Lecture 10 Pricing


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Lecture 10 Pricing

  1. 1. Lecture 10 Pricing; Prepared by Zaved Mannan 1 | P a g e Lecture 10 Pricing Objectives At the completion of this lecture, you should be able: • Implement a six-step procedure for setting the price of a product; • Explain how price is influences by various situational considerations; and • Identify the factors to be considered in making a price change. Commentary Introduction Next time you go to the supermarket (Agora, Meena Bazar, Shopno or Almas), stop and examine the range of choices for some of the off-the-shelf food products you buy. Study the ingredient labels, the relative quantities in the packets, and look at the prices (ignore any temporary discount prices). How much does the price per quantity vary? Can you see any reason for the differences? Example, do some have a recognized brand that may be perceived as offering belter quality? Do some offer different product attributes (different ingredients, packaging, flavours)? Are some imported so therefore incur higher transport costs? It should be obvious that pricing has to work in tandem with the rest of the marketing mix. Price is clearly a vital part of the marketing mix as it is the only marketing variable that produces revenue. Price is the only variable that can be changed at short Essential Reading Textbook: Koteler et al., Chapter 14 Reading 10.1: Kung, M., Munroe, K. B., & Cox, J. L. (2002). Pricing on the internet. Journal of Product and Brand Management, 11(5), 274-287.
  2. 2. Lecture 10 Pricing; Prepared by Zaved Mannan 2 | P a g e notice without major cost implications. It is also important because it affects demand, and demand and price are usually inversely related. It is important that consumers see a relationship between price and perceived value. Thus price must be equal to or below the perceived value. In some ways, the setting of prices can be considered to be an ‘art’ where the marketer needs to balance the expense of producing customer value against the value delivered and perceived by the consumer. This lecture focuses on the broader aspects of pricing strategy rather than looking at how markets adjust the price of products during the product life-cycle. Price can be set by the firm or be an intermediary. The ability of a firm to change its prices will increase as a firm gains experiences and market share and is also affected by the level of competition in the market and the nature of the product. Read Kotler et al. (2009, pp. 408-412) for broader coverage of how companies price, and the consumer's role in the pricing process. The price charged for a product may not only be for the physical product but also could be for an associated bundle of attributes that come with the purchase, e.g. motor car + 30,000 km warranty + servicing+ affiliation with credit card frequent flyer program. Setting the Pricing Policy Kotler et al. (2009, pp. 375-388) suggests a six step process in determining pricing as shown in Table 10.1 below. Table 10.1: Steps in determining price. 1.Seclecting pricing objectives Five major objectives- survival, maximise current profits, maximise market share, maximise market skimming and product/quality leadership. 2.Determining demand Need to estimate the probable quantity sold at various price levels. This will be influences by price sensitivity and price elasticity. 3.Estimating costs Need to estimate how the costs will vary depending on production levels, different marketing strategies and target costing based on market research. 4.Analysing competitor’s costs, prices & offers Need to evaluate competitor’s prices and any differentiation features that may be present or absent from our product. Then the critical decision of whether to charge more, the same or less than our competitors. 5.Selecting a pricing method i. Mark up pricing ii. Target return pricing iii. Perceived value pricing iv. Competitor pricing v. Auction type pricing 6. selecting the final Need to consider other factors such as psychological pricing,
  3. 3. Lecture 10 Pricing; Prepared by Zaved Mannan 3 | P a g e price shared risk pricing and be compatible with other company pricing policies. Modifying the Price Companies usually do not set a single price, instead they develop a pricing structure that reflects variations in geographical demand and costs, market segment requirements, order levels and delivery frequencies etc. geographical pricing involves the company in deciding how to price its products for distant customers in different locations and different countries. Price discounts and allowances occur when companies adjust their list price for early payment, volume purchases and off-season purchases. Retailers may request certain allowances be paid in order to stock particular lines – this is commonly known as new-line fees. Promotional pricing is used to stimulate early purchase and can be in the form of loss-leader pricing, special event pricing, cash rebates, low interest terms or delayed payment offers and the common technique of psychological pricing. Differentiating pricing occurs when companies accommodate differences in customers, products, locations and other variables. Kotler et al. (2009, pp. 389- 393) provide detailed coverage of these options. Initiating and Responding to Price Changes The various strategic pricing options, a rationale for each option and the predicted outcome for each option are covered in depth on pages 394 to 398 of Kotler et al. (2009). Contemporary Issues – Pricing and the Internet Conclusion Price is a crucial element of marketing since it is the only element that produces revenue. In setting its pricing policy, companies follow a six step procedure. The final price is usually not a single price but a pricing structure that allows for variations n geography, demand and costs. Companies may wish to pursue a range READ Reading 10.1: Kung, M., Munroe, K. B., & Cox, J. L. (2002). Pricing on the internet. Journal of Product and Brand Management, 11(5), 274-287. This article looks at the very contemporary issue of pricing and the Internet. The article challenges the idea that online pricing is always lower than conventional pricing. It also highlights the advantages to firms in online pricing as a tool to test pricing schedules and consumer behaviour.
  4. 4. Lecture 10 Pricing; Prepared by Zaved Mannan 4 | P a g e of pricing strategies by offering discounts, using promotional pricing or they may wish to differentiate their pricing strategies according to customers, products or other variables. After developing pricing strategies firms may face situation where they need to increase the price (due to inflation or increased demand) or decrease the price (due to oversupply, failing market share, recession or to gain market dominance). Prepared by Zaved Mannan Adjunct Faculty Member University of Liberty Arts Bangladesh