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Marketing: Pricing Decision.

Marketing: Pricing Decision.

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  • 1. Pricing: Approaches and Strategies Session 5 Chapter 10 & 11
  • 2. Objectives
    • Understand the internal & external factors affecting a firm’s pricing decisions.
    • Be able to contrast the three general approaches to setting prices.
    • Learn the major strategies for pricing imitative and new products.
    • Understand how companies find a set of prices that maximizes the profits from the total product mix.
    • Learn how companies adjust their prices to take into account different types of customers and situations.
    • Know the key issues related to initiating and responding to price changes.
  • 3. 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 and the Marketing Mix
      • Only element to produce revenues
      • Most flexible element
      • Can be changed quickly
    • Price as a tool of Competition
    • Common Pricing Mistakes
  • 4. Factors to Consider in Setting Price
    • Marketing objectives
    • Marketing mix strategies
    • Costs
    • Organizational considerations
    • Market positioning influences pricing strategy
    • Other pricing objectives:
      • Survival
      • Current profit maximization
      • Market share leadership
      • Product quality leadership
    • Not-for-profit objectives:
      • Partial or full cost recovery
      • Social pricing
    Internal Factors
  • 5.
    • Marketing objectives
    • Marketing mix strategies
    • Costs
    • Organizational considerations
    • Pricing must be carefully coordinated with the other marketing mix elements
    • Target costing is often used to support product positioning strategies based on price
    • Non-price positioning can also be used
    Internal Factors Factors to Consider in Setting Price (contd.)
  • 6.
    • Marketing objectives
    • Marketing mix strategies
    • Costs
    • Organizational considerations
    • Types of costs:
      • Variable
      • Fixed
      • Total costs
    • How costs vary at different production levels will influence price setting
    • Experience (learning) curve effects on price
    Internal Factors Factors to Consider in Setting Price (contd.)
  • 7. Strategic Impact & Cost Analysis: Pareto Law Effect
    • CitiBank NA Example
    • 80% of Cost Structure on staff and even Marketing Expenses is caused by 20% of Accounts for their Low Deposits and high Transaction Volume.
    • There are only few things that are really important.
    • If you successfully improve 20% of the most important problems, you will gain the same effect as you would by improving the rest 80%. This represents a big advantage with respect to cost versus effect.
    • For an Effective Cost-Structure:
    • 20% of the Customers and 20% of the Services contribute 80% of Revenue.
    • Rationalize 80% services & Purify 80% Accounts as they contribute only 20% of revenue.
    • Eliminate Services & Accounts in the Bottom-Right-Cell as they are certainly running at a loss .
  • 8.
    • Marketing objectives
    • Marketing mix strategies
    • Costs
    • Organizational considerations
    • Who sets the price?
      • In Small companies : CEO or top management
      • In Large companies : Divisional or product line managers
    • Price negotiation is common in industrial settings
    • Some industries have pricing departments
    Internal Factors Factors to Consider in Setting Price (contd.)
  • 9.
    • Nature of market and demand
    • Competitors’ costs, prices, and offers
    • Other environmental elements
    • Types of markets
      • Pure competition
      • Monopolistic competition
      • Oligopolistic competition
      • Pure monopoly
    • Consumer perceptions of price and value
    • Price-demand relationship
      • Demand curve
      • Price elasticity of demand
    External Factors Factors to Consider in Setting Price (contd.)
  • 10.
    • Nature of market and demand
    • Competitors’ costs, prices, and offers
    • Other environmental elements
    • Consider competitors’ costs, prices, and possible reactions when developing a pricing strategy
    • Pricing strategy influences the nature of competition
      • Low-price low-margin strategies inhibit competition
      • High-price high-margin strategies attract competition
    • Benchmarking costs against the competition is recommended
    External Factors Factors to Consider in Setting Price (contd.)
  • 11.
    • Nature of market and demand
    • Competitors’ costs, prices, and offers
    • Other environmental elements
    • Economic conditions
      • Affect production costs
      • Affect buyer perceptions of price and value
    • Reseller reactions to prices must be considered
    • Government may restrict or limit pricing options
    • Social considerations may be taken into account
    External Factors Factors to Consider in Setting Price (contd.)
  • 12.
    • 1. Cost-Based Pricing: a) Cost-Plus Pricing
      • Adding a standard markup to cost
      • Ignores demand and competition
      • Popular pricing technique because:
        • It simplifies the pricing process
        • Price competition may be minimized
        • It is perceived as more fair to both buyers and sellers
    • Example
      • Variable costs: Tk. 20 Fixed costs: Tk. 500,000
      • Expected sales: 100,000 units Desired Sales Markup: 20%
      • Variable Cost + Fixed Costs/Unit Sales = Unit Cost
      • Tk. 20 + Tk. 500,000/100,000 = Tk. 25 per unit
      • Unit Cost/(1 – Desired Return on Sales) = Markup Price
      • Tk. 25 / (1 - .20) = Tk. 31.25
    General Pricing Approaches
  • 13.
    • b) Break-Even Analysis & Target Profit Pricing
    • Break-even charts show total cost and total revenues at different levels of unit volume.
    • The intersection of the total revenue and total cost curves is the break-even point.
    • Companies wishing to make a profit must exceed the break-even unit volume.
    General Pricing Approaches (contd.)
  • 14.
    • 2. Value-Based Pricing
    • Uses buyers’ perceptions of value rather than seller’s costs to set price.
    • Measuring perceived value can be difficult.
    • Consumer attitudes toward price and quality have shifted during the last decade.
      • Introduction of less expensive versions of established brands has become common.
    General Pricing Approaches (contd.)
    • Business-to-business firms seek to retain pricing power
      • Value-added strategies can help
    • Value pricing at the retail level
      • Everyday low pricing (EDLP) vs. high-low pricing
  • 15.
    • 3. Competition-Based Pricing
      • Also called going-rate pricing
      • May price at the same level, above, or below the competition
      • Bidding for jobs is another variation of competition-based pricing
        • Sealed bid pricing
    General Pricing Approaches (contd.)
  • 16.
    • Market-Skimming Pricing
      • Setting a high price for a new product to skim maximum revenues layer by layer from segments willing to pay the high price.
    • Market-Penetration Pricing
      • Setting a low price for a new product in order to attract a large number of buyers and a large market share.
    • Market Rate Pricing
      • Ceding the initiative to the key competitors to set the price.
      • Dangerous for leaving the strategic initiative to competitors
      • Potential threat of ‘Sudden Price Shift’ by newer, or ‘Changes in delivery system capability’.
    • Relationship Pricing
      • Different price for Different class of customers depending on relationship and the potentiality of cross-selling or future business.
    Other Pricing Approaches
  • 17.
    • Product Line Pricing
      • Setting price steps between product line items.
        • Line of products rather single one
        • Price points
    • Optional-Product Pricing
      • Pricing optional or accessory products sold with the main product
    • By-Product Pricing
      • Pricing low-value by-products to get rid of them
    Product Mix Pricing Strategies
    • Captive-Product Pricing
      • Pricing products that must be used with the main product
        • High margins are often set for supplies
      • Services: two-part pricing strategy
        • Fixed fee plus a variable usage rate
    • Product Bundle Pricing
      • Pricing bundles of products sold together
  • 18. Price Adjustment Strategies
    • Discount / allowance
    • Segmented
    • Psychological
    • Promotional
    • Types of discounts
      • Cash discount
      • Quantity discount
      • Functional (trade) discount
      • Seasonal discount
    • Allowances
      • Trade-in allowances
      • Promotional allowances
    Strategies
  • 19. Price Adjustment Strategies (contd.)
    • Discount / allowance
    • Segmented
    • Psychological
    • Promotional
    • Types of segmented pricing strategies:
      • Customer-segment
      • Product-form pricing
      • Location pricing
      • Time pricing
    • Also called revenue or yield management
    • Certain conditions must exist for segmented pricing to be effective
    Strategies
  • 20.
    • Market is segmentable
    • Lower priced segments are not able to resell
    • Competitors can not undersell segments charging higher prices
    • Pricing must be legal
    • Costs of segmentation can not exceed revenues earned
    • Segmented pricing must reflect real differences in customers’ perceived value
    Conditions Necessary for Segmented Pricing Effectiveness
  • 21.
    • Discount / allowance
    • Segmented
    • Psychological
    • Promotional
    • The price is used to say something about the product.
      • Price-quality relationship
      • Reference prices
      • Differences as small as five cents can be important
      • Numeric digits may have symbolic and visual qualities that psychologically influence the buyer
        • Odd
        • rounding
    Strategies Price Adjustment Strategies (contd.)
  • 22.
    • Discount / allowance
    • Segmented
    • Psychological
    • Promotional
    • Temporarily pricing products below the list price or even below cost
    • Loss leaders
      • Special-event pricing
      • Cash rebates
      • Low-interest financing, longer warranties, free maintenance
    • Promotional pricing can have adverse effects
    Strategies Price Adjustment Strategies (contd.)
  • 23.
    • Easily copied by competitors
    • Creates deal-prone consumers
    • May erode brand’s value
    • Not a legitimate substitute for effective strategic planning
    • Frequent use leads to industry price wars which benefit few firms
    Promotional Pricing Problems
  • 24.
    • Customer Discrimination
      • for students only
    • Product-form Discrimination
      • Telecom products
    • Place Discrimination
      • service at ATM versus at counters
    • Time Discrimination
      • peak -hours/ off-peak-hours
    Price Discrimination
  • 25.
    • Initiating Price Cuts is Desirable When a Firm
      • Has excess capacity
      • Faces falling market share due to price competition
      • Desires to be a market share leader
    • Price Increases are Desirable
      • If a firm can increase profit, faces cost inflation, or faces greater demand than can be supplied.
    • Methods of Increasing Price
    • Alternatives to Increasing Price
      • Reducing product size, using less expensive materials, unbundling the product.
    Price Changes
  • 26.
    • Buyer reactions to price changes must be considered.
    • Competitors are more likely to react to price changes under certain conditions.
      • Number of firms is small
      • Product is uniform
      • Buyers are well informed
    • Respond to Price Changes only if:
      • Market share / profits will be negatively affected if nothing is changed.
      • Effective action can be taken:
        • Reducing price
        • Raising perceived quality
        • Improving quality and increasing price
        • Launching low-price “fighting brand”
    Price Changes (contd.)
  • 27.
    • Pricing within Channel Levels
      • Price-fixing
        • Competitors can not work with each other to set prices
      • Predatory pricing
        • Firms may not sell below cost with the intention of punishing a competitor or gaining higher long-run profits or running a competitor out of business.
    • Pricing across Channel Levels
      • Price discrimination
      • Retail price maintenance
      • Deceptive pricing
        • Bogus reference / comparison pricing
        • Scanner fraud
        • Price confusion
    Public Policy and Pricing