chapter 9 11/3/2015 7:15 am1. objectives understanding the factors that affect the pricing...

Chapter 9

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Objectives Understanding the factors that affect the

pricing strategies Learn the major strategies and approaches

for pricing. Know about the New-Product Pricing

Strategies Learn how companies adjust their prices to

take into account different types of customers and situations.

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What Is Price

Price Has Many Names

● Rent● Fee● Rate● Commission● Assessment

● Tuition● Fare● Toll● Premium● Retainer

Bribe Salary Wage Interest Tax

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What Is Price? Definition:“The amount of money charged for a product or

service. More broadly price is the sum of the values that consumers exchange for the benefits of having or using the product or service.”

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What Is Price? Price and the Marketing Mix:

Only element to produce revenuesMost flexible elementCan be changed quickly

Common Pricing MistakesReducing prices too quickly to get salesPricing based on costs, not customer valueNot taking the rest of the marketing mix into account.

As part of company’s overall value proposition, price plays a key role in creating customer value and building customer relationship

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Factors To Consider When Setting Price

Customer Customer perception perception of value of value

Other internal and Other internal and external external

consideration consideration ________________________

Marketing strategy, Marketing strategy, objectives and mixobjectives and mix

Nature of the market Nature of the market and demandand demand

Competitors’ strategies Competitors’ strategies and priceand price

Product Product cost cost

Price ceilingPrice ceilingNo demand above No demand above

this price this price

Price floorPrice floor No profits below No profits below

this price this price

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Value-based Pricing Versus Cost-based Pricing

Cost-based Pricing

value-based Pricing

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Value-based Pricing Versus Cost-based Pricing

Cost-based Pricing

value-based Pricing

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General Pricing Approaches Buyer-Based pricing - Buyer-Based pricing - Value-Based Pricing:

Uses buyers’ perceptions of value rather than seller’s costs to set price.

Measuring perceived value can be difficult.

Good-Value Pricing: Good-Value Pricing: offering just the right combination of quality and good service at a fair price ○ Introducing less-expensive versions (value menus)○ Redesigning existing brands for less price (more quality for

the same, or the same quality for less)

Value-Added Pricing: Value-Added Pricing: attaching value-added features and services to differentiate a marketing offer and support higher price, rather than cutting price to match competitions.

o Shifting the focus from price to value

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General Pricing Approaches Buyer-Based pricing - Buyer-Based pricing - Competition-Based Pricing:

Going-rate pricing: Going-rate pricing: is setting the price based largely on following competitors’ price rather then on company cost or demand.○ May price at the same level, above, or below the

competition (different fast-food chains)

Sealed-Bid PricingSealed-Bid Pricing: setting price based on how the firm thinks competitors will price rather than on its own cost or demand ○ Used when company bids for jobs.

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General Pricing Approaches Cost-Based Pricing: Types of Cost

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General Pricing Approaches Cost-Based Pricing: Cost-Plus PricingAdding standard MARKUP to the cost of the product

Markup pricing: Markup pricing: Calculating all the costs associated with a product and then determining a

markup percentage to cover the costs and expected profits.

Example:Example:

Variable costs: $20Variable costs: $20 Fixed costs: $ 500,000Fixed costs: $ 500,000

Expected sales: 100,000 unitsExpected sales: 100,000 units Desired Sales Markup: 20% Desired Sales Markup: 20%

Variable Cost + Fixed Costs/Unit Sales = Unit CostVariable Cost + Fixed Costs/Unit Sales = Unit Cost

$20 $20 ++ $500,000$500,000//100,000100,000 = = $25 per unit$25 per unit

Unit Cost/(1 – Desired Return on Sales) = Markup PriceUnit Cost/(1 – Desired Return on Sales) = Markup Price

$25 $25 / / (1 - (1 - .20.20) ) = = $31.25$31.25

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General Pricing Approaches Cost-Based Pricing: Cost-Plus Pricing

Ignores demand and competitionPopular pricing technique because:

○ It simplifies the pricing process○ Price competition may be minimized○ It is perceived as more fair to both buyers and

sellers

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General Pricing Approaches Cost-Based Pricing: Break-Even Analysis and

Target Profit PricingSetting a price to break even on the costs of making and marketing a

product; or setting price to make a target profit.

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Fixed Costs

Total Costs

Revenues

Sales Volume in Thousands of Units

Thousands of Dollars

0 10 20 30 40

1000

800

600

400

200

Break-even point

Target Profit $200,000

Quantity To Be Sold To Meet Target Profit

Variable cost

Break-even point calculation The Break-even point (zero profit)

BEP (Units) = Total Fixed Cost

Price - Variable costs

BEP (Dollars) = Fixed Costs

Contribution Margin Ratio = Fixed Costs

(Price–Variable costs)/ V. costs

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General Pricing Approaches Cost-Based Pricing: Break-Even Analysis and

Target Profit Pricing

Break-even charts show total cost and total revenues at different levels of unit volume.

The intersection of the total revenue and total cost curves is the break-even point.

The higher the price the less number of units the company will need to sell to break even

This method does not take the price-demand relationship into account.

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Factors to Consider When Setting Price

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Internal Factors

Overall Marketing Strategy, Objectives And Mix

• Market positioning influences pricing strategy

•Pricing must be carefully coordinated with the other marketing mix elements

Factors to Consider When Setting Price Pricing objectives: ● Profit-oriented

o To achieve a target return, or to maximise profits.

● Sales-orientedo To increase sales volume, or to maintain or increase market

share.

● Status-quo orientedo To stabilise prices, or to meet competition.

● Customer retentiono Relationship building, attract new customers, and profitably

retain existing ones

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New-Product Pricing Strategies Market-Skimming PricingMarket-Skimming Pricing

Setting a high price for a new product to skim maximum revenues layer by layer from segments willing to pay the high price.

Normally used to introduce new products to the market that attract the innovator market.

The product quality and image must support its higher price

Competitors should not be able to enter the market easily.

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New-Product Pricing Strategies Market-Penetration PricingMarket-Penetration Pricing

Setting a low price for a new product in order to attract a large number of buyers and a large market share.

Usually to reach mass markets and discourage competition.

The market should be highly price sensitive

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Price Adjustment Strategies

Discount / allowance Segmented Psychological Promotional Geographical International

Types of discounts

Cash discount

Quantity discount

Functional (trade) discount

Seasonal discount

Allowances

Trade-in allowances

Promotional allowances

Strategies

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Types of segmented pricing strategies:

Customer-segment (museum)

Product-form pricing (top models)

Location pricing (theaters)

Time pricing (seasonal)

Certain conditions must exist for segmented pricing to be effective

Strategies

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Price Adjustment Strategies Conditions Necessary for Segmented

Pricing Effectiveness

Market must be segmentable

Segments must show different demand

Pricing must be legal

Costs of segmentation can not exceed revenues earned

Segmented pricing must reflect real differences in customers’ perceived value

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The price is used to say something about the product.

Price-quality relationship

Reference prices

Differences as small as five cents can be important

Strategies

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Temporarily charge low price or even below cost

Loss leaders

Special-event pricing

Low-interest financing, longer warranties, free maintenance

Promotional pricing can have adverse effects

Strategies

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Price Adjustment Strategies Promotional Pricing Problems

Easily copied by competitors

Creates deal-prone consumers

May grind down brand’s value

Not a legitimate substitute for effective strategic planning

Frequent use leads to industry price wars which benefit few firms

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Types of geographic pricing strategies:

FOB-origin pricing (free on board) – factory price + freight-

Uniform-delivered pricing

Zone pricing

Basing-point pricing

Freight-absorption pricing

Strategies

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Prices charged in a specific country depend on many factors

Economic conditions

Competitive situation

Laws / regulations

Distribution system

Consumer perceptions

Corporate marketing objectives

Cost considerations

Strategies

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chapter 9 11/3/2015 7:15 am1. objectives understanding the factors that affect the pricing...

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