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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  • Price is not just a number on a tag. It comes in many forms and performs many functions. Rent, tuition, fares, fees, rates, tolls, retainers, wages, and commissions are all the price you pay for some good or service.
  • Executives complain that pricing is a big headache—and getting worse by the day. Many companies do not handle pricing well and fall back on “strategies” such as: “We determine our costs and take our industry’s traditional margins.” Other common mistakes are not revising price often enough to capitalize on market changes; setting price independently of the rest of the marketing program rather than as an intrinsic element of market-positioning strategy; and not varying price enough for different product items, market segments, distribution channels, and purchase occasions.
  • Note to Instructor The text gives an excellent example of IKEA in China: When IKEA first opened stores in China in 2002, people crowded to take advantage of the freebies—air conditioning, clean toilets, and even decorating ideas. Chinese consumers are famously frugal. When it came time to actually buy, they shopped instead at local stores just down the street that offered knockoffs of IKEA’s designs at a fraction of the price. So IKEA slashed its prices in China to the lowest in the world. The penetration pricing strategy worked. IKEA now captures a 43 percent market share of China’s fast-growing home wares market.
  • Product-Mix Pricing Strategies This CTR corresponds to Table 11-1 on p. 331 and the relates to the material on pp. 331-334. Product-Mix Pricing Strategies Product Line Pricing. Companies usually develop product lines rather than single products. In product line pricing, management must decide on the price steps to set between each product in the line. Companies often use price points to target distinctive combinations of product features and value represented by a particular price. Optional-Product Pricing. Under this strategy, the company offers a base product and prices differently for each combination of additional features or options added to the base product as desired by the customer. Automobile pricing is famous -- or infamous -- for this practice. But many manufacturers use optional-product pricing, such as personal computer makers. Captive-Product Pricing. Under this strategy, producers price products that must be used with a main product. The text describes razor blades as an example. The razor is priced low while high markups are attached to the price of the blades. Discussion Note: Students should distinguish captive pricing from optional pricing on the basis of need versus convenience. When Apple Computer prices its keyboards separately from its computers, it is practicing captive-product pricing. When it offers additional RAM beyond the included board memory, it is practicing optional-product pricing. By-Product Pricing. Waste from production and distribution may be marketable as by-products. Selling by-products allows producers to lower prices and costs on their main products. Otherwise, the prices of main products must cover the disposable or storage of by- products. Product-Bundle Pricing. This strategy combines several products and offers them at a reduced price from the cost of each product purchased separately. Season tickets and group rates are examples.
  • Note to Instructor This Web link brings you to Bluemountain.com. Many students may know this site for its free greeting cards. Notice how they have product line pricing—you can get some basic cards for free but need to join to be able to use more advanced features.
  • Note to Instructor Students will quickly realize this is what their cell phone bill might be. Ask them how they feel about this pricing. This Web link goes to an ad for AT&T’s campaign for rollover minutes.
  • Companies prefer customers who are less price-sensitive. Table 14.3 lists some characteristics associated with decreased price sensitivity.
  • Demand sets a ceiling on the price the company can charge for its product. Costs set the floor. The company wants to charge a price that covers its cost of producing, distributing, and selling the product, including a fair return for its effort and risk. Yet when companies price products to cover their full costs, profitability isn’t always the net result.
  • To price intelligently, management needs to know how its costs vary with different levels of production. Take the case in which a company such as TI has built a fixed-size plant to produce 1,000 hand calculators a day. The cost per unit is high if few units are produced per day. As production approaches 1,000 units per day, the average cost falls because the fixed costs are spread over more units. Short-run average cost increases after 1,000 units, however, because the plant becomes inefficient. Workers must line up for machines, getting in each other’s way, and machines break down more often. This is shown in Figure 14.2a. If TI believes it can sell 2,000 units per day, it should consider building a larger plant. The plant will use more efficient machinery and work arrangements, and the unit cost of producing 2,000 calculators per day will be lower than the unit cost of producing 1,000 per day. This is shown in the long-run average cost curve (LRAC) in Figure 14.2b. In fact, a 3,000-capacity plant would be even more efficient according to Figure 14.2b, but a 4,000-daily production plant would be less so because of increasing diseconomies of scale: There are too many workers to manage, and paperwork slows things down. Figure 14.2b indicates that a 3,000-daily production plant is the optimal size if demand is strong enough to support this level of production.
  • Costs change with production scale and experience. They can also change as a result of a concentrated effort by designers, engineers, and purchasing agents to reduce them through target costing. Market research establishes a new product’s desired functions and the price at which it will sell, given its appeal and competitors’ prices. This price less desired profit margin leaves the target cost the marketer must achieve. The firm must examine each cost element—design, engineering, manufacturing, sales—and bring down costs so the final cost projections are in the target range. When ConAgra Foods decided to increase the list prices of its Banquet frozen dinners to cover higher commodity costs, the average retail price of the meals increased from $1 to $1.25.When sales dropped significantly, management vowed to return to a $1 price, which necessitated cutting $250 million in other costs through a variety of methods, such as centralized purchasing and shipping, less expensive ingredients, and smaller portions.
  • Tries to Determine the Price at Which a Firm Will Break Even or Make a Target Profit
  • Price Adjustment Strategies I This CTR corresponds to Table 11-2 on p. 334 and relates to the material on pp. 334-335. Discount and Allowance Pricing. Several forms of discount and allowance pricing are used by marketers: Cash Discounts. These are price reductions to buyers who pay bills promptly. Quantity Discounts. These refer to price reductions per unit on large volumes. Functional Discounts. These are granted to channel members who perform various marketing functions. Seasonal Discounts . These are granted to buyers who purchase merchandise out of season. Allowances . These are discounts such as trade-ins for turning in old items on new purchases or promotional allowances for participating in seller sponsored advertising can also lower buyer prices. Segmented Pricing . Segmented pricing refers to pricing differences not based on costs and takes several forms: Customer-segment pricing. These target a specific segment, as in senior citizen discounts. Product-form pricing. This varies costs on versions of a product by features but not production costs. Location pricing. This stems from preferences where different locations have different perceived values, such as seating in a theater. Time pricing. This refers to price breaks given at times of lower demand. Price Adjustment Strategies Companies typically adjust their prices to account for various customer differences and changing situations:
  • Adjustment Strategies - II This CTR corresponds to Table 11-2 on p. 334 and relates to the discussion on pp. 335-340. Psychological Pricing. A key component in psychological pricing is the reference price consumers carry in their mind when considering sellers prices. Promotional Pricing. Promotional prices are temporary reductions below list and sometimes below costs, used to attract customers: Loss leaders . These may be offered below costs to attract attention to an entire line. Special event . This type of pricing may be used during slow seasons. Cash rebates or low financing . These “extras” may bring in customers “on the brink” and help them to decide to finally purchase. Geographical Pricing. Several forms of geographical pricing are common: FOB-Origin . Free On Board has customer pay freight. Uniform Delivered . Here the company charges the same price to all. Zone . Zone uses different areas pay different prices on freight but all customers within the same area pay the same freight charges. Basing-Point . Under this system, all customers charged freight from a specified billing location. Freight-Absorption . Here the seller pays all or part of the shipping costs to get the desired business. International Pricing. Firms may charge the same price throughout the world, especially for high-ticket, high-tech products like jetliners. Or it may offer different prices based upon differing taxes, tariffs, distribution, and promotion costs.
  • Note to Instructor There is an excellent example in the text for dynamic pricing: Alaska airlines Web banner promotes “ fly Alaska Airlines to Honolulu for $200 round trip.” Alaska Airlines is introducing a system that creates unique prices and advertisements for people as they surf the Web. The system identifies consumers by their computers, using a small piece of code known as a cookie. It company then combines detailed data from several sources to paint a picture of who’s sitting on the other side of the screen. When the person clicks on an ad, the system quickly analyzes the data to assess how price-sensitive customers seem to be.
  • Note to Instructor Discounts are either cash discount for paying promptly, quantity discount for buying in large volume, or functional (trade) discount for selling, storing, distribution, and record keeping. Allowances include trade-in allowance for turning in an old item when buying a new one and promotional allowance to reward dealers for participating in advertising or sales support programs.
  • Note to Instructor Loss leaders are products sold below cost to attract customers in the hope they will buy other items at normal markups. Special event pricing is used to attract customers during certain seasons or periods. Cash rebates are given to consumers who buy products within a specified time. Low-interest financing, longer warrantees, and free maintenance lower the consumer’s “total price.”
  • In third-degree price discrimination, the seller charges different amounts to different classes of buyers, as in the following situations. Customer segment pricing means that different customer groups pay different prices for the same product or service. Product form pricing means that different versions of the product are priced differently, but not proportionately to their costs. Evian prices a 48 ounce bottle of its mineral water at $2.00 and 1.7 ounces of the same water in a moisturizer spray at $6.00. Some companies price the same product at two different levels based on image differences. Channel pricing means charging a different price depending on where the consumer buys the product. Location pricing means the same product is priced differently at different locations even though the cost of offering it at each location is the same. Time pricing means that prices are varied by season, day, or hour.
  • Note to Instructor The three types of segmented pricing are: Customer segment pricing is when different customers pay different prices for the same product or service. Product form segment pricing is when different versions of the product are priced differently but not according to differences in cost. Location pricing is when the product sold in different geographic areas is priced differently even though the cost is the same.
  • Note to Instructor Discussion Question How have you benefited from price segmentation? Most likely they have had student discounts. Ask them why that is effective given the criteria above.
  • Note to Instructor Discussion Question How well do you carry prices of coffee, pizza, and milk in your head? It might be interesting to collect the prices of items sold near or on campus including coffee, pizza, and sandwiches. Ask them how well they know these prices, have them write down the price of these items and then check themselves. You will often find that people do NOT know prices as well as they think they do.
  • Price Changes This CTR relates to the material on pp. 340-342. Initiating Price Changes Price changes may be initiated for several reasons, including: Price Cuts. Reasons for cutting prices may stem from overcapacity, falling market share, or attempts to dominate the market through lower costs. Price Increases. Inflation is a major source of price increases but so is the tendency to speculate on inflationary trends and raise prices beyond the rate of inflation. Over demand may also cause prices to rise. Higher prices can also increase profit margins. Buyer Reactions to Price Changes. Buyer reactions usually respond directly to price changes but not always. Usually lower prices pleases consumers, higher prices do not. But sometimes higher prices support quality improvements and lower prices mean company or product problems. Whether the buyer is correct or not in these perceptions will not immediately change their inclination to act on them. Competitor Reactions to Price Changes. Competitors most often react in industries with a small number of firms, uniform products in the market, and buyers are well informed. Competitive reactions may be similar price changes or increased non price competition. Companies should anticipate probable competitive moves prior to initiating price changes.
  • There are several consequences of cutting prices. Consumers may assume quality is low. They may be fickle due to lower price. Competitors may match prices to encourage customers to switch.
  • It can be worthwhile to raise prices. A successful price increase can raise profits considerably. If the company’s profit margin is 3 percent of sales, a 1 percent price increase will increase profits by 33 percent if sales volume is unaffected. This situation is illustrated in Table 14.6. The assumption is that a company charged $10 and sold 100 units and had costs of $970, leaving a profit of $30, or 3 percent on sales. By raising its price by 10 cents (a 1 percent price increase), it boosted its profits by 33 percent, assuming the same sales volume. A major circumstance provoking price increases is cost inflation. Rising costs unmatched by productivity gains squeeze profit margins and lead companies to regular rounds of price increases. Companies often raise their prices by more than the cost increase, in anticipation of further inflation or government price controls, in a practice called anticipatory pricing.
  • Another factor leading to price increases is overdemand. When a company cannot supply all its customers, it can raise its prices, ration supplies, or both. It can increase price in the following ways, each of which has a different impact on buyers. Delayed quotation pricing means that the company does not set a final price until the product is finished or delivered. This pricing is prevalent in industries with long production lead times, such as industrial construction and heavy equipment. Escalator clauses are used when the company requires the customer to pay today’s price and all or part of any inflation increase that takes place before delivery. An escalator clause bases price increases on some specified price index. Unbundling means the company maintains its price but removes or prices separately one or more elements that were part of the former offer, such as free delivery or installation. Car companies sometimes add higher-end audio entertainment systems or GPS navigation systems as extras to their vehicles. Reduction of discounts means that the company instructs its sales force not to offer its normal cash and quantity discounts.
  • Note to Instructor There is an example in the book about a Tiffany’s price changes: In the late 1990s, the high-end jeweler responded to the “affordable luxuries” craze with a new “Return to Tiffany” line of less expensive silver jewelry. The “Return to Tiffany” silver charm bracelet quickly became a must-have item, as teens jammed Tiffany’s hushed stores clamoring for the $110 silver bauble. Sales skyrocketed. But despite this early success, Tiffany’s bosses grew worried that the bracelet fad could alienate the firm’s older, wealthier, and more conservative clientele. So, in 2002, to chase away the teeny-boppers, the firm began hiking prices on the fast-growing, highly profitable line of cheaper silver jewelry and at the same time, it introduced pricier jewelry collections, renovated its stores, and showed off its craftsmanship by highlighting spectacular gems like a $2.5 million pink diamond ring.
  • Note to Instructor This is an interesting Web link to the Professional Jewelers Magazine Web site. It contains an article encouraging jewelers to fight deceptive pricing in their industry.
  • Price is the one element of the marketing mix that produces revenue; the other elements produce costs. Prices are perhaps the easiest element of the marketing program to adjust; product features, channels, and even communications take more time. Price also communicates to the market the company’s intended value positioning of its product or brand. A well-designed and marketed product can command a price premium and reap big profits. But new economic realities have caused many consumers to pinch pennies, and many companies have had to carefully review their pricing strategies as a result. Pricing decisions are clearly complex and difficult, and many marketers neglect their pricing strategies. Holistic marketers must take into account many factors in making pricing decisions—the company, the customers, the competition, and the marketing environment. Pricing decisions must be consistent with the firm’s marketing strategy and its target markets and brand positioning. In this chapter, we cover the concepts and tools to facilitate the setting of initial prices and adjusting prices over time and markets.
  • These are the questions addressed.
  • 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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