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Lecture 5 pricing strategies

The document discusses pricing strategies and factors to consider when setting prices. It covers internal factors like costs of production and external factors like competition and economic conditions. The major pricing strategies discussed are customer value-based pricing, cost-based pricing, and competition-based pricing. It also discusses strategies for new products, products within a mix, and adjusting prices for different customers. The objectives of pricing are to ensure business survival, improve profitability, and increase sales and market share.

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MKT 351: PRINCIPLES OF
MARKETING
LECTURE 5: PRICING STRATEGIES
4/24/2021
BY ASHMOND ADU- ANSERE
ASHMOND ADU- ANSERE
Price is the amount of money charged for a product or a service.
It is the sum of all the values that customers give up to gain the
benefits of having or using a product or service.
Among the marketing mix, price is the most flexible and it remains
the only element that generates revenue; all other elements
represent cost.
Unlike product features and channel commitments, prices can be
changed quickly. at the same time, pricing is the number one
problem facing many marketing executives, and many companies
do not handle pricing well.
ABOUT PRICING
4/24/2021
BY ASHMOND ADU- ANSERE
Smart managers treat pricing as a key strategic tool for creating and capturing customer value.
price also plays two roles in the evaluation of product alternatives: as a measure of sacrifice and as
an information cue. To some degree, these are two opposing effects.
THE SACRIFICE EFFECT OF PRICE: thus, “that which is given up”. What is sacrificed to get a good or
service. It may be time lost while waiting to acquire the good or service. It could be lost of dignity for
individuals who lose their jobs and must rely on charity. Any practical example?
THE INFORMATION EFFECT OF PRICE: Consumers do not always choose the lowest-priced product
in a category, such as shoes, cars, or wine, even when the products are otherwise similar. One
explanation of this behavior, based upon research, is that we infer quality information from price.
A typical example: Imagine buying soaked gari with milk for Ghc 150.00 at Kimpiski, when you can
prepare same at Ghc 5.00.
ABOUT PRICING contd.
4/24/2021
Pricing decisions are affected by both internal and external
factors. Companies should take all these factors into
consideration before arriving at the final price to avoid
rejection from customers or losing out to competitors.
FACTORS TO CONSIDER WHEN SETTING PRICE
4/24/2021
BY ASHMOND ADU- ANSERE
INTERNAL FACTORS TO CONSIDER WHEN SETTING PRICE
4/24/2021
BY ASHMOND ADU- ANSERE
MARKETING OBJECTIVES
The company must decide on its overall objectives and strategy for the product in terms of; survival, profit
maximization and market share leadership to set its price.
MARKETING MIX STRATEGY
Decision made for other marketing mix variables affect pricing decisions because it is the only variable that
generate revenue. Typically, a producer using many distribution channels to support and promote the products
may have to build larger margins into their prices.
COST OF PRODUCTION
The company wants to charge a price that covers all its cost of producing, distributing, selling the product as well
as a fair return on investment. These costs involve: fixed (overhead) costs (rent, interests, salary) and variable
cost.
ORGANIZATIONAL CONSIDERATION
Management should decide who within the organization must set the prices. In smaller companies, prices are
often set by top management. Those who influence pricing such as sales managers, production managers, finance
managers and accountants’ views must as well be taking into account.
INTERNAL FACTORS TO CONSIDER WHEN SETTING PRICE
4/24/2021
BY ASHMOND ADU- ANSERE

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Lecture 5 pricing strategies

  • 1. MKT 351: PRINCIPLES OF MARKETING LECTURE 5: PRICING STRATEGIES 4/24/2021 BY ASHMOND ADU- ANSERE ASHMOND ADU- ANSERE
  • 2. Price is the amount of money charged for a product or a service. It is the sum of all the values that customers give up to gain the benefits of having or using a product or service. Among the marketing mix, price is the most flexible and it remains the only element that generates revenue; all other elements represent cost. Unlike product features and channel commitments, prices can be changed quickly. at the same time, pricing is the number one problem facing many marketing executives, and many companies do not handle pricing well. ABOUT PRICING 4/24/2021 BY ASHMOND ADU- ANSERE
  • 3. Smart managers treat pricing as a key strategic tool for creating and capturing customer value. price also plays two roles in the evaluation of product alternatives: as a measure of sacrifice and as an information cue. To some degree, these are two opposing effects. THE SACRIFICE EFFECT OF PRICE: thus, “that which is given up”. What is sacrificed to get a good or service. It may be time lost while waiting to acquire the good or service. It could be lost of dignity for individuals who lose their jobs and must rely on charity. Any practical example? THE INFORMATION EFFECT OF PRICE: Consumers do not always choose the lowest-priced product in a category, such as shoes, cars, or wine, even when the products are otherwise similar. One explanation of this behavior, based upon research, is that we infer quality information from price. A typical example: Imagine buying soaked gari with milk for Ghc 150.00 at Kimpiski, when you can prepare same at Ghc 5.00. ABOUT PRICING contd. 4/24/2021
  • 4. Pricing decisions are affected by both internal and external factors. Companies should take all these factors into consideration before arriving at the final price to avoid rejection from customers or losing out to competitors. FACTORS TO CONSIDER WHEN SETTING PRICE 4/24/2021 BY ASHMOND ADU- ANSERE
  • 5. INTERNAL FACTORS TO CONSIDER WHEN SETTING PRICE 4/24/2021 BY ASHMOND ADU- ANSERE
  • 6. MARKETING OBJECTIVES The company must decide on its overall objectives and strategy for the product in terms of; survival, profit maximization and market share leadership to set its price. MARKETING MIX STRATEGY Decision made for other marketing mix variables affect pricing decisions because it is the only variable that generate revenue. Typically, a producer using many distribution channels to support and promote the products may have to build larger margins into their prices. COST OF PRODUCTION The company wants to charge a price that covers all its cost of producing, distributing, selling the product as well as a fair return on investment. These costs involve: fixed (overhead) costs (rent, interests, salary) and variable cost. ORGANIZATIONAL CONSIDERATION Management should decide who within the organization must set the prices. In smaller companies, prices are often set by top management. Those who influence pricing such as sales managers, production managers, finance managers and accountants’ views must as well be taking into account. INTERNAL FACTORS TO CONSIDER WHEN SETTING PRICE 4/24/2021 BY ASHMOND ADU- ANSERE
  • 7. EXTERNAL FACTORS TO CONSIDER WHEN SETTING PRICE 4/24/2021 BY ASHMOND ADU- ANSERE
  • 8. NATURE OF THE MARKET AND DEMAND The type of market that involves pure competition, monopolistic competition, oligopolistic competition, and pure monopoly present a different pricing challenge for organizations.  Pure Competition: a market that consists of many buyers and sellers trading in an even commodity such as wheat, or financial securities and no single buyer or seller has much effect on the going market price. In such markets, marketing research, product development, pricing, advertising, and sales promotion have very little impact.  Monopolistic Competition: the market consists of many buyers and sellers who trade over a range of prices rather than a single market price. This is because sellers can differentiate their offers among various customer segments through branding, advertising, and personal selling to vary prices.  Oligopolistic Competition: the market consists of a few sellers who are highly sensitive to each other’s pricing and marketing strategies. Because there are few sellers, each seller is alert and responsive to competitors’ pricing strategies and tactics.  Pure Monopoly: the market consists of one seller that could be a government monopoly, a private regulated monopoly, or a private unregulated monopoly. EXTERNAL FACTORS TO CONSIDER WHEN SETTING PRICE 4/24/2021 BY ASHMOND ADU- ANSERE
  • 9.  COMPETITION Another external factor affecting the company’s pricing decisions is competitors’ costs and prices. the company needs to learn the price and quality of each competitor’s offer. if offering of the company is of high quality than that of competitor’s, higher price may be charged.  ECONOMIC CONDITIONS Economic factors such as boom, recession, inflation, interest rate, etc., can have a strong impact on the firms pricing strategies. Boom: a period of increased commercial activity within either a business, market, industry, or an economy. Recession: a significant decline in general economic activity in a designated region. Inflation: the decline of purchasing power of a given currency over time  GOVERNMENT REGULATIONS The government is another external influence on pricing decisions. Marketers need to know the laws affecting price and make sure that the pricing policies does not violate the laws. Therefore, legal concerns may have to be taken into account. EXTERNAL FACTORS TO CONSIDER WHEN SETTING PRICE contd. 4/24/2021
  • 10. The major pricing strategies constitute: customer value–based pricing, cost- based pricing, and competition-based pricing. CUSTOMER VALUE-BASED PRICING Setting price based on buyers’ perceptions of value rather than on the seller’s cost. The company first assesses customer needs and value perceptions in order to set a corresponding price. Good-value pricing: offering just the right combination of quality and good service at a fair price. Value-added pricing: attaching value-added features and services to differentiate a company’s offers and charging higher prices. MAJOR PRICING STRATEGIES 4/24/2021 BY ASHMOND ADU- ANSERE
  • 11. COST-BASED PRICING Setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk. Types of cost Fixed costs (overhead): costs that do not vary with production or sales level. Variable costs: Costs that differ/vary directly with the level of production. Total costs: the sum of the fixed and variable costs for any given level of production. Cost-plus pricing (or mark-up pricing): adding a standard mark-up to the cost of the product. Break-even pricing (or target return pricing): setting price to break even on the costs of making and marketing a product, or setting price to make a target return 4/24/2021 BY ASHMOND ADU- ANSERE
  • 12. COMPETITION-BASED PRICING Setting prices based on competitors’ strategies, prices, costs, and market offerings. Consumers will base their judgments of a product’s value on the prices that competitors charge for similar products. In assessing competitors’ pricing strategies, the company should ask several questions. How does the company’s market offering compare with competitors’ offerings in terms of customer value? How strong are current competitors and what are their current pricing strategies? If consumers perceive the offerings of a company to be of greater value as compared to competitors, they can charge a higher/premium price but if they perceive the value to be lesser, they can decide to charge lower or work on the perception of consumers to justify the price. Additionally, the company can adopt “price wars” to drive out competitors or carve a niche to target unserved markets with value-added products at higher prices. 4/24/2021 BY ASHMOND ADU- ANSERE
  • 13. Pricing strategies usually change as the product passes through its life cycle. The introductory stage is very challenging in terms of pricing. However, two broad strategies: market-skimming pricing and market- penetration pricing are available to companies. Market-Skimming Pricing: a product pricing strategy by which a firm charges the highest initial price that customers will pay and then lowers it over time. Market skimming makes sense when: the product’s quality and image support its higher price, competitors are unable to enter the market easily and undercut the high price, the costs of producing a smaller volume cannot be so high to enjoy economies of scale. Market-Penetration Pricing: a marketing strategy used by businesses to attract customers to a new product or service by offering a lower price during its initial offering. The lower price helps a new product or service penetrate the market and attract customers away from competitors. The low initial price is aimed at attracting a large number of buyers and a large market share. NEW PRODUCT PRICING STRATEGIES 4/24/2021 BY ASHMOND ADU- ANSERE
  • 14. When a product is part of a product mix, different pricing strategies are applied. Prices that would maximize profit of the total product mix are preferred. Five key strategies are often adopted: Product line pricing: Setting across an entire product line based on cost differences between the products, customer evaluations of different features, and competitors’ prices. Optional-product pricing: Pricing optional or accessory products sold with the main product. The main product is then sold at a marginal price and the accessory accounts for the difference. Captive-product pricing: Pricing products that must be used along with the main product such as cartridges for printer. By-product pricing: Pricing low-value by-products to get rid of or make money on them. Turning trash to cash. Product bundle pricing: Combining several products and offer the bundle at a reduced price. For example, fast-food restaurants bundle a burger, fries, and a soft drink at a bundle price. Price bundling can promote the sale of products that consumers might not otherwise buy. PRODUCT MIX PRICING STRATEGIES 4/24/2021 BY ASHMOND ADU- ANSERE
  • 15. Companies usually adjust their basic prices to account for various customer differences and changing situations. The seven price adjustment strategies are assessed: Discount and allowance pricing: Reducing prices to reward customer responses such as volume purchases, paying early, or promoting the product. They take the form of cash, quantity or seasonal discount. Segmented pricing: Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. Other factors could be location, time and customer-segment pricing. Psychological pricing: Pricing that considers the psychology of prices and not simply the economics. In another vein it considers the reference prices. Promotional pricing: Temporarily pricing products below the list price and sometimes even below cost to increase short-run sales. Geographical pricing: Adjusting prices for customers located in different parts of the country or the world. Dynamic pricing: Adjusting prices continually to meet the characteristics and needs of individual customers and situations. International pricing: Adjusting prices for international markets. Such pricing depend on several factors. PRICE ADJUSTMENT STRATEGIES
  • 16. The following are some of the objectives of pricing of a firm: To achieve long term business survival. To improve profitability. To increase market share. To increase shareholders value. To increase sales revenue. To improve cash flow. To achieve returns on investment PRICING OBJECTIVES 4/24/2021 BY ASHMOND ADU- ANSERE