The document discusses various factors and strategies companies consider when setting prices. It covers internal factors like costs, objectives, and competitors as well as external factors like demand, the market, and regulations. The document also outlines three main approaches to setting prices - cost-based, value-based, and competition-based - as well as various pricing strategies companies use like discounts, price discrimination, and adjusting prices.

1. Pricing: Approaches and Strategies Session 5 Chapter 10 & 11

2. Objectives Understand the internal & external factors affecting a firm’s pricing decisions. Be able to contrast the three general approaches to setting prices. Learn the major strategies for pricing imitative and new products. Understand how companies find a set of prices that maximizes the profits from the total product mix. Learn how companies adjust their prices to take into account different types of customers and situations. Know the key issues related to initiating and responding to price changes.

3. Price The amount of money charged for a product, or the sum of the values that consumers exchange for the benefits of having/using the product or service. Price and the Marketing Mix Only element to produce revenues Most flexible element Can be changed quickly Price as a tool of Competition Common Pricing Mistakes

4. Factors to Consider in Setting Price Marketing objectives Marketing mix strategies Costs Organizational considerations Market positioning influences pricing strategy Other pricing objectives: Survival Current profit maximization Market share leadership Product quality leadership Not-for-profit objectives: Partial or full cost recovery Social pricing Internal Factors

5. Marketing objectives Marketing mix strategies Costs Organizational considerations Pricing must be carefully coordinated with the other marketing mix elements Target costing is often used to support product positioning strategies based on price Non-price positioning can also be used Internal Factors Factors to Consider in Setting Price (contd.)

6. Marketing objectives Marketing mix strategies Costs Organizational considerations Types of costs: Variable Fixed Total costs How costs vary at different production levels will influence price setting Experience (learning) curve effects on price Internal Factors Factors to Consider in Setting Price (contd.)

7. Strategic Impact & Cost Analysis: Pareto Law Effect CitiBank NA Example 80% of Cost Structure on staff and even Marketing Expenses is caused by 20% of Accounts for their Low Deposits and high Transaction Volume. There are only few things that are really important. If you successfully improve 20% of the most important problems, you will gain the same effect as you would by improving the rest 80%. This represents a big advantage with respect to cost versus effect. For an Effective Cost-Structure: 20% of the Customers and 20% of the Services contribute 80% of Revenue. Rationalize 80% services & Purify 80% Accounts as they contribute only 20% of revenue. Eliminate Services & Accounts in the Bottom-Right-Cell as they are certainly running at a loss .

8. Marketing objectives Marketing mix strategies Costs Organizational considerations Who sets the price? In Small companies : CEO or top management In Large companies : Divisional or product line managers Price negotiation is common in industrial settings Some industries have pricing departments Internal Factors Factors to Consider in Setting Price (contd.)

9. Nature of market and demand Competitors’ costs, prices, and offers Other environmental elements Types of markets Pure competition Monopolistic competition Oligopolistic competition Pure monopoly Consumer perceptions of price and value Price-demand relationship Demand curve Price elasticity of demand External Factors Factors to Consider in Setting Price (contd.)

10. Nature of market and demand Competitors’ costs, prices, and offers Other environmental elements Consider competitors’ costs, prices, and possible reactions when developing a pricing strategy Pricing strategy influences the nature of competition Low-price low-margin strategies inhibit competition High-price high-margin strategies attract competition Benchmarking costs against the competition is recommended External Factors Factors to Consider in Setting Price (contd.)

11. Nature of market and demand Competitors’ costs, prices, and offers Other environmental elements Economic conditions Affect production costs Affect buyer perceptions of price and value Reseller reactions to prices must be considered Government may restrict or limit pricing options Social considerations may be taken into account External Factors Factors to Consider in Setting Price (contd.)

12. 1. Cost-Based Pricing: a) Cost-Plus Pricing Adding a standard markup to cost Ignores demand and competition Popular pricing technique because: It simplifies the pricing process Price competition may be minimized It is perceived as more fair to both buyers and sellers Example Variable costs: Tk. 20 Fixed costs: Tk. 500,000 Expected sales: 100,000 units Desired Sales Markup: 20% Variable Cost + Fixed Costs/Unit Sales = Unit Cost Tk. 20 + Tk. 500,000/100,000 = Tk. 25 per unit Unit Cost/(1 – Desired Return on Sales) = Markup Price Tk. 25 / (1 - .20) = Tk. 31.25 General Pricing Approaches

13. b) Break-Even Analysis & Target Profit Pricing Break-even charts show total cost and total revenues at different levels of unit volume. The intersection of the total revenue and total cost curves is the break-even point. Companies wishing to make a profit must exceed the break-even unit volume. General Pricing Approaches (contd.)

14. 2. Value-Based Pricing Uses buyers’ perceptions of value rather than seller’s costs to set price. Measuring perceived value can be difficult. Consumer attitudes toward price and quality have shifted during the last decade. Introduction of less expensive versions of established brands has become common. General Pricing Approaches (contd.) Business-to-business firms seek to retain pricing power Value-added strategies can help Value pricing at the retail level Everyday low pricing (EDLP) vs. high-low pricing

15. 3. Competition-Based Pricing Also called going-rate pricing May price at the same level, above, or below the competition Bidding for jobs is another variation of competition-based pricing Sealed bid pricing General Pricing Approaches (contd.)

16. Market-Skimming Pricing Setting a high price for a new product to skim maximum revenues layer by layer from segments willing to pay the high price. Market-Penetration Pricing Setting a low price for a new product in order to attract a large number of buyers and a large market share. Market Rate Pricing Ceding the initiative to the key competitors to set the price. Dangerous for leaving the strategic initiative to competitors Potential threat of ‘Sudden Price Shift’ by newer, or ‘Changes in delivery system capability’. Relationship Pricing Different price for Different class of customers depending on relationship and the potentiality of cross-selling or future business. Other Pricing Approaches

17. Product Line Pricing Setting price steps between product line items. Line of products rather single one Price points Optional-Product Pricing Pricing optional or accessory products sold with the main product By-Product Pricing Pricing low-value by-products to get rid of them Product Mix Pricing Strategies Captive-Product Pricing Pricing products that must be used with the main product High margins are often set for supplies Services: two-part pricing strategy Fixed fee plus a variable usage rate Product Bundle Pricing Pricing bundles of products sold together

18. Price Adjustment Strategies Discount / allowance Segmented Psychological Promotional Types of discounts Cash discount Quantity discount Functional (trade) discount Seasonal discount Allowances Trade-in allowances Promotional allowances Strategies

19. Price Adjustment Strategies (contd.) Discount / allowance Segmented Psychological Promotional Types of segmented pricing strategies: Customer-segment Product-form pricing Location pricing Time pricing Also called revenue or yield management Certain conditions must exist for segmented pricing to be effective Strategies

20. Market is segmentable Lower priced segments are not able to resell Competitors can not undersell segments charging higher prices Pricing must be legal Costs of segmentation can not exceed revenues earned Segmented pricing must reflect real differences in customers’ perceived value Conditions Necessary for Segmented Pricing Effectiveness

21. Discount / allowance Segmented Psychological Promotional The price is used to say something about the product. Price-quality relationship Reference prices Differences as small as five cents can be important Numeric digits may have symbolic and visual qualities that psychologically influence the buyer Odd rounding Strategies Price Adjustment Strategies (contd.)

22. Discount / allowance Segmented Psychological Promotional Temporarily pricing products below the list price or even below cost Loss leaders Special-event pricing Cash rebates Low-interest financing, longer warranties, free maintenance Promotional pricing can have adverse effects Strategies Price Adjustment Strategies (contd.)

23. Easily copied by competitors Creates deal-prone consumers May erode brand’s value Not a legitimate substitute for effective strategic planning Frequent use leads to industry price wars which benefit few firms Promotional Pricing Problems

24. Customer Discrimination for students only Product-form Discrimination Telecom products Place Discrimination service at ATM versus at counters Time Discrimination peak -hours/ off-peak-hours Price Discrimination

25. Initiating Price Cuts is Desirable When a Firm Has excess capacity Faces falling market share due to price competition Desires to be a market share leader Price Increases are Desirable If a firm can increase profit, faces cost inflation, or faces greater demand than can be supplied. Methods of Increasing Price Alternatives to Increasing Price Reducing product size, using less expensive materials, unbundling the product. Price Changes

26. Buyer reactions to price changes must be considered. Competitors are more likely to react to price changes under certain conditions. Number of firms is small Product is uniform Buyers are well informed Respond to Price Changes only if: Market share / profits will be negatively affected if nothing is changed. Effective action can be taken: Reducing price Raising perceived quality Improving quality and increasing price Launching low-price “fighting brand” Price Changes (contd.)

27. Pricing within Channel Levels Price-fixing Competitors can not work with each other to set prices Predatory pricing Firms may not sell below cost with the intention of punishing a competitor or gaining higher long-run profits or running a competitor out of business. Pricing across Channel Levels Price discrimination Retail price maintenance Deceptive pricing Bogus reference / comparison pricing Scanner fraud Price confusion Public Policy and Pricing