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Marketing: Pricing Decision.

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  1. 1. Pricing: Approaches and Strategies Session 5 Chapter 10 & 11
  2. 2. Objectives <ul><li>Understand the internal & external factors affecting a firm’s pricing decisions. </li></ul><ul><li>Be able to contrast the three general approaches to setting prices. </li></ul><ul><li>Learn the major strategies for pricing imitative and new products. </li></ul><ul><li>Understand how companies find a set of prices that maximizes the profits from the total product mix. </li></ul><ul><li>Learn how companies adjust their prices to take into account different types of customers and situations. </li></ul><ul><li>Know the key issues related to initiating and responding to price changes. </li></ul>
  3. 3. Price <ul><li>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. </li></ul><ul><li>Price and the Marketing Mix </li></ul><ul><ul><li>Only element to produce revenues </li></ul></ul><ul><ul><li>Most flexible element </li></ul></ul><ul><ul><li>Can be changed quickly </li></ul></ul><ul><li>Price as a tool of Competition </li></ul><ul><li>Common Pricing Mistakes </li></ul>
  4. 4. Factors to Consider in Setting Price <ul><li>Marketing objectives </li></ul><ul><li>Marketing mix strategies </li></ul><ul><li>Costs </li></ul><ul><li>Organizational considerations </li></ul><ul><li>Market positioning influences pricing strategy </li></ul><ul><li>Other pricing objectives: </li></ul><ul><ul><li>Survival </li></ul></ul><ul><ul><li>Current profit maximization </li></ul></ul><ul><ul><li>Market share leadership </li></ul></ul><ul><ul><li>Product quality leadership </li></ul></ul><ul><li>Not-for-profit objectives: </li></ul><ul><ul><li>Partial or full cost recovery </li></ul></ul><ul><ul><li>Social pricing </li></ul></ul>Internal Factors
  5. 5. <ul><li>Marketing objectives </li></ul><ul><li>Marketing mix strategies </li></ul><ul><li>Costs </li></ul><ul><li>Organizational considerations </li></ul><ul><li>Pricing must be carefully coordinated with the other marketing mix elements </li></ul><ul><li>Target costing is often used to support product positioning strategies based on price </li></ul><ul><li>Non-price positioning can also be used </li></ul>Internal Factors Factors to Consider in Setting Price (contd.)
  6. 6. <ul><li>Marketing objectives </li></ul><ul><li>Marketing mix strategies </li></ul><ul><li>Costs </li></ul><ul><li>Organizational considerations </li></ul><ul><li>Types of costs: </li></ul><ul><ul><li>Variable </li></ul></ul><ul><ul><li>Fixed </li></ul></ul><ul><ul><li>Total costs </li></ul></ul><ul><li>How costs vary at different production levels will influence price setting </li></ul><ul><li>Experience (learning) curve effects on price </li></ul>Internal Factors Factors to Consider in Setting Price (contd.)
  7. 7. Strategic Impact & Cost Analysis: Pareto Law Effect <ul><li>CitiBank NA Example </li></ul><ul><li>80% of Cost Structure on staff and even Marketing Expenses is caused by 20% of Accounts for their Low Deposits and high Transaction Volume. </li></ul><ul><li>There are only few things that are really important. </li></ul><ul><li>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. </li></ul><ul><li>For an Effective Cost-Structure: </li></ul><ul><li>20% of the Customers and 20% of the Services contribute 80% of Revenue. </li></ul><ul><li>Rationalize 80% services & Purify 80% Accounts as they contribute only 20% of revenue. </li></ul><ul><li>Eliminate Services & Accounts in the Bottom-Right-Cell as they are certainly running at a loss . </li></ul>
  8. 8. <ul><li>Marketing objectives </li></ul><ul><li>Marketing mix strategies </li></ul><ul><li>Costs </li></ul><ul><li>Organizational considerations </li></ul><ul><li>Who sets the price? </li></ul><ul><ul><li>In Small companies : CEO or top management </li></ul></ul><ul><ul><li>In Large companies : Divisional or product line managers </li></ul></ul><ul><li>Price negotiation is common in industrial settings </li></ul><ul><li>Some industries have pricing departments </li></ul>Internal Factors Factors to Consider in Setting Price (contd.)
  9. 9. <ul><li>Nature of market and demand </li></ul><ul><li>Competitors’ costs, prices, and offers </li></ul><ul><li>Other environmental elements </li></ul><ul><li>Types of markets </li></ul><ul><ul><li>Pure competition </li></ul></ul><ul><ul><li>Monopolistic competition </li></ul></ul><ul><ul><li>Oligopolistic competition </li></ul></ul><ul><ul><li>Pure monopoly </li></ul></ul><ul><li>Consumer perceptions of price and value </li></ul><ul><li>Price-demand relationship </li></ul><ul><ul><li>Demand curve </li></ul></ul><ul><ul><li>Price elasticity of demand </li></ul></ul>External Factors Factors to Consider in Setting Price (contd.)
  10. 10. <ul><li>Nature of market and demand </li></ul><ul><li>Competitors’ costs, prices, and offers </li></ul><ul><li>Other environmental elements </li></ul><ul><li>Consider competitors’ costs, prices, and possible reactions when developing a pricing strategy </li></ul><ul><li>Pricing strategy influences the nature of competition </li></ul><ul><ul><li>Low-price low-margin strategies inhibit competition </li></ul></ul><ul><ul><li>High-price high-margin strategies attract competition </li></ul></ul><ul><li>Benchmarking costs against the competition is recommended </li></ul>External Factors Factors to Consider in Setting Price (contd.)
  11. 11. <ul><li>Nature of market and demand </li></ul><ul><li>Competitors’ costs, prices, and offers </li></ul><ul><li>Other environmental elements </li></ul><ul><li>Economic conditions </li></ul><ul><ul><li>Affect production costs </li></ul></ul><ul><ul><li>Affect buyer perceptions of price and value </li></ul></ul><ul><li>Reseller reactions to prices must be considered </li></ul><ul><li>Government may restrict or limit pricing options </li></ul><ul><li>Social considerations may be taken into account </li></ul>External Factors Factors to Consider in Setting Price (contd.)
  12. 12. <ul><li>1. Cost-Based Pricing: a) Cost-Plus Pricing </li></ul><ul><ul><li>Adding a standard markup to cost </li></ul></ul><ul><ul><li>Ignores demand and competition </li></ul></ul><ul><ul><li>Popular pricing technique because: </li></ul></ul><ul><ul><ul><li>It simplifies the pricing process </li></ul></ul></ul><ul><ul><ul><li>Price competition may be minimized </li></ul></ul></ul><ul><ul><ul><li>It is perceived as more fair to both buyers and sellers </li></ul></ul></ul><ul><li>Example </li></ul><ul><ul><li>Variable costs: Tk. 20 Fixed costs: Tk. 500,000 </li></ul></ul><ul><ul><li>Expected sales: 100,000 units Desired Sales Markup: 20% </li></ul></ul><ul><ul><li>Variable Cost + Fixed Costs/Unit Sales = Unit Cost </li></ul></ul><ul><ul><li>Tk. 20 + Tk. 500,000/100,000 = Tk. 25 per unit </li></ul></ul><ul><ul><li>Unit Cost/(1 – Desired Return on Sales) = Markup Price </li></ul></ul><ul><ul><li>Tk. 25 / (1 - .20) = Tk. 31.25 </li></ul></ul>General Pricing Approaches
  13. 13. <ul><li>b) Break-Even Analysis & Target Profit Pricing </li></ul><ul><li>Break-even charts show total cost and total revenues at different levels of unit volume. </li></ul><ul><li>The intersection of the total revenue and total cost curves is the break-even point. </li></ul><ul><li>Companies wishing to make a profit must exceed the break-even unit volume. </li></ul>General Pricing Approaches (contd.)
  14. 14. <ul><li>2. Value-Based Pricing </li></ul><ul><li>Uses buyers’ perceptions of value rather than seller’s costs to set price. </li></ul><ul><li>Measuring perceived value can be difficult. </li></ul><ul><li>Consumer attitudes toward price and quality have shifted during the last decade. </li></ul><ul><ul><li>Introduction of less expensive versions of established brands has become common. </li></ul></ul>General Pricing Approaches (contd.) <ul><li>Business-to-business firms seek to retain pricing power </li></ul><ul><ul><li>Value-added strategies can help </li></ul></ul><ul><li>Value pricing at the retail level </li></ul><ul><ul><li>Everyday low pricing (EDLP) vs. high-low pricing </li></ul></ul>
  15. 15. <ul><li>3. Competition-Based Pricing </li></ul><ul><ul><li>Also called going-rate pricing </li></ul></ul><ul><ul><li>May price at the same level, above, or below the competition </li></ul></ul><ul><ul><li>Bidding for jobs is another variation of competition-based pricing </li></ul></ul><ul><ul><ul><li>Sealed bid pricing </li></ul></ul></ul>General Pricing Approaches (contd.)
  16. 16. <ul><li>Market-Skimming Pricing </li></ul><ul><ul><li>Setting a high price for a new product to skim maximum revenues layer by layer from segments willing to pay the high price. </li></ul></ul><ul><li>Market-Penetration Pricing </li></ul><ul><ul><li>Setting a low price for a new product in order to attract a large number of buyers and a large market share. </li></ul></ul><ul><li>Market Rate Pricing </li></ul><ul><ul><li>Ceding the initiative to the key competitors to set the price. </li></ul></ul><ul><ul><li>Dangerous for leaving the strategic initiative to competitors </li></ul></ul><ul><ul><li>Potential threat of ‘Sudden Price Shift’ by newer, or ‘Changes in delivery system capability’. </li></ul></ul><ul><li>Relationship Pricing </li></ul><ul><ul><li>Different price for Different class of customers depending on relationship and the potentiality of cross-selling or future business. </li></ul></ul>Other Pricing Approaches
  17. 17. <ul><li>Product Line Pricing </li></ul><ul><ul><li>Setting price steps between product line items. </li></ul></ul><ul><ul><ul><li>Line of products rather single one </li></ul></ul></ul><ul><ul><ul><li>Price points </li></ul></ul></ul><ul><li>Optional-Product Pricing </li></ul><ul><ul><li>Pricing optional or accessory products sold with the main product </li></ul></ul><ul><li>By-Product Pricing </li></ul><ul><ul><li>Pricing low-value by-products to get rid of them </li></ul></ul>Product Mix Pricing Strategies <ul><li>Captive-Product Pricing </li></ul><ul><ul><li>Pricing products that must be used with the main product </li></ul></ul><ul><ul><ul><li>High margins are often set for supplies </li></ul></ul></ul><ul><ul><li>Services: two-part pricing strategy </li></ul></ul><ul><ul><ul><li>Fixed fee plus a variable usage rate </li></ul></ul></ul><ul><li>Product Bundle Pricing </li></ul><ul><ul><li>Pricing bundles of products sold together </li></ul></ul>
  18. 18. Price Adjustment Strategies <ul><li>Discount / allowance </li></ul><ul><li>Segmented </li></ul><ul><li>Psychological </li></ul><ul><li>Promotional </li></ul><ul><li>Types of discounts </li></ul><ul><ul><li>Cash discount </li></ul></ul><ul><ul><li>Quantity discount </li></ul></ul><ul><ul><li>Functional (trade) discount </li></ul></ul><ul><ul><li>Seasonal discount </li></ul></ul><ul><li>Allowances </li></ul><ul><ul><li>Trade-in allowances </li></ul></ul><ul><ul><li>Promotional allowances </li></ul></ul>Strategies
  19. 19. Price Adjustment Strategies (contd.) <ul><li>Discount / allowance </li></ul><ul><li>Segmented </li></ul><ul><li>Psychological </li></ul><ul><li>Promotional </li></ul><ul><li>Types of segmented pricing strategies: </li></ul><ul><ul><li>Customer-segment </li></ul></ul><ul><ul><li>Product-form pricing </li></ul></ul><ul><ul><li>Location pricing </li></ul></ul><ul><ul><li>Time pricing </li></ul></ul><ul><li>Also called revenue or yield management </li></ul><ul><li>Certain conditions must exist for segmented pricing to be effective </li></ul>Strategies
  20. 20. <ul><li>Market is segmentable </li></ul><ul><li>Lower priced segments are not able to resell </li></ul><ul><li>Competitors can not undersell segments charging higher prices </li></ul><ul><li>Pricing must be legal </li></ul><ul><li>Costs of segmentation can not exceed revenues earned </li></ul><ul><li>Segmented pricing must reflect real differences in customers’ perceived value </li></ul>Conditions Necessary for Segmented Pricing Effectiveness
  21. 21. <ul><li>Discount / allowance </li></ul><ul><li>Segmented </li></ul><ul><li>Psychological </li></ul><ul><li>Promotional </li></ul><ul><li>The price is used to say something about the product. </li></ul><ul><ul><li>Price-quality relationship </li></ul></ul><ul><ul><li>Reference prices </li></ul></ul><ul><ul><li>Differences as small as five cents can be important </li></ul></ul><ul><ul><li>Numeric digits may have symbolic and visual qualities that psychologically influence the buyer </li></ul></ul><ul><ul><ul><li>Odd </li></ul></ul></ul><ul><ul><ul><li>rounding </li></ul></ul></ul>Strategies Price Adjustment Strategies (contd.)
  22. 22. <ul><li>Discount / allowance </li></ul><ul><li>Segmented </li></ul><ul><li>Psychological </li></ul><ul><li>Promotional </li></ul><ul><li>Temporarily pricing products below the list price or even below cost </li></ul><ul><li>Loss leaders </li></ul><ul><ul><li>Special-event pricing </li></ul></ul><ul><ul><li>Cash rebates </li></ul></ul><ul><ul><li>Low-interest financing, longer warranties, free maintenance </li></ul></ul><ul><li>Promotional pricing can have adverse effects </li></ul>Strategies Price Adjustment Strategies (contd.)
  23. 23. <ul><li>Easily copied by competitors </li></ul><ul><li>Creates deal-prone consumers </li></ul><ul><li>May erode brand’s value </li></ul><ul><li>Not a legitimate substitute for effective strategic planning </li></ul><ul><li>Frequent use leads to industry price wars which benefit few firms </li></ul>Promotional Pricing Problems
  24. 24. <ul><li>Customer Discrimination </li></ul><ul><ul><li>for students only </li></ul></ul><ul><li>Product-form Discrimination </li></ul><ul><ul><li>Telecom products </li></ul></ul><ul><li>Place Discrimination </li></ul><ul><ul><li>service at ATM versus at counters </li></ul></ul><ul><li>Time Discrimination </li></ul><ul><ul><li>peak -hours/ off-peak-hours </li></ul></ul>Price Discrimination
  25. 25. <ul><li>Initiating Price Cuts is Desirable When a Firm </li></ul><ul><ul><li>Has excess capacity </li></ul></ul><ul><ul><li>Faces falling market share due to price competition </li></ul></ul><ul><ul><li>Desires to be a market share leader </li></ul></ul><ul><li>Price Increases are Desirable </li></ul><ul><ul><li>If a firm can increase profit, faces cost inflation, or faces greater demand than can be supplied. </li></ul></ul><ul><li>Methods of Increasing Price </li></ul><ul><li>Alternatives to Increasing Price </li></ul><ul><ul><li>Reducing product size, using less expensive materials, unbundling the product. </li></ul></ul>Price Changes
  26. 26. <ul><li>Buyer reactions to price changes must be considered. </li></ul><ul><li>Competitors are more likely to react to price changes under certain conditions. </li></ul><ul><ul><li>Number of firms is small </li></ul></ul><ul><ul><li>Product is uniform </li></ul></ul><ul><ul><li>Buyers are well informed </li></ul></ul><ul><li>Respond to Price Changes only if: </li></ul><ul><ul><li>Market share / profits will be negatively affected if nothing is changed. </li></ul></ul><ul><ul><li>Effective action can be taken: </li></ul></ul><ul><ul><ul><li>Reducing price </li></ul></ul></ul><ul><ul><ul><li>Raising perceived quality </li></ul></ul></ul><ul><ul><ul><li>Improving quality and increasing price </li></ul></ul></ul><ul><ul><ul><li>Launching low-price “fighting brand” </li></ul></ul></ul>Price Changes (contd.)
  27. 27. <ul><li>Pricing within Channel Levels </li></ul><ul><ul><li>Price-fixing </li></ul></ul><ul><ul><ul><li>Competitors can not work with each other to set prices </li></ul></ul></ul><ul><ul><li>Predatory pricing </li></ul></ul><ul><ul><ul><li>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. </li></ul></ul></ul><ul><li>Pricing across Channel Levels </li></ul><ul><ul><li>Price discrimination </li></ul></ul><ul><ul><li>Retail price maintenance </li></ul></ul><ul><ul><li>Deceptive pricing </li></ul></ul><ul><ul><ul><li>Bogus reference / comparison pricing </li></ul></ul></ul><ul><ul><ul><li>Scanner fraud </li></ul></ul></ul><ul><ul><ul><li>Price confusion </li></ul></ul></ul>Public Policy and Pricing