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Pricing Products: Pricing Considerations and Strategies


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Student Report, Feb. 17, 2012

Published in: Business
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Pricing Products: Pricing Considerations and Strategies

  1. 1. • Rent • Wages• Interest • Bribe• Rate • Fare• Professional • Premium Fee • Retainer• Commission • Toll• Tuition • Tax• Salary • Assessment
  2. 2. Price The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.
  3. 3. •Price and the Marketing Mix: Only element to produce revenues Most flexible element•Price Competition•Common Pricing Mistakes
  4. 4. Factors Affecting Price Decisions
  5. 5. Factors to Consider When Setting Internal Factors Price1. Marketing objectives •Market positioning influences 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
  6. 6. Factors to Consider When Setting PriceInternal Factors2. Marketing mix strategies •Pricing must be carefully coordinated with the other marketing mix elements •Target costing is often used to support product positioning strategies based on price •Nonprice positioning can also be used
  7. 7. Factors to Consider When Setting PriceInternal Factors3. Costs •Types of costs: Variable Fixed Total costs
  8. 8. Factors to Consider When Setting PriceInternal Factors4. Organizational considerations •Who sets the price? Small companies: CEO or top management Large companies: Divisional or product line managers •Price negotiation is common in industrial settings •Some industries have pricing departments
  9. 9. Factors to Consider When Setting PriceExternal Factors1. Nature of market and demand •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
  10. 10. Factors to Consider When Setting riceExternal Factors2. Competitors’ costs, prices, and offers •Consider competitors’ costs, prices, and possible reactions when developing a pricing strategy •Benchmarking costs against the competition is recommended
  11. 11. Factors to Consider When Setting PriceExternal Factors3. Other environmental elements •Economic conditions Affect production costs Affect buyer perceptions of price and value •Reseller reactions to prices must be considered •Government may limit or restrict pricing options •Social considerations may be taken into account
  12. 12. Price AdjustmentStrategies
  14. 14. Major Considerations in Setting Prices Competitor’s prices Consumer’sProduct perceptions and other internal Costs of value and external factors
  15. 15. General Pricing Approaches1) Cost-based Approach 1) Cost-plus Pricing 2) Break-even Analysis or Target Profit Pricing2) Buyer-based Approach 1) Value-based Pricing3) Competition-based Approach 1) Going-rate Pricing 2) Sealed-bid Pricing
  16. 16. General Pricing Approaches1) Cost-based Approach 1) Cost-plus Pricing 2) Break-even Analysis or Target Profit Pricing2) Buyer-based Approach 1) Value-based Pricing3) Competition-based Approach 1) Going-rate Pricing 2) Sealed-bid Pricing
  17. 17. The Cost-Based Approach: Cost-Plus Pricing Adding standard mark-up to costs Process:  Estimating the per unit cost of production  Capital(K): land, building, equipment = FC  Labor(L): worker’s wages = VC  Adding a mark-up  Desired profit per item  Sales price = COP + mark-up
  18. 18. The Cost-Based Approach: Cost-Plus Pricing Customers are price sensitive Popular pricing technique because:  It simplifies the pricing process.  Buyers are more certain to costs.  Price competition may be minimized.  It is perceived as more fair to both buyers and sellers.
  19. 19. How costs affect gasoline prices Distribution & $0.278 10% Marketing Refining Costs $0.1946 7% & Profits Federal & $0.3892 14%2010 State TaxesAverageRetail Price:$2.78 $1.8904 68% Crude Oil
  20. 20. The Cost-Based Approach: Cost-Plus PricingDoes using standard mark-ups to set prices make sense?
  21. 21. General Pricing Approaches1) Cost-based Approach 1) Cost-plus Pricing 2) Break-even Analysis or Target Profit Pricing2) Buyer-based Approach 1) Value-based Pricing3) Competition-based Approach 1) Going-rate Pricing 2) Sealed-bid Pricing
  22. 22. Cost-Based Approach: Break-even Analysis and Target Profit Pricing Firm tries to determine the price at which it will break even or make the target profit it is seeking. Companies wishing to make profit must exceed the break-even unit volume.
  23. 23. The Cost-Based Approach What is ignored:  Brand / Image / Market Position  Price-Demand Relationship  Customer-perceived Value Problems:  Sub-optimal profits  Difficult to allocate cost
  24. 24. General Pricing Approaches1) Cost-based Approach 1) Cost-plus Pricing 2) Break-even Analysis or Target Profit Pricing2) Buyer-based Approach 1) Value-based Pricing3) Competition-based Approach 1) Going-rate Pricing 2) Sealed-bid Pricing
  25. 25. Buyer-Based Approach: Value-Based Pricing Basing prices on product’s perceived value Buyer’s perceptions of value is the key to pricing. Price is considered along with the other marketing mix variables before the marketing program is set.
  26. 26. General Pricing Approaches Value-basedCost-based Pricing Pricing Easiest pricing method  Requires research Sub-optimal profits  Optimal profits Considered fair  Can be considered Difficult to allocate fixed unfair costs  Complicated to administer
  27. 27. Buyer-Based Approach: Value-Based Pricing Measuring perceived value:  Asking customers  Conducting experiments Situations:  Overpriced = products sell poorly  Underpriced = sell very well, less revenue* Consumer’s attitudes toward price and quality have shifted during the last decade.
  28. 28. Buyer-Based Approach: Value-Based Pricing
  29. 29. Buyer-Based Approach: Value-Based Pricing Jack Welch, Former CEO of GE“The value decade is upon us. If you can’t sell a top qualityproduct at the world’s best price, you’regoing to be out of the game…. The best way to hold your customers is to constantly figure out how to give them more or less.”
  30. 30. Buyer-Based Approach: Value-Based Pricing Value-pricing strategies – offering just the right combination of quality and good service at a fair price Value pricing has involved redesigning existing brands in order to offer more quality for the given price or the same quality for less.
  31. 31. Buyer-Based Approach: Value-Based Pricing
  32. 32. Buyer-Based Approach: Value-Based Pricing In business-to-business marketing situations, the pricing challenge is to find ways to maintain the company’s pricing power. Many companies adopt value-added strategies.
  33. 33. Buyer-Based Approach: Value-Based Pricing Value Pricing at the Retail Level  Everyday Low Pricing (EDLP)  Charging a constant, everyday low price with few or no temporary price discounts  High-Low Pricing  Charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items below EDLP level
  34. 34. Buyer-Based Approach: Value-Based Pricing Why adopt Everyday Low Pricing?  Constant sales and promotions are costly and have eroded consumer confidence in the credibility of everyday shelf prices.  Consumers have less time and patience for such time-honored traditions as watching for supermarket specials and clipping options.
  35. 35. Buyer-Based Approach: Value-Based Pricing To EDLP, to Hi-Lo or not to?  What type of market are you in?  Are your customers price sensitive?  Do you have a cost advantage?  Who are your customers? Are your price sensitive customers willing to invest in searching for the lowest price (i.e., read weekly circulars)?
  36. 36. Everyday Low Prices (EDLP)
  37. 37. Everyday Low Prices (EDLP)
  38. 38. High-Low (Hi-Lo) Pricing
  39. 39. General Pricing Approaches1) Cost-based Approach 1) Cost-plus Pricing 2) Break-even Analysis or Target Profit Pricing2) Buyer-based Approach 1) Value-based Pricing3) Competition-based Approach 1) Going-rate Pricing 2) Sealed-bid Pricing
  40. 40. Competition-Based Approach: Going-rate Pricing A firm bases its price largely on competitor’s prices, with less attention paid to its own costs or to demand. May price at the same level, above, or below competition.
  41. 41. Competition-Based Approach: Going-rate Pricing
  42. 42. Competition-Based Approach: Going-rate Pricing Why is it quite popular?  Represents the collective wisdom of the industry concerning the price that will yield a fair return.  Holding on to the going price will prevent harmful price wars.
  43. 43. General Pricing Approaches1) Cost-based Approach 1) Cost-plus Pricing 2) Break-even Analysis or Target Profit Pricing2) Buyer-based Approach 1) Value-based Pricing3) Competition-based Approach 1) Going-rate Pricing 2) Sealed-bid Pricing
  44. 44. Competition-Based Approach: Sealed-bid Pricing A firm bases its price on how it thinks competitors will price rather that on its own costs or on the demand. Firms bid for jobs. The firm wants to win the contract.
  46. 46. Market Skimming PricingSetting a high price fora new product to skim maximum revenueslayer by layer from the segments willing topay the high price; thecompany makes fewer but more profitable sales.
  47. 47. Conditions that favor Market Skimming Pricing•The product’s quality and image must support itshigher price, and image must support its higherprice, and enough buyers must want the product atthe price.•The cost of producing a smaller volume cannot beso high that they cancel the advantage of chargingmore.•Competitors should not be able to enter the marketeasily and undercut the high price.
  48. 48. Market Penetration Pricing Setting a low price for a newproduct in orderto attract a large number of buyers and a large market share.
  49. 49. Conditions that favor MarketPenetration Pricing• The market must be price sensitive so that a low price produces more market growth.• Production and distribution cost must fall as sales volume increases.• The low price must help keep out the competition, and the penetration pricer must maintain its low-price position.
  50. 50. Product Mix Pricing Strategies
  51. 51. Product Mix Pricing StrategiesProduct Line Pricing  Setting price steps between product line items.  Price points
  52. 52. Product MixPricing Strategies Optional-Product Pricing  Pricing optional or accessory products sold with the main product
  53. 53. Product Mix Pricing StrategiesCaptive-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
  54. 54. Product MixPricing Strategies By-Product Pricing  Pricing of low-value by-products to get rid of them
  55. 55. Product MixPricing Strategies Product Bundle Pricing  Pricing bundles of products sold together  Common in fast food industry
  56. 56. Price AdjustmentStrategies
  57. 57. Price Adjustment Strategies Strategies  Types of discounts  Cash discount  Quantity discount Discount / allowance  Functional (trade) discount Segmented  Seasonal discount Psychological  Allowances Promotional  Trade-in allowances  Promotional allowances Geographical Dynamic International
  58. 58. Price Adjustment Strategies Strategies  Types of segmented pricing strategies:  Customer-segment Discount / allowance  Product-form pricing  Location pricing Segmented  Time pricing Psychological  Also called revenue or yield Promotional management Geographical  Certain conditions must exist for segmented pricing to be Dynamic effective International
  59. 59. Price Adjustment Strategies Conditions Necessary for Segmented Pricing Effectiveness  Market must be segmentable  Segments must show different demand  Pricing must be legal  Costs of segmentation can not exceed revenues earned  Segmented pricing must reflect real differences in customers’ perceived value
  60. 60. Price Adjustment Strategies Strategies  The price is used to say something about the product.  Reference prices Discount / allowance  Numeric digits may have symbolic and visual qualities Segmented that psychologically influence Psychological the buyer Promotional Geographical Dynamic International
  61. 61. Price Adjustment Strategies Strategies  Temporarily pricing products below the list price or even below cost Discount / allowance  Loss leaders  Special-event pricing Segmented  Cash rebates Psychological  Low-interest financing, longer warranties, free maintenance Promotional  Promotional pricing can have Geographical adverse effects Dynamic International
  62. 62. Price Adjustment Strategies Promotional Pricing Problems  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
  63. 63. Price Adjustment Strategies Strategies  Types of geographic pricing strategies:  FOB-origin pricing Discount / allowance  Uniform-delivered pricing Segmented  Zone pricing Psychological  Basing-point pricing Promotional  Freight-absorption pricing Geographical Dynamic International
  64. 64. Price Adjustment Strategies Strategies Discount / allowance Adjusting prices Segmented continually to meet the characteristics and Psychological needs of individual Promotional customers and situations Geographical Dynamic International
  65. 65. Price Adjustment Strategies Strategies  Prices charged in a specific country depend on many factors Discount / allowance  Economic conditions  Competitive situation Segmented  Laws / regulations Psychological  Distribution system Promotional  Consumer perceptions  Corporate marketing Geographical objectives Dynamic  Cost considerations International
  66. 66. Price change
  68. 68. Price Cuts Why? Excess capacity Falling market share Drive to dominate themarket share through lower cost
  69. 69. Price Increases Why? Cost inflation Over demand:Company cannot supply all customer needs
  70. 70. Some techniques in initiating priceincrease Making low visibility price moves (dropping discounts, increasing minimum order size, curtailing production of low margin products ) Unbundling (removing features, packaging, or services and separately pricing elements that where formerly part of the offer)
  71. 71. Buyers reaction toprice cutsPOSITIVE: they think they got a better deal on the product.NEGATIVE: consumers assume low quality, new model coming, company is having a financial trouble, price will decline further.
  72. 72. Buyers reaction toprice cutsPOSITIVE: the item is “hot” good value, high quality, and exclusive.NEGATIVE: company is just being greedy, consumer perceived the company as a price gouger.
  73. 73. Competitors ReactionCompetitors are likely to react when:No. of firm is smallHomogenous productBuyers are highly informed
  74. 74. Responding to price changesQuestionsWhy did the competitor change the price?Price change- temporary or permanent?What will happen to market share? Profit? If do not respond?Other companies will respond too?What are competitors and other firms responses to each possible reaction likely to be?
  75. 75. Assessing and responding to competitors pricechanges
  76. 76. Four Possible ResponsesReduce priceRaise perceive valueImprove quality and increase priceLaunch a low price ”fighting brand”
  80. 80. “Treating customers fairly and making certain that they fully understand prices and pricing terms is an important part of building strong and lasting customer relationships.”