Note to InstructorThe text gives an excellent example of IKEA in China:When IKEA first opened stores in China in 2002, people crowded to take advantage of the freebies—air conditioning, clean toilets, and even decorating ideas. Chinese consumers are famously frugal. When it came time to actually buy, they shopped instead at local stores just down the street that offered knockoffs of IKEA’s designs at a fraction of the price. So IKEA slashed its prices in China to the lowest in the world.The penetration pricing strategy worked. IKEA now captures a 43 percent market share of China’s fast-growing home wares market.
Note to InstructorThis Web link brings you to Bluemountain.com. Many students may know this site for its free greeting cards. Notice how they have product line pricing—you can get some basic cards for free but need to join to be able to use more advanced features.
Note to InstructorStudents will quickly realize this is what their cell phone bill might be. Ask them how they feel about this pricing. This Web link goes to an ad for AT&T’s campaign for rollover minutes.
To price intelligently, management needs to know how its costs vary with different levels of production. Take the case in which a company such as TI has built a fixed-size plant to produce 1,000 hand calculators a day. The cost per unit is high if few units are produced per day. As production approaches 1,000 units per day, the average cost falls because the fixed costs are spread over more units. Short-run average cost increases after 1,000 units, however, because the plant becomes inefficient. Workers must line up for machines, getting in each other’s way, and machines break down more often. This is shown in Figure 14.2a. If TI believes it can sell 2,000 units per day, it should consider building a larger plant. The plant will use more efficient machinery and work arrangements, and the unit cost of producing 2,000 calculators per day will be lower than the unit cost of producing 1,000 per day. This is shown in the long-run average cost curve (LRAC) in Figure 14.2b. In fact, a 3,000-capacity plant would be even more efficient according to Figure 14.2b, but a 4,000-daily production plant would be less so because of increasing diseconomies of scale: There are too many workers to manage, and paperwork slows things down. Figure 14.2b indicates that a 3,000-daily production plant is the optimal size if demand is strong enough to support this level of production.
Costs change with production scale and experience. They can also change as a result of a concentrated effort by designers, engineers, and purchasing agents to reduce them through target costing. Market research establishes a new product’s desired functions and the price at which it will sell, given its appeal and competitors’ prices. This price less desired profit margin leaves the target cost the marketer must achieve. The firm must examine each cost element—design, engineering, manufacturing, sales—and bring down costs so the final cost projections are in the target range. When ConAgra Foods decided to increase the list prices of its Banquet frozen dinners to cover higher commodity costs, the average retail price of the meals increased from $1 to $1.25.When sales dropped significantly, management vowed to return to a $1 price, which necessitated cutting $250 million in other costs through a variety of methods, such as centralized purchasing and shipping, less expensive ingredients, and smaller portions.
Note to InstructorThere is an excellent example in the text for dynamic pricing:Alaska airlines Web banner promotes “fly Alaska Airlines to Honolulu for $200 round trip.”Alaska Airlines is introducing a system that creates unique prices and advertisements for people as they surf the Web. The system identifies consumers by their computers, using a small piece of code known as a cookie. It company then combines detailed data from several sources to paint a picture of who’s sitting on the other side of the screen. When the person clicks on an ad, the system quickly analyzes the data to assess how price-sensitive customers seem to be.
Note to InstructorDiscounts are either cash discount for paying promptly, quantity discount for buying in large volume, or functional (trade) discount for selling, storing, distribution, and record keeping.Allowances include trade-in allowance for turning in an old item when buying a new one and promotional allowance to reward dealers for participating in advertising or sales support programs.
Note to InstructorLoss leaders are products sold below cost to attract customers in the hope they will buy other items at normal markups.Special event pricing is used to attract customers during certain seasons or periods.Cash rebates are given to consumers who buy products within a specified time.Low-interest financing, longer warrantees, and free maintenance lower the consumer’s “total price.”
Note to InstructorThe three types of segmented pricing are: Customer segment pricing is when different customers pay different prices for the same product or service. Product form segment pricing is when different versions of the product are priced differently but not according to differences in cost. Location pricing is when the product sold in different geographic areas is priced differently even though the cost is the same.
Note to InstructorDiscussion QuestionHow have you benefited from price segmentation?Most likely they have had student discounts. Ask them why that is effective given the criteria above.
Note to InstructorDiscussion QuestionHow well do you carry prices of coffee, pizza, and milk in your head?It might be interesting to collect the prices of items sold near or on campus including coffee, pizza, and sandwiches. Ask them how well they know these prices, have them write down the price of these items and then check themselves. You will often find that people do NOT know prices as well as they think they do.
There are several consequences of cutting prices. Consumers may assume quality is low. They may be fickle due to lower price. Competitors may match prices to encourage customers to switch.
It can be worthwhile to raise prices. A successful price increase can raise profits considerably. If the company’s profit margin is 3 percent of sales, a 1 percent price increase will increase profits by 33 percent if sales volume is unaffected. This situation is illustrated in Table 14.6. The assumption is that a company charged $10 and sold 100 units and had costs of $970, leaving a profit of $30, or 3 percent on sales. By raising its price by 10 cents (a 1 percent price increase), it boosted its profits by 33 percent, assuming the same sales volume.A major circumstance provoking price increases is cost inflation. Rising costs unmatched by productivity gains squeeze profit margins and lead companies to regular rounds of price increases. Companies often raise their prices by more than the cost increase, in anticipation of further inflation or government price controls, in a practice called anticipatory pricing.
Note to InstructorThere is an example in the book about a Tiffany’s price changes:In the late 1990s, the high-end jeweler responded to the “affordable luxuries” craze with a new “Return to Tiffany” line of less expensive silver jewelry. The “Return to Tiffany” silver charm bracelet quickly became a must-have item, as teens jammed Tiffany’s hushed stores clamoring for the $110 silver bauble. Sales skyrocketed. But despite this early success, Tiffany’s bosses grew worried that the bracelet fad could alienate the firm’s older, wealthier, and more conservative clientele.So, in 2002, to chase away the teeny-boppers, the firm began hiking prices on the fast-growing, highly profitable line of cheaper silver jewelry and at the same time, it introduced pricier jewelry collections, renovated its stores, and showed off its craftsmanship by highlighting spectacular gems like a $2.5 million pink diamond ring.
Dr. Nirmalya Kumar’s “ Strategies to fight Low-Cost Rivals” Harvard Business Review (December, 2006); 104-12.
Note to InstructorThis is an interesting Web link to the Professional Jewelers Magazine Web site. It contains an article encouraging jewelers to fight deceptive pricing in their industry.
Developing price strategies
MARKETING MANAGEMENT Developing Pricing Strategies D.V. Madhusudan Rao Dept. MBA, School of Graduate Studies, Jigjiga University ETHOPIA- - . PM 1
Learning Objectives After studying this chapter, you should be able to: 1. Describe the major strategies for pricing initiative and new products 2. Explain how companies find a set of prices that maximize the profits from the total product mix 3. Discuss how companies adjust their prices to take into account different types of customers and situations 4. Discuss the key issues related to initiating and responding to price changes- - . PM 2
VALUEValue is a ratio between what customer gets and what he gives Value = Benefits/CostsHow to increase its Value?•Raise benefits•Reduce costs•Raise benefits and reduce costs•Raise benefits by more than the raise of costs•Lower benefits by less than the reduction ofcosts
A Secret Pie• Impact of a 1 % price increase on profits – Coca-Cola 6,4 % – Nestlé 17,5 % – Ford 26,0 % – Philips 28,7 %
Common Pricing Mistakes• Determine costs and take traditional industry margins• Failure to revise price to capitalize on market changes• Setting price independently of the rest of the marketing mix• Failure to vary price by product item, market segment, distribution channels, and purchase occasion - - . PM 9
Price–Quality Inferences: An Image pricing for ego-sensitive products. Eg: Perfumes, cars (over-valued andunder-valued)When information about true quality is known, pricebecomes a less significant indicator of quality. Wheninformation is not available, price acts as a signal ofquality.Price endings: Price tags end with 0 and 5 or 9 arecommonly seen examples.
Price Cues• “Left to right” pricing ($299 vs. $300)• Odd number discount perceptions• Even number value perceptions• Ending prices with 0 or 5• “Sale” written next to price - - . PM 19
Internal Factors Affecting Pricing Decisions: Marketing Objectives Survival Low Prices to Cover Variable Costs and Some Fixed Costs to Stay in Business. Current Profit Maximization Choose the Price that Produces the Maximum Current Profit, Etc.MarketingObjectives Market Share Leadership Low as Possible Prices to Become the Market Share Leader. Product Quality Leadership High Prices to Cover Higher Performance Quality and R & D.
Market SkimmingMarket-skimming pricing is a strategy for setting a high price for anew product to skim maximum revenues layer by layer from thesegments willing to pay the high price, the company make fewer (lowvolume) but more profitable sales.• Product quality and image must support the price• Buyers must want the product at the price• Costs of producing the product in small volume should not cancelthe advantage of higher prices• Competitors should not be able to enter the market easily• Suitable for products that have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out)• Examples include: Playstation, jewellery, digital technology, new DVDs, Bic, Biro etc
Market-skimming pricing• For example when Sony introduced the world first high definition television (HDTV) to the Japanese market , the high tech sets cost 43,000$ . These televisions were purchased only by customers who really wanted the new technology and afford to pay high prices. - - . PM 28
Market Penetration Contd..Market-penetration pricing sets a low initial price in order to penetrate the market quickly and deeply to attract a large number of buyers quickly to gain market share• Price sensitive market• Production and distribution costs must fail as sales volume increases.• Low prices must keep competition out of the market
Market-penetration pricing • For example ,Dell used penetration pricing to enter the personal computer market, selling high quality computer products through lower cost direct channels.- - . PM 31
Price-Quality Strategies• Philip Kotler identified 9 price-quality strategies High Price Mid Price Low Price High Quality High Super Premium Value Value Middle Quality Over Mid Good Charging Value Value False Rip-off Economy Economy Low Quality - - . PM 32
Product Mix Pricing Strategies Product Line Pricing Setting Price Steps Between Product Line Items i.e. $299, $399 Optional-Product Pricing Pricing Optional or Accessory Products Sold With The Main Product i.e. Car Options Product Captive-Product Pricing Mix Pricing Products That Must Be Used With The Main Product Pricing i.e. Razor Blades, Film, SoftwareStrategies By-Product Pricing Pricing Low-Value By-Products To Get Rid of Them i.e. Lumber Mills, Zoos Product-Bundle Pricing Pricing Bundles Of Products Sold Together i.e. Season Tickets, Computer Makers - - . PM 33
Product line pricingProduct line pricing takes into account the cost differences between products in the line, customer evaluation of their features, and competitors’ prices* For example channel offers 20 different collections of bags of all shapes and sizes at price that range from under $50 to more than $1,250.
Optional Product pricing• Optional-product pricing takes into account optional or accessory products along with the main product• For example : a car buyer may choose to order a GPS navigation system & Bluetooth wireless communication.• Refrigerators come with optional ice maker
Captive-product pricing • Captive-product pricing involves products that must be used along with the main product • Examples of Captive products are razor blade cartridges , Gillette once you bought the razor, you are committed to buying replacement cartridges at $25 an eight pack
Two-part pricingTwo-part pricing involves breaking the price into: – Fixed fee – Variable usage fee For example : Jawwal company charge a flat rate for a basic calling plan, then charge for minutes over what the plan allows. The service firm must decide how much to charge for the basic service and how much for the variable usage. – Another example is when you visit a park , you pay a ticket charge + fee for food and additional feature
By-product pricing• By-product pricing refers to products with little or no value produced as a result of the main product. Producers will seek little or no profit other than the cost to cover storage and delivery.• Petroleum products often results in by- products.
Product bundle pricingProduct bundle pricing combines several products at a reduced priceFor example : fast food restaurants bundle a burger , fries and a soft drink at a combo price
Table 14.3 Factors Leading to Less Price Sensitivity• The product is more distinctive• Buyers are less aware of substitutes• Buyers cannot easily compare the quality of substitutes• Expenditure is a smaller part of buyer’s total income• Expenditure is small compared to the total cost• Part of the cost is paid by another party• Product is used with previously purchased assets• Product is assumed to have high quality and prestige• Buyers cannot store the product - - . PM 42
Influence of Elasticity • Any pricing decision must be mindful of the impact of price elasticity • The degree of price elasticity impacts on the level of sales and hence revenue • Elasticity focuses on proportionate (percentage) changes • PED = % Change in Quantity demanded/% Change in Price- - . PM 43
Influence of Elasticity• Price Inelastic:• % change in Q < % change in P• e.g. a 5% increase in price would be met by a fall in sales of something less than 5%• Revenue would rise• A 7% reduction in price would lead to a rise in sales of something less than 7%• Revenue would fall - - . PM 45
Influence of Elasticity contd.. • Price Elastic: • % change in quantity demanded > % change in price • e.g. A 4% rise in price would lead to sales falling by something more than 4% • Revenue would fall • A 9% fall in price would lead to a rise in sales of something more than 9% • Revenue would rise- - . PM 46
Step 3: Estimating Costs • Types of costs • Cost Terms and Production • Fixed costs • Variable costs • Total costs • Average cost • Cost at different levels of production • Accumulated production • Activity-Based Cost accounting • Target costing- - . PM 47
Figure 14.3 Cost Per Unit at Different Levels of Production- - . PM 48
Figure 14.4 Estimating Cost per Unit as a Function of Accumulated Production- - . PM 49
Markup/ Cost-Plus Pricing contd.. • Calculation of the average cost (AC) plus a mark up • AC = Total Cost/Output Eg: An Immersion Rod mfg. costs are: Variable C=$10, FC=$300,000, Expected unit sales = 50,000. A Unit Cost = VC + FC/Unit sales =10+300k/50k = $16. IF mfr. Wants to earn a 20% markup on sales, Markup price = Unit cost/ 1-desired return on sales = $16/1-0.2 = $20 per unit Hence Mfr can sell to Dealers at $ 20 and earn $4 as profit- - . PM 54
BEP / Target-return pricingAn expected percentage of profit on mfr’s investment (Return on Investment)Target-return pricing = Unit Cost + Desired return x Invested Capital Unit SalesBreak-Even Volume = Fixed Cost (Price - Variable Cost)
Perceived Value Pricing Table 14.2 Consumer Perceptions vs. Reality for CarsOvervalued Brands Undervalued Brands• Land Rover • Mercury• Kia • Infiniti• Volkswagen • Buick• Volvo • Lincoln• Mercedes • Chrysler
Some important pricing definitions• Utility: The attribute that Value Example: Caterpillar Tractor is $100,000 vs. Market makes it capable of want $90,000 satisfaction $90,000 if equal 7,000 extra durable• Value: The worth in 6,000 reliability terms of other products 5,000 service 2,000 warranty• Price: The monetary $110,000 in benefits - $10,000 medium of exchange. discount!
Value Pricing contd.. • Price set in accordance with customer perceptions about the value of the product/service • Examples include status products/exclusive products Companies may be able to set prices according to perceived value. Copyright: iStock.com- - . PM 62
Going Rate (Price Leadership) • In case of price leader, rivals have difficulty in competing on price – too high and they lose market share, too low and the price leader would match price and force smaller rival out of market • May follow pricing leads of rivals especially where those rivals have a clear dominance of market share • Where competition is limited, ‘going rate’ pricing may be applicable – banks, petrol, supermarkets, electrical goods – find very similar prices in all outlets- - . PM 64
Auction-Type Pricing English auctions Dutch auctions Sealed-bid auctions
Step 6: Selecting the Final Price• Impact of other marketing activities• Company pricing policies• Gain-and-risk sharing pricing• Impact of price on other parties
Price-Adjustment/ Adaption Strategies Price Adaptation Strategies Discount & Allowance Reducing Prices to Reward SegmentedCustomer Responses such as Adjusting Prices to Allow Paying Early or Promoting for Differences in Customers, the Product. Products, or Locations. Cash Discount Customer Quantity Discount Product Form Functional Discount Location Seasonal Discount Time Trade-In Allowance - - . PM 68
Price-Adjustment Strategies • Adjusting Prices for Psychological Psychological Pricing Effect. •Price Used as a Quality Indicator. • Temporarily Reducing Prices to Promotional Pricing Increase Short-Run Sales. • i.e. Loss Leaders, Special-Events • Adjusting Prices to Account for the Geographical Pricing Geographic Location of Customers. • i.e. FOB-Origin, Uniform-Delivered, Zone Pricing, Basing-Point, & Freight-Absorption. International Pricing • Adjusting Prices for International Markets. • Price Depends on Costs, Consumers, Economic Conditions & Other Factors.- - . PM 69
Price-Adjustment Strategies contd..Geographical pricing is used for customers in different parts of the country or the world• FOB pricing• Uniformed-delivery pricing• Zone pricing• Basing-point pricing• Freight-absorption pricing• Counter trade (Barter,Compensation deal, Buyback arrangement, Offset)
Price Adjustment Strategies• FOB (free on board) pricing means that the goods are delivered to the carrier and the title and responsibility passes to the customer• Uniformed-delivery pricing means the company charges the same price plus freight to all customers, regardless of location
Price Adjustment Strategies• Zone pricing means that the company sets up two or more zones where customers within a given zone pay a single total price• Basing-point pricing means that a seller selects a given city as a “basing point” and charges all customers the freight cost associated from that city to the customer location, regardless of the city from which the goods are actually shipped
Price-Adjustment Strategies• Freight-absorption pricing means the seller absorbs all or part of the actual freight charge as an incentive to attract business in competitive markets
Price-Adjustment StrategiesDynamic pricing is whenprices are adjustedcontinually to meet thecharacteristics and needsof the individualcustomer and situations Ex. Alaska airlines creates unique prices and advertisements for people as they surf the web
Price Adjustment StrategiesInternational pricing is when prices are set in a specific country based on country-specific factors• Economic conditions• Competitive conditions• Laws and regulations• Infrastructure• Company marketing objective
International pricing• For example : Boeing sells its jetliners at about the same price everywhere, whether in the United states , Europe or the third world• A pair of Levi’s selling for $30 in Canada might go for $ 63 in Tokyo and $ 88 in Paris - - . PM 76
Discount and allowance pricingDiscount and allowance pricing reduces prices to reward customer responses such as paying early or promoting the product• Discounts• Allowances
Price-Adjustment StrategiesPrice Discounts and AllowancesQuantity discount: The more you buy, thecheaper it becomes-- cumulative and non-cumulative.Trade discounts” functional”: Reductions fromlist for functions performed-- storage, promotion.Cash discount: A deduction granted to buyersfor paying their bills within a specified period oftime, (after first deducting trade and quantitydiscounts from the base price) - - . PM
Price Adjustment StrategiesFunctional discount: discount offered by a manufacturerto trade-channel members if they will perform certainfunctions.Seasonal discount: a price reduction to those who buyout of season.Allowance: an extra payment designed to gain resellerparticipation in special programs.a) Trade in allowances: are price reductions given for turning in an old item when buying a new one ( Automobiles industry)b) Promotional allowances: are payments or price reductions to reward dealer for participating in advertising and sales support program - - . PM
Price-Adjustment StrategiesPromotional pricing is when prices are temporarily priced below list price or cost to increase demand• Loss leaders• Special event pricing• Cash rebates• Low-interest financing• Longer warrantees• Free maintenance
Price-Adjustment strategiesPromotional Pricing• Loss-leader pricing: supermarkets and department stores often drop the price on well known brands to stimulate additional store traffic• Special-event pricing: sellers well establish special pricing in certain seasons to draw in more customers• Cash rebates: companies offer cash rebates to encourage purchase of the manufacturers products within a specified time period• Low-interest financing: the company can offer customers low- interest financing - - . PM
Price-Adjustment strategies• Longer payment terms: sellers especially mortgage banks and auto companies stretch loans over longer periods and thus lower the monthly payment• Warranties and service contracts: companies can promote sales by adding a free or low cost warranty or service contract - - . PM
Price-Adjustment StrategiesRisks of promotional pricing• Used too frequently, and copies by competitors can create “deal-prone” customers who will wait for promotions and avoid buying at regular price• Creates price wars
Price-Adjustment Strategies Segmented pricing is used when a company sells a product at two or more prices even though the difference is not based on cost
Segmented pricinga) Customer segment pricing: different customers pay different prices for the same product or service . For ex. Museums charge a lower admission for students .b) Product from pricing: different versions of the product are priced differently but not according to differences in their costsc) Location pricing: company charges different prices for different locationsd) Time pricing : a firm varies it prices by the season , the month , the day and even the hour- - . PM 87
Price-Adjustment Strategies Segmented PricingTo be effective:• Market must be segmentable• Segments must show different degrees of demand• Watching the market cannot exceed the extra revenue obtained from the price difference• Must be legal
Price-Adjustment StrategiesPsychological pricing occurs when sellers consider the psychology of prices and not simply the economics” the price is used to say something about the product”Reference prices are prices that buyers carry in their minds and refer to when looking at a given product – Noting current prices – Remembering past prices – Assessing the buying situations – For example : a company could display its product next to more expensive ones in order to imply that it belongs in the same class
Initiating and Responding to Price Changes Competitor Reactions to Initiating Price Price Cuts Changes Price Changes Buyer Reactions Initiating to Price Price Increases Changes - - . PM 90
Price Changes contd.. Buyer Reactions to Pricing Changes Price increases Price cuts• Product is “hot” • New models will that means be available better made • Models are not• Company is selling well greedy • Quality issues
Price Changes Responding to Price ChangesQuestions – Why did the competitor change the price? – Is the price cut permanent or temporary? – What is the effect on market share and profits? – Will competitors respond?
Price Changes contd… Responding to Price ChangesSolutions – Reduce price to match competition – Maintain price but raise the perceived value through communications – Improve quality and increase price – Launch a lower-price “fighting” brand
Brand Leader Responses to Competitive Price Changes Has Competitor Cut No Hold Current Price; Price? Continue to Monitor Competitor’s Price. Will Lower Price Negatively Affect Our NoMarket Share & Profits? Reduce Price No Raise PerceivedCan/ Should Effective Quality Action be Taken? Yes Improve Quality & Increase Price Launch Low-Price “Fighting Brand” - - . PM 98
A frame work for responding to Low-Cost Rivals
Public Policy and Pricing Pricing Within Channel LevelsPrice fixing: Sellers must set prices without talking to competitorsPredatory pricing: Selling below cost with the intention of punishing a competitor or gaining higher long-term profits by putting competitors out of business , this will protect small sellers from larger ones
Public Policy and Pricing contd.. Pricing Across Channel LevelsRobinson-Patman Act prevents unfair price discrimination by ensuring that the seller offer the same price terms to customers at a given level of trade
Public Policy and Pricing contd… Pricing Across Channel LevelsRobinson-Patman Act• Price discrimination is allowed: – If the seller can prove that costs differ when selling to different retailers – If the seller manufactures different qualities of the same product for different retailers
Public Policy and Pricing Retail (or resale) price maintenance is when a manufacturer requires a dealer to charge a specific retail price for its products
Public Policy and Pricing contd… Pricing Across Channel LevelsDeceptive pricing occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers• Scanner fraud failure of the seller to enter current or sale prices into the computer system• Price confusion results when firms employ pricing methods that make it difficult for consumers to understand what price they are really paying
Loss Leader contd..• Goods/services deliberately sold below cost to encourage sales elsewhere• Typical in supermarkets, e.g. at Christmas, selling bottles of gin at £3 in the hope that people will be attracted to the store and buy other things• Purchases of other items more than covers ‘loss’ on item sold• e.g. ‘Free’ mobile phone when taking on contract package - - . PM 106
Psychological Pricing contd..• Used to play on consumer perceptions• Classic example - £9.99 instead of £10.99!• Links with value pricing – high value goods priced according to what consumers THINK should be the price - - . PM 108
Price Discrimination contd.. • Charging a different price for the same good/service in different markets • Requires each market to be impenetrable • Requires different price elasticity of demand in each marketPrices for rail travel differ for the same journey atdifferent times of the dayCopyright: iStock.com - - . PM 110
Destroyer/Predatory Pricing • 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- - . PM 112
Absorption/Full Cost Pricing contd..• Full Cost Pricing – attempting to set price to cover both fixed and variable costs• Absorption Cost Pricing – Price set to ‘absorb’ some of the fixed costs of production - - . PM 114
Marginal Cost Pricing contd..• 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 - - . PM 116
Marginal Cost Pricing contd... • Example:Aircraft flying from Bristol to Edinburgh – Total Cost (including normal profit) =£15,000 of which £13,000 is fixed cost*Number of seats = 160, average price = £93.75MC of each passenger = 2000/160 = £12.50If flight not full, better to offer passengers chance of flying at £12.50 and fill theseat than not fill it at all!*All figures are estimates only- - . PM 117
Contribution Pricing contd..• Contribution = Selling Price – Variable (direct costs)• Prices set to ensure coverage of variable costs and a ‘contribution’ to the fixed costs• Similar in principle to marginal cost pricing• Break-even analysis might be useful in such circumstances - - . PM 119
Target Pricing contd.. • Setting price to ‘target’ a specified profit level • Estimates of the cost and potential revenue at different prices, and thus the break-even have to be made, to determine the mark- up • Mark-up = Profit/Cost x 100- - . PM 121
Chapter Questions• How do consumers process and evaluate prices?• How should a company set prices initially for products or services?• How should a company adapt prices to meet varying circumstances and opportunities?• When should a company initiate a price change?• How should a company respond to a competitor’s price challenge? - - . PM 122
One Final Word“ A product is not a product unless it sells. Otherwise, it’s just a museum piece…” Ted Levitt
Marketing Debate Is the right price a fair price?Take a position:1. Prices should reflect the value thatconsumers are willing to pay.or2. Prices should primarily just reflect the costinvolved in making a product.
Marketing Discussion Think of all the pricing methods described in the chapter. As a consumer, which pricing method do you personally prefer to deal with? Why?
Reference• Kotler, Kelly, Koshy and Jha (2009) Marketing Management: A South Asian Perspective, 14th ed. Pearson Prentice Hall, pp.368-99