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Lecture 7:Lecture 7:Pricing considerations and Pricing considerations and approachesapproaches

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Chapter Objectives (ch 13)

1. Explain how marketing objectives, marketing-mix strategy, costs, and other company factors affect pricing decisions

2. List and discuss factors outside the company that affect pricing decisions

3. Explain how price setting depends on consumer perceptions of price and on the price-demand relationship

4. Compare the five general pricing approaches

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Chapter Objectives (ch 13) cont’d

5. Describe some major strategies for pricing new products

6. Outline some price adjustment strategies and the rationale

7. Summarise steps to effective pricing

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Factors to consider when setting prices

• Internal factors:– Marketing objectives– Marketing mix strategy– Costs

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Factors to consider when setting prices

• External factors– The market, and demand– Consumer perceptions of price and value– Competitor’s prices

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Price “floor” dictated by your costs

Price “ceiling” indicated by customer valuation of your features

Orienting points set by competitorsprices

Setting your price

High price

Low price

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General pricing approaches

• Cost-based pricing

• Value-based pricing

• Competition-based pricing

• Performance-based pricing

• Relationship pricing

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Cost-based pricing (‘cost-plus’)

The simplest pricing method is cost-plus pricing - adding a standard mark-up to the cost of the product. Construction companies, for example, submit job bids by estimating the total project cost and adding a standard mark-up for profit.

• Also popular in:– Professional services –

salary costs plus 100%– Retailers, wholesalers

• Ensures costs are covered

• Fair (costs up or down, prices up or down !)

• What are the negatives?

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Value-based pricing• Buyers perceptions of

value, not just sellers costs

• How do you do this ?• Often methods such as

conjoint analysis are used to determine the ‘worth’ of each product feature

• Positive/negatives?

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Competition-based pricing• First lets talk about:• Going rate pricing

– What are the competitors doing ?

– Common in commodity-type industries

– Can avoid price wars

• Sealed bid – tenders• Common for

construction and provision of services to government

• “what will the competitors bid …can I bid just under and make money”

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Competition-based pricing

• Economic value pricing• This uses the idea of value-

based pricing but explicitly compares to competitors

• It says “don’t just look at the price of our product look at what it does to your overall costs”

• So economic value pricing sets a price such that a particular economic (money) benefit can be shown to the customer when total costs are summed

• Mainly business to business

Competitor Vacuum seal (us)

Value comparison

Cost component:

Carton $0.60 $0.60

Packaging material

$0.80 $1.10

Labour $0.90 $0.10

Freight $2.70 $2.20

Total cost $5.00 $4.00

Economic value

+$1.00

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Performance-based pricing

• The seller is paid according to some set performance criteria

• If they perform in full, they get the full payment

• Example: a maintenance company responds to equipment breakdowns within 6 hrs at least 98% of the time.

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Relationship pricing

• Background:• A move towards

closer buyer-seller relationships in business markets

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Three levels of relationship pricing

• Special relationship– Work together to find ways to add value to both businesses

• Enrichment– Seller helps buyer save a lot of money, the ‘price’ is a portion

of the saving

• Shared risk and reward– Price is replaced by a sharing arrangement based on value

provided– Example – work together to develop a new technology, if

seller’s contribution results in 30% of the ‘value add’ then they get 30% of the resultant profits or cost saving.

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Pricing and the PLC• The price of a product changes along with its life cycle. The

introductory stage is the most challenging stage for new products.

• Companies may use marketing-skimming pricing when they introduce innovative new products. Such companies set a high price in order to maximise their profit quickly.

• Marketing-skimming pricing Setting a high price for a new product to skim maximum revenue from the segments willing to pay the high price; the company makes fewer but more profitable sales. (useful if competitors cannot copy)

• Market penetration pricing. Pricing low, build market share quickly. Perhaps can attract and retain customers and help costs fall.

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Product Mix Pricing Strategiessome key terms and approaches

Product Line PricingSetting price steps between product line items

Optional-Product PricingPricing optional products sold with the main product

Captive-Product PricingPricing products that must be used with the main product

By-Product PricingPricing low-value by-products to get rid of them

Product-Bundle PricingPricing bundles of products sold together

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Adjusting price

NB value pricing is really no different to segmented pricing here

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Steps to effective pricing

1. Determine the value the customer places on the product.

2. Assess the different value placed by different market segments.

3. Determine price sensitivity.

4. Identify the best pricing structure.

5. Take account of competitors’ likely reactions.

6. Measure and monitor the net prices obtained in the market—know the effects of price changes, discounts etc.

7. Assess customers’ emotional responses to prices.

8. Determine whether the market segment or key customer provides sufficient returns in relation to costs to serve.