Price• The amount of money charged for a product, or the sum of the values that consumers exchange for the benefits of having/using the product or service.Price is…main element to produce revenues ….most flexible element…a tool of competition ….can be changed quickly
Factors to consider in setting a price Company Objectives Customer Economic Needs and Conditions Characteristics Pricing Cost of the Product Policy and Competition Decision
Four views of priceEconomists view Price is set by the forces of supply and demandAccountant’s Price should cover costs so that aview profit can be madeCustomer’s view Price has to represent good valueMarketer’s view Pricing is an opportunity to gain a competitive advantage
Factors to Consider in Setting Price • Market positioning influencesInternal Factors pricing strategy • Other pricing objectives: • Marketing objectives – Survival • Marketing mix strategies – Current profit maximization • Costs – Market share leadership – Product quality leadership • Organizational considerations • Not-for-profit objectives: – Partial or full cost recovery – Social pricing
Factors to Consider in Setting Price (contd.) Internal Factors • Pricing must be carefully coordinated with the other marketing mix elements • Marketing objectives • Marketing mix strategies • Target costing is often used to support product positioning • Costs strategies based on price • Organizational considerations • Non-price positioning can also be used
Factors to Consider in Setting Price (contd.) Internal Factors • Types of costs: – Variable – Fixed • Marketing objectives – Total costs • Marketing mix strategies • Costs • How costs vary at different production levels will influence • Organizational price setting considerations • Experience (learning) curve effects on price
Factors to Consider in Setting Price (contd.) Internal Factors • Who sets the price? – In Small companies: CEO or top management • Marketing objectives – In Large companies: Divisional • Marketing mix strategies or product line managers • Costs • Price negotiation is common in industrial settings • Organizational considerations • Some industries have pricing departments
Factors to Consider in Setting Price (contd.) External • Types of markets Factors – Pure competition – Monopolistic competition • Nature of market and – Oligopolistic competition demand – Pure monopoly • Competitors’ costs, prices, • Consumer perceptions of price and offers and value • Other environmental elements • Price-demand relationship – Demand curve – Price elasticity of demand
Factors to Consider in Setting Price (contd.) • Consider competitors’ costs, prices, External and possible reactions when Factors developing a pricing strategy • Pricing strategy influences the • Nature of market and nature of competition – Low-price low-margin strategies demand inhibit competition • Competitors’ costs, prices, – High-price high-margin strategies and offers attract competition • Other environmental • Benchmarking costs against the elements competition is recommended
Factors to Consider in Setting Price (contd.) External • Economic conditions Factors – Affect production costs – Affect buyer perceptions of price and value • Nature of market and demand • Reseller reactions to prices must be considered • Competitors’ costs, prices, and offers • Government may restrict or limit pricing options • Other environmental • Social considerations may be elements taken into account
Pricing MethodCost-Oriented Method• Focus on cost, not market conditionMarket-Oriented Method• Focus on both – market conditions and costs
Cost-Oriented Method Markup pricing – Standard pricing - Target return pricing - adding markup to charging the same setting a target rate unit cost of product price in all countries or return• Information • Drawbacks: lacks • Information needed: fixed cost, marketing needed: total variable cost, orientation, difficult investment, desired expected sales, to implement target return, unit markup • Advantage: firm cost, expected sales• Appeal is simplicity won’t be blamed for • Drawbacks: lacks• Risks: overpricing price discrimination marketing and underpricing orientation, sales and cost estimates must be accurate
Market-Oriented Method • - may attract accusations ofMarket- unfair pricing and encouragebased the practice of gray marketingpricing (buying in low-price countries, selling in high-price countries) • setting minimum standardStrategic price while giving localpricing managers freedom to charge more
Penetration Pricing• Price set to ‘penetrate the market’• ‘Low’ price to secure high volumes• Typical in mass market products – chocolate bars, food stuffs, household goods, etc.• Suitable for products with long anticipated life cycles• May be useful if launching into a new market
Market SkimmingHigh price, Low volumesSkim the profit from the marketSuitable for products that have short life cycles or whichwill face competition at some point in the future (e.g.after a patent runs out)Examples include: iPhone, PlayStation, jewellery,digital technology, new DVDs, etc.
Value Pricing• Price set in accordance with customer perceptions about the value of the product / service• Examples include status Companies may be able to set products/exclusive prices according to perceived value. products
Tender Pricing• Many contracts awarded on a tender basis• Firm (or firms) submit their price for carrying out the work• Purchaser then chooses which represents best value• Most government contracts
Price Discrimination• Charging a different price for the same good/service in different markets• Requires different price elasticity of demand in each market• Air/rail – First class – Business class – Economy class Prices for the flight differ for the same journey at different class
Marginal Cost Pricing• 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.• Get one extra student and get fees discount.
Target Pricing• 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• This strategy is used by many clothes retailers where they can add upto 60% mark-up on the basic cost of the clothes. So even with a 50% sales offer they still make a profit!
Pricing tacticsUnlike pricing strategies, these refer to theshort run Predatory Loss leaders pricing (illegal) Price wars Promotional Psychological pricing and pricing discounts
Predatory pricing • Predatory pricing occurs when a dominant company incurs losses with the purpose of removing a competitor and/or deterring other potential competition • This anti- competitive practice Microsoft – have been accused of is used when competitors predatory pricing strategies in offering threaten to reduce market‘free’ software as part of their operating system – Internet Explorer and share and profitability Windows Media Player - forcing competitors like Netscape and Real Player out of the market • Illegal if it can be proved
Price warsCompetitive price reductions by firms in acompetitive industryEach seeks to increase market share by pricereduction but the result is destroying a price levelThe process continues until weaker firms go out ofbusinessPrice wars might be seen as good for customers in theshort run but it is harmful in the long run ifcompetition is reduced
Psychological pricing• In this case consideration is given to the psychology of prices and not simply the economics of pricing• Charging at a price which ends in 99p is a way of deceiving people into believing that the product is cheaper than it really is
Psychological pricing• Prestige Pricing – sets a higher than average price to suggest status
Psychological pricing• Multiple-Unit Pricing – 3 for $.99• Suggests a bargain and helps increase sales volume.• Better than selling the same items at $.33 each.
Psychological pricing• Everyday Low Prices (EDLP) – set on a consistent basis
Loss leaders • A loss leader is a product prominently displayed and advertised and price below the normal price and even below cost to the seller • A product which is sold at a low (even loss making) price in order to encourage customers to buy other full price products from the business along with the loss leader product • Loss leaders are widely used by supermarkets to draw in customers from competitors • The aim is to encourage people to buy complementary goods at full price
Promotional pricing and discountsType of Who for?discountCash For those who pay cashQuantity For customers who buy large volumes (bulk buying)Trade Intermediaries in the tradeSeasonal For buying off peak or out of seasonPromotional Temporary pricing of products below list price to increase short run sales