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Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
Lecture 8 mba_marketing_management_-_pricing
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Lecture 8 mba_marketing_management_-_pricing

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  • 1. MBA MARKETING MANAGEMENT
    • Pricing
    • Lecture Overview
    • Introduction
    • Theory of Pricing
    • Pricing Objectives
    • Strategic Determinants of Price
      • Costs
      • Demand
      • Competition
    • Positioning of Life Cycles
    • Pricing Strategies
      • Market skimming
      • Market penetration
      • Destroyer pricing
      • Promotional pricing
  • 2. INTRODUCTION
    • All products and services have a price just as they have value. Mnay non-profit and all
    • profit-making organisations must also set prices, be they; the price to see a consultant
    • doctor or to buy a pair of trainers or a price to visit the island where Princess Diana lies.
    • Pricing is because it sets a value to a product and service – it also goes under many
    • names.
    • Rent for your flat
    • Tuition for your education
    • Fee to see your dentist
    • Airline, bus and taxi firms charge a fare
    • A guest lecturer charges an honorarium
    • Clubs and societies charge subscriptions
    • Lawyers may ask for a retainer
    • Definition - ‘ Price is the sum of all the values that consumers exchange foe the benefits of having or using the product and service.’
  • 3.
    • Probably the single most important decision in marketing is of place, in that economists
    • will agree that price directly affects sales volumes. If a price is too high and the market
    • competitive, sales will fall.
    • On the other hand, many marketers have found ways to reduce the impact of price. In the
    • case of non-profit organisations there simply is no price (eg seeing a doctor) and as such
    • may not be applicable.
    • On the other hand, some principles can still be applied if ‘price’ is replaced by the
    • ‘ perceived value’ to the customer. In this way the customers put a value (often a high
    • value) on the service, and this can be dealt with much as price is itself.
  • 4. THEORY OF PRICING Much of the theory of pricing is derived from that of economics. The basic idea is that, ‘ Demand will be different at each price level chosen’ As can be seen from the diagram, demand normally (but not always) falls as price increases. Demand curve Price Quantity demanded
  • 5.
    • Alternatively, supply normally increases as prices rise (the reverse of demand), gaining
    • the supply curve (see below).
    Supply curve Price Quantity supplied
  • 6.
    • In theory, prices changed will be set such that demand and supply are equally balanced,
    • such that demand = supply . This point is called the equilibrium price , as shown below.
    Price £ Demand Supply Equilibrium Price Quantity
  • 7.
    • The problem with economic theory is it discounts to a great extent. The fact that buyers
    • today are no longer restricted to buying essentials but can indulge in choice products,
    • including luxuries. The suppliers of these products differentiate them (via the marketing
    • mix) such that they can be more flexible with their pricing.
    • Price Elasticity of Demand – Different markets for products ad services have different
    • levels of sensitivity towards the prices changed. The degree to which demand is sensitive
    • to price is called ‘price elasticity of demand’.
    • Definition - Price elasticity of demand is the percentage change in the quantity of a good demanded, divided by the corresponding percentage change in its price,
    • or
    • price elasticity of demand = change of demand (%)
    • change of price (%)
  • 8.
    • In the commodities market, for example, where products such as; salt, cement, oil etc
    • are often undifferentiated, the demand for your product will be very dependent on the
    • price you seek.
    • Where a company sets it commodity prices above the market price it is unlikely to sell its
    • product. Here the products price is said to be elastic .
    • At the other end of the spectrum there are products that are very insensitive in terms of
    • price. These products or services are often highly differentiated such that the market is
    • willing to pay a higher price.
    • Products and services are often branded to reflect this differentiation and so claim a
    • premium price. Demand for such products/brands are often called ’ price inelastic ’.
  • 9. PRICING OBJECTIVES
    • Survival – Under service competitive pressure, in order to survive companies will cut prices
    • to the extent they do not cover all their costs – so long as it generates cash to keep the
    • company going.
    • Profit Maximisation – In the long-term all companies must make profits otherwise their
    • future will be uncertain.
    • Sales Maximisation – Generating lots of sales can lead to reduced unit costs and so make
    • the company more profitable as well as dominant in its market sector.
    • Price competition – A competitive price is not necessarily the lowest price, but it is one that
    • gives the company a competitive advantage in the marketplace. For example, Gillette razor
    • blades are often priced higher than their competitors because they are perceived to provide
    • a much higher quality than their competitors. This quality leadership means they can change
    • and are expected to change to a higher price. Rolls Royce cars are expensive products that
    • maintain their competitive edge in international markets because of the combination of
    • benefits offered through the marketing mix, including a high price.
  • 10.  
  • 11. STRATEGIC DTERMINANTS OF PRICE
    • There are 3 major influences on pricing decisions. These are -
    • Costs
    • The quantity of products sold ( ie sales volume) is a critical factor in the success of any business. The reason is that every business has to pay 2 different kinds of costs associated with sales, fixed costs and variable costs .
    • Types of Costs
    • Fixed Costs – Are so called because they remain the same mo matter how many units of product are sold. (Such costs include; rent, rates, heating, lighting, wages, depreciation, insurance etc.)
    • Variable Costs – Are those that vary directly according to the number of units produced/sold. (Such costs include; materials and components, machine running time etc)
    Cost Competition Demand
  • 12.
    • The difference between the variable cost per unit of product and the price paid by the
    • customer is called the margin. While the rates of variable costs to the margin remains
    • constant no matter how many units are sold, the rates of fixed costs to margin changes
    • with the number of units sold. For example;
    • If your fixed costs are £1000 a year and you sell 100 units, then each unit will gave to
    • carry £10 of fixed costs. If on the other hand you sell 500 units then each unit only has to
    • carry £2 of fixed costs which makes a big difference when you come to price the product.
    • Cost Plus Pricing – T he vast majority of firms price their products based on mark up on
    • the cost providing the product or service concerned. The reason it is simple to calculate is
    • information on costs are often well defined by accountants so firms simply add a margin
    • to the unit cost.
    • The unit cost is the average cost of each item produced. If a firm produces 800 units a
    • total cot of £24,000 the unit cost will be £30. many small businesses will tell you they
    • ‘ cost out’ each hour worked and then add a margin for profits. For example, fashion
    • clothes sold by retailers are marked up between 75-150%.
    • The process if cost plus pricing can best be illustrated in relation to large firms where
    • economies of scale can be spread over a considerable range of output. Whilst very
    • popular, there are dangers attached. If the price is set too high, a sale will be lost; if set
    • too low, profit will be lost.
  • 13.
    • Firms that operate in international markets tend to favour cost-plus pricing because it
    • involves using a simple formula rather than having to calculate the relative strength of
    • demand in lots of quite different markets. However, if this method is applied too rigidly, it
    • can cause problems in the marketplace.
    • For example, if demand is lower than expected, unit costs may be slightly higher. In this
    • case the accountants may well seek to raise prices. This will in turn make sales even
    • harder to achieve. If on the other hand, demand is higher than expected, unit costs may
    • fall and a price reduction may be sought which could lead to loss of revenue and profit.
  • 14.
    • Contribution Pricing – This involves separating out the different product that make up a
    • company’s portfolio in order to change individual prices appropriate to a product’s share in
    • total costs. We have already identified the 2 broad categories of costs : variable (direct)
    • costs vary with the quantity of output produced or sold; fixed (indirect) costs have to be
    • paid irrespective of the level of output or sales.
    • While it is easy to attribute direct costs to products it is not always that simple to indirect
    • costs, such as, wages, business, rent and rates etc. however, if we can identify the
    • variable costs we can at least identify each products ability to cover its direct cost and
    • assess how much is left over to contribute to fixed costs.
    • The total of all the contribution should cover all the fixed costs. Any balance is called the
    • profit.
    • Contribution is an excellent way of pricing for firms selling to a range of international
    • markets which share a common fixed cost base.
    Revenue from Product X – Direct variable costs = Contribution of X Revenue of Product Y – Direct variable costs = Contribution of Y
  • 15.
    • Demand
    • Demand orientated pricing involve reacting to the intensity of demand for a product, so that
    • high demand leads to high prices and work demand ti low prices, even though unit costs are
    • similar.
    • When a firm can segment its market into different groups, it can carry out a policy of price
    • discrimination. This involves selling at high prices in segments of the market where demand
    • is intense (ie where demand is inelastic and at relatively low prices where demand is elastic.
    • Customer Orientated Discrimination – Customers are often willing to pay a high price
    • when something is new. They also have an expectation of what price to pay. Therefore, firms
    • can, and often do, charge different prices for the same product at different times and in
    • different locations. For example, many boos are initially sold in hardbook at a high price, but
    • when the innovator section of the market is satisfied, a cheaper paperback version is
    • released at a lower price to attract other market sectors.
    • Time Orientated Discrimination – Demand for a service or product can vary by season or
    • even the time of day. At these peak demand time, products/service are often charged at a
    • high price and at off peak time at a lower price. This applies to a wide variety of items from
    • fashion clothes to train and air services.
  • 16.
    • Product Orientated Discrimination – Slight modification to products can allow for high
    • and low price strategies. For example, many car models have additional extras (eg 2 or
    • 4 door version, with or without sunroof etc). Customers have a choice of the cheaper
    • basic model or a more expensive version.
    • Situation Orientated Discrimination – Products or services can change more or less
    • based on their situation or location. For example, demand for houses can very dependant
    • on the location of the house, cinema and theatre seats may be priced according to their
    • proximity to the screen or stage.
  • 17.
    • Competition
    • The nature and extent of competition is frequently an important influence on price. If
    • forced by direct competition, then the product will compete against very similar products
    • in the marketplace and as such with little differentiation prices will need to be I line with
    • rival prices.
    • In contrast, when a product is faced with indirect competition (ie competition with
    • products in different sectors of the market) then there will be more scope to vary price.
    • For example, a firm may choose a high price strategy to give a product or brand a
    • ‘ quality’ feel. In contrast, it might change a low price so that consumers view the product
    • as a bargain.
  • 18.
    • However, Hatton and Oldroyd have shown there is a price floor and a price ceiling in
    • which marketers can set prices, as shown below -
    Price Ceiling Demand What the market will Costs Price Floor Competitors Price Range Within this band, there may be agreement between competitors (eg petrol/cigarettes) to avoid retaliatory responses.
  • 19. POSITIONING AND LIFE CYCLES
    • The price a company sets impacts on the position of its products the competition in
    • terms of quality.
    • It may be necessary to change the price of a product as it moves through its life cycle
    • and hence needs to be repositioned.
    • Introduction - High performance costs – high prices
    • Growth - High performance costs but also sales growth – prices become more competitive.
    • Maturity - Lower promotional costs – Sales growth slow, profit taken, prices stabilise at level determined by market share/volume/demand relationships.
    • Decline - Minimal promotional costs
    • Sales decline
    • Prices reduced
  • 20. PRICING STRATEGIES
    • Pricing can be used as an in tool to pursue short term marketing and selling targets for a
    • company. Typical attack based policies/strategies include –
    • Market Skimming – Often used when launching anew product into a market where there is
    • little direct competitions in the market so demand for the product may be somewhat inelastic.
    • Skimming involves setting a relatively high (or very high) initial price in order to yield high
    • returns from the consumers willing to buy the product as shown below -
    First layer of customers Second layer Third layer etc
    • Promotional pricing
    • Penetration pricing
    • Destroy pricing
    • Skimming pricing
  • 21.
    • Market Penetration – This method offers low prices to attract large numbers of
    • customers and so gain market share by penetrating the existing market. The method
    • works best where demand is relatively elastic and increased sales can have a great
    • effect on reducing the unit cost per sale.
    • High fixed costs
    • Demand elastic
    • Economies of scale
    • Lots of customers
    Penetration pricing Leads to increased sales and market share A typical example would be a new breakfast cereal or a product launched in a new overseas market. Initially it would be launched with a relatively low price, coupled to discounts and special offers. As the product penetrates the market, sales and profitability increase. Prices can then creep upwards.
  • 22.
    • Destroyer Pricing – This policy can be used to undermine the sales of rivals or to warn
    • potential new rivals not to enter the market. Destroyer pricing involves reducing the price
    • of an existing product at an artificial low price in order to destroy competitor sales as
    • shown below –
    • When entered the UK market in the mid 90s, British supermarkets slashed their prices
    • in the localities close to the new stores in an attempt to kill off the American rival.
    • Supermarkets continue to practice similar tactics in their local business environments in
    • order to close down the number of local independent traders around them.
    Price Natural Market Price Price which yields lowest acceptable long-term return on capital invested Destroyer price range
  • 23.
    • Promotional Pricing – This policy is used to inject fresh life into an existing product or to
    • create new interest in a new product. It can help to increase the rate at which the product
    • is turned over, which can reduce stock levels. Loss leaders are products whose price has
    • been reduced in order to boast its sales, but also the sales of products closely associated
    • to it.

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