractive to morecustomers, firms offer installmentplans. By direct sellers By firms in franchising By retailers
Product cost must be brokendown to fixed and variablecost as most the companies sellmore than one item and fixedcost must be allocated todifferent products in a sensibleway. Most cost-based pricingare used when there isrelatively little, if any, directcompetition or when buyers arenot price sensitive.
Under cost-based pricing strategy, there are two common types ofsetting prices:•Mark-up, where a standard percentagebased on cost is adopted.•Target profit, where prices are settowards attaining satisfactory rate ofreturn.
The company‟s objectives will have a big effect onits pricing strategy. There is always a need to balancebetween profit and the marketing shares objectives, andregular dividends and growth revenue. For more marketshares a company would have to invest more marketingmoney which may affect profit in the short run.
•Differential Pricing strategy- wherethe same brand is sold at different pricesto different market segments.•Competitive Pricing strategy- whereprices are set to exploit a firm‟scompetitive position.•Product Line Pricing Strategy- whererelated brands or products are sold atprices that exploit mutual dependenciesor balance pricing over product line.
Some have high search costSome have low reservation priceAll have special transaction
Objective of the Firm Differential Competitive Product Line Pricing Pricing PricingSome have Randomhigh search Price Signaling Image Pricing DiscountingcostSome have low Penetration/ Periodic Price bundling/reservation experience discounting Premiumprice curveAll have Second Geographic Complementaryspecial marketing Pricing Pricingtransaction Discounting
•Random DiscountingThe marketer tries tomaximize the number ofcustomers informed of therandom discount at hisproduct‟s low price instead ofat a competitor‟s price.
•Second MarketDiscountingIn second marketdiscounting strategy, onlythe second market segmentenjoys savings throughlower price.
•Periodic DiscountingThe manner of discounting ispredictable over time and known toconsumers and the discount can beused by all consumers. This periodicdiscount enables the firm to cover histotal costs and still make a reasonableprofit.
•Price SignalingPrices are set regardless ofhigh or basic productquality. The high priceaims to influenceconsumer‟s perception ofhigh quality.
•Consumers must be able to get informationabout price more easily than information aboutquality.•Consumers must want the high qualityenough to risk buying the high priced producteven without a certainty of high quality.•There must be a sufficiently large number ofinformed consumers who can understand thevalue quality and will pay a high price for thathigh quality product.
•Penetration Pricing-exploits economies ofscale by having cheapercost, superiortechnology, and anefficient organization.
•Experience Curve Pricing- conceptexploits a firm‟s production experience ascost decrease due to cumulative volume.•The use of experience curve pricingstarts by projecting the declining per unitproduction cost (inflation adjusted) of aproduct and then basing the pricingstrategy on a series of significant pricedecreases that come with accumulatedproduction volume.
•Geographic or zone pricingstrategy- can be adoptedwhen there are adjacentmarkets separated bytransport costs rather thanreservation or transactioncosts. Within each zone, itwould charge one price.
•Image PricingImage Pricing- makes us ofhigh price to signal highquality and uses the profit itmakes from higher pricedversions to subsidize theprice of lower priced version.
•Price Bundling-The basic idea of price bundling isthat the whole bundle is cheaperthan the buying the partsseparately.-The basic requirement for price isbundling is non- substitutionamong products within the bundleas a strategy to convince consumersto buy all the products as apackage.
•Premium Pricing The firm sets a high price emphasizing on unique product features.•Complementary Pricing3 related pricing strategiescomprise complementary pricing:CAPTIVE, TWO-PART, andLOSS LEADER PRICING.
•Complementary Pricing CAPTIVE PRICING •The firm tries to price their product to low to attract buyers and recover from the bigger volume expected in the accessories or consumables.
•Complementary Pricing TWO- PART PRICING • Two part pricing refers to pricing commonly used by service- based firms. There is a fixed fee plus a variable fee to charge to the customers.
•Complementary Pricing LOSS LEADER PRICING -Prices of well-known brands are dropped to attract traffic to the store. Several nationally branded products would be advertised with amazingly low prices.
Marketers may be tempted to price theirproducts low during the introductoryperiod, regardless of product quality andchoices of available distribution methods. Thetemporary market shares gained however maycreate a permanent price image for the brandwhich may be difficult to change over time. Amarket reality, is that whenever priceadjustments are needed, increasing prices ismuch more difficult than lowering them.
Most common ways in setting prices under the marketdemand-based pricing strategy:•Perceived value, where marketers use theperception of customers in establishing itsprices.•Demand differential, where marketers chooseprice level that would support their plannedsales volume and profit.
Diagnostic Perception Pricing Products have differentfeatures or attributes. Theseattributes have different levelsof importance to thecustomers.
Competition-based pricing strategy, there are twocommon ways in setting prices:•Going rate, where marketers begin and workwithin the prevailing market price. Commoditieslike gasoline have smaller prices except for self-service stations, which charge little less.•Sealed Bid, where the marketers price theirproduct or service depending on how competitorsare expected to price theirs. Mostly required bygovernment offices.
Different companies have differentobjectives, different cost structures, anddifferent strengths. Marketers mustremember that the more unique theirproducts are, the more flexible they canbe in formulating pricing.
•F.O.B- Free on Board. This means that supplierpays the freight up to a certain point, usually theport of origin.•C & F- Cost and Freight. Means that thePhilippine exporter is quoting a price inclusive offreight from the Philippines up to Busan in SouthKorea, the port of destination.•C.I.F- Cost, Insurance, and Freight. Price has asimilar meaning with our C & F example exceptthat it includes the cargo insurance covering theshipment from the port of origin to the port ofdestination.
•Also called “Noticeable price Difference”, this technique is used most specially in supermarkets and department stores to create an impression of “good value”.•The term Elasticity connects the relationshipbetween changes in price and quantity of sales.•Price elasticity means that demand will changeif change in pricing occurs. Measurement allowscompanies to evaluate how price changes willaffect total revenue.
•The objective is to know the fair rangeof the upper and lower threshold limits ofpricing.•Above the upper threshold limit,consumer will feel the product is tooexpensive.•Below the lower threshold limit,consumers will doubt the quality of theproduct and may not buy it.
General guideline as to when to increase or decrease price:•When to Increase PriceThe firm will have to absorb the cost, and look forways to increase customer base, purchase volume, andminimize wastage.•When to Cut PriceIn general, a price reduction is perceived as a sign thatsomething is wrong and needs correcting.• When to Sell Below Cost The bad news for all is when a firm not only has todecrease price but also has to sell below cost.
When to Increase PriceReasons for increasing Prices: •Inflation- •Foreign Exchange- •Shortages •Product repositioning
When to Cut Price•Lower Cost•Falling Market Shares•Excess Capacity•Excess Inventory•Discourage Competition
When to Cut Price•Socialized Pricing•New Market Segment•Availability of New Substitutes•Subsequent Sales•Competitive Trends•Increase CompetitiveVulnerability
When to Sell Below Cost•Perishable Goods•Phase-out Products•Damaged Products
In a free economy, marketers will having dealwith lower prices from competitors sooner and later.There are price and non-price responses to priceattacks of the competition. Each of the alternativesmust be weight carefully considering the option thatwill maximize its gain and preserve its longevity inthe marketplace.
Examples of price responses are:•Flanker brand•Fight•Selective Response•Quality•Alliance•Cost Advantage
This chapter is designed to give students a fundamental butcomprehensive insight into pricing. It sets out in a logicalorder the keyfactors that affect price and how it can be used strategicallyand tactically. It starts, in the first section, by looking at anumber of key issues relating to price, what it means, and itsimportance in terms of marketing and the other elements ofthe marketing mix. It also sets the theme for thechapter - that a systematic approach to pricing shouldalways be adopted.