Pricing Strategy


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Pricing Strategy

  2. 2. “Pricing is a critical ingredient in the marketing mix that diffirentiates the brand. In some cases, it is the major factor that determines brand image.” ALEX FERNANDEZ Head of Consumer Health, United Laboratories, Inc.
  3. 3. Overview          Definition of price Function of Price International Pricing Psychological Pricing Price Elasticity Price Expectations Price Sensitivity Meter Price Adjustment Fighting Price Attacks
  4. 4. Price - Definition   the amount of money asked or given for “something” the sum of all the values that consumers exchange for the benefits of having or using the product or service  Lessor – rent; schools – tuition; employees – wages; banks – interest; lawyers and doctors – professional fee; fixers – consultancy fee
  5. 5. Pricing Strategy It can be defined as “a reasoned choice from set of a alternative prices (or price schedules) that aim at profit maximization within a planning period in response to a given scenario” (Gerard Tellis, 1986)
  6. 6. Function of Price  It makes the product affordable to its target market    Firms offer installment plan It reflects the value of the product A major tool for business model innovation
  7. 7. al rn on te titi Ex pe m Co M E ar x ke te t D rn em al an d Factors to Consider in Pricing Internal Factor: Product Cost Company Objectives
  8. 8. Factors to Consider in Pricing  Internal Factor 1: Product Cost   Product cost must be broken down to fixed and variable cost as most companies sell more than one item and the fixed cost must be allocated to different products in a sensible way Under the cost-based pricing strategy, two common types of setting prices: Mark-up  Target Profit 
  9. 9. Internal Factor 1: Product Cost   Mark-up – a retail price of P1000 with 10% mark-up on sales = P900 Target Profit Pricing = = unit cost + target ROI x investment Unit sales = P20 + 35% x P2,000,000 P100,000 = P27
  10. 10. Internal Factor 1: Product Cost  Unit Cost Pricing = = variable cost + fixed cost Unit sales = P10 + P1,000,000 P100,000 = P10 + P10 = P20
  11. 11. Cost vs Expense Structure  Your main competitor has just lowered their price. Should you also lower your price or will it risk an expensive price war?
  12. 12. Internal Factor 2: Company’s Objectives Pricing Objectives of the firm:  Differential Pricing Strategy  Competitive Pricing Strategy  Product Line Pricing Strategy Characteristics of the consumers:  Some consumers have high search costs  Some consumers have a low reservation for the price  All consumers have certain special transaction costs other than search costs
  13. 13. Pricing Strategies based on Company’s Objectives and Consumer Characteristics Characteristics of Consumer Differential Pricing Competitive Pricing Product line Pricing Some consumers have high search costs Random Discounting Price Signalling Image Pricing Some consumers have a low reservation for the price All consumers have certain special transaction costs other than search costs Periodic Discounting Penetration / Experience Curve Price Bundling / Premium Second Market Discounting Georgraphic Pricing Complementary Pricing
  14. 14. Differential Pricing Random Discounting - Common examples are “sale” prices or special discounts provided by companies. Second Market Discounting – Only the second market segment enjoys through lower price Periodic Discounting – the manner of discounting is predictable over time and known to consumers and the discount can be used by all consumers
  15. 15. Competitive Pricing Price Signaling – Prices are set high regardless of high or basic product quality Penetration Pricing – Exploits economies of scale having cheaper cost, superior technology, and an efficient organization Experience Curve – Exploits a firm’s production experience as cost decreases due to cumulative volume Geographic Pricing – Can be adopted when there are adjacent markets separated by transport costs rather than reservation or transaction costs
  16. 16. Product Line Pricing Image Pricing – Makes use of high price to signal high quality and uses the profit it makes from higher priced versions to subsidize the price of lower priced version Price Bundling – Buying the whole bundle is cheaper than the buying the parts separately Premium Pricing – the firms set a high price emphasizing on unique product features Complementary Pricing – Captive pricing, two-part pricing, loss-leader pricing
  17. 17. Generic Strategy: The Bigger Picture of Pricing Product Market Low-cost Differentiation Broad Broad Cost Broad Differentiation Focus Focus Cost Focus Differentiation
  18. 18. The Practice of Foolish Penetration Marketers may be tempted to price their products low during the introductory period, regardless of product quality and choices of available distribution methods. The obvious intention is to gain market shares quickly. The temporary market shares gained, however, may create a permanent price image for a brand which may be difficult to change over time.
  19. 19. External Factor 1: Market Demand Different market create different market demand. Two of the most common ways in setting prices under the market demand-based pricing strategy are: a. Perceived value b. Demand Differential
  20. 20. Diagnostic Perception Pricing Products have different features or attributes. These attributes have different levels of importance to the customers.
  21. 21. External Factor 2: Competition Two of the most common ways in setting prices under the competition-based pricing strategy are: a. Going rate b. Sealed bid
  22. 22. The Practice of “Foolish Fellowship” While external factors may be similar to competing companies, internal factors are not. Different companies have different objectives, different cost structures, and different strengths. Abusing and overusing competitor’s price or “going rate” pricing is common practice among lazy marketers. Marketers remember that the more unique their products are, the more flexible they can be in formulating pricing.
  23. 23. INTERNATIONAL PRICING F.O.B. – FREE ON BOARD. The supplier pays the freight up to a certain point, usually the point of origin. C&F – COST AND FREIGHT. It means that the Philippine exporter is quoting a price inclusive of freight from the Philippines. C.I.F. – COST, INSURANCE and FREIGHT – has a similar meaning with C&F except that it includes the cargo insurance covering the shipment from the port of origin
  24. 24. INTERNATIONAL PRICING International marketers have to consider buyer’s landed cost and not only the competitiveness of their final quote price. Landed cost would take into consideration additional expenses that the buyer would incur such as freight, insurance, brokerage and arrester charges, and tariff (which may vary from country to country).
  25. 25. PSYCHOLOGICAL PRICING Also called “Noticeable Price Difference”, this technique is used most specially in supermarkets and department stores to create an impression of “good value”.
  26. 26. PRICE ELASTICITY The term Elasticity connects the relationship between changes in price and quantity of sales. Price elasticity means that demand will change if change in pricing occurs. Price elasticity means that demand will not change even when changes in pricing occur. Price elasticity measurement allows companies to evaluate how price changes will affect total revenue. Price elasticity of demand for a product is the ratio of the percentage change in quantity sold to the percentage in price.
  27. 27. PRICE ELASTICITY OF DEMAND Price Elasticity of Demand = % Change in Quantity Sold % Change in Price 1. 2. If the price elasticity of demand is more than one, we can say that demand is elastic. If the price elasticity of demand is less than one, we can say that demand in inelastic.
  28. 28. Significant Findings on Price Elasticity 1. 2. 3. “Consumers tend to be more price-elastic towards an impending price increase than what actually takes place when the price increase happens.” “Consumers appear to be more sensitive to price decreases than to price increases. They are more ‘downside elastic’ than being ‘upside elastic’.” “The consumer’s price elasticity is observed to diminish when shopping with a friend or when being persuaded by a salesman perceived as an expert.”
  29. 29. PRICE EXPECTATIONS Using pricing research, price expectation can be identified. The objective is to know the fair range of the upper and lower threshold limits of pricing. Within the fair price range, there is likely to be neither change in quantity purchased nor any brand switching. Above the upper threshold limit, consumers will feel the product is too expensive. Below the lower threshold limit, consumers will doubt the quality of the product and may not buy it.
  30. 30. PRICE SENSITIVITY METER Van Westendorp’s Price Sensitivity Meter is one of a number of direct techniques to research pricing. Direct techniques assume that people have some understanding of what a product or service is worth, and therefore that it makes sense to ask explicitly about price. By contrast, indirect techniques, typically using conjoint or discrete choice analysis, combine the price with other attributes, ask questions about the total package, and then extract feelings about price from the results.
  31. 31. BPTO MODEL BPTO enables marketers to understand the implications of any change of price as well as the way in which price and brand relate for each respondent type, BPTO identifies price premiums customers are willing to pay and the added advantage of identifying which brands are directly competing with each other. A consumer brand loyalty specifying their favorite and second choices can also be identified in the model.
  32. 32. PRICING CRITERIA …BASED ON COMPANY’S OBJECTIVES: Objectives When to charge Lower Price When to charge Higher Price Sales Volume Turnover Fast Slow Market Dominance Low High Profit Objective Long-term Short-term
  33. 33. PRICING CRITERIA …BASED ON PRODUCT SPECIFICATIONS: Product Specifications When to Charge Lower Price When to charge Higher Price Product Type Commodity Patented Product Usage Single Use Multiple Use Product Obsolescence Product Appeal Slow Fast Price Sensitive Price Insensitive Production Method Mass Production Custom Made Production Quantity Big Small Production Capacity Excess Limited Types of Service Regular Extra Perceived Value Overpriced Underpriced