Week 5Week 5

Topic 1: Price Management

Price and PricingIn the narrowest sense, price is the amount of money charged

for a product or service.In the broadest sense, price is the sum of all the values that

consumers exchange for the benefits of having or using the product or service. Fixed pricing and Dynamic pricing Price is the only element in the marketing mix that

produces revenue. Price is also one of the most flexible elements.

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The Most Common Mistakes of Pricing1. Pricing that is too cost oriented rather than customer value

oriented2. Prices that are not revised often enough to reflect market

changes3. Pricing that does not take the rest of the marketing mix into

account4. Prices that are not varied enough for different products,

market segments, and purchase occasions

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Internal Factors Affecting the Pricing Decision

1. Marketing objectives The clearer a firm is about its objectives, the easier it is to set price.

Common objectives are Survival Current profit maximization Market share leadership Product quality leadership

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Internal Factors Affecting the Pricing Decision (cont.)

Other objectives A company can set prices low to prevent competition from entering

the market Company can set prices at competitors’ levels to stabilize the market Prices can be set to keep the loyalty and support of resellers Prices can be set to avoid government intervention. Prices can be reduced temporarily to create excitement for a product

or to draw more consumers into retail store One product may be priced to sell other products in the company’s

line.

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2. Marketing mix strategy Companies often position their products on price

Target costing: Pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met.

Other companies de-emphasize price and use other marketing mix tools to create non-price positions. The best strategy is not to charge the lowest price but rather to differentiate

the marketing offer to make it worth a higher price.

Internal Factors Affecting the Pricing Decision (cont.)

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3. Cost Total cost Fixed cost and variable cost Experience curve (learning curve): The drop in the average per unit

production cost that comes with accumulated production experience.

4. Organisational considerations Management must decide who within organisation should set prices.

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Internal Factors Affecting the Pricing Decision (cont.)

1. The market and demand Pricing is different types of markets

Pure competition Monopolistic competition Oligopoly competition Monopoly competition

 2. Consumer perceptions of price and value

External Factors Affecting the Pricing Decision

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3. Analyzing the price-demand relationship Demand curve slopes downward, sometimes upward (prestige

products)

 Price elasticity of demand: Price elasticity is the measure of the sensitivity of the demand to

changes in price. If demand hardly changes with a small change in price, the demand is

inelastic. If demand changes greatly with a small change in price, the demand is

elastic.

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External Factors Affecting the Pricing Decision (cont.)

What determines the price elasticity of demand?Buyers are less price sensitive when:

The product is unique, high quality, prestige, and exclusive Substitute products are hard to find or cannot easily be compared with

the quality of substitute. Total expenditure for a product is low relative to income. The cost is shared by another party.

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External Factors Affecting the Pricing Decision (cont.)

4. Competitors’ costs, prices, and offers

5. Other external factors, such as economic conditions,

government, and social concerns.

External Factors Affecting the Pricing Decision (cont.)

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General Pricing Approaches

1. Cost based pricing

Cost + Markups = Selling price Unit cost = Variable cost + (Fixed cost/Unit sales)

2. Break-even analysis and Target profit pricing

  Fixed costBreak-even volume = ---------------------------

Price – Variable cost

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3. Value-based pricing Setting price based on buyers’ perceptions of value rather than on the

seller’s cost. Value pricing: Offering just the right combination of quality and good

service at a fair price. Everyday Low Pricing (EDLP) High-low pricing

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General Pricing Approaches

 4. Competition-based pricing Setting prices based on the prices that competitors charge for similar

products. Going rate pricing: Based on competitors’ price, paid less attention

to its own costs or to demand.

General Pricing Approaches

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Thank You!