Pricing Strategies

Pricing Strategies

Instructor: Safaa S. Y. Dalloul

E-MarketingUnit 7

Elements of LecturePricing Strategy

Definition

Role of Pricing

How Companies Price?

Pricing Strategies and Procedures

Adapting for Pricing

Price Change

Pricing

Pricing

Price is not just a number on a tag or an item.

Prices were set by negotiation between buyers and sellers. "Bargaining" is still a sport in some areas.

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Pricing

Today the Internet is partially reversing the fixed pricing trend.

Computer technology is making it easier for sellers to use software that monitors customers' movements over the Web and allows them to customize offers and prices.

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Role of Pricing

Role of Pricing

Pricing can help a company attain its other marketing objectives.

Business (Vision,

Mission…)

Marketing Objectives Competitors

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Role of Pricing

Pricing enables the marketer to segment markets, define products, create customer incentives, and even send signals to competitors.

The pricing program should be supported with a focused plan of implementation.

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Role of Pricing

Many marketing professionals argue that pricing is a

valuable strategic weapon that helps companies

enhance and capitalize on competitive vulnerability, and

there is no question that pricing decisions have an

immediate impact on a company’s bottom line.

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Role of Pricing

From this perspective, it is easy to argue that to a large

degree, pricing decisions can determine whether a

product or a company will succeed or fail.

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In small companies, prices are often set by the boss.

In large companies, pricing is handled by division and product-line managers. Even here, top management sets general pricing objectives and policies and often approves the prices proposed by lower levels of management.

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In industries where pricing is a key factor (aerospace,

railroads, oil companies), companies will often establish

a pricing department to set or assist others in

determining appropriate prices.

This department reports to the marketing department,

finance department, or top management.

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Consumer Psychology and PricingMany economists assume that consumers are "price takers" and accept prices at "face value" or as given.

Marketers recognize that consumers often actively process price information, interpreting prices in terms of

Their knowledge from prior purchasing experience

Formal communications (advertising, sales calls, and

brochures)

Informal communications (friends, colleagues, or family

members), and point-of-purchase or online resources.

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Consumer Psychology and PricingUnderstanding how consumers arrive at their perceptions of prices is an important marketing priority.

Reference Prices

Price-Quality Inferences

Price Cues

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Reference Prices: consumers may have fairly good

knowledge of the range of prices.

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Price-Quality Inferences: many consumers use

price as an indicator of quality.

High Price High Quality

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Consumer Psychology and PricingWhen alternative information about true quality is available, price becomes a less significant indicator of quality. When this information is not available, price acts as a signal of quality.

Dem

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Lead to

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Price Cues: many sellers believe that prices should

end in an odd number. Many customers see a

stereo amplifier priced at $299 instead of $300 as a

price in the $200 range rather than $300 range.

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Pricing Strategies

Pricing StrategiesPrice has become one of the more important marketing

variables.

Despite the increased role of non-price factors in the

modern marketing process, price is a critical marketing

element, especially in markets characterized by

monopolistic competition or oligopoly.

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Pricing StrategiesCompetition and buyers that are more sophisticated

has forced many retailers to lower prices and in turn

place pressure on manufacturers.

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Pricing StrategiesFurther, there has been increasing buyer awareness of

costs and pricing, and growing competition within the

channels, which in turn provides the consumer with

even more awareness of the pricing process.

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Pricing Procedure

Pricing ProcedureEstablishes marketing objective

Determines the demand schedule

Estimates how its costs vary

Examines competitors’ prices

Selects pricing methods

Selects final price

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Pricing Procedure1

Survival

Maximum current profit

Maximum market share

Maximum market skimming

Product-quality leadership.

The company carefully establishes its marketing objective(s)

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Pricing Procedure1 ӾSurvival

Companies pursue survival as their major objective if they are plagued with overcapacity, intense competition, or changing 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.

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Pricing Procedure1 ӾMaximum 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 the price that produces maximum current profit, cash flow, or rate of return on investment.

This strategy assumes that the firm has knowledge of its demand and cost functions.

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Pricing Procedure1 ӾMaximum 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.

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Pricing Procedure1 ӾMaximum Market Skimming

Companies presentation a new technology favor setting high prices to maximize market skimming.

Sony is a frequent practitioner of market-skimming pricing, where prices start high and are slowly lowered over time.

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Pricing Procedure1 ӾMaximum Market Skimming

Market skimming makes sense under the following conditions:

1) A sufficient number of buyers have a high

current demand

2) The high initial price does not attract more

competitors to the market

3) The high price communicates the image of

a superior product.

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Pricing Procedure1 ӾProduct Quality Leadership

A company might aim to be the product-quality leader in the market.

Many brands strive to be "affordable luxuries"—products or services characterized by

High levels of perceived quality, Taste, and

status with a price just high enough not to be

out of consumers' reach.

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Pricing Procedure1 ӾProduct Quality Leadership

BMW cars, has been able to position themselves as quality leaders in their categories, combining quality, luxury, and premium prices with an intensely loyal customer base.

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Pricing Procedure2

The company determines the demand

schedule, which shows the probable

quantity purchased per period at alternative

price levels.

The company determines the demand schedule

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Pricing Procedure2 ӾPrice Elasticity of Demand

Marketers need to know how responsive, or elastic, demand would be to a change in price.

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With demand curve (a), a price increase from $10 to $15 leads to a relatively small decline in demand from 105 to 100.

With demand curve (b), the same price increase leads to a substantial drop in demand from 150 to 50.

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

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If demand changes considerably, demand is elastic.

The higher the elasticity, the greater the volume growth resulting from a 1 percent price reduction.

The more inelastic the demand, the higher the company can set its price.

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Pricing Procedure2 ӾEstimating Demand Curves

Most companies make some attempt to measure their demand curves using several different methods.

Statistical analysis

Price experiments

Surveys

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Pricing Procedure3

The company estimates how its costs vary

at different output levels: “production levels,

different marketing strategies, differing

marketing offers, and target costing based

on market research”


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Pricing Procedure3

A company's costs take two forms, fixed and

variable.

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.


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Pricing Procedure3

Variable costs vary directly with the level of

production.

For example, each hand calculator produced by

Texas Instruments involves the cost of plastic,

microprocessor chips, packaging.


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Pricing Procedure3

These costs tend to be constant per unit produced.

They are called variable because their total varies

with the number of units produced. (HOW)


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Pricing Procedure3

Total costs consist of the sum of the fixed and

variable costs for any given level of production.

Average cost is the cost per unit at that level of

production; it is equal to total costs divided by

production


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Pricing Procedure4

The company examines competitors’ prices as a

basis for positioning its own price.

The company examines competitors’ prices

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Pricing Procedure5

Markup pricing

Target return pricing

Perceived-value pricing, value-pricing

Going-rate pricing

Sealed-bid pricing.

The company selects one of the pricing methods

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Pricing Procedure5 ӾMarkup Pricing

The most elementary pricing method is to add a standard markup to the product's cost.

Construction companies submit job bids by estimating the total project cost and adding a standard markup for profit.

Lawyers and accountants typically price by adding a standard markup on their time and costs.

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Variable cost per unit $10 Fixed cost $300,000

Expected unit sales 50,000

The manufacturer's unit cost is given by:

Unit cost = variable cost + fixed cost = $10 + $300,000 = $16 unit sales 50,000

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Now assume the manufacturer wants to earn a 20 percent markup on sales.

The manufacturer's markup price is given by:

Markup price = unit cost/(1 - desired return on sales) = $16/(1 - 0.2) = $20

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Pricing Procedure5 ӾTarget-Return Pricing

In target-return pricing, pricing used to achieve a planned or target rate of return on investment.

Target-return price = unit cost + (desired return * invested capital) / Unit sales

Target-return price =16$ + 0.20 *

1,000,000/ $50,000

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Pricing Procedure5 ӾValue Pricing

In recent years, several companies have adopted value pricing:

They win loyal customers by charging a fairly low price for a high-quality offering that means : reengineering the companies operations to be low-cost without sacrificing quality.

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Pricing Procedure5 ӾValue Pricing

Among the best practitioners of value pricing are:

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Pricing Procedure5 ӾGoing-Rate Pricing

In going-rate pricing, the firm bases its price largely on competitors' prices.

It is quite popular where costs are difficult to measure or competitive response is uncertain.

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Pricing Procedure5 ӾAuction-Type Pricing

Auction-type pricing is growing more popular, especially with the growth of the Internet.

There are over 2,000 electronic marketplaces selling everything from pigs to used vehicles to cargo to chemicals.

One major purpose of auctions is to dispose of excess inventories or used goods.

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Pricing Procedure6

The company selects its final price,

expressing it in the most effective

psychological way, coordinating it with the

other marketing mix elements, checking that it

conforms to company pricing policies, and

making sure it will prevail with distributors and

dealers, company sales force, competitors,

suppliers, and government.

The company selects its final price

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Strategies of Adapting/adjusting

the Price

Price adjustment strategiesCompanies will adapt the price to varying conditions in the marketplace. Geographical pricing is one marketplace adjustment based on a company decision related to pricing distant customers (cash, counter trade, barter).

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Price adjustment strategiesPrice discounts and allowances are a second area for adjustment where the company establishes Cash discounts.

• The more you buy, the cheaper it becomes cumulative and non-cumulative.

Quantity discounts

• discount offered by a manufacturer to trade-channel members if they will perform certain functions.

Functional (trade)

discounts

• Price reduction to buyers who buy merchandise or services out of season

Seasonal Discounts

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Adapting/adjusting the Price

• are payments or price reductions designed to reward dealers/reseller for participating in Advertising and Sales Support programs.

Promotional Allowances

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Adapting/adjusting the PricePromotional pricing provides a third marketplace option, with the company deciding on loss-leader pricing, to stimulate traffic.

Special event pricing—to draw customers

Cash rebates—to encourage purchase within a specified time period

Low-interest financing—to facilitate purchase

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Adapting/adjusting the PricePromotional pricing provides a third marketplace option, with the company deciding on loss-leader pricing, to stimulate traffic.

Longer payment terms—for lower monthly payments

Warranties and service contracts—added value

Psychological discounting—set an artificially high initial price

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Adapting/adjusting the PriceDiscriminatory/Segmented pricing, the fourth option,

enables the company to establish different prices for

different customer segments, product forms, brand

images, places, and times.

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Adapting/adjusting the PriceCustomer-segment pricing—different prices for different

groups for the same product or services

Product-form pricing—different versions priced differently

Image pricing—same product at two different levels

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Adapting/adjusting the PriceChannel pricing (location pricing)—same product priced

differently at different locations

Time pricing—same product priced differently at different day, time or season.

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Adapting/adjusting the PricePrice discrimination works when:

Market segments show different intensities of

demand.

Consumers in higher price tiers must feel that

they’re getting their extra money’s worth for the

higher prices paid.

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Adapting/adjusting the PricePrice discrimination works when:

Competitors can not undersell the firm in higher-

price segments.

The costs of segmenting and reaching the market

cannot exceed the extra revenue obtained from the

price difference.

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Adapting/adjusting the PriceProduct-mix pricing, enables the company to determine price zones for several products in a product line, as well as differential pricing for optional features, captive products, byproducts, and product bundles.

Product-Line Pricing— determine price steps

Optional-feature pricing—in addition to main product

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Adapting/adjusting the PriceCaptive-product pricing—main products that

require ancillary products, It is also called “Two-part pricing”—fixed fee + variable fee based on usage

Byproduct pricing—to recover production costs of main product

Product-bundling pricing—less costly when purchased together

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Price Change

Price ChangeWhen a firm considers initiating a price change, it must carefully consider customer and competitor reactions. Customer reactions are influenced by the meaning customers see in the price change. Competitor reactions flow either from a set reaction policy or from a fresh appraisal of each situation.

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Price ChangeThe firm initiating the price change must also anticipate the probable reactions of suppliers, middlemen, and governments. The firm encountering a competitor-initiated price change must attempt to understand the competitor’s intent and the likely duration of the change.

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Price ChangeInitiating price cuts

Circumstances leading to price cuts

Price cutting traps

Excess plant capacityDeclining market shareAttempt to dominate the market via lower costs

Price/quality perceptionsLow prices don’t create market loyaltyCompetition may match or beat price cuts

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Price changeInitiating price increases

Circumstances leading to price increases

Methods of dealing with over demand

Cost inflationOver demand

Delayed quotation pricingEscalator clausesUnbundlingReduction of discounts

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Price ChangeReactions to competitor’s price changes

Competitor Reaction

Competitor reactions are common when

Few firms offer the productThe product is homogeneousBuyers are highly informed

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Price ChangeMarket Leader can respond to competitor initiated price cuts in several ways:

Maintain price and add valueReduce price (and cost)Maintain price and profit marginIncrease price and improve quality (add new brand)

Launch a low-price fighter line

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Price changeReactions to competitor’s price changes

Customer ReactionCut/Increase

Rolex “Example”

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Pricing Strategies

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