c25f8module 3

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Amity School of Business

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Marketing Management - II

PRICINGModule - III

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Pricing Concept & Importance

Pricing = deciding what price to set for products andservices

What is a price? What the buyer is prepared to pay in exchange for a product or

service

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Not just a number on the tag or an item,it is all around: Rent Fees Fare Interest Toll Tax Premium Honorarium

Bribe Salary Commission

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Price and the Marketing Mix Price is a very important part of the

marketing mix

Price directly influences profits bycreating revenue rather thanaffecting costs

One element of marketing mix thatproduces revenue.

All other produce cost.

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Importance of Price Helps and establishes a firms image

High price means better quality? Diamonds

Low price means more for your money? Gas

Establishes a competitive edge

Will beat any competitors price

Helps determine profit

Revenue = price X quantity

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Price helps a business differentiate its productor service compared with other, similar products

E.g. High price = better quality?

The price that is set must be consistent witheverything else in the marketing mix

E.g. a high-priced product needs to havefeatures/benefits that customers feel justify payingmore

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Example !!!

The black T-shirt for women looks pretty ordinary.

In fact theres not much difference in a black t-shirt sold by GAP oran ordinary discount clothing chain.

Yet a black Armani T-shirt costs $275, where as the GAP item costs$14.90 and a ordinary thing somewhere around $7.

Customers who purchase the Armani T-shirt are paying for a T-shirtmade of 70% Nylon, 25% polyester and 5 % elastine. Whereas theGAP T-shirt are made mainly of cotton.

True, that Armani is a bit more stylish cut than the others and sportsa Made in Italy label, but how does it command $275 tag.

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A luxury brand Armani is mainly known for its suits,handbags and evening gowns that it sells for thousandsof dollars.

Because there are not many takers for $275 t-shirt,Armani doesn't make many, thus further enhancing theappeal for status seekers who like the idea of having alimited edition T-shirts.

Value is not only quality, function, utility, distribution, itsalso a customers perception of a brands luxuryconnotations

Arnold Aronson, Former CEO Saks Fifth Avenue.

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Market Factors Affecting Price1. Costs and Expenses

What happens when the price for a barrel of oilgoes up?

Keeping customers happy Same price but reduce size bag of chips Same price but drop features no meal on a

plane

Higher price but more features Break even point sales revenue equals costs and

expenses after this its all profit

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Market Factors Affecting Price

2. Supply and Demand

Demand elasticity

Elastic demand change in price = change indemand

Steak, Leather

Inelastic demand change in price has little effecton demand

Milk, Heart Transplant

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Market Factors Affecting Price3. Consumer Perceptions

A low priced item can be perceived as Cheap

A high priced item can be perceived as High quality

Premium pricing Pricing a product high, eitherbecause it is of good quality or to be perceived asgood quality

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Market Factors Affecting Price4. Competition

Price vs. non-price competition

Price competition appeals on low price, when product arevery similar

Non-Price competition minimizes price as a reason forpurchase and focuses on something else, anything else

Quality

Service Convenience

Association

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Pricing Process

Selecting the pricing objective

Determine Demand

Estimate Cost

Analyze competitors cost,

price and offers

Selecting pricing method

Selecting the final price

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Selecting Pricing Objective Decide where it wants to position its market offering.

A company generally pursues any of 5 pricingobjectives:-

1. Survival

2. Maximum current profit

3. Maximum market share

4. Maximum market skimming5. Product-Quality leadership

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Determine Demand Each price leads to a different demand and has different

impact on marketing objectives.

The relationship between alternative prices and theresulting current demand is captured on the demandcurves.

Measure the impact of price change on total revenue

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Determine Demand

Different customers have different price sensitivities and needs

In normal case demand and price are inversely related.

In case of prestigious goods, demand curve sometimes slopesupward.

Some consumers take higher price as a indicator of better quality.

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Estimate Cost Demand sets a ceiling on the price the company can

charge and costs sets the floor.

Company charges a price that covers its cost ofproducing, distributing and selling the product, includinga fair return for its effort and risk.

Types of costs: Fixed Cost Total Cost Variable Cost Average Cost

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Analyze Competitors Cost, Price and Offers

With a range of possible prices determined by market demand andcompany costs the firm must take competitors cost, price andpossible price reactions into account

Firm should consider the nearest competitor price.

If the firm is offering positive differentiation features not offered bycompetitor, their worth to the customer should be evaluated andadded to the competitors price and vice versa.

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Selecting a Pricing Method

Given the customers demand schedule, the cost functionand competitors prices, the company now selects aprice.

Price Setting Methods:1. Mark up Pricing2. Target Return Pricing3. Perceived Value Pricing

4. Value Pricing5. Going Rate Pricing

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(1) Mark Up Pricing Most elementary method.

Add up a standard markup to the products cost.

E.g. Construction companies submit a bid by estimating total cost ofproject and adding a standard markup for profit.

Generally higher on seasonal items (to cover risk of not selling),specialty item, slow moving goods, items with high storage andhandling cost and demand inelastic products.

Doesn't consider current demand, perceived value and competition.

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(2) Target Return Pricing The firm determines the price that would yield its target

ROI.

E.g. General motors has priced its products to achieve a15-20% ROI.

Target-return price = unit cost + desired return x investedcapital

unit sales

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(3) Perceived Value Pricing

Base price on the basis of customers perceived value.

Made of many factors like: Buyers image of product performance Guarantee & Warranty Quality of product Customer support Supplier reputation

Firms use marketing mix elements like sales force andadvertising to enhance perceived value.

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(4) Value Pricing Winning customer loyalty by charging fairly low price for high quality

offering. Its not only about setting low prices but reengineeringprocesses to become low cost producer.

This approach is used where external factors such as recession orincreased competition force companies to provide 'value' productsand services to retain sales e.g. value meals at McDonalds.

E.g. EDLP, high-low pricing

In EDLP pricing, a retailer charges a constant, low price with notemporary discounts. For example: Wal-Mart, Price Club, andSaturn.

In high-low pricing, a retailer charges higher prices but then runsfrequent promotions in which prices are temporarily lowered.

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(5) Going- rate Pricing

Firm basis its price largely on competitors prices.

In industries like paper, fertilizer, steel, almost everyonehas similar prices.

Competitive response is uncertain.

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Selecting Final price Impact of other marketing activities

Branding, advertising.

Company pricing policy

Impact on other parties.

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Adapting the price Companies usually don't set a single price, but

rather develop a pricing structure that reflects

variations in geographical demand and cost,market segment requirements, purchase timing,delivery frequency, etc.

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Price Adaptation Strategies

Geographical Pricing

Price Discount & Allowances

Promotional Pricing

Differentiated Pricing

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Geographic Pricing Strategies

F.O.B. Point-of-Production pricing: Price quoted atfactory-- buyer pays transportation.

Uniform delivered pricing: Same delivered price quotedto all; works if transportation costs small.

Zone-delivered pricing: Set same price within severalzones

Freight-absorption pricing: Seller absorbs transport costto penetrate market.

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Price Discount and Allowances

Cash Discount = A price reduction to buyer who pays the bill promptly.

Quantity Discount = A price reduction to those who buys large volumes.

Functional Discount = Discount (trade discount) offered by a manufacturerto trade channel members

Seasonal Discount = A price reduction to those who buy merchandise orservices out of season

Allowance = An extra payment to gain reseller participation in special

programs. (Trade-in allowances, Promotional allowances)

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Promotional Pricing

Pricing to promote a product is a very commonapplication. There are many examples of promotionalpricing including approaches such as

BOGOF (Buy One Get One Free). Loss leader pricing Specialevent pricing Cash rebates

Longer payment terms Warranties and service contracts Psychological discounting

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Loss Leaders

A product offered at a loss to entice customers to visit a shop orwebsite.

The hope is that customers will either : Purchase other products at the same time, Or become longtime / loyal customers to make up for the loss.

Advantages Loss leaders can be just a few products in a much wider range - but

the customer has the impression that the whole range is great value

Good method of short-term pricingDisadvantages Customers come to expect low prices on these products

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Differentiated Pricing

Customer Segment Pricing: Different groups charged different prices (eg. Museums)

Product form pricing:

Different versions of the product are priced differently but notproportionately to their cost.

Channel pricing: Based on the channel

Location Pricing: E.G. Theater

Time Pricing: By season, day, hour (eg. Restaurants)

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For discrimination (pricing) to work:

Market must be segmentable Segments should show different intensities of

demand Competitors must not be able to undersell the firm

in a high segment market. Cost of segmenting should not be very high

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More Pricing Strategies & Application.

Cost-plus pricing Setting a price by adding a fixed amount or percentageto cost of making product

Penetration

pricing

Setting a very low price to gain as many sales aspossible

Price skimming Setting a high price before other competitors come intomarket

Predatory pricing Setting a very low price to knock out all othercompetition

Competitorpricing Setting a price based on competitors prices

Price

discrimination

Setting different prices for same good, but to differentmarkets e.g. peak and off peak mobile phone calls

Psychological

pricing

Setting a price just below a large number to make itseem smaller e.g. 9.99 not 10

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Price-Quality Strategies

Philip Kotler identified 9 price-quality strategies

PremiumHigh

Value

Super

Value

OverCharging MidValue GoodValue

Rip-offFalse

EconomyEconomy

High Quality

Low Quality

High Price Low Price

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Product Life Cycle and PricingThe Product Life Cycle

Describes how sales of a product change over time Various phases introduction; growth; maturity; decline Price needs to change depending on the stage of the product

life cycle

E.g. launch phase For a new market with few competitors. Then price can be

high

E.g. growth phase More competitors and higher sales volume; price likely to be

lower

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Product Mix Pricing

Prices can be modified when a product is a part of entireproduct mix.

In that case a firm searches for a price that maximizesprofits of the total mix. Optional Feature Pricing

Captive Product Pricing

Two Part Pricing

Product Bundle Pricing

c25f8module 3

Documents

Transcript of c25f8module 3