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Unit 7 – Marketing Mix: Price

7.1. Definition of Price

The Value placed on what is exchanged. Something of value is exchanged for satisfaction & utility & includes tangible (functional) & intangible (prestige) factors. The value may be represented in terms of money or barter.

Price is the only element of the marketing mix that brings revenue to the organisation.

Price plays a pivotal role in enabling market exchanges & influencing customers to purchase.

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7.2. Price Terminologies

Fixed Price – The retailer or supplier sets the price & the customer cannot normally negotiate the price.

Negotiated Price – Buyer & seller negotiate the price between them.

Tender Price – The buyer calls for competitive bids from a variety of potential buyers.

Market Prices – Neither buyers nor sellers can influence the price & have to accept the ruling market price.

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7.3. Environmental Factors Influencing Price

Prices are set on the basis of the marketing mix & the other environmental factors that may have probable impact on them.

7.3.1. Marketing Mix Influence on Price

In relation to the marketing mix, pricing considerations involve:

(a) The value to the customer of what product represents (3 levels)

Pricing must reflect the value of the product to the customer

Price will have to incorporate the cost associated with credit facilities, after sales services, warranty, transportation, packaging, labelling, etc.

(b) Product manufacture costs

Price will include the costs of input to manufacture the products such as fixed costs and variable costs.

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(c) Marketing channel costs

Price will also include costs associated with distribution, such as sales manager & salesmen salaries, storage cost, transportation & delivery cost, cost of obsolescence, defects, damaged products, intermediaries commission, etc.

(d) Promotion expenditure

Price will include expenses made towards advertising, sales promotion, personal selling & cost implications of publicity.

7.3.2. Environmental Influences

In setting the price of a product, the marketing manager has to take into consideration several factors in the environment within which the organisation operates.

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(1) Competitive Environment Influence

In the competitive environment, the organisation has the choice of setting its prices Above, At Par, With or Below what competitors price.

Example

An organisation may decide to match or beat price cuts by competitors.

An organisation may have no choice but to align with competitors’ pricing.

Organisations may also compete on non-pricing consideration by emphasising product features, service, quality etc.

These strategies help to build customer loyalty towards the product & the brand.

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(2) Legal Environment

The Legal environment can put many constraints on pricing decisions.

Government can control the price of certain products & even fix them.

Many countries have laws pertaining to the following in connection with price:

Horizontal price fixing – Competing organisatons join together to set prices, agreements between competitors are forbidden.

Price discrimination – When organisation sells the same product at different prices to different customers without any valid justification.

Deceptive pricing – To deceive customers by advertising sales promotion & offering discounts when in fact there is no such discount.

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(3) Economic Conditions

The economic conditions of a country can also have important influences on pricing.

During recession, there is more emphasis on the price/value. People & organisations become very price conscious.

Offer discounts & sales promotion in order to keep sales on-going.

During inflationary period, consumers become used to price escalation & this influence their buying behaviour.

Demands for product fall & organisations should consider providing superior service to keep sales on-going.

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7.4. Steps Involved in Setting Price

The price setting exercise consist of five steps

7.4.1. Establishing Pricing Objectives

Price must be set in line with the financial & marketing objectives of the organisation.

Financial objectives may be either profit maximisation or a target return on investment or pricing for cash flow purposes.

Marketing objectives may be either sales growth (increase in market share) or maintaining the current level of sales or even survival of the business.

Profit in short run – Increase price to recover investment costs quickly

Profit in long run – Lower price to attract customers.

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7.4.2. Establishing Pricing Strategies

Marketing Managers have to consider what strategies they wish to pursue in setting prices.

Pricing decision must be taken for both existing & new products.

Strategies may be formulated to keep margins low so as to discourage competitors from entering the market.

The following strategies are possible for existing & new products.

(a) Existing Products

Price above the market (particularly when the product is differentiated or higher prices reflect higher quality).

Price below the market (go to gain market share, to discourage competition, etc).

Price at market (for standardised products that offer no visible element of differentiation)

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(b) New Products’ Pricing

Two options in the setting the price of new product.

(1) Skimming Pricing

Charge the highest price possible to buyers who most desire the product

Helps to generate much needed initial cash flow & to cover high Research & Development costs quickly or sooner.

Key points as regards skimming pricing:

Involves setting the price high at introductory stage of the PLC (to recoup investment more quickly, etc).

The price is lowered in later stages.

Price skimming is only possible when there is sufficient number of customers who have a strong demand for the product & who are able to pay a premium price for it.

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It is useful or appropriate practice when there are few close substitutes for the product.

Price skimming is normally adopted for unique products that are difficult to copy or imitate & with which there is an element of status associated.

(2) Market Penetration Pricing

Involves the setting of price at the lowest level compared to competitors, to penetrate into markets to increase sales.

Market Penetration Pricing

Implies setting low price at the outset of PLC to capture the market.

Is useful when all segments are sensitive to price (i.e. demand is elastic).

Is useful when all costs decrease rapidly with volume.

Aims to take as much market share as possible when competitors are likely to enter the market quickly.

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7.4.3. Determine Pricing Policies

Successful organisations normally define their policies in connection with the price of their products.

Pricing policies generally cover areas such as:

Uniform delivered pricing across a region (i.e. same price across a region)

Zone/area pricing (different prices in different area or zone)

Discount policies (what a company believes concerning discount)

Credit policies (what policies exist in connection with credit policies)

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7.4.4. Determining Pricing Tactics

The next step in price setting is to decide on the tactics to be adopted vis a vis the customers & competitors.

Tactics would include elements such as:

Price lining or matching – Multiple products in a particular product line, each at a different price. Ex: a range of different food processors at different price.

Psychological pricing – When price is used as a measure of quality, benefits.

Prestige pricing – Pricing that is associated with status. Ex: BMW, Mercedes, Parker Pens.

Odd-even pricing – Price tags of Rs 99.99 sounds cheaper than those of Rs 100, may indicate that it is Rs 99.

Value for money pricing – Provide for a reasonable margin so as to enable customers to appreciate the value of the product to him/her.

Price bundling – Offer a product, options & customer service for one total price. Ex: An air conditioner with installation charges included, Toothpaste plus toothbrush bundled together & offered at one price.

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7.4.5. Make the Final Pricing Offer

The last step in the price setting process is to make & communicate the final offer to the buyers.

7.5. Pricing Tools

This part discusses some of the tools marketing managers could use for pricing decisions.

What is Elasticity?

Price elasticity is a measure of the sensitivity of the demand to changes in prices.

Price Elasticity = % change in Quantity

% change in Price

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If the

Price elasticity is greater than one, then price is elastic.

Price elasticity is less than one, then price is inelastic.

The more inelastic the demand, the more it pays for sellers to raise the price. This basically applies to products that are unique, high in quality, prestigious & exclusive amongst others.

The more elastic the demand, the more sellers should consider lowering the price, as long as costs do not exceed extra revenue.

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7.5.1. Profit Oriented Pricing

Pricing for profit orientation is worked out as follows:

Price (P) = Fixed cost per unit (F/Q) + Variable cost per unit (V) + expected return per unit (r x I)

Q

That is P = F + V + r x I where

Q Q

P = price to be charged

F = total of fixed costs

Q = quantity to be produced & sold

V = variable cost per unit

r = expected rate of return on investment

I = investment needed to produce & market product

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For profit oriented pricing, the organisation decided on an expected rate of return for the investment that it has made in producing or acquiring the product or service.

The price is set to cover fixed & variable cost, all overheads as well as the expected rate of return from the sale of one unit of the product.

7.5.2. Cost Oriented Pricing

Cost oriented pricing basically means

Cost Plus Pricing

Mark Up Pricing

P = C + M where

C = Rupee cost of goods per unit

M = Rupee mark up per unit

P = Selling price per unit

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This is simply worked out from the cost that is incurred in producing or acquiring the product.

A desired mark up is added to the cost & the selling price is the sum of these 2 components

P – C x 100 represents the percentage mark-up on price.

P

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7.5.3. Break Even Pricing

It enables the organisation to just break even with no profit or loss incurred.

The break even quantity is computed as follows:

Break even quantity

Q = F

(P – V)

(the terms are defined in 7.5.1)

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7.6. Bases for Pricing

Organisations can decide to set price of their products or services on the following bases.

7.6.1. Cost Based Pricing

Involves adding to the total cost incurred in producing or acquiring the product or service a percentage or a sum that represents the desired profit.

7.6.2. Demand Based pricing

Based on an estimate of demand for the products or services at different prices.

It is related to how the consumer’s demand for a product would be affected by price.

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7.6.3. Competition Based Pricing

This strategy is based on what competitors are pricing for the products.

Possibilities under this strategy are:

(a) Price leadership – The organisation sets the price first; all others may follow with similar price.

(b) Pricing with competition – Parity pricing – prices are kept at the same level as competitors; this helps to eliminate price comparison.

(c) Ceiling or Limit pricing – The intention is to set a price that is low enough to discourage competition but high enough to generate the desired profit. The low price acts as a barrier to entry to the market.

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7.6.4. Customers’ Needs Based Pricing

Customers have certain needs & expectations about the price of the products they desire. Customers’ needs based pricing tales care of these needs & expectations.

Example:

There are customers who look for every day low prices

Others like to negotiate & bargain

Others feel more at ease with fixed prices.

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7.6.5. Multiple Product Pricing

It is quite common to see on the market, products that are bundled together & offered as one package.

Organisations try to achieve various objectives thru this strategy. Ex: Increase sales volume (Four for the price of three)

Other examples and possibilities are:

(a) Price Bundling – selling two or more goods/services as a single package for one price. Ex: Travel tours package (with hotel accommodation, tickets, etc.), toothbrush plus toothpaste.

(b) Captive Product Pricing – Two products that must be used together. Ex: Camera and films, Mobile phone and calls.

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7.6.6. Channel Based Pricing

Organisations have recourse to offering special prices to their intermediaries.

Quantity Discounts – Reduced prices for large volume or bulk purchases.

Cash Discounts – Incentives given for purchasers to pay their bill quickly by offering discounts (Ex: 5% discounts for cash payment)

Seasonal Discounts (also cyclical pricing) – Offering discounts at certain times of the year.

Geographic pricing – Zone, area or region pricing – different prices for different parts of the country.