Part 5 : Shaping the Market Offerings Chapter 14 – Developing Pricing Strategies & Programs

Understanding Pricing Although non price factors have become more important in modern marketing, price is the most important elements determining market share and profitability Effectively designing and implementing pricing strategies requires a thorough understanding of consumer pricing psychology and a systematic approach to setting, adapting, and changing prices Consumer pricing psychology  how consumers arrive at their perceptions of price, the marketers must think of: Reference price: consumers get pricing information from internal reference price (used as habitual decision making) or external reference price (used as limited decision making and extended decision making) Price-quality inferences: many consumers use price as an indicator of quality whenever the information is not available Price cues: consumers tend to process prices in a “left to right” manner rather than by rounding e.g. stereo amplifier priced at 299 instead $300 as a price in the $200 range rather than $300 range

Although non price factors have become more important in modern marketing, price is the most important elements determining market share and profitability

Effectively designing and implementing pricing strategies requires a thorough understanding of consumer pricing psychology and a systematic approach to setting, adapting, and changing prices

Consumer pricing psychology  how consumers arrive at their perceptions of price, the marketers must think of:

Reference price: consumers get pricing information from internal reference price (used as habitual decision making) or external reference price (used as limited decision making and extended decision making)

Price-quality inferences: many consumers use price as an indicator of quality whenever the information is not available

Price cues: consumers tend to process prices in a “left to right” manner rather than by rounding e.g. stereo amplifier priced at 299 instead $300 as a price in the $200 range rather than $300 range

Setting the Price In setting pricing policy, a company follows a Six-Step procedures : Selecting the Pricing Objective through Survival if a firm sets prices covering variable cost and some fixed cost to face overcapacity, intense competition or changing consumer wants. Maximum current profit if a firm has knowledge of its demand and cost function Maximum market share if a firm believes a higher sales volume will lead to lower unit cost and higher long run profit. They set “the lowest price” assuming the market is price sensitive Maximum market skimming if a firm unveiling a new technology favor setting “higher price” as to communicate superior product but sales drop in the next future making the price low e.g. initially higher price for TV flat with billingual system

In setting pricing policy, a company follows a Six-Step procedures :

Selecting the Pricing Objective through

Survival if a firm sets prices covering variable cost and some fixed cost to face overcapacity, intense competition or changing consumer wants.

Maximum current profit if a firm has knowledge of its demand and cost function

Maximum market share if a firm believes a higher sales volume will lead to lower unit cost and higher long run profit. They set “the lowest price” assuming the market is price sensitive

Maximum market skimming if a firm unveiling a new technology favor setting “higher price” as to communicate superior product but sales drop in the next future making the price low e.g. initially higher price for TV flat with billingual system

Setting the Price Product-Quality leadership if a firm makes the brands “affordable luxuries”-products or services characterized by high levels of perceived quality, taste, and status with a price e.g. Jaguar car Other objectives: suitable to nonprofit and public organization to cover the remaining cost e.g. customers pay for building maintenance Determining Demand : price elasticity of demand Price $15 $10 100 105 $15 $10 50 150 ------------------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------- (a) Inelastic Demand (b) Elastic Demand Quantity Demanded per Period Quantity Demanded per Period

Product-Quality leadership if a firm makes the brands “affordable luxuries”-products or services characterized by high levels of perceived quality, taste, and status with a price e.g. Jaguar car

Other objectives: suitable to nonprofit and public organization to cover the remaining cost e.g. customers pay for building maintenance

Determining Demand : price elasticity of demand

Setting the Price Estimating costs : a company’s costs take two forms, fixed costs and variable costs. The models are: The decline in the average cost (total costs divided by production) with accumulated production experience is called experience curve Cost per unit $2 $4 $6 $8 $10 100,000 200,000 400,000 800,000 ----------------------------------------------------------------------- B I I A I I I I I I I I I TI Current price Experience curve Accumulated Production I I I

Estimating costs : a company’s costs take two forms, fixed costs and variable costs. The models are:

The decline in the average cost (total costs divided by production) with accumulated production experience is called experience curve

Setting the Price Activity-Based Cost Accounting is to identify the real costs associated with serving each customer Analyzing Competitors Costs, Prices, and Offers by considering the nearest competitor’s price so that the firm can charge (competitors’ price as benchmarking) Selecting a Pricing methods: Markup pricing e.g. VC/unit: $10; FC: $300,000; Expected unit sales 50,000, the unit cost = $10 + ($ 300,000/50,000) = $ 16, then markup price = $16/(1-0.2) = $20 Perceived-value pricing: setting premium price for excellent services, luxurious products etc. Value pricing: setting price with “everyday low pricing” at the retail level

Activity-Based Cost Accounting is to identify the real costs associated with serving each customer

Analyzing Competitors Costs, Prices, and Offers by considering the nearest competitor’s price so that the firm can charge (competitors’ price as benchmarking)

Selecting a Pricing methods:

Markup pricing e.g. VC/unit: $10; FC: $300,000; Expected unit sales 50,000, the unit cost = $10 + ($ 300,000/50,000) = $ 16, then markup price = $16/(1-0.2) = $20

Perceived-value pricing: setting premium price for excellent services, luxurious products etc.

Value pricing: setting price with “everyday low pricing” at the retail level

Setting the Price Selecting the final price : the company must consider additional factors such as Impact of other marketing activities: the final price must take the brand’s quality, advertising media, channel selection and services provided The salespeople quote prices that are reasonable to customer and profitable to the company Risk and gain sharing pricing: the company must aware “the risk of pricing” such as consumers will see uncompetitive price for homogenous products or loss of customers if it does not deliver the full promised value for non homogenous products.

Selecting the final price : the company must consider additional factors such as

Impact of other marketing activities: the final price must take the brand’s quality, advertising media, channel selection and services provided

The salespeople quote prices that are reasonable to customer and profitable to the company

Risk and gain sharing pricing: the company must aware “the risk of pricing” such as consumers will see uncompetitive price for homogenous products or loss of customers if it does not deliver the full promised value for non homogenous products.

Adapting the Price Companies usually do not set a single price, but rather a pricing structure that reflects variation in: Geographical pricing: the company decides how to price its products to different customers in different locations and countries Price discounts and allowance: most companies will adjust their list price and give discounts and allowances for early payment, volume purchases, and off-season buying Promotional pricing: companies can use several pricing techniques to stimulate early purchases or attract customers attention such as loss leader pricing, special event pricing, longer payment terms Differentiated pricing or price discrimination: companies often adjust their basic price in customer segment pricing (adult vs child), product form pricing (1 for $10, 2 for $15), location pricing and time pricing

Companies usually do not set a single price, but rather a pricing structure that reflects variation in:

Geographical pricing: the company decides how to price its products to different customers in different locations and countries

Price discounts and allowance: most companies will adjust their list price and give discounts and allowances for early payment, volume purchases, and off-season buying

Promotional pricing: companies can use several pricing techniques to stimulate early purchases or attract customers attention such as loss leader pricing, special event pricing, longer payment terms

Differentiated pricing or price discrimination: companies often adjust their basic price in customer segment pricing (adult vs child), product form pricing (1 for $10, 2 for $15), location pricing and time pricing

Initiating & Responding to Price Changes Companies face situations where they need to cut or raise price Initiating Price Cuts: as a drive to dominate the market through lower cost and excess plant capacity. A price-cutting strategy involves possible traps: Low quality trap A low price buys market share but not market loyalty Little cash receives due to price wars Initiating Price Increases: as a drive to face the cost inflation and the over demand. A price-increase strategy involves different impact on buyers: Delayed quotation pricing: the company does not set a final price until the product is finished or delivered Unbundling: the company prices separately one or more elements that were part of the offer such as delivery and installation cost Reduction of discounts: the price increase makes the company to instruct its sales force not to offer its normal cash e.g. 30% discount but price already changes Market leaders attacked by lower-priced competitors can choose: to maintain price, raise the perceived quality of their product, reduce price, increase price and improve quality, or launch a low-priced fighter line

Companies face situations where they need to cut or raise price

Initiating Price Cuts: as a drive to dominate the market through lower cost and excess plant capacity. A price-cutting strategy involves possible traps:

Low quality trap

A low price buys market share but not market loyalty

Little cash receives due to price wars

Initiating Price Increases: as a drive to face the cost inflation and the over demand. A price-increase strategy involves different impact on buyers:

Delayed quotation pricing: the company does not set a final price until the product is finished or delivered

Unbundling: the company prices separately one or more elements that were part of the offer such as delivery and installation cost

Reduction of discounts: the price increase makes the company to instruct its sales force not to offer its normal cash e.g. 30% discount but price already changes

Market leaders attacked by lower-priced competitors can choose: to maintain price, raise the perceived quality of their product, reduce price, increase price and improve quality, or launch a low-priced fighter line