Lt-16 Pricing- The Second P of Marketing
Transcript of Lt-16 Pricing- The Second P of Marketing
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Pricing :
The Second P of Marketing
16
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Pricing:Understanding and
Capturing Customer Value
What Is a Price?
Customer Perceptions of Value
Consumer Psychology and Price
Other Internal and External ConsiderationsAffecting Price Decisions
Pricing Process
Topic Outline
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Amount of money charged for a product orservice.
The sum of all the values that consumersgive up in order to gain the benefits of havingor using a product or service.
The only P in the marketing mix thatproduces revenue; all other elementsrepresent costs
What Is a Price?
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Synonyms for Price
Rent
Tuition
Fee Fare
Rate
Toll
Premium
Honorarium
Special assessment
Bribe
Dues
Salary
Commission
Wage
Tax
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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
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Factors to Consider When Setting Prices
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Factors to Consider When Setting Prices
Understanding how much value consumers place on thebenefits they receive from the product and setting a price that
captures that value
Value-based pricing uses the buyers perceptions of value,not the sellerscost, as the key to pricing. Price is considered
before the marketing program is set.
Value-based pricing is customer driven
Cost-based pricing is product driven
1. Customer Perceptions of Value
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Two Alternative Approaches of
Determining Price of a Product
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Gillette Commands a
Price Premium
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Consumer Psychology
and Pricing
Reference Prices
Price-quality inferences
Price endings
Price cues
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Possible Consumer Reference Prices
Fair price
Typical price
Last price paid Upper-bound price
Lower-bound price
Competitor prices
Expected futureprice
Usual discountedprice
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Consumer Perceptions vs. Reality for Cars
Overvalued Brands
Land Rover
Kia
Volkswagen
Volvo
Mercedes
Undervalued Brands
Mercury
Infiniti
Buick
Lincoln
Chrysler
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Tiffanys
Price-Quality Relationship
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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 price
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When to Use Price Cues
Customers purchaseitem infrequently
Customers are new
Product designs varyover time
Prices vary seasonally
Quality or sizes vary
across stores
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Steps in Setting Price
Select the price objective
Determine demand
Estimate costs
Analyze competitor price mix
Select pricing method
Select final price
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Step 1: Selecting the Pricing Objective
Survival
Maximum current profit
Maximum market share
Maximum market skimming
Product-quality leadership
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SURVIVAL:
When Companies are plagued with overcapacity, intense competition, orchanging consumer wants.
As long as prices cover variable costs and some fixed costs, the company stays
in business. Survival is a short-run objective; in the long run, the firm must learn how to add
value or face extinction.
MAXIMUM CURRENT PROFIT Many companies try to set a price that will maximize current profits.
They estimate the demand and costs associated with alternative prices and choose theprice that produces maximum current profit, cash flow, or rate of return on investment.
This strategy assumes that the firm has knowledge of demand levels
MAXIMUM MARKET SHARE Some companies want to maximize their market share. They believe that a higher sales
volume will lead to lower unit costs and higher long-run profit. They set the lowest price,assuming the market is price sensitive. They have have knowledge of its demand andcost functions.
Conditions favoring setting a low price: (1) The market is highly price sensitive, and a lowprice stimulates market growth; (2) production and distribution costs fall with accumulated
production experience; and (3) a low price discourages actual and potential competition.
MAXIMUM MARKET SKIMMING C i ili t h l
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MAXIMUM MARKET SKIMMING: Companies unveiling a new technologyfavor setting high prices to maximize market skimming. where prices starthigh and are slowly lowered over time.
Conditions:
(1) A sufficient number of buyers have a high current demand;
(2) the unit costs of producing a small volume are not so high that they cancel theadvantage of charging what the traffic will bear;
(3) the high initial price does not attract more competitors to the market;
(4) the high price communicates the image of a superior product.
PRODUCT-QUALITY LEADERSHIP A company might aim to be theproduc t-quali ty leader in the market.
To create a percept ion abou t produ cts as of high quality, taste, and status thecompany may charge a price just high enough not to be out of consumers' reach
OTHER OBJECTIVES Nonprofit and public organizations may haveother pricing objectives.
A university aims for part ial cost recovery, know ing th at i t must rely on p r ivategi f ts and publ ic g rants to cover the remaining c osts.
A nonpro f i t hospi ta l may aim for fu l l cost recovery in i ts pr ic ing.
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Step 2: Determining Demand
Price Sensitivity
Estimating
Demand Curves
Price Elasticity
of Demand
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PRICE SENSITIVITY
The demand curve shows the market's probable purchase quantity atalternative prices. It sums the reactions of many individuals who have
different price sensitivities.
The first step in estimating demand is to understand what affects pricesensitivity.
Generally, customers are most price sensitive to products that cost a
lot or are bought frequently.
They are less price sensitive to low-cost items or items they buyinfrequently.
They are also less price sensitive when price is only a small part of thetotal cost of obtaining, operating, and servicing the product over its
lifetime.
A seller can charge a higher price than competitors and still get the
business if the company can convince the customer that it offers thelowest total cos t of ow nership (TCO).
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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
The expenditure is a smaller part of buyers total income
The expenditure is small compared to the total cost ofthe end product
Part of the cost is paid by another party
The product is used with previously purchased assets
The product is assumed to have high quality andprestige
Buyers cannot store the product
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ESTIMATING DEMAND CURVESMost companies make some attempt to measure their demand curves
using several different methods.
Statist ical analysis of past prices, quantities sold, and other factors can revealtheir relationships. The data can be longitudinal (over time) or cross-sectional(different locations at the same time). Building the appropriate model and fittingthe data with the proper statistical techniques calls for considerable skill.
Price exper iments can be conducted.
Bennett and Wilkinson systematically varied the prices of several products sold in adiscount store and observed the results.
An alternative approach is to charge different prices in similar territories to see howsales are affected. Still another approach is to use the Internet. An e-business couldtest the impact of a 5 percent price increase by quoting a higher price to every fortiethvisitor to compare the purchase response.
Surveys can explore how many units consumers would buy at differentproposed prices, although there is always the chance that they might understatetheir purchase intentions at higher prices to discourage the company fromsetting higher prices.3
I l ti
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Inelastic
and Elastic Demand
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PRICE ELASTICITY OF DEMAND
Marketers need to know how responsive, or elastic,demand would be to a change in price
Demand is likely to be less elastic under the followingconditions:
(1) There are few or no substitutes or competitors;
(2) buyers do not readily notice the higher price;
(3) buyers are slow to change their buying habits;
(4) buyers think the higher prices are justified.
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Step 3: Estimating Costs
Types of Costs
Target Costing
Accumulated
Production
Activity-Based
Cost Accounting
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Cost Terms and Production
Fixed costs
Variable costs
Total costs
Average cost
Cost at differentlevels of production
Step 3: Estimating Costs
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Step 3: Estimating Costs
Demand sets a ceiling on the price the company can charge for itsproduct. 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 andrisk. Yet, when companies price products to cover full costs, the net result
is not always profitability.
A company's costs take two forms, Fixed Costs and VariableCosts
Fixed costs (also known as overhead) are costs that do not vary with
production or sales revenue. A company must pay bills each month for rent,heat, interest, salaries, and so on, regardless of output.
Variable costs vary directly with the level of production
Total costs consist of the sum of the fixed and variable costs for anygiven level of production.
Average cost is the cost per unit at that level of production; it is equal to totalcosts divided by production. Management wants to charge a price that will at
least cover the total production costs at a given level of production.
ACTIVITY BASED COST ACCOUNTING
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ACTIVITY-BASED COST ACCOUNTING :
ABC accounting tries to identify the real costs associated withserving each customer.
It allocates indirect costs like clerical costs, office expenses,supplies, and so on, to the activities that use them, rather than in
some proportion to direct costs.
TARGET COSTING:
Market research is used to establish a new product's desiredfunctions and the price at which the product will sell, given its appeal
and competitors' prices.
Deducting the desired profit margin from this price leaves the targetcost that must be achieved.
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Cost per Unit as a Function of
Accumulated Production
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Tata motors developed Nanoits
small car with a target price
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Step 5: Selecting a Pricing Method
Markup pricing
Target-return pricing
Perceived-value pricing
Value pricing
Going-rate pricing
Auction-type pricing
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Practice Question
A consumer purchases a flat iron to straightenher hair for Rs. 7,500 from a salon at which
she gets her hair cut. If the salons markup is
40 percent and the wholesalers markup is 15percent, both based on their selling prices, for
what price does the manufacturer sell the
product to the wholesaler?
T t R t P i i M th d
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Target Return Pricing Method
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Break-Even Chart
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Exercises: 1
a) If the unit variable costs for each flat iron are Rs.2000 and the manufacturer has fixed costs totaling
Rs. 10,000,000, how many flat irons must this
manufacturer sell to break even?
a) How many must it sell to realize a profit of Rs.
40,000,000?
Fixed cost
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Breakeven volume =PriceVariable Cost
So,
Rs. 10,000Breakeven volume = = 1,818 flatirons
Rs. 7,500Rs. 2,000
If the manufacturer wants to realize a Rs. 40,000,000 profit,
then this amount is added to the fixed costs in the
numerator:
Rs. 10,000,000 + Rs. 40,000,000Breakeven volume =___Rs. 7,500Rs. 2,000
= 9,090.91 or 9,091 flat irons
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Perceived-Value Pricing
Customers perceived-value
Performance $$$ Warranty $
Customer support $ Reputation $$
Perceived Value Pricing
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Perceived Value Pricing
Perceived value is made up of several elements, such asthebuyer's image of the product performance,
the channel deliverables,thewarranty quality,customer support,andsofter attributes such as the supplier's reputation, trustworthiness,
and esteem.
Furthermore, each potential customer places different weights on these differentelements result ing in following group of buyer :
For pr ice buyers, companies need to offer stripped-down products andreduced services.
For value buyers, companies must keep innovating new value andaggressively reaffirming their value.
For loyal buyers, companies must invest in relationship building and
customer intimacy.
**Companies need different strategies for these three groups.
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Value Pricing
Through Value pricing companies charge a fairly low price for a high-quality offering fom its customers.
However, Value pricing is not a matter of simply setting lower prices; it is a
matter of reengineering the company's operations to become a low-cost
producer without sacrificing quality, and lowering prices significantly to attracta large number of value-conscious customers
An important type of value pricing is everyday low pricing (EDLP), which
takes place at the retail level. A retailer who holds to an EDLP pricing policy
charges a constant low price with little or no price promotions and special
sales. These constant prices eliminate week-to-week price uncertainty and
can be contrasted to the "high-low" pricing of promotion-oriented
competitors. In high-low pricing, the retailer charges higher prices on an
everyday basis but then runs frequent promotions in which prices are
temporarily lowered below the EDLP level
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Value Pricing
P1 P2C1 C2
Level of
Quality
THOUSANDS OF
LOW
PRICES
EVERY DAYthroughout the store
EDLP
High
LowPricing
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Going Rate Pricing
In going-rate pricing, the firm bases its price largely on
competitors' prices. The firm might charge the same, more, orless than major competitor(s).
In oligopolistic industries that sell a commodity such as steel,
paper, or fertilizer, firms normally charge the same price.
The smaller firms "follow the leader," changing their prices when
the market leader's prices change rather than when their own
demand or costs change.
Some firms may charge a slight premium or slight discount, but
they preserve the amount of difference.
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Auction-Type Pricing
English auctions
Dutch auctions
Sealed-bid auctions
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Auction PricingEnglish auction(ascending bids)
Dutch auction(descending bids)
Sealed-bid auction
Engl ish auct ions (ascending bids) One seller and many
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Engl ish auct ions (ascending bids). One seller and manybuyers. e.g. sites such as Yahoo! and eBay,
Dutch auct ions (descending bids). One seller and many
buyers, or one buyer and many sellers. In the first kind, anauctioneer announces a high price for a product and then slowlydecreases the price until a bidder accepts the price. In the other,the buyer announces something that he wants to buy and then
potential sellers compete to get the sale by offering the lowestprice.
Sealed-bid auctions. Would-be suppliers can submit only onebid and cannot know the other bids. A supplier will not bid belowits cost but cannot bid too high for fear of losing the job. The neteffect of these two pulls can be described in terms of the bid'sexpected profit. Using expected profit for setting price makessense for the seller that makes many bids.
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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
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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?
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Variable Cost/Unit 12500.00
Fixed Cost 10,00,00,000
Units Sales 100000.00Mark-up% 0.20
Mark up Price ?
Total Investment 50,00,00,000
Investor Return on Investment 0.25
RoI Pricing ?
Competitor's Price 18000.00
Customer Perception 17500.00
Bep
Q.1 Find out the Floor and Ceiling price for this NG LCD
Q.2 What will be the Mark-up price here?
Q.3 What will be the ROI price here?
Q.4 Which price will you charge from the customers & why?
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Lecture 17
Pricing Strategies
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1. New-Product Pricing Strategies
2. Product Mix Pricing Strategies
3. Price Adjustment Strategies
4. Price Changes
Topic Outline
1. New-Product Pricing Strategies
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1. New Product Pricing Strategies
a. Market-skimming pricing High initial prices to skim revenue layers from the market
Conditions Product quality and image must support the price
Buyers must want the product at the price
Costs of producing the product in small volume should not cancel the
advantage of higher prices Competitors should not be able to enter the market easily
b. Market- penetration pricing setting a low initial price in order to penetrate the market quickly and
deeply to attract a large number of buyers quickly to gain marketshare
Conditions Price sensitive market
Inverse relationship of production and distribution cost to sales growth
Low prices must keep competition out of the market
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2. Product Mix Pricing Strategies
Product
line pricing
Optional-product
pricing
Captive-product
pricing
By-product
pricing
Product
bundlepricing
Product Mix Pricing Strategies
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g g
i) Product line pricing : takes into account the cost
differences between products in the line, customer
evaluation of their features, and competitorspricesii) Optional-product pricing takes into account optional or
accessory products along with the main product
iii) Captive-product pricing involves products that must be
used along with the main productiv) Two-part pricinginvolves breaking the price into:
Fixed fee
Variable usage fee
v) Product bundle pricing combines several products at areduced price
vi) 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
stora e and deliver
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Adapting the Price
Possible Reasons variations in
Geographical demand & Cost
Market-segment requirements,
purchase timing, order levels,
delivery frequency,
guarantees,
service contracts,
3 Price Adjustment Strategies
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3. Price-Adjustment Strategies
Discount andallowance
pricing
Segmented orDifferentiated pricing
Psychologicalpricing
Promotionalpricing
Geographicpricing
Dynamicpricing
Internationalpricing
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Price-Adjustment Strategies
1. Discount and allowance pricingreducesprices to reward customer responses such as
paying early or promoting the product
Types of Discounts
Cash discount
Quantity discount
Functional discount
Seasonal discount
Allowance
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2. Promotional Pricing
Promotional pricing is when prices are temporarilypriced below list price or cost to increase demand
Loss leaders
Special event pricing
Cash rebates
Low-interest financing
Longer warrantees
Free maintenance
2. Promotional Pricing Tactics
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gLoss- leader pr icing. Supermarkets and department stores often drop the price onwell-known brands to stimulate additional store traffic. This pays if the revenue on theadditional sales compensates for the lower margins on the loss-leader items.
Cash rebates. Auto companies and other consumer-goods companies offer cashrebates to encourage purchase of the manufacturers' products within a specified timeperiod. Rebates can help clear inventories without cutting the stated list price.
Special-event p r icing. Sellers will establish special prices in certain seasons to draw inmore customers.
Low-interest f inancing . Instead of cutting its price, the company can offer customerslow-interest financing. Automakers have even announced no-interest financing to attractcustomers.
Warrant ies and s ervice cont racts. Companies can promote sales by adding a free orlow-cost warranty or service contract.
Lon ger payment terms. Sellers, especially mortgage banks and auto companies,stretch loans over longer periods and thus lower the monthly payments.Psycho logica l discou nt ing. This strategy involves setting an artificially high price andthen offering the product at substantial savings; for example, "Was $359, now $299.
3. Differentiated Pricing
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gPrice discrimination
occurs when a company sells a product or service at two or more prices that do not
reflect a proportional difference in costs.
In first-degree price discrimination, the seller charges a separate price to eachcustomer depending on the intensity of his or her demand.
In second-degree price discrimination, the seller charges less to buyers who buy a
larger volume.
In third-degree price discrimination, the seller charges different amounts to different
classes of buyers, as in the following cases:
Customer-segment p r ic ing.Different customer groups are charged differentprices for the same product or service.
Product- form p r ic ing. Different versions of the product are priced differentlybut not proportionately to their respective costs
Image pr icin g. Some companies price the same product at two differentlevels based on image differences.
Channel pr ic ing. Coca-Cola carries a different price depending on whether itis purchased in a fine restaurant, a fast-food restaurant, or a vending machine
Loc ation pr ic ing. The same product is priced differently at different locationseven though the cost of offering at each location is the same
Time pr ic ing .Prices are varied by season, day, or hour. Public utilities varyenergy rates to commercial users by time of day and weekend versus weekday
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Special festivalpricing by
Coca-Cola on the
occasion of
Ramzan in
Pakistan.
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4. Geographical pricing
It is used for customers in different partsof the country or the world
FOB-origin pricing
Uniformed-delivered pricing
Zone pricing
Basing-point pricing
Freight-absorption pricing
4. Geographical Pricing Strategies
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FOB-origin (free on board) pricing means that the goods aredelivered to the carrier and the title and responsibility passes to the
customer
Uniformed-delivered pricingmeans the company charges the sameprice plus freight to all customers, regardless of location
Zone pricing means that the company sets up two or more zoneswhere customers within a given zone pay a single total price
Basing-point pricing means that a seller selects a given city as a
basingpointand charges all customers the freight cost associatedfrom that city to the customer location, regardless of the city fromwhich the goods are actually shipped
Freight-absorption pricing means the seller absorbs all or part ofthe actual freight charge as an incentive to attract business incompetitive markets
Dynamic pricing is when prices are adjusted continually to meet thecharacteristics and needs of the individual customer and situations
International pricing is when prices are set in a specific countrybased on country-specific factors
Economic conditions, Competitive conditions, Laws and regulations,
Infrastructure, Company marketing, objective
g p g g
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Price Changes
Price cuts
Priceincreases
Initiating Pricing Changes
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Price Changes
Initiating Pricing Changes
Price cuts occur due to:
Excess capacity Increased market share
Price increase from:
Cost inflation Increased demand
Lack of supply
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Price Changes
Price increases
Product is hot
Company greed
Price cuts
New models willbe available
Models are notselling well
Quality issues
Buyer Reactions to Pricing Changes
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Price Changes
Questions
Why did the competitor change the price?
Is the price cut permanent or temporary?
What is the effect on market share andprofits?
Will competitors respond?
Responding to Price Changes
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Price Changes
Solutions
Reduce price to match competition
Maintain price but raise the perceivedvalue through communications
Improve quality and increase price
Launch a lower-price fighting brand
Responding to Price Changes
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Chapter 11- slide 69Copyright 2010 Pearson Education, Inc.Publishing as Prentice Hall
Price Changes
Responding to Price Changes
P bli P li d P i i
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Public Policy and Pricing
Price competitionis a core elementof our free-market economy. In settingprices, companies usually are not free
to charge whatever prices they wish.Many laws govern the rules of fairplay in pricing.
The Monopolies and Restrictive
Trade Practices (MRTP) Act, 1969 The Competition Act, 2002
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Public Policy and Pricing
Salient features of the Competition
Act:
anti-competitive agreements
prohibition of abuse of dominantpositions by an enterprise
regulation of combinations such asacquisitions, mergers, joint ventures,
takeovers, and amalgamations
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Public Policy and Pricing
Under the MRTP Act, acts such asmisleading consumers about theprices at which goods and services
are available in the market and falseoffers of bargain prices areconsidered to be unfair trade practices
The Consumer Protection Act, 1986(amended in 2002), also safeguards
the interests of consumers
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Public Policy and Pricing
Predatory pricing, or selling andproviding services with the intention of
reducing competition or eliminating
competitors, is not permissible underthe MRTP Act or the Competition Act.
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Increasing Prices
Delayed quotationpricing
Escalator clauses
Unbundling
Reduction of discounts
Brand Leader Responses to
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Copyright 2009 Dorling Kindersley (India) Pvt. Ltd. 14-75
Brand Leader Responses to
Competitive Price Cuts
Maintain price
Maintain price and add value
Reduce price Increase price and improve quality
Launch a low-price fighter line
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Copyright 2009 Dorling Kindersley (India) Pvt. Ltd. 14-76
Marketing Debate
Is the right price a fair price?
Take a position:
1. Prices should reflect the value thatconsumers are willing to pay.
or
2. Prices should primarily just reflect the costinvolved in making a product.
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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?