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
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
Factors to Consider When Setting PriceInternal Factors3. Costs •Types of costs: Variable Fixed Total costs
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
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
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
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
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
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.
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
The Cost-Based Approach: Cost-Plus PricingDoes using standard mark-ups to set prices make sense?
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.
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
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.
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
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.
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.”
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.
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.
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
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.
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)?
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.
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.
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.
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.
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.
Market Penetration Pricing Setting a low price for a newproduct in orderto attract a large number of buyers and a large market share.
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.
Product Mix Pricing StrategiesProduct Line Pricing Setting price steps between product line items. Price points
Product MixPricing Strategies Optional-Product Pricing Pricing optional or accessory products sold with the main product
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
Product MixPricing Strategies By-Product Pricing Pricing of low-value by-products to get rid of them
Product MixPricing Strategies Product Bundle Pricing Pricing bundles of products sold together Common in fast food industry
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
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
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
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
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
Price Cuts Why? Excess capacity Falling market share Drive to dominate themarket share through lower cost
Price Increases Why? Cost inflation Over demand:Company cannot supply all customer needs
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)
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.
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.
Competitors ReactionCompetitors are likely to react when:No. of firm is smallHomogenous productBuyers are highly informed
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?
Assessing and responding to competitors pricechanges
Four Possible ResponsesReduce priceRaise perceive valueImprove quality and increase priceLaunch a low price ”fighting brand”