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Pricing6
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- 2. Structure of theSession … • Essentials about pricing • Basic concepts revisited • Key questions which a brand manager faces • Recommending an approach to pricing • Developing the pricing strategy
- 3. Essentials about pricing •Price is the only element in the marketing mix that produces ‘revenue’; the other elements produce ‘costs’ • Also, it is one of the two mix elements (along with packaging) with a public face. The packaging says what the brand is while the price should say what it is worth or what is its value. • Price is also the most flexible elements of the marketing mix. It can be changed quickly, unlike product features and channel commitments.
- 4. Essentials about pricing… • Price can also convey image connotations regarding the brand to its consumers. • Finally, price is not only absolute but comparative and is linked with the brand offer which is being made.
- 5. Basic Economic Concepts Demandcurve: The relationship between a given set of prices and the quantity bought at each price point. Market demand curve: Represents the sum total of the quantity demanded by all individuals in that market at each price point. Supply curve: The relationship between the market price and the amount of commodity that marketers are willing to market at that price .
- 6. Basic elements ofsupply and demand • Factors affecting demand: Average income Population Price of related products Preferences ‘Other’ influences on demand.
- 7. Basic elements ofsupply and demand (contd.) Price of automobiles (thousands of Rupees per unit) P D D’ The role of marketing (or product differentiation) D D’ Quantity demanded of automobiles (millions per year) Q
- 8. Basic elements ofsupply and demand (contd.) • Factors affecting supply: Production availability Cost of production (prices of inputs & technological advances) Prices of related goods Government policies ‘Other’ influences on supply
- 9. Elasticity of demand •The price elasticity of demand measures how much the quantity demanded of a good changes when its price changes Price elasticity of demand = Ep Ep = Percentage change in quantity demanded Percentage change in price
- 10. Elasticity and revenue Valueof demand Description elasticity Definition Impact on revenues Greater than Elastic demand one (Ep>1) % change in demand greater than the % change in price Equal to one (Ep=1) % change in demand similar to the change in price Unit-elastic demand Less than one Inelastic demand % change in demand (Ep<1) less than % change in (relative) price Revenues increase when price decreases or decreases when price increases Revenues unchanged when price decreases Revenues decrease when price decreases
- 11. Implications on Pricing •Consumer price value relationship needs to be assessed and price positioned accordingly. • We need to recognise that price insensitivity can be generated
- 12. Main approaches topricing … • • • • Premium pricing, Penetration pricing Economy pricing, Price skimming
- 13. Nine Price-Quality Strategies High High Product.. Quality Low Price .. Low
- 14. Price Positioning Options ProductsQuality High Super bargain strategy (Air Deccan) Medium Bargain Strategy (Big Bazaar) Low Economy Strategy Low Penetration strategy (Motorola) Average quality strategy Shoddy – goods Medium Price Premium strategy (Benz) Overpricing strategy Hit-and-run strategy High
- 15. Other approaches topricing … • Pschycological pricing • Geographic pricing • Product Line pricing • Value pricing • Captive pricing • Optional procing • Bundling
- 16. Price insensitivity canbe generated • How? : Desensitising factors can be used to diminish the impact of price changes • Desensitizing factors may either be through an understanding of consumer behaviour / impacting consumer pschycgraphics and point-of-sale variations • Where favourable desensitising differentials exist in a particular sale, the sale will not be lost until the price is increased more than the value of the desensitising differentials
- 17. Price insensitivity canbe generated (Contd.) • Insensitivity will tend to be greater where: Point of Sale effectiveness After Sales Consumer loyalties are significant There are multiple dimensions of product quality Unit price is low The product is more sophisticated or not fully understood by the consumer
- 18. Some Concepts inPricing …
- 19. Factors Influencing Price InternalFactors • • • • • Marketing objectives Marketing mix strategies Costs Organizational considerations Market positioning influences pricing strategy • Other pricing objectives: Survival Profit maximization Market share leadership Product quality leadership • Non Profit objectives: Partial or full cost recovery Social pricing
- 20. Factors to ConsiderWhen Setting Price Internal Factors • • • • • 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
- 21. Factors to ConsiderWhen Setting Price Internal Factors • • • • • 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
- 22. Factors to ConsiderWhen Setting Price Internal Factors • • • • Marketing objectives Marketing mix strategies Costs Organizational considerations • Who sets the price? Small companies: CEO or top management Large companies: Divisional or product line managers • Price negotiations
- 23. Factors to ConsiderWhen Setting Price External Factors • 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 • • Nature of market and demand Competitors’ costs, prices, and offers • Other environmental elements
- 24. Factors to ConsiderWhen Setting Price External Factors • • 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
- 25. Factors to ConsiderWhen Setting Price External Factors • 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 • • Nature of market and demand Competitors’ costs, prices, and offers • Other environmental elements
- 26. Key issues whicha manager faces .. • How should a brand be priced for the first time? • How should the price be changed over time to meet varying circumstances and opportunities? • When should the company initiate a price change, and how should it respond to a competitor’s price change?
- 27. Recommended approach topricing (contd.) Stage I : Select a market target Stage II : Choose a Brand Position • Need to select a price which establishes the image Stage III : Develop a marketing mix • Determine the role which price has to play
- 28. Recommended approach topricing (contd.) Stage IV : Select a pricing policy • Questions that need to answered are : How should price compare with “average” prices in the industry ? » How ‘above’ or ‘below’ ? » Who comprises the ‘average’? How fast will we meet price reductions or increases by rivals ? How frequently is it advisable to vary price? To what extent is stability of price advantageous? How frequently should ‘price promotions’ be run?
- 29. Recommended approach topricing (contd.) Stage V : Determine a pricing strategy • Formulate a strategy to guide management in setting price during the time that the special situation endures. Stage IV : Select specific price • However, the ideal situation does not happen too often ….. What happens is : Price calculated/selected is not in line with ideal price so hence : » Re-examine assumptions » Re-examine costs » Re-examine sales plan
- 30. Finally … TheProcedure for Price setting Select the pricing objective Estimate costs Estimate margins Establish Company price Calculate excise,local taxes and regional margins Establish price
- 31. Procedure for Pricesetting (contd) Establish price Compare with competition Confirm if in line with strategy Establish final price
- 32. Further … • Paritypricing , Cost + pricing … etc • ‘Market clearing price’ • Modern pricing concepts .. ‘reference price’ , ‘EDLP’ ..