Prof. Bauer-RamazaniProf. Bauer-Ramazani

PRICING PRICING STRATEGIESSTRATEGIES

MECHELLE V. MECHELLE V. BALBOABALBOA

MBAMBA

““Pricing is a critical ingredient Pricing is a critical ingredient in the marketing mix that in the marketing mix that diffirentiates the brand. In diffirentiates the brand. In some cases, it is the major some cases, it is the major

factor that determines brand factor that determines brand image.”image.”

ALEX FERNANDEZALEX FERNANDEZHead of Consumer Health, United Laboratories, Inc.Head of Consumer Health, United Laboratories, Inc.

OverviewOverview

Definition of price Definition of price Function of Price Function of Price International PricingInternational Pricing Psychological PricingPsychological Pricing Price ElasticityPrice Elasticity Price ExpectationsPrice Expectations Price Sensitivity MeterPrice Sensitivity Meter Price AdjustmentPrice Adjustment Fighting Price AttacksFighting Price Attacks

Price - DefinitionPrice - Definition the amount of money asked or given the amount of money asked or given

for “something”for “something” the sum of all the values that the sum of all the values that

consumers exchange for the consumers exchange for the benefits of having or using the benefits of having or using the product or serviceproduct or service

Lessor – rent; schools – tuition; Lessor – rent; schools – tuition; employees – wages; banks – interest; employees – wages; banks – interest; lawyers and doctors – professional fee; lawyers and doctors – professional fee; fixers – consultancy feefixers – consultancy fee

Pricing StrategyPricing Strategy

It can be defined as “a It can be defined as “a reasoned choice from set of a reasoned choice from set of a alternative prices (or price alternative prices (or price schedules) that aim at profit schedules) that aim at profit maximization within a planning maximization within a planning period in response to a given period in response to a given scenario” (Gerard Tellis, 1986)scenario” (Gerard Tellis, 1986)

Function of PriceFunction of Price It makes the product affordable to It makes the product affordable to

its target marketits target market Firms offer installment planFirms offer installment plan

It reflects the value of the productIt reflects the value of the product A major tool for business model A major tool for business model

innovationinnovation

Factors to Consider in Factors to Consider in PricingPricing

Internal Factor:Product Cost

Company Objectives

Exter

nal

Mar

ket D

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d External

Competition

Factors to Consider in Factors to Consider in PricingPricing

Internal Factor 1: Product CostInternal Factor 1: Product Cost Product cost must be broken down to Product cost must be broken down to

fixed and variable cost as most fixed and variable cost as most companies sell more than one item and companies sell more than one item and the fixed cost must be allocated to the fixed cost must be allocated to different products in a sensible waydifferent products in a sensible way

Under the cost-based pricing strategy, Under the cost-based pricing strategy, two common types of setting prices:two common types of setting prices:

Mark-upMark-up Target ProfitTarget Profit

Internal Factor 1: Product CostInternal Factor 1: Product Cost

Mark-up – a retail price of P1000 Mark-up – a retail price of P1000 with 10% mark-up on sales = P900with 10% mark-up on sales = P900

Target Profit Pricing =Target Profit Pricing = = = unit cost + target ROI x investmentunit cost + target ROI x investment

Unit salesUnit sales = = P20 + 35% x P2,000,000P20 + 35% x P2,000,000 P100,000P100,000 = P27= P27

Internal Factor 1: Product CostInternal Factor 1: Product Cost

Unit Cost Pricing =Unit Cost Pricing = = = variable cost + fixed costvariable cost + fixed cost Unit salesUnit sales = = P10 + P1,000,000P10 + P1,000,000 P100,000P100,000 = P10 + P10= P10 + P10 = P20= P20

Cost vs Expense StructureCost vs Expense Structure

Your main competitor has just Your main competitor has just lowered their price. Should you also lowered their price. Should you also lower your price or will it risk an lower your price or will it risk an expensive price war?expensive price war?

Internal Factor 2: Company’s Internal Factor 2: Company’s ObjectivesObjectives

Pricing Objectives of the firm:Pricing Objectives of the firm: Differential Pricing StrategyDifferential Pricing Strategy Competitive Pricing StrategyCompetitive Pricing Strategy Product Line Pricing StrategyProduct Line Pricing StrategyCharacteristics of the consumers:Characteristics of the consumers: Some consumers have high search Some consumers have high search

costscosts Some consumers have a low Some consumers have a low

reservation for the pricereservation for the price All consumers have certain special All consumers have certain special

transaction costs other than search transaction costs other than search costscosts

Pricing Strategies based on Pricing Strategies based on Company’s Objectives and Company’s Objectives and Consumer CharacteristicsConsumer Characteristics

Differential Differential PricingPricing

Competitive Competitive PricingPricing

Product line Product line PricingPricing

Some Some consumers have consumers have high search high search costscosts

Random Random DiscountingDiscounting

Price SignallingPrice Signalling Image PricingImage Pricing

Some Some consumers have consumers have a low a low reservation for reservation for the pricethe price

Periodic Periodic DiscountingDiscounting

Penetration / Penetration / Experience Experience CurveCurve

Price Bundling / Price Bundling / PremiumPremium

All consumers All consumers have certain have certain special special transaction transaction costs other than costs other than search costssearch costs

Second Market Second Market DiscountingDiscounting

Georgraphic Georgraphic PricingPricing

Complementary Complementary PricingPricingC

ha

ract

eri

sti

cs

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Co

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Differential PricingDifferential Pricing

Random DiscountingRandom Discounting - Common - Common examples are “sale” prices or special examples are “sale” prices or special discounts provided by companies.discounts provided by companies.Second Market DiscountingSecond Market Discounting – Only the – Only the second market segment enjoys through second market segment enjoys through lower pricelower pricePeriodic DiscountingPeriodic Discounting – the manner of – the manner of discounting is predictable over time and discounting is predictable over time and known to consumers and the discount known to consumers and the discount can be used by all consumerscan be used by all consumers

Competitive PricingCompetitive Pricing

Price SignalingPrice Signaling – Prices are set high – Prices are set high regardless of high or basic product regardless of high or basic product qualityqualityPenetration PricingPenetration Pricing – Exploits – Exploits economies of scale having cheaper economies of scale having cheaper cost, superior technology, and an cost, superior technology, and an efficient organizationefficient organizationExperience CurveExperience Curve – Exploits a firm’s – Exploits a firm’s production experience as cost production experience as cost decreases due to cumulative volumedecreases due to cumulative volumeGeographic PricingGeographic Pricing – Can be adopted – Can be adopted when there are adjacent markets when there are adjacent markets separated by transport costs rather separated by transport costs rather than reservation or transaction coststhan reservation or transaction costs

Product Line PricingProduct Line Pricing

Image PricingImage Pricing – Makes use of high – Makes use of high price to signal high quality and price to signal high quality and uses the profit it makes from uses the profit it makes from higher priced versions to subsidize higher priced versions to subsidize the price of lower priced versionthe price of lower priced versionPrice BundlingPrice Bundling – Buying the whole – Buying the whole bundle is cheaper than the buying bundle is cheaper than the buying the parts separatelythe parts separatelyPremium PricingPremium Pricing – the firms set a – the firms set a high price emphasizing on unique high price emphasizing on unique product featuresproduct featuresComplementary PricingComplementary Pricing – Captive – Captive pricing, two-part pricing, loss-pricing, two-part pricing, loss-leader pricingleader pricing

Generic Strategy: The Bigger Generic Strategy: The Bigger Picture of PricingPicture of Pricing

Low-costLow-cost DifferentiatioDifferentiationn

BroadBroad Broad CostBroad Cost Broad Broad DifferentiatioDifferentiationn

FocusFocus Focus CostFocus Cost Focus Focus DifferentiatioDifferentiationn

Product

Mark

et

The Practice of Foolish The Practice of Foolish PenetrationPenetration

Marketers may be tempted to price their Marketers may be tempted to price their products low during the introductory products low during the introductory period, regardless of product quality and period, regardless of product quality and choices of available distribution choices of available distribution methods. The obvious intention is to methods. The obvious intention is to gain market shares quickly. The gain market shares quickly. The temporary market shares gained, temporary market shares gained, however, may create a permanent price however, may create a permanent price image for a brand which may be difficult image for a brand which may be difficult to change over time. to change over time.

External Factor 1: Market External Factor 1: Market DemandDemand

Different market create different market Different market create different market demand.demand.

Two of the most common ways in setting Two of the most common ways in setting prices under the market demand-prices under the market demand-based pricing strategy are:based pricing strategy are:

a.a. Perceived valuePerceived valueb.b. Demand DifferentialDemand Differential

Diagnostic Perception PricingDiagnostic Perception Pricing

Products have different features or Products have different features or attributes. These attributes have attributes. These attributes have different levels of importance to the different levels of importance to the customers.customers.

External Factor 2: External Factor 2: CompetitionCompetition

Two of the most common ways in setting Two of the most common ways in setting prices under the competition-based prices under the competition-based pricing strategy are:pricing strategy are:

a.a. Going rateGoing rateb.b. Sealed bidSealed bid

The Practice of “Foolish The Practice of “Foolish Fellowship”Fellowship”

While external factors may be similar to While external factors may be similar to competing companies, internal competing companies, internal factors are not. Different companies factors are not. Different companies have different objectives, different have different objectives, different cost structures, and different cost structures, and different strengths. Abusing and overusing strengths. Abusing and overusing competitor’s price or “going rate” competitor’s price or “going rate” pricing is common practice among pricing is common practice among lazy marketers. Marketers remember lazy marketers. Marketers remember that the more unique their products that the more unique their products are, the more flexible they can be in are, the more flexible they can be in formulating pricing.formulating pricing.

INTERNATIONAL PRICINGINTERNATIONAL PRICING

F.O.B. – FREE ON BOARD. The supplier pays the F.O.B. – FREE ON BOARD. The supplier pays the freight up to a certain point, usually the point freight up to a certain point, usually the point of origin.of origin.

C&F – COST AND FREIGHT. It means that the C&F – COST AND FREIGHT. It means that the Philippine exporter is quoting a price inclusive Philippine exporter is quoting a price inclusive of freight from the Philippines.of freight from the Philippines.

C.I.F. – COST, INSURANCE and FREIGHT – has a C.I.F. – COST, INSURANCE and FREIGHT – has a similar meaning with C&F except that it similar meaning with C&F except that it includes the cargo insurance covering the includes the cargo insurance covering the shipment from the port of originshipment from the port of origin

INTERNATIONAL PRICINGINTERNATIONAL PRICING

International marketers have to consider International marketers have to consider buyer’s landed cost and not only the buyer’s landed cost and not only the competitiveness of their final quote competitiveness of their final quote price. Landed cost would take into price. Landed cost would take into consideration additional expenses that consideration additional expenses that the buyer would incur such as freight, the buyer would incur such as freight, insurance, brokerage and arrester insurance, brokerage and arrester charges, and tariff (which may vary from charges, and tariff (which may vary from country to country).country to country).

PSYCHOLOGICAL PRICINGPSYCHOLOGICAL PRICING

Also called “Noticeable Price Difference”, Also called “Noticeable Price Difference”, this technique is used most specially in this technique is used most specially in supermarkets and department stores to supermarkets and department stores to create an impression of “good value”.create an impression of “good value”.

PRICE ELASTICITYPRICE ELASTICITY

The term Elasticity connects the The term Elasticity connects the relationship between changes in price relationship between changes in price and quantity of sales. Price elasticity and quantity of sales. Price elasticity means that demand will change if means that demand will change if change in pricing occurs. Price elasticity change in pricing occurs. Price elasticity means that demand will not change means that demand will not change even when changes in pricing occur.even when changes in pricing occur.

Price elasticity measurement allows Price elasticity measurement allows companies to evaluate how price companies to evaluate how price changes will affect total revenue.changes will affect total revenue.

Price elasticity of demand for a product is Price elasticity of demand for a product is the ratio of the percentage change in the ratio of the percentage change in quantity sold to the percentage in price.quantity sold to the percentage in price.

PRICE ELASTICITY OF DEMANDPRICE ELASTICITY OF DEMAND

Price Elasticity of Demand = Price Elasticity of Demand = % Change in Quantity Sold% Change in Quantity Sold

% Change in Price% Change in Price

1.1. If the price elasticity of demand If the price elasticity of demand is more than one, we can say is more than one, we can say that demand is elastic.that demand is elastic.

2.2. If the price elasticity of demand If the price elasticity of demand is less than one, we can say that is less than one, we can say that demand in inelastic. demand in inelastic.

Significant Findings on Price Significant Findings on Price ElasticityElasticity

1.1. ““Consumers tend to be more price-Consumers tend to be more price-elastic towards an impending price elastic towards an impending price increase than what actually takes place increase than what actually takes place when the price increase happens.”when the price increase happens.”

2.2. ““Consumers appear to be more Consumers appear to be more sensitive to price decreases than to sensitive to price decreases than to price increases. They are more price increases. They are more ‘downside elastic’ than being ‘upside ‘downside elastic’ than being ‘upside elastic’.”elastic’.”

3.3. ““The consumer’s price elasticity is The consumer’s price elasticity is observed to diminish when shopping observed to diminish when shopping with a friend or when being persuaded with a friend or when being persuaded by a salesman perceived as an expert.”by a salesman perceived as an expert.”

PRICE EXPECTATIONSPRICE EXPECTATIONS

Using pricing research, price expectation Using pricing research, price expectation can be identified. The objective is to can be identified. The objective is to know the fair range of the upper and know the fair range of the upper and lower threshold limits of pricing. Within lower threshold limits of pricing. Within the fair price range, there is likely to be the fair price range, there is likely to be neither change in quantity purchased neither change in quantity purchased nor any brand switching. Above the nor any brand switching. Above the upper threshold limit, consumers will upper threshold limit, consumers will feel the product is too expensive. Below feel the product is too expensive. Below the lower threshold limit, consumers will the lower threshold limit, consumers will doubt the quality of the product and doubt the quality of the product and may not buy it.may not buy it.

PRICE SENSITIVITY METERPRICE SENSITIVITY METER

Van Westendorp’s Price Sensitivity Meter is one of a number of direct techniques to research pricing. Direct techniques assume that people have some understanding of what a product or service is worth, and therefore that it makes sense to ask explicitly about price. By contrast, indirect techniques, typically using conjoint or discrete choice analysis, combine the price with other attributes, ask questions about the total package, and then extract feelings about price from the results.

BPTO MODELBPTO MODEL

BPTO enables marketers to understand the BPTO enables marketers to understand the implications of any change of price as implications of any change of price as well as the way in which price and brand well as the way in which price and brand relate for each respondent type,relate for each respondent type,

BPTO identifies price premiums customers BPTO identifies price premiums customers are willing to pay and the added are willing to pay and the added advantage of identifying which brands advantage of identifying which brands are directly competing with each other. are directly competing with each other. A consumer brand loyalty specifying A consumer brand loyalty specifying their favorite and second choices can their favorite and second choices can also be identified in the model.also be identified in the model.

PRICING CRITERIAPRICING CRITERIA

……BASED ON COMPANY’S OBJECTIVES:BASED ON COMPANY’S OBJECTIVES:

Objectives When to charge Lower Price

When to charge Higher Price

Sales Volume Turnover

Fast Slow

Market Dominance

Low High

Profit Objective Long-term Short-term

PRICING CRITERIAPRICING CRITERIA

……BASED ON PRODUCT SPECIFICATIONS:BASED ON PRODUCT SPECIFICATIONS:

Product Specifications

When to Charge Lower Price

When to charge Higher Price

Product Type Commodity Patented

Product Usage Single Use Multiple Use

Product Obsolescence

Slow Fast

Product Appeal Price Sensitive Price Insensitive

Production Method Mass Production Custom Made

Production Quantity

Big Small

Production Capacity

Excess Limited

Types of Service Regular Extra

Perceived Value Overpriced Underpriced