pricing fdiv revised copy

8/2/2019 Pricing Fdiv Revised Copy

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PRICING


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Price Quality Strategies

Super value High value Premium

Good value Medium value Overcharging

Economy False economy Rip off

Price

qu

ality


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Price brings in the revenues

This is the only element in the marketing mix

that brings in the revenues. All the rest are

costs

Price communicates the value positioning of

the product.


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What is price elasticity?

This determines the changes in demand with

unit change in price

If there is little or no change in demand, it is

said to beprice inelastic.

If there is significant change in demand, then

it is said to beprice elastic.


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Demand is likely to be less elastic

when

There are few or no substitutes

Buyers readily do not notice the higher price

Buyers are slow to change their buying habits Buyers think that the higher prices are

justified


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Selecting the pricing objective

Determining demand Estimating costs

Analyzing competitors costs, prices, offers

Selecting a pricing method Selecting the final price

Pricing policy


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The pricing objectives

Short-term profit maximization

Short-term revenue maximization

Maximize quantity Maximize profit margin

Differentiation

Survival


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Short-term profit maximization - it may not actually be the optimal approach for

long-term profits. This approach is common in companies that are trying to sustain

as cash flow is the overriding consideration. It's also common among smaller

companies hoping to attract venture funding by demonstrating profitability as

soon as possible.

Short-term revenue maximization - This approach seeks to maximize long-term

profits by increasing market share and lowering costs through economy of scale.

For a well-funded company, or a newly public company, revenues are considered

more important than profits in building investor confidence. Higher revenues at a

slim profit, or even a loss, show that the company is building market share and will

likely reach profitability. Amazon.com, for example, posted record-breaking

revenues for several years before ever showing a profit, and its market

capitalization reflected the high investor confidence those revenues generated.

Maximize quantity - There are a couple of possible reasons to choose the strategy.It may be to focus on reducing long-term costs by achieving economies of scale.

This approach might be used by a company well-funded by its founders and other

"close" investors. Or it may be to maximize market penetration - particularly

appropriate when you expect to have a lot repeat customers. The plan may be to

increase profits by reducing costs, or to up-sell existing customers on higher-profit

products down the road.


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Maximize profit margin - This strategy is most appropriate when the number

of sales is either expected to be very low or sporadic and unpredictable.

Examples include custom jewelry, art, hand-made automobiles and otherluxury items.

Differentiation - At one extreme, being the low-cost leader is a form of

differentiation from the competition. At the other end, a high price signals

high quality and/or a high level of service. Some people really do order lobster

just because it's the most expensive thing on the menu.

Survival - In certain situations, such as a price war, market decline or market

saturation, you must temporarily set a price that will cover costs and allow you

to continue operations.


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Considerations in setting price

Customer

perceptions

of value

Other Internal &External considerations

Marketing strategy,

objectives & mix

Nature of the market& demand

Competitors

strategies & prices

Product

costs

Price ceiling

No demandabove this price

Price floor

No profits belowthis price


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PRICING METHODS

1. Cost-plus pricing

2. Market based/Competitive pricing

3. Target return pricing

4. Value-based pricing

5. Psychological pricing

6. Break-even pricing


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CostPlus/ Mark-Up Pricing

Setting prices based on the costs for producing, distributing and selling

the product plus a fair rate of return for effort and risk.

Set the price at your production cost, including both cost of goods and

fixed costs at your current volume, plus a certain profit margin.

For example, your widgets cost $20 in raw materials and productioncosts, and at current sales volume (or anticipated initial sales volume),

your fixed costs come to $30 per unit. Your total cost is $50 per unit. You

decide that you want to operate at a 20% mark-up, so you add $10 (20%

x $50) to the cost and come up with a price of $60 per unit.

Production cost = Cost of goods + Fixed Costs + Profit


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Value Based Pricing

Setting prices based on buyers perceptions of value rather than on the sellers cost. Price your product based on the value it creates for the customer. This is usually the

most profitable form of pricing, if you can achieve it. Let's say that your widget above

saves the typical customer $1,000 a year in, say, energy costs. In that case, $60 seems

like a bargain - maybe even too cheap. If your product reliably produced that kind of cost

savings, you could easily charge $200, $300 or more for it, and customers would gladly

pay it, since they would get their money back in a matter of months.


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Value based pricing Vs Cost based pricing

Product Cost Price Value Customers

Customers Value Price Cost Product

Cost-based pricing

Value-based pricing


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Target Return Pricing

Target return pricingPricing that starts with an ideal selling price, then

targets costs that will ensure that the price is met.Set your price to achieve a target return-on-investment (ROI). For example,

let's use the same situation as above, and assume that you have $10,000

invested in the company. Your expected sales volume is 1,000 units in the

first year. You want to make up all your investment in the first year, so you

need to make $10,000 profit on 1,000 units, or $10 profit per unit, giving

you again a price of $60 per unit.


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Market Based/ Competitive Pricing

Based on Industry standards.


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Break even Pricing

Types of Costs

1.Fixed costs (overhead): costs that do not vary with production or sales level.e.g. rent, salary etc.

2.Variable costs: costs that vary directly with the level of production. e.g.

packaging, trims etc.

3.Total costs: the sum of the fixed & variable costs for any given level ofproduction.

Experience curve (learning curve): the drop in the average per unit production

cost that comes with accumulated production experience.

Break-even pricing (target profit pricing): setting prices to break even on thecosts of making & marketing a product; or setting prices to make a target profit.


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Break-Even Volume = Fixed Cost

Price Variable Cost

Break even Pricing

Break-even Point = Fixed Costs

(Unit Selling Price-Variable Costs)


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Pricing Strategies


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Pricing Strategies

New-Product Pricing Strategies

Product Mix Pricing Strategies

Price Adjustment Strategies

Price Changes


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New-Product Pricing StrategiesMarket-skimming

Market-skimming pricing is a strategy

with high initial prices to skim

revenue layers from the market 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 theadvantage of higher prices

Competitors should not be able to

enter the market easily

Market-penetration

Market-penetration pricing sets a low

initial price in order to penetrate the

market quickly and deeply to attracta large number of buyers quickly to

gain market share

Price sensitive market

Inverse relationship of production

and distribution cost to sales growth

Low prices must keep competitionout of the market


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Product Mix Pricing StrategiesProduct Line pricing : Setting the price steps between various products in aproduct line based on cost differences between products in the line, customerevaluation of their features, and competitors prices.

Optional-product pricing: takes into account optional or accessory productsalong with the main product.

Captive-product pricing: involves products that must be used along with themain product. E.g. blades for a razor.

By-product pricing: refers to products with little or no value produced as a resultof the main product. Producers will seek little or no profit and will accept any pricethat covers more than the cost of storing and delivering them.

Product bundle pricing: combining several products & offering the bundle at areduced price.


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Price-Adjustment Strategies

Discount and allowance pricing reduces prices to reward customerresponses such as paying early, volume purchases & off-season buying.

Discount : a straight reduction in price on purchases during a statedperiod of time.

Allowance: promotional money paid by manufacturers to retailers inreturn for an agreement to feature the manufacturers products in some

way.


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Discounts and Allowances

Early payment

Off season

Bulk purchase Retail discount

Cash discount

Trade in allowance


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Segmented pricing is used when a company sells a product at two or moreprices where the difference in prices is not based on differences in costs.

Psychological pricing a pricing approach that considers the psychology of prices & not

simply the economics; the price is used to say something about the product.

Positioning - If you want to be the "low-cost leader", you must be priced lower

than your competition. If you want to signal high quality, you should probably be

priced higher than most of your competition.

Popular price points - There are certain "price points" (specific prices) at which

people become much more willing to buy a certain type of product. For example,

"under $100" is a popular price point. "Enough under $20 to be under $20 with

sales tax" is another popular price point, because it's "one bill" that people

commonly carry. Meals under $5 are still a popular price point, as are entree or

snack items under $1 (notice how many fast-food places have a $0.99 "valuemenu"). Dropping your price to a popular price point might mean a lower margin,

but more than enough increase in sales to offset it.

Reference pricesprices that buyers carry in their minds & refer to when they

look at a given product.



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Psychological pricing - consumer's perception of your price, figuring

things like:

Positioning - If you want to be the "low-cost leader", you must

be priced lower than your competition. If you want to signal

high quality, you should probably be priced higher than most of

your competition.

Popular price points - There are certain "price points" (specific

prices) at which people become much more willing to buy a

certain type of product. For example, "under $100" is a popular

price point. "Enough under $20 to be under $20 with sales tax"

is another popular price point, because it's "one bill" that

people commonly carry. Meals under $5 are still a popular pricepoint, as are entree or snack items under $1 (notice how many

fast-food places have a $0.99 "value menu"). Dropping your

price to a popular price point might mean a lower margin, but

more than enough increase in sales to offset it.



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Price-Adjustment StrategiesPromotional pricing: temporarily pricing products below the list

price & sometimes even below cost to increase short-run sales.

Geographical pricing: setting prices for customers located indifferent parts of the country or world.


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Four Major Pricing Strategies


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Premium Pricing

Use a high price where there is a uniqueness about the product or service. E.g.

Luxury

Penetration Pricing

The price charged for products and services is set artificially low in order to

gain market share. Once this is achieved, the price is increased.

Economy Pricing.

This is a no frills low price. The cost of marketing and manufacture are kept ata minimum. E.g. Supermarkets often have economy brands for soups,

spaghetti, etc.

Price Skimming.

Charge a high price because you have a substantial competitive advantage.

However, the advantage is not sustainable. The high price tends to attract newcompetitors into the market, and the price inevitably falls due to increased

supply. E.g. Manufacturers of digital watches used a skimming approach in the

1970s. Once other manufacturers were tempted into the market and the

watches were produced at a lower unit cost, other marketing strategies and

pricing approaches are implemented.

Mobile handsets etc


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Price Changes


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Price ChangesHas competitor

cut price?

Will lower pricenegatively affect

our market share

& profits?

Can/ shouldeffective action be

taken?

Hold current price,

continue to monitor

competitors price

Reduce price

Raise perceived

value

Improve quality &

increase price

Launch low-price

fighting brand

Yes

Yes

No

No

No

Yes

Assessing & responding tocompetitor price changes

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