MARKETING MANAGEMENT              Developing Pricing Strategies                     D.V. Madhusudan Rao                   ...
Learning ObjectivesAfter studying this chapter, you should be able to:1. Describe the major strategies for pricing   initi...
Pricing Products             Topic Outline• New-Product Pricing  Strategies• Product Mix Pricing  Strategies• Price Adjust...
What Is a Price?Price is the onlyelement in themarketing mix thatproduces revenue;all other elementsrepresent costs.So Cos...
Pricing Puzzle              Minimize      Optimize          Maximize              Costs + Margins = PRICE                 ...
A Secret Pie• Impact of a 1 % price increase on profits  –   Coca-Cola     6,4   %  –   Nestlé       17,5   %  –   Ford   ...
Synonyms for Price•    Rent              •   Special assessment•    Tuition           •   Bribe•    Fee               •   ...
Common Pricing Mistakes• Determine costs and take traditional  industry margins• Failure to revise price to capitalize  on...
Customer Perceptions of Value                 A priceUnderstandinghow much valueconsumers placeon the benefitsthey receive...
Pricing Puzzle4 P’s                   4 C’s•   PRODUCT             •   CUSTOMER VALUE•   PRICE               •   COST•   P...
Pricing Puzzle4 P’s                         4 C’s•   PRODUCT                   •   CUSTOMER VALUE•   PRICE                ...
Key = Differentiation   The key to drive value is to offer relevant and         distinctive product differentiation• Physi...
Key = Differentiation     Differentiation : Examples• Physical Differences   – Levi’s Engineered Jeans (Ergonomic construc...
Key = Differentiation    Differentiating commodities…• Perdue Chicken (USA)   – Guaranteed tenderness (30 % market-share, ...
• INTERNAL                Pricing Decisions FACTORS                         • EXTERNAL  FACTORS                    – Marke...
Consumer Psychology              and Pricing                  Reference Prices              Price-quality inferences      ...
Table 14.1 Possible Consumer              Reference Prices•   “Fair price”      • Lower-bound•   Typical price       price...
Price–Quality Inferences: An Image pricingfor ego-sensitive products. Eg: Perfumes, cars(over-valued and under-valued)When...
Price Cues• “Left to right” pricing ($299 vs.  $300)• Odd number discount perceptions• Even number value perceptions• Endi...
Steps in Setting   the Price 18-2-2013 10.00   20 PM
Pricing Strategies18-2-2013 10.00                        21PM
Internal Factors Affecting PricingDecisions: Marketing Objectives                             Survival              Low Pr...
Internal Factors Affecting Pricing    Decisions: Marketing Mix                 Product Design     Nonprice       Price    ...
External Factors Affecting Pricing                                     Decisions                                          ...
Market Skimming18-2-2013 10.00                     25PM
New-Product Pricing Strategies               • Market-skimming                 pricing               • Market-penetration ...
Market-skimming pricing is a strategy for setting a highprice for a new product to skim maximum revenues layerby layer fro...
Market-skimming pricing• For example when Sony introduced  the      world first high definition  television (HDTV) to the ...
Penetration Pricing18-2-2013 10.00                     29PM
Market-penetration pricing sets a low  initial price in order to penetrate the  market quickly and deeply to attract a  la...
Market-penetration pricing• For example ,Dell used penetration  pricing to enter the personal  computer market, selling hi...
Price-Quality Strategies• Philip Kotler identified 9 price-quality strategies                     High Price Mid Price   L...
Product Mix Pricing Strategies                            Product Line Pricing                            Product Line Pri...
Product line pricing takes into  account the cost differences  between products in the line,  customer evaluation of their...
• Optional-product pricing takes  into account optional or accessory  products along with the main  product• For example :...
• Captive-product  pricing involves  products that must be  used along with the  main product• Examples of Captive  produc...
•   Two-part pricing involves breaking the price    into:    – Fixed fee    – Variable usage fee    – For example : Jawwal...
• By-product pricing refers to  products with little or no value  produced as a result of the main  product. Producers wil...
Product bundle pricing combines  several products at a reduced  priceFor example : fast food restaurants  bundle a burger ...
Step 2: Determining Demand1.Price Sensitivity  2. Estimating Demand Curves3. Price Elasticity    of Demand 18-2-2013 10.00...
Fig 14.2 Inelastic and Elastic Demand18-2-2013 10.00                           41PM
Table 14.3 Factors Leading to Less             Price Sensitivity• The product is more distinctive• Buyers are less aware o...
Influence of Elasticity• Any pricing decision must be mindful of  the impact of price elasticity• The degree of price elas...
Price Elasticity of Demand
Influence of Elasticity• Price Inelastic:• % change in Q < % change in P• e.g. a 5% increase in price would be met  by a f...
Influence of Elasticity• Price Elastic:• % change in quantity demanded > %  change in price• e.g. A 4% rise in price would...
Step 3: Estimating Costs• Types of costs    • Cost Terms and Production        •   Fixed costs        •   Variable costs  ...
Figure 14.3 Cost Per Unit at Different           Levels of Production18-2-2013 10.00                             48PM
Figure 14.4 Estimating Cost per Unit as  a Function of Accumulated Production18-2-2013 10.00                        49PM
Target Costing18-2-2013 10.00                    50PM
Step 4: Analysing Competitors’   Costs, Prices and Offers
Step 5: Selecting a PricingMethod              •   Markup pricing              •   Target-return pricing              •   ...
Markup /Cost-Plus Pricing18-2-2013 10.00                  53PM
Markup/ Cost-Plus Pricing• Calculation of the average cost (AC)  plus a mark up• AC = Total Cost/OutputEg: An Immersion Ro...
BEP / Target-return pricingAn expected percentage of profit on mfr’s investment(Return on Invst)Target-return pricing = un...
Figure 14.6 Break-Even Chart18-2-2013 10.00            56PM
Break-even• BE= Fixed Costs/Contribution (SP-VC)• Example - Meal - SP = $20, VC = $8• Fixed costs are $2400 a day• BE=$240...
Break-even Analysis or Target        Profit Pricing
Perceived Value Pricing Table 14.2 Consumer Perceptions vs. Reality for CarsOvervalued Brands                Undervalued• ...
Some important pricing definitions• Utility: The attribute   Value Example: Caterpillar                           Tractor ...
Value Pricing18-2-2013 10.00                   61PM
Value Pricing• Price set in  accordance with  customer  perceptions about  the value of the  product/service• Examples inc...
Going Rate (Price Leadership)18-2-2013 10.00                     63PM
Going Rate (Price Leadership)• In case of price leader, rivals have difficulty in  competing on price – too high and they ...
Auction / Tender Pricing18-2-2013 10.00                   65PM
Auction-Type Pricing            English auctions            Dutch auctions          Sealed-bid auctions
Step 6: Selecting the Final Price• Impact of other  marketing activities• Company pricing  policies• Gain-and-risk  sharin...
Price-Adjustment/ Adaption Strategies                     Price Adaptation Strategies                     Price Adaptation...
Price-Adjustment Strategies                         • Adjusting Prices for PsychologicalPsychological Pricing     Effect. ...
Price-Adjustment StrategiesGeographical pricing is used for customers in different parts of the country or the world•   FO...
Price Adjustment Strategies• FOB (free on board) pricing means  that the goods are delivered to the  carrier and the title...
Price Adjustment Strategies• Zone pricing means that the company  sets up two or more zones where  customers within a give...
Price-Adjustment Strategies• Freight-absorption pricing  means the seller absorbs all or  part of the actual freight charg...
Price-Adjustment StrategiesDynamic pricing iswhen prices areadjusted continuallyto meet thecharacteristics andneeds of the...
Price Adjustment StrategiesInternational pricing is when prices are set  in a specific country based on country-  specific...
International pricing• For example : Boeing sells its  jetliners at about the same price  everywhere, whether in the Unite...
Discount and allowance pricing  reduces    prices to    reward  customer responses such as  paying early or promoting the ...
Price-Adjustment StrategiesPrice Discounts and AllowancesQuantity discount: The more you buy, the cheaper itbecomes-- cumu...
Price Adjustment StrategiesFunctional discount: discount offered by a manufacturer totrade-channel members if they will pe...
Promotional Pricing Tactics              • Loss-leader pricing              • Special-event pricing              • Cash re...
Price-Adjustment StrategiesPromotional pricing is when prices are  temporarily priced below list price or  cost to increas...
Price-Adjustment strategiesPromotional Pricing• Loss-leader pricing: supermarkets and  department stores often drop the pr...
Price-Adjustment strategies• Longer payment terms: sellers especially  mortgage banks and auto companies stretch  loans ov...
Price-Adjustment StrategiesRisks of promotional pricing• Used too frequently, and copies by  competitors can create “deal-...
Differentiated/segmented Pricing • Customer-segment pricing • Product-form pricing • Image pricing • Channel pricing • Loc...
Price-Adjustment Strategies          Segmented pricing            is used when a            company sells a            pro...
Segmented pricinga) Customer       segment      pricing:    different   customers pay different prices for the same   prod...
Price-Adjustment Strategies         Segmented PricingTo be effective:• Market must be segmentable• Segments must show diff...
Price-Adjustment Strategies• Psychological pricing occurs when sellers  consider the psychology of prices and not  simply ...
Initiating and Responding to Price               Changes      Competitor      Reactions          to                  Initi...
Traps in Price Cutting Strategies• Low-quality trap• Fragile-market-share trap• Shallow-pockets trap• Price-war trap   18-...
Should We Raise Prices?18-2-2013 10.00                  92PM
Methods for Increasing Prices• Delayed quotation pricing• Escalator clauses• Unbundling• Reduction of discounts18-2-2013 1...
Price ChangesInitiating Pricing Changes
Price ChangesBuyer Reactions to Pricing         Changes
Price Changes   Responding to Price ChangesQuestions  – Why did the competitor change the    price?  – Is the price cut pe...
Price Changes    Responding to Price ChangesSolutions  – Reduce price to match competition  – Maintain price but raise the...
Brand Leader Responses to Competitive Price ChangesBrand Leader Responses to Competitive Price Changes   Has Competitor Cu...
Public Policy and Pricing     Pricing Within Channel LevelsPrice fixing: Sellers must set prices   without talking to comp...
Public Policy and Pricing     Pricing Across Channel LevelsRobinson-Patman Act prevents  unfair price discrimination by  e...
Public Policy and Pricing     Pricing Across Channel LevelsRobinson-Patman Act• Price discrimination is allowed:  – If the...
Public Policy and PricingPricing Across Channel Levels             Retail (or resale)             price maintenance       ...
Public Policy and Pricing      Pricing Across Channel LevelsDeceptive pricing occurs when a seller  states prices or price...
Loss Leader18-2-2013 10.00                 104PM
Loss Leader• Goods/services deliberately sold below  cost to encourage sales elsewhere• Typical in supermarkets, e.g. at  ...
Psychological Pricing18-2-2013 10.00                    106PM
Psychological Pricing• Used to play on consumer  perceptions• Classic example - £9.99 instead of  £10.99!• Links with valu...
Price Discrimination18-2-2013 10.00                    108PM
Price Discrimination                                             • Charging a different                                   ...
Destroyer Pricing/Predatory Pricing18-2-2013 10.00                    110PM
Destroyer/Predatory Pricing • Deliberate price cutting or offer of ‘free   gifts/products’ to force rivals (normally   sma...
Absorption/Full Cost Pricing18-2-2013 10.00                   112PM
Absorption/Full Cost Pricing• Full Cost Pricing – attempting to  set price to cover both fixed and  variable costs• Absorp...
Marginal Cost Pricing18-2-2013 10.00                    114PM
Marginal Cost Pricing• Marginal cost – the cost of producing ONE  extra or ONE fewer item of production• MC pricing – allo...
Marginal Cost Pricing • Example:Aircraft flying from Bristol to Edinburgh – Total Cost (includingnormal profit) = £15,000 ...
Contribution Pricing18-2-2013 10.00                    117PM
Contribution Pricing• Contribution = Selling Price – Variable  (direct costs)• Prices set to ensure coverage of  variable ...
Target Pricing18-2-2013 10.00                    119PM
Target Pricing• Setting price to ‘target’ a specified  profit level• Estimates of the cost and potential  revenue at diffe...
Chapter Questions• How do consumers process and evaluate  prices?• How should a company set prices initially  for products...
One Final Word“ A product is not a product unless it sells.  Otherwise, it’s just a museum piece…”                        ...
For Review• How do consumers process and evaluate  prices?• How should a company set prices initially  for products or ser...
Marketing Debate Is the right price a fair price?Take a position:1. Prices should reflect the value thatconsumers are wil...
Marketing Discussion Think of all the pricing methods  described in the chapter. As a consumer, which pricing method  do...
Reference• Kotler, Kelly, Koshy and Jha (2009) Marketing Management:    A South Asian Perspective, 14th ed. Pearson Prenti...
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Madhu PRICING STRATEGIES

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Price is one of the marketing mix. Here price related activities are illustrated in PPT style to make the students, teaching faculty and the other related people to understand easily for their teaching and learning.

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Madhu PRICING STRATEGIES

  1. 1. MARKETING MANAGEMENT Developing Pricing Strategies D.V. Madhusudan Rao Dept. MBA, School of Graduate Studies, Jigjiga University18-2-2013 10.00 ETHOPIA 1PM
  2. 2. Learning ObjectivesAfter studying this chapter, you should be able to:1. Describe the major strategies for pricing initiative and new products2. Explain how companies find a set of prices that maximize the profits from the total product mix3. Discuss how companies adjust their prices to take into account different types of customers and situations4. Discuss the key issues related to initiating and responding to price changes18-2-2013 10.00 2PM
  3. 3. Pricing Products Topic Outline• New-Product Pricing Strategies• Product Mix Pricing Strategies• Price Adjustment Strategies• Price Changes
  4. 4. What Is a Price?Price is the onlyelement in themarketing mix thatproduces revenue;all other elementsrepresent costs.So Cost =FACT;Price (cost+Margin) = POLICY 18-2-2013 10.00 4 PM
  5. 5. Pricing Puzzle Minimize Optimize Maximize Costs + Margins = PRICE VALUE• Production costs  Product performance• Indirect costs • Usefulness & Quality  Image / Aspirations• Advertising costs • Brand Equity• Distribution costs  Availability• Manufacturer’s margin • Distribution Strategy• Distributor’s margin  Service• Seller’s margin • Before/During & After sales
  6. 6. A Secret Pie• Impact of a 1 % price increase on profits – Coca-Cola 6,4 % – Nestlé 17,5 % – Ford 26,0 % – Philips 28,7 %
  7. 7. Synonyms for Price• Rent • Special assessment• Tuition • Bribe• Fee • Dues• Fare • Salary• Rate • Interest• Toll • Donation• Premium • Commission• Honorarium • Tax• Wage 18-2-2013 10.00 7 PM
  8. 8. Common Pricing Mistakes• Determine costs and take traditional industry margins• Failure to revise price to capitalize on market changes• Setting price independently of the rest of the marketing mix• Failure to vary price by product item, market segment, distribution channels, and purchase occasion 18-2-2013 10.00 8 PM
  9. 9. Customer Perceptions of Value A priceUnderstandinghow much valueconsumers placeon the benefitsthey receive fromthe product andsetting a price thatcaptures that value
  10. 10. Pricing Puzzle4 P’s 4 C’s• PRODUCT • CUSTOMER VALUE• PRICE • COST• PLACE • CONVENIENCE• PROMOTION • COMMUNICATION Seller’s Dilemma
  11. 11. Pricing Puzzle4 P’s 4 C’s• PRODUCT • CUSTOMER VALUE• PRICE • COST• PLACE • CONVENIENCE• PROMOTION • COMMUNICATION “ Tomorrow’s winner companies will be those who offer distinct products at comparatively low market prices ”
  12. 12. Key = Differentiation The key to drive value is to offer relevant and distinctive product differentiation• Physical Differences – Features, performance, durability, conformance, design, etc…• Availability Differences – Distribution channels ; Stores, mail-order, internet, etc…• Service Differences – Delivery, installation, training, consulting, maintenance, etc…• Price Differences – Price positioning (Very high / High / Medium / Low / Very Low)• Image Differences – Symbols, atmosphere, events, media, etc…
  13. 13. Key = Differentiation Differentiation : Examples• Physical Differences – Levi’s Engineered Jeans (Ergonomic construction, durability, style)• Availability Differences – Dell Computer’s customized production, Volkswagen “e.lupo”• Service Differences – Acıbadem Hospital – Mother Care Division, Nissan “5-year Warranty”• Image Differences – Audi vs Mercedes, DuPont (Innovation Leader)
  14. 14. Key = Differentiation Differentiating commodities…• Perdue Chicken (USA) – Guaranteed tenderness (30 % market-share, 10 % premium pricing)• Flora Drinking Water (Turkey – Sabancı Holding) – Service, packaging, attributes, operation• Starbuck’s Coffee (USA) – Atmosphere, standard service Everything can be differentiated !...
  15. 15. • INTERNAL Pricing Decisions FACTORS • EXTERNAL FACTORS – Market – Marketing Objectives • Pure Competition • Positioning • Monopolistic Competition • Target Group • Oligopolistic Competition – Marketing Mix Strategy • Pure Monopoly • 4 P’s – Demand – Costs • Elastic / Inelastic • Fixed & Variable – Competition – Management Approach • Competitors’ offers • Responsibility • Competitiors’ reactions • Perspective – Economy • Buying power – Government Influence • Laws & Regulations
  16. 16. Consumer Psychology and Pricing Reference Prices Price-quality inferences Price endings Price cues18-2-2013 10.00 16PM
  17. 17. Table 14.1 Possible Consumer Reference Prices• “Fair price” • Lower-bound• Typical price price• Last price paid • Competitor prices• Upper-bound • Expected future price price • Usual discounted price18-2-2013 10.00 17PM
  18. 18. Price–Quality Inferences: An Image pricingfor ego-sensitive products. Eg: Perfumes, cars(over-valued and under-valued)When information about true quality is known,price becomes a less significant indicator ofquality. When information is not available, priceacts as a signal of quality.Price endings: Price tags end with 0 and5 or 9 are commonly seen examples.
  19. 19. Price Cues• “Left to right” pricing ($299 vs. $300)• Odd number discount perceptions• Even number value perceptions• Ending prices with 0 or 5• “Sale” written next to price18-2-2013 10.00 19PM
  20. 20. Steps in Setting the Price 18-2-2013 10.00 20 PM
  21. 21. Pricing Strategies18-2-2013 10.00 21PM
  22. 22. Internal Factors Affecting PricingDecisions: Marketing Objectives Survival Low Prices to Cover Variable Costs and Some Fixed Costs to Stay in Business. Current Profit Maximization Choose the Price that Produces theMarketing Maximum Current Profit, Etc.Objectives Market Share Leadership Low as Possible Prices to Become the Market Share Leader. Product Quality Leadership High Prices to Cover HigherCHPT: 14-22 Performance Quality and R & D.
  23. 23. Internal Factors Affecting Pricing Decisions: Marketing Mix Product Design Nonprice Price Distribution PositionsCHPT: 14-23 Promotion
  24. 24. External Factors Affecting Pricing Decisions Market and Demand Competitors’ Costs, Prices, and Offers Other External Factors Economic Conditions Reseller Needs Government Actions Competitor CostsThis ad by LCI International accuses its competitors of usingunfair practices in pricing, hiding fees incurred by rounding up. Social Concerns Why is LCI focusing on this practice? Hidden fees, defined as “cramming” by the CHPT: 14-24 FCC, are the number one source of billing complaints among long-distance customers.
  25. 25. Market Skimming18-2-2013 10.00 25PM
  26. 26. New-Product Pricing Strategies • Market-skimming pricing • Market-penetration pricing • Intermediate Pricing
  27. 27. Market-skimming pricing is a strategy for setting a highprice for a new product to skim maximum revenues layerby layer from the segments willing to pay the high price,the company make fewer (low volume) but more profitablesales.• Product quality and image must support the price• Buyers must want the product at the price• Costs of producing the product in small volume shouldnot cancel the advantage of higher prices• Competitors should not be able to enter the marketeasily•Suitable for products that have short life cycles or whichwill face competition at some point in the future (e.g. aftera patent runs out)•Examples include: Playstation, jewellery, digitaltechnology, new DVDs, Bic, Biro etc
  28. 28. Market-skimming pricing• For example when Sony introduced the world first high definition television (HDTV) to the Japanese market , the high tech sets cost 43,000$ . These televisions were purchased only by customers who really wanted the new technology and afford to pay high prices.18-2-2013 10.00 28PM
  29. 29. Penetration Pricing18-2-2013 10.00 29PM
  30. 30. Market-penetration pricing sets a low initial price in order to penetrate the market quickly and deeply to attract a large number of buyers quickly to gain market share• Price sensitive market• Production and distribution costs must fail as sales volume increases.• Low prices must keep competition out of the market
  31. 31. Market-penetration pricing• For example ,Dell used penetration pricing to enter the personal computer market, selling high quality computer products through lower cost direct channels.18-2-2013 10.00 31PM
  32. 32. Price-Quality Strategies• Philip Kotler identified 9 price-quality strategies High Price Mid Price Low Price High Quality PremiumHigh Super Value Value Over Mid Good Middle Quality Charging Value Value False Rip-off Economy Economy Low Quality 18-2-2013 10.00 32 PM
  33. 33. Product Mix Pricing Strategies Product Line Pricing Product Line Pricing Setting Price Steps Between Product Line Items Setting Price Steps Between Product Line Items i.e. $299, $399 i.e. $299, $399 Optional-Product Pricing Optional-Product Pricing Pricing Optional or Accessory Products Pricing Optional or Accessory Products Sold With The Main Product Sold With The Main Product i.e. Car Options i.e. Car Options Product Product Captive-Product Pricing Captive-Product Pricing Mix Mix Pricing Products That Must Be Used Pricing Products That Must Be Used With The Main Product Pricing Pricing With The Main Product i.e. Razor Blades, Film, Software i.e. Razor Blades, Film, SoftwareStrategiesStrategies By-Product Pricing By-Product Pricing Pricing Low-Value By-Products To Get Rid Pricing Low-Value By-Products To Get Rid of Them of Them i.e. Lumber Mills, Zoos i.e. Lumber Mills, Zoos Product-Bundle Pricing Product-Bundle Pricing Pricing Bundles Of Products Sold Together Pricing Bundles Of Products Sold Together i.e. Season Tickets, Computer Makers i.e. Season Tickets, Computer Makers 18-2-2013 10.00 33 PM
  34. 34. Product line pricing takes into account the cost differences between products in the line, customer evaluation of their features, and competitors’ prices* For example channel offers 20 different collections of bags of all shapes and sizes at price that range from under $50 to more than $1,250.
  35. 35. • Optional-product pricing takes into account optional or accessory products along with the main product• For example : a car buyer may choose to order a GPS navigation system & Bluetooth wireless communication.• Refrigerators come with optional ice maker
  36. 36. • Captive-product pricing involves products that must be used along with the main product• Examples of Captive products are razor blade cartridges , Gillette once you bought the razor, you are committed to buying replacement cartridges at $25 an eight pack
  37. 37. • Two-part pricing involves breaking the price into: – Fixed fee – Variable usage fee – For example : Jawwal company charge a flat rate for a basic calling plan, then charge for minutes over what the plan allows. The service firm must decide how much to charge for the basic service and how much for the variable usage. – Another example is when you visit a park , you pay a ticket charge + fee for food and additional feature
  38. 38. • By-product pricing refers to products with little or no value produced as a result of the main product. Producers will seek little or no profit other than the cost to cover storage and delivery.• petroleum products often results in by-products.
  39. 39. Product bundle pricing combines several products at a reduced priceFor example : fast food restaurants bundle a burger , fries and a soft drink at a combo price
  40. 40. Step 2: Determining Demand1.Price Sensitivity 2. Estimating Demand Curves3. Price Elasticity of Demand 18-2-2013 10.00 40 PM
  41. 41. Fig 14.2 Inelastic and Elastic Demand18-2-2013 10.00 41PM
  42. 42. Table 14.3 Factors Leading to Less Price Sensitivity• The product is more distinctive• Buyers are less aware of substitutes• Buyers cannot easily compare the quality of substitutes• Expenditure is a smaller part of buyer’s total income• Expenditure is small compared to the total cost• Part of the cost is paid by another party• Product is used with previously purchased assets• Product is assumed to have high quality and prestige• Buyers cannot store the product 18-2-2013 10.00 42 PM
  43. 43. Influence of Elasticity• Any pricing decision must be mindful of the impact of price elasticity• The degree of price elasticity impacts on the level of sales and hence revenue• Elasticity focuses on proportionate (percentage) changes • PED = % Change in Quantity demanded/% Change in Price18-2-2013 10.00 43PM
  44. 44. Price Elasticity of Demand
  45. 45. Influence of Elasticity• Price Inelastic:• % change in Q < % change in P• e.g. a 5% increase in price would be met by a fall in sales of something less than 5%• Revenue would rise• A 7% reduction in price would lead to a rise in sales of something less than 7%• Revenue would fall 18-2-2013 10.00 45 PM
  46. 46. Influence of Elasticity• Price Elastic:• % change in quantity demanded > % change in price• e.g. A 4% rise in price would lead to sales falling by something more than 4%• Revenue would fall• A 9% fall in price would lead to a rise in sales of something more than 9%• Revenue would rise18-2-2013 10.00 46PM
  47. 47. Step 3: Estimating Costs• Types of costs • Cost Terms and Production • Fixed costs • Variable costs • Total costs • Average cost • Cost at different levels of production• Accumulated production• Activity-based cost accounting• Target costing18-2-2013 10.00 47PM
  48. 48. Figure 14.3 Cost Per Unit at Different Levels of Production18-2-2013 10.00 48PM
  49. 49. Figure 14.4 Estimating Cost per Unit as a Function of Accumulated Production18-2-2013 10.00 49PM
  50. 50. Target Costing18-2-2013 10.00 50PM
  51. 51. Step 4: Analysing Competitors’ Costs, Prices and Offers
  52. 52. Step 5: Selecting a PricingMethod • Markup pricing • Target-return pricing • Perceived-value pricing • Value pricing • Going-rate pricing • Auction-type pricing
  53. 53. Markup /Cost-Plus Pricing18-2-2013 10.00 53PM
  54. 54. Markup/ Cost-Plus Pricing• Calculation of the average cost (AC) plus a mark up• AC = Total Cost/OutputEg: An Immersion Rod mfg. costs are: Variable C=$10,FC=$300,000, Expected unit sales = 50,000.A Unit Cost = VC + FC/Unit sales =10+300k/50k = $16. IF mfr. Wants to earn a 20% markup on sales,Markup price = Unit cost/ 1-desired return on sales = $16/1-0.2 = $20 per unitHence Mfr can sell to Dealers at $ 20 and earn $4 as profit18-2-2013 10.00 54PM
  55. 55. BEP / Target-return pricingAn expected percentage of profit on mfr’s investment(Return on Invst)Target-return pricing = unit cost + desired return x invested capital Unit salesBreak-even volume = Fixed cost (price-variable cost)
  56. 56. Figure 14.6 Break-Even Chart18-2-2013 10.00 56PM
  57. 57. Break-even• BE= Fixed Costs/Contribution (SP-VC)• Example - Meal - SP = $20, VC = $8• Fixed costs are $2400 a day• BE=$2400/$12 = 200• Need to sell 200 meals @ $20 to break- even• VC = 40%, contribution = 60%• BE = $2400/.6 = $4000
  58. 58. Break-even Analysis or Target Profit Pricing
  59. 59. Perceived Value Pricing Table 14.2 Consumer Perceptions vs. Reality for CarsOvervalued Brands Undervalued• Land Rover Brands• Kia • Mercury• Volkswagen • Infiniti• Volvo • Buick• Mercedes • Lincoln • Chrysler
  60. 60. Some important pricing definitions• Utility: The attribute Value Example: Caterpillar Tractor is $100,000 vs. that makes it Market $90,000 capable of want $90,000 if equal satisfaction 7,000 extra durable 6,000 reliability• Value: The worth in 5,000 service terms of other 2,000 warranty $110,000 in benefits - products $10,000 discount!• Price: The monetary medium of exchange.
  61. 61. Value Pricing18-2-2013 10.00 61PM
  62. 62. Value Pricing• Price set in accordance with customer perceptions about the value of the product/service• Examples include status Companies may be able to set prices products/exclusive according to perceived value. products Copyright: iStock.com18-2-2013 10.00 62PM
  63. 63. Going Rate (Price Leadership)18-2-2013 10.00 63PM
  64. 64. Going Rate (Price Leadership)• In case of price leader, rivals have difficulty in competing on price – too high and they lose market share, too low and the price leader would match price and force smaller rival out of market• May follow pricing leads of rivals especially where those rivals have a clear dominance of market share• Where competition is limited, ‘going rate’ pricing may be applicable – banks, petrol, supermarkets, electrical goods – find very similar prices in all outlets18-2-2013 10.00 64PM
  65. 65. Auction / Tender Pricing18-2-2013 10.00 65PM
  66. 66. Auction-Type Pricing English auctions Dutch auctions Sealed-bid auctions
  67. 67. Step 6: Selecting the Final Price• Impact of other marketing activities• Company pricing policies• Gain-and-risk sharing pricing• Impact of price on other parties
  68. 68. Price-Adjustment/ Adaption Strategies Price Adaptation Strategies Price Adaptation StrategiesDiscount & AllowanceDiscount & Allowance Segmented Reducing Prices to Reward Reducing Prices to Reward SegmentedCustomer Responses such as Adjusting Prices to Allow Adjusting Prices to AllowCustomer Responses such as for Differences in Customers, Paying Early or Promoting Paying Early or Promoting for Differences in Customers, the Product. Products, or Locations. Products, or Locations. the Product. Cash Discount Cash Discount Customer Customer Quantity Discount Quantity Discount Product Form Product Form Functional Discount Functional Discount Location Location Seasonal Discount Seasonal Discount Time Time Trade-In Allowance Trade-In Allowance 18-2-2013 10.00 68 PM
  69. 69. Price-Adjustment Strategies • Adjusting Prices for PsychologicalPsychological Pricing Effect. •Price Used as a Quality Indicator. • Temporarily Reducing Prices toPromotional Pricing Increase Short-Run Sales. • i.e. Loss Leaders, Special-Events • Adjusting Prices to Account for theGeographical Pricing Geographic Location of Customers. • i.e. FOB-Origin, Uniform-Delivered, Zone Pricing, Basing-Point, & Freight-Absorption. International Pricing • Adjusting Prices for International Markets. • Price Depends on Costs, Consumers, Economic Conditions & Other Factors.18-2-2013 10.00 69PM
  70. 70. Price-Adjustment StrategiesGeographical pricing is used for customers in different parts of the country or the world• FOB pricing• Uniformed-delivery pricing• Zone pricing• Basing-point pricing• Freight-absorption pricing• Counter trade (Barter,Compensation deal, Buyback arrangement, Offset)
  71. 71. Price Adjustment Strategies• FOB (free on board) pricing means that the goods are delivered to the carrier and the title and responsibility passes to the customer• Uniformed-delivery pricing means the company charges the same price plus freight to all customers, regardless of location
  72. 72. Price Adjustment Strategies• Zone pricing means that the company sets up two or more zones where customers within a given zone pay a single total price• Basing-point pricing means that a seller selects a given city as a “basing point” and charges all customers the freight cost associated from that city to the customer location, regardless of the city from which the goods are actually shipped
  73. 73. Price-Adjustment Strategies• Freight-absorption pricing means the seller absorbs all or part of the actual freight charge as an incentive to attract business in competitive markets
  74. 74. Price-Adjustment StrategiesDynamic pricing iswhen prices areadjusted continuallyto meet thecharacteristics andneeds of the Ex. Alaska airlines creates uniqueindividual customer prices andand situations advertisements for people as they surf the web
  75. 75. Price Adjustment StrategiesInternational pricing is when prices are set in a specific country based on country- specific factors• Economic conditions• Competitive conditions• Laws and regulations• Infrastructure• Company marketing objective
  76. 76. International pricing• For example : Boeing sells its jetliners at about the same price everywhere, whether in the United states , Europe or the third world• A pair of Levi’s selling for $30 in Canada might go for $ 63 in Tokyo and $ 88 in Paris18-2-2013 10.00 76PM
  77. 77. Discount and allowance pricing reduces prices to reward customer responses such as paying early or promoting the product• Discounts• Allowances
  78. 78. Price-Adjustment StrategiesPrice Discounts and AllowancesQuantity discount: The more you buy, the cheaper itbecomes-- cumulative and non-cumulative.Trade discounts” functional”: Reductions from list forfunctions performed-- storage, promotion.Cash discount: A deduction granted to buyers for payingtheir bills within a specified period of time, (after firstdeducting trade and quantity discounts from the base price) 18-2-2013 10.00 PM
  79. 79. Price Adjustment StrategiesFunctional discount: discount offered by a manufacturer totrade-channel members if they will perform certain functions.Seasonal discount: a price reduction to those who buy out ofseason.Allowance: an extra payment designed to gain resellerparticipation in special programs.a)Trade in allowances: are price reductions given for turningin an old item when buying a new one ( Automobiles industry)b)Promotional allowances: are payments or price reductionsto reward dealer for participating in advertising and salessupport program 18-2-2013 10.00 PM
  80. 80. Promotional Pricing Tactics • Loss-leader pricing • Special-event pricing • Cash rebates • Low-interest financing • Longer payment terms • Warranties and service contracts • Psychological discounting
  81. 81. Price-Adjustment StrategiesPromotional pricing is when prices are temporarily priced below list price or cost to increase demand• Loss leaders• Special event pricing• Cash rebates• Low-interest financing• Longer warrantees• Free maintenance
  82. 82. Price-Adjustment strategiesPromotional Pricing• Loss-leader pricing: supermarkets and department stores often drop the price on well known brands to stimulate additional store traffic• Special-event pricing: sellers well establish special pricing in certain seasons to draw in more customers• Cash rebates: companies offer cash rebates to encourage purchase of the manufacturers products within a specified time period• Low-interest financing: the company can offer customers low-interest financing18-2-2013 10.00PM
  83. 83. Price-Adjustment strategies• Longer payment terms: sellers especially mortgage banks and auto companies stretch loans over longer periods and thus lower the monthly payment• Warranties and service contracts: companies can promote sales by adding a free or low cost warranty or service contract 18-2-2013 10.00 PM
  84. 84. Price-Adjustment StrategiesRisks of promotional pricing• Used too frequently, and copies by competitors can create “deal- prone” customers who will wait for promotions and avoid buying at regular price• Creates price wars
  85. 85. Differentiated/segmented Pricing • Customer-segment pricing • Product-form pricing • Image pricing • Channel pricing • Location pricing • Time pricing • Yield pricing 18-2-2013 10.00 85 PM
  86. 86. Price-Adjustment Strategies Segmented pricing is used when a company sells a product at two or more prices even though the difference is not based on cost
  87. 87. Segmented pricinga) Customer segment pricing: different customers pay different prices for the same product or service . For ex. Museums charge a lower admission for students .b) Product from pricing: different versions of the product are priced differently but not according to differences in their costsc) Location pricing: company charges different prices for different locationsd) Time pricing : a firm varies it prices by the season , the month , the day and even the hour 18-2-2013 10.00 87 PM
  88. 88. Price-Adjustment Strategies Segmented PricingTo be effective:• Market must be segmentable• Segments must show different degrees of demand• Watching the market cannot exceed the extra revenue obtained from the price difference• Must be legal
  89. 89. Price-Adjustment Strategies• Psychological pricing occurs when sellers consider the psychology of prices and not simply the economics” the price is used to say something about the product”• Reference prices are prices that buyers carry in their minds and refer to when looking at a given product – Noting current prices – Remembering past prices – Assessing the buying situations – For example : a company could display its product next to more expensive ones in order to imply that it belongs in the same class
  90. 90. Initiating and Responding to Price Changes Competitor Reactions to Initiating Price Price Cuts Changes Price Changes Buyer Reactions Initiating to Price Price Increases Changes18-2-2013 10.00 90PM
  91. 91. Traps in Price Cutting Strategies• Low-quality trap• Fragile-market-share trap• Shallow-pockets trap• Price-war trap 18-2-2013 10.00 91 PM
  92. 92. Should We Raise Prices?18-2-2013 10.00 92PM
  93. 93. Methods for Increasing Prices• Delayed quotation pricing• Escalator clauses• Unbundling• Reduction of discounts18-2-2013 10.00 93PM
  94. 94. Price ChangesInitiating Pricing Changes
  95. 95. Price ChangesBuyer Reactions to Pricing Changes
  96. 96. Price Changes Responding to Price ChangesQuestions – Why did the competitor change the price? – Is the price cut permanent or temporary? – What is the effect on market share and profits? – Will competitors respond?
  97. 97. Price Changes Responding to Price ChangesSolutions – Reduce price to match competition – Maintain price but raise the perceived value through communications – Improve quality and increase price – Launch a lower-price “fighting” brand
  98. 98. Brand Leader Responses to Competitive Price ChangesBrand Leader Responses to Competitive Price Changes Has Competitor Cut Has Competitor Cut No Hold Current Price; Price? Hold Current Price; Price? Continue to Monitor Continue to Monitor Competitor’s Price. Competitor’s Price. Will Lower Price Will Lower Price Negatively Affect Our No Negatively Affect Our Market Share & Profits? Market Share & Profits? Reduce Price Reduce Price No Raise Perceived Raise Perceived Can/ Should Effective Quality Quality Can/ Should Effective Action be Taken? Action be Taken? Yes Improve Quality Improve Quality & Increase Price & Increase Price Launch Low-Price Launch Low-Price “Fighting Brand” “Fighting Brand” 18-2-2013 10.00 PM 98
  99. 99. Public Policy and Pricing Pricing Within Channel LevelsPrice fixing: Sellers must set prices without talking to competitorsPredatory pricing: Selling below cost with the intention of punishing a competitor or gaining higher long-term profits by putting competitors out of business , this will protect small sellers from larger ones
  100. 100. Public Policy and Pricing Pricing Across Channel LevelsRobinson-Patman Act prevents unfair price discrimination by ensuring that the seller offer the same price terms to customers at a given level of trade
  101. 101. Public Policy and Pricing Pricing Across Channel LevelsRobinson-Patman Act• Price discrimination is allowed: – If the seller can prove that costs differ when selling to different retailers – If the seller manufactures different qualities of the same product for different retailers
  102. 102. Public Policy and PricingPricing Across Channel Levels Retail (or resale) price maintenance is when a manufacturer requires a dealer to charge a specific retail price for its products
  103. 103. Public Policy and Pricing Pricing Across Channel LevelsDeceptive pricing occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers• Scanner fraud failure of the seller to enter current or sale prices into the computer system• Price confusion results when firms employ pricing methods that make it difficult for consumers to understand what price they are really paying
  104. 104. Loss Leader18-2-2013 10.00 104PM
  105. 105. Loss Leader• Goods/services deliberately sold below cost to encourage sales elsewhere• Typical in supermarkets, e.g. at Christmas, selling bottles of gin at £3 in the hope that people will be attracted to the store and buy other things• Purchases of other items more than covers ‘loss’ on item sold• e.g. ‘Free’ mobile phone when taking on contract package18-2-2013 10.00 105PM
  106. 106. Psychological Pricing18-2-2013 10.00 106PM
  107. 107. Psychological Pricing• Used to play on consumer perceptions• Classic example - £9.99 instead of £10.99!• Links with value pricing – high value goods priced according to what consumers THINK should be the price18-2-2013 10.00 107PM
  108. 108. Price Discrimination18-2-2013 10.00 108PM
  109. 109. Price Discrimination • Charging a different price for the same good/service in different markets • Requires each market to be impenetrable • Requires differentPrices for rail travel differ for the samejourney at different times of the day price elasticity of demand in eachCopyright: iStock.com market 18-2-2013 10.00 109 PM
  110. 110. Destroyer Pricing/Predatory Pricing18-2-2013 10.00 110PM
  111. 111. Destroyer/Predatory Pricing • Deliberate price cutting or offer of ‘free gifts/products’ to force rivals (normally smaller and weaker) out of business or prevent new entrants • Anti-competitive and illegal if it can be proved18-2-2013 10.00 111PM
  112. 112. Absorption/Full Cost Pricing18-2-2013 10.00 112PM
  113. 113. Absorption/Full Cost Pricing• Full Cost Pricing – attempting to set price to cover both fixed and variable costs• Absorption Cost Pricing – Price set to ‘absorb’ some of the fixed costs of production18-2-2013 10.00 113PM
  114. 114. Marginal Cost Pricing18-2-2013 10.00 114PM
  115. 115. Marginal Cost Pricing• Marginal cost – the cost of producing ONE extra or ONE fewer item of production• MC pricing – allows flexibility• Particularly relevant in transport where fixed costs may be relatively high• Allows variable pricing structure – e.g. on a flight from London to New York – providing the cost of the extra passenger is covered, the price could be varied a good deal to attract customers and fill the aircraft18-2-2013 10.00 115PM
  116. 116. Marginal Cost Pricing • Example:Aircraft flying from Bristol to Edinburgh – Total Cost (includingnormal profit) = £15,000 of which £13,000 is fixed cost*Number of seats = 160, average price = £93.75MC of each passenger = 2000/160 = £12.50If flight not full, better to offer passengers chance of flying at£12.50 and fill the seat than not fill it at all!*All figures are estimates only18-2-2013 10.00 116PM
  117. 117. Contribution Pricing18-2-2013 10.00 117PM
  118. 118. Contribution Pricing• Contribution = Selling Price – Variable (direct costs)• Prices set to ensure coverage of variable costs and a ‘contribution’ to the fixed costs• Similar in principle to marginal cost pricing• Break-even analysis might be useful in such circumstances18-2-2013 10.00 118PM
  119. 119. Target Pricing18-2-2013 10.00 119PM
  120. 120. Target Pricing• Setting price to ‘target’ a specified profit level• Estimates of the cost and potential revenue at different prices, and thus the break-even have to be made, to determine the mark-up• Mark-up = Profit/Cost x 10018-2-2013 10.00 120PM
  121. 121. Chapter Questions• How do consumers process and evaluate prices?• How should a company set prices initially for products or services?• How should a company adapt prices to meet varying circumstances and opportunities?• When should a company initiate a price change?• How should a company respond to a competitor’s price challenge? 18-2-2013 10.00 121 PM
  122. 122. One Final Word“ A product is not a product unless it sells. Otherwise, it’s just a museum piece…” Ted Levitt
  123. 123. For Review• How do consumers process and evaluate prices?• How should a company set prices initially for products or services?• How should a company adapt prices to meet varying circumstances and opportunities?• When should a company initiate a price change?• How should a company respond to a competitor’s price challenge? 18-2-2013 10.00 123 PM
  124. 124. Marketing Debate Is the right price a fair price?Take a position:1. Prices should reflect the value thatconsumers are willing to pay.or2. Prices should primarily just reflect the costinvolved in making a product.
  125. 125. Marketing Discussion Think of all the pricing methods described in the chapter. As a consumer, which pricing method do you personally prefer to deal with? Why?
  126. 126. Reference• Kotler, Kelly, Koshy and Jha (2009) Marketing Management: A South Asian Perspective, 14th ed. Pearson Prentice Hall, pp.368-99

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