lt-16 pricing- the second p of marketing

8/12/2019 Lt-16 Pricing- The Second P of Marketing

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Pricing :

The Second P of Marketing

16


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Pricing:Understanding and

Capturing Customer Value

What Is a Price?

Customer Perceptions of Value

Consumer Psychology and Price

Other Internal and External ConsiderationsAffecting Price Decisions

Pricing Process

Topic Outline


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Amount of money charged for a product orservice.

The sum of all the values that consumersgive up in order to gain the benefits of havingor using a product or service.

The only P in the marketing mix thatproduces revenue; all other elementsrepresent costs

What Is a Price?


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Synonyms for Price

Rent

Tuition

Fee Fare

Rate

Toll

Premium

Honorarium

Special assessment

Bribe

Dues

Salary

Commission

Wage

Tax


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Common Pricing Mistakes

Determine costs and take traditional industry margins

Failure to revise price to capitalize on market changes

Setting price independently of the rest of the marketing mix

Failure to vary price by product item, market segment,distribution channels, and purchase occasion


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Factors to Consider When Setting Prices


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Factors to Consider When Setting Prices

Understanding how much value consumers place on thebenefits they receive from the product and setting a price that

captures that value

Value-based pricing uses the buyers perceptions of value,not the sellerscost, as the key to pricing. Price is considered

before the marketing program is set.

Value-based pricing is customer driven

Cost-based pricing is product driven

1. Customer Perceptions of Value


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Two Alternative Approaches of

Determining Price of a Product


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Copyright 2009 Dorling Kindersley (India) Pvt. Ltd. 14-9

Gillette Commands a

Price Premium
http://www.gillettefusion.com/


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Consumer Psychology

and Pricing

Reference Prices

Price-quality inferences

Price endings

Price cues


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Possible Consumer Reference Prices

Fair price

Typical price

Last price paid Upper-bound price

Lower-bound price

Competitor prices

Expected futureprice

Usual discountedprice


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Consumer Perceptions vs. Reality for Cars

Overvalued Brands

Land Rover

Kia

Volkswagen

Volvo

Mercedes

Undervalued Brands

Mercury

Infiniti

Buick

Lincoln

Chrysler


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Tiffanys

Price-Quality Relationship
http://www.tiffany.com/


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Price Cues

Left to right pricing ($299 vs. $300)

Odd number discount perceptions

Even number value perceptions

Ending prices with 0 or 5

Sale written next to price


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When to Use Price Cues

Customers purchaseitem infrequently

Customers are new

Product designs varyover time

Prices vary seasonally

Quality or sizes vary

across stores


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Steps in Setting Price

Select the price objective

Determine demand

Estimate costs

Analyze competitor price mix

Select pricing method

Select final price


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Step 1: Selecting the Pricing Objective

Survival

Maximum current profit

Maximum market share

Maximum market skimming

Product-quality leadership


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SURVIVAL:

When Companies are plagued with overcapacity, intense competition, orchanging consumer wants.

As long as prices cover variable costs and some fixed costs, the company stays

in business. Survival is a short-run objective; in the long run, the firm must learn how to add

value or face extinction.

MAXIMUM CURRENT PROFIT Many companies try to set a price that will maximize current profits.

They estimate the demand and costs associated with alternative prices and choose theprice that produces maximum current profit, cash flow, or rate of return on investment.

This strategy assumes that the firm has knowledge of demand levels

MAXIMUM MARKET SHARE Some companies want to maximize their market share. They believe that a higher sales

volume will lead to lower unit costs and higher long-run profit. They set the lowest price,assuming the market is price sensitive. They have have knowledge of its demand andcost functions.

Conditions favoring setting a low price: (1) The market is highly price sensitive, and a lowprice stimulates market growth; (2) production and distribution costs fall with accumulated

production experience; and (3) a low price discourages actual and potential competition.

MAXIMUM MARKET SKIMMING C i ili t h l


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MAXIMUM MARKET SKIMMING: Companies unveiling a new technologyfavor setting high prices to maximize market skimming. where prices starthigh and are slowly lowered over time.

Conditions:

(1) A sufficient number of buyers have a high current demand;

(2) the unit costs of producing a small volume are not so high that they cancel theadvantage of charging what the traffic will bear;

(3) the high initial price does not attract more competitors to the market;

(4) the high price communicates the image of a superior product.

PRODUCT-QUALITY LEADERSHIP A company might aim to be theproduc t-quali ty leader in the market.

To create a percept ion abou t produ cts as of high quality, taste, and status thecompany may charge a price just high enough not to be out of consumers' reach

OTHER OBJECTIVES Nonprofit and public organizations may haveother pricing objectives.

A university aims for part ial cost recovery, know ing th at i t must rely on p r ivategi f ts and publ ic g rants to cover the remaining c osts.

A nonpro f i t hospi ta l may aim for fu l l cost recovery in i ts pr ic ing.


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Step 2: Determining Demand

Price Sensitivity

Estimating

Demand Curves

Price Elasticity

of Demand


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PRICE SENSITIVITY

The demand curve shows the market's probable purchase quantity atalternative prices. It sums the reactions of many individuals who have

different price sensitivities.

The first step in estimating demand is to understand what affects pricesensitivity.

Generally, customers are most price sensitive to products that cost a

lot or are bought frequently.

They are less price sensitive to low-cost items or items they buyinfrequently.

They are also less price sensitive when price is only a small part of thetotal cost of obtaining, operating, and servicing the product over its

lifetime.

A seller can charge a higher price than competitors and still get the

business if the company can convince the customer that it offers thelowest total cos t of ow nership (TCO).


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Factors Leading to Less Price

Sensitivity

The product is more distinctive

Buyers are less aware of substitutes

Buyers cannot easily compare the quality of substitutes

The expenditure is a smaller part of buyers total income

The expenditure is small compared to the total cost ofthe end product

Part of the cost is paid by another party

The product is used with previously purchased assets

The product is assumed to have high quality andprestige

Buyers cannot store the product


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ESTIMATING DEMAND CURVESMost companies make some attempt to measure their demand curves

using several different methods.

Statist ical analysis of past prices, quantities sold, and other factors can revealtheir relationships. The data can be longitudinal (over time) or cross-sectional(different locations at the same time). Building the appropriate model and fittingthe data with the proper statistical techniques calls for considerable skill.

Price exper iments can be conducted.

Bennett and Wilkinson systematically varied the prices of several products sold in adiscount store and observed the results.

An alternative approach is to charge different prices in similar territories to see howsales are affected. Still another approach is to use the Internet. An e-business couldtest the impact of a 5 percent price increase by quoting a higher price to every fortiethvisitor to compare the purchase response.

Surveys can explore how many units consumers would buy at differentproposed prices, although there is always the chance that they might understatetheir purchase intentions at higher prices to discourage the company fromsetting higher prices.3

I l ti


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Inelastic

and Elastic Demand


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PRICE ELASTICITY OF DEMAND

Marketers need to know how responsive, or elastic,demand would be to a change in price

Demand is likely to be less elastic under the followingconditions:

(1) There are few or no substitutes or competitors;

(2) buyers do not readily notice the higher price;

(3) buyers are slow to change their buying habits;

(4) buyers think the higher prices are justified.


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Step 3: Estimating Costs

Types of Costs

Target Costing

Accumulated

Production

Activity-Based

Cost Accounting


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Cost Terms and Production

Fixed costs

Variable costs

Total costs

Average cost

Cost at differentlevels of production



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Demand sets a ceiling on the price the company can charge for itsproduct. Costs set the floor.

The company wants to charge a price that covers its cost of producing,

distributing, and selling the product, including a fair return for its effort andrisk. Yet, when companies price products to cover full costs, the net result

is not always profitability.

A company's costs take two forms, Fixed Costs and VariableCosts

Fixed costs (also known as overhead) are costs that do not vary with

production or sales revenue. A company must pay bills each month for rent,heat, interest, salaries, and so on, regardless of output.

Variable costs vary directly with the level of production

Total costs consist of the sum of the fixed and variable costs for anygiven level of production.

Average cost is the cost per unit at that level of production; it is equal to totalcosts divided by production. Management wants to charge a price that will at

least cover the total production costs at a given level of production.

ACTIVITY BASED COST ACCOUNTING


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ACTIVITY-BASED COST ACCOUNTING :

ABC accounting tries to identify the real costs associated withserving each customer.

It allocates indirect costs like clerical costs, office expenses,supplies, and so on, to the activities that use them, rather than in

some proportion to direct costs.

TARGET COSTING:

Market research is used to establish a new product's desiredfunctions and the price at which the product will sell, given its appeal

and competitors' prices.

Deducting the desired profit margin from this price leaves the targetcost that must be achieved.


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Cost per Unit as a Function of

Accumulated Production


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Tata motors developed Nanoits

small car with a target price


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Step 5: Selecting a Pricing Method

Markup pricing

Target-return pricing

Perceived-value pricing

Value pricing

Going-rate pricing

Auction-type pricing


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Practice Question

A consumer purchases a flat iron to straightenher hair for Rs. 7,500 from a salon at which

she gets her hair cut. If the salons markup is

40 percent and the wholesalers markup is 15percent, both based on their selling prices, for

what price does the manufacturer sell the

product to the wholesaler?

T t R t P i i M th d


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Target Return Pricing Method


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Break-Even Chart


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Exercises: 1

a) If the unit variable costs for each flat iron are Rs.2000 and the manufacturer has fixed costs totaling

Rs. 10,000,000, how many flat irons must this

manufacturer sell to break even?

a) How many must it sell to realize a profit of Rs.

40,000,000?

Fixed cost


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Breakeven volume =PriceVariable Cost

So,

Rs. 10,000Breakeven volume = = 1,818 flatirons

Rs. 7,500Rs. 2,000

If the manufacturer wants to realize a Rs. 40,000,000 profit,

then this amount is added to the fixed costs in the

numerator:

Rs. 10,000,000 + Rs. 40,000,000Breakeven volume =___Rs. 7,500Rs. 2,000

= 9,090.91 or 9,091 flat irons


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Perceived-Value Pricing

Customers perceived-value

Performance $$$ Warranty $

Customer support $ Reputation $$

Perceived Value Pricing


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Perceived Value Pricing

Perceived value is made up of several elements, such asthebuyer's image of the product performance,

the channel deliverables,thewarranty quality,customer support,andsofter attributes such as the supplier's reputation, trustworthiness,

and esteem.

Furthermore, each potential customer places different weights on these differentelements result ing in following group of buyer :

For pr ice buyers, companies need to offer stripped-down products andreduced services.

For value buyers, companies must keep innovating new value andaggressively reaffirming their value.

For loyal buyers, companies must invest in relationship building and

customer intimacy.

**Companies need different strategies for these three groups.


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Value Pricing

Through Value pricing companies charge a fairly low price for a high-quality offering fom its customers.

However, Value pricing is not a matter of simply setting lower prices; it is a

matter of reengineering the company's operations to become a low-cost

producer without sacrificing quality, and lowering prices significantly to attracta large number of value-conscious customers

An important type of value pricing is everyday low pricing (EDLP), which

takes place at the retail level. A retailer who holds to an EDLP pricing policy

charges a constant low price with little or no price promotions and special

sales. These constant prices eliminate week-to-week price uncertainty and

can be contrasted to the "high-low" pricing of promotion-oriented

competitors. In high-low pricing, the retailer charges higher prices on an

everyday basis but then runs frequent promotions in which prices are

temporarily lowered below the EDLP level


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Value Pricing

P1 P2C1 C2

Level of

Quality

THOUSANDS OF

LOW

PRICES

EVERY DAYthroughout the store

EDLP

High

LowPricing


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Going Rate Pricing

In going-rate pricing, the firm bases its price largely on

competitors' prices. The firm might charge the same, more, orless than major competitor(s).

In oligopolistic industries that sell a commodity such as steel,

paper, or fertilizer, firms normally charge the same price.

The smaller firms "follow the leader," changing their prices when

the market leader's prices change rather than when their own

demand or costs change.

Some firms may charge a slight premium or slight discount, but

they preserve the amount of difference.


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Auction-Type Pricing

English auctions

Dutch auctions

Sealed-bid auctions
http://www.ebay.com/


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Auction PricingEnglish auction(ascending bids)

Dutch auction(descending bids)

Sealed-bid auction

Engl ish auct ions (ascending bids) One seller and many


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Engl ish auct ions (ascending bids). One seller and manybuyers. e.g. sites such as Yahoo! and eBay,

Dutch auct ions (descending bids). One seller and many

buyers, or one buyer and many sellers. In the first kind, anauctioneer announces a high price for a product and then slowlydecreases the price until a bidder accepts the price. In the other,the buyer announces something that he wants to buy and then

potential sellers compete to get the sale by offering the lowestprice.

Sealed-bid auctions. Would-be suppliers can submit only onebid and cannot know the other bids. A supplier will not bid belowits cost but cannot bid too high for fear of losing the job. The neteffect of these two pulls can be described in terms of the bid'sexpected profit. Using expected profit for setting price makessense for the seller that makes many bids.


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Step 6: Selecting the Final Price

Impact of other marketing activities

Company pricing policies

Gain-and-risk sharing pricing

Impact of price on other parties


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Marketing Discussion

Think of all the pricing methods

described in the chapter.As a consumer, which pricing method

do you personally prefer to deal with?

Why?


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Variable Cost/Unit 12500.00

Fixed Cost 10,00,00,000

Units Sales 100000.00Mark-up% 0.20

Mark up Price ?

Total Investment 50,00,00,000

Investor Return on Investment 0.25

RoI Pricing ?

Competitor's Price 18000.00

Customer Perception 17500.00

Bep

Q.1 Find out the Floor and Ceiling price for this NG LCD

Q.2 What will be the Mark-up price here?

Q.3 What will be the ROI price here?

Q.4 Which price will you charge from the customers & why?


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Lecture 17

Pricing Strategies


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1. New-Product Pricing Strategies

2. Product Mix Pricing Strategies

3. Price Adjustment Strategies

4. Price Changes

Topic Outline

1. New-Product Pricing Strategies


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1. New Product Pricing Strategies

a. Market-skimming pricing High initial prices to skim revenue layers from the market

Conditions 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 the

advantage of higher prices Competitors should not be able to enter the market easily

b. Market- penetration pricing setting a low initial price in order to penetrate the market quickly and

deeply to attract a large number of buyers quickly to gain marketshare

Conditions Price sensitive market

Inverse relationship of production and distribution cost to sales growth

Low prices must keep competition out of the market


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2. Product Mix Pricing Strategies

Product

line pricing

Optional-product

pricing

Captive-product

pricing

By-product

pricing

Product

bundlepricing

Product Mix Pricing Strategies


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g g

i) Product line pricing : takes into account the cost

differences between products in the line, customer

evaluation of their features, and competitorspricesii) Optional-product pricing takes into account optional or

accessory products along with the main product

iii) Captive-product pricing involves products that must be

used along with the main productiv) Two-part pricinginvolves breaking the price into:

Fixed fee

Variable usage fee

v) Product bundle pricing combines several products at areduced price

vi) By-product pricing refers to products with little or no

value produced as a result of the main product. Producers

will seek little or no profit other than the cost to cover

stora e and deliver


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Adapting the Price

Possible Reasons variations in

Geographical demand & Cost

Market-segment requirements,

purchase timing, order levels,

delivery frequency,

guarantees,

service contracts,

3 Price Adjustment Strategies


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3. Price-Adjustment Strategies

Discount andallowance

pricing

Segmented orDifferentiated pricing

Psychologicalpricing

Promotionalpricing

Geographicpricing

Dynamicpricing

Internationalpricing


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Price-Adjustment Strategies

1. Discount and allowance pricingreducesprices to reward customer responses such as

paying early or promoting the product

Types of Discounts

Cash discount

Quantity discount

Functional discount

Seasonal discount

Allowance


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2. Promotional Pricing

Promotional pricing is when prices are temporarilypriced below list price or cost to increase demand

Loss leaders

Special event pricing

Cash rebates

Low-interest financing

Longer warrantees

Free maintenance

2. Promotional Pricing Tactics


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gLoss- leader pr icing. Supermarkets and department stores often drop the price onwell-known brands to stimulate additional store traffic. This pays if the revenue on theadditional sales compensates for the lower margins on the loss-leader items.

Cash rebates. Auto companies and other consumer-goods companies offer cashrebates to encourage purchase of the manufacturers' products within a specified timeperiod. Rebates can help clear inventories without cutting the stated list price.

Special-event p r icing. Sellers will establish special prices in certain seasons to draw inmore customers.

Low-interest f inancing . Instead of cutting its price, the company can offer customerslow-interest financing. Automakers have even announced no-interest financing to attractcustomers.

Warrant ies and s ervice cont racts. Companies can promote sales by adding a free orlow-cost warranty or service contract.

Lon ger payment terms. Sellers, especially mortgage banks and auto companies,stretch loans over longer periods and thus lower the monthly payments.Psycho logica l discou nt ing. This strategy involves setting an artificially high price andthen offering the product at substantial savings; for example, "Was $359, now $299.

3. Differentiated Pricing


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gPrice discrimination

occurs when a company sells a product or service at two or more prices that do not

reflect a proportional difference in costs.

In first-degree price discrimination, the seller charges a separate price to eachcustomer depending on the intensity of his or her demand.

In second-degree price discrimination, the seller charges less to buyers who buy a

larger volume.

In third-degree price discrimination, the seller charges different amounts to different

classes of buyers, as in the following cases:

Customer-segment p r ic ing.Different customer groups are charged differentprices for the same product or service.

Product- form p r ic ing. Different versions of the product are priced differentlybut not proportionately to their respective costs

Image pr icin g. Some companies price the same product at two differentlevels based on image differences.

Channel pr ic ing. Coca-Cola carries a different price depending on whether itis purchased in a fine restaurant, a fast-food restaurant, or a vending machine

Loc ation pr ic ing. The same product is priced differently at different locationseven though the cost of offering at each location is the same

Time pr ic ing .Prices are varied by season, day, or hour. Public utilities varyenergy rates to commercial users by time of day and weekend versus weekday


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Special festivalpricing by

Coca-Cola on the

occasion of

Ramzan in

Pakistan.


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4. Geographical pricing

It is used for customers in different partsof the country or the world

FOB-origin pricing

Uniformed-delivered pricing

Zone pricing

Basing-point pricing

Freight-absorption pricing

4. Geographical Pricing Strategies


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FOB-origin (free on board) pricing means that the goods aredelivered to the carrier and the title and responsibility passes to the

customer

Uniformed-delivered pricingmeans the company charges the sameprice plus freight to all customers, regardless of location

Zone pricing means that the company sets up two or more zoneswhere customers within a given zone pay a single total price

Basing-point pricing means that a seller selects a given city as a

basingpointand charges all customers the freight cost associatedfrom that city to the customer location, regardless of the city fromwhich the goods are actually shipped

Freight-absorption pricing means the seller absorbs all or part ofthe actual freight charge as an incentive to attract business incompetitive markets

Dynamic pricing is when prices are adjusted continually to meet thecharacteristics and needs of the individual customer and situations

International pricing is when prices are set in a specific countrybased on country-specific factors

Economic conditions, Competitive conditions, Laws and regulations,

Infrastructure, Company marketing, objective

g p g g


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Price Changes

Price cuts

Priceincreases

Initiating Pricing Changes


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Price Changes

Initiating Pricing Changes

Price cuts occur due to:

Excess capacity Increased market share

Price increase from:

Cost inflation Increased demand

Lack of supply


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Price Changes

Price increases

Product is hot

Company greed

Price cuts

New models willbe available

Models are notselling well

Quality issues

Buyer Reactions to Pricing Changes


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Price Changes

Questions

Why did the competitor change the price?

Is the price cut permanent or temporary?

What is the effect on market share andprofits?

Will competitors respond?

Responding to Price Changes


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Price Changes

Solutions

Reduce price to match competition

Maintain price but raise the perceivedvalue through communications

Improve quality and increase price

Launch a lower-price fighting brand



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Chapter 11- slide 69Copyright 2010 Pearson Education, Inc.Publishing as Prentice Hall

Price Changes


P bli P li d P i i


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Public Policy and Pricing

Price competitionis a core elementof our free-market economy. In settingprices, companies usually are not free

to charge whatever prices they wish.Many laws govern the rules of fairplay in pricing.

The Monopolies and Restrictive

Trade Practices (MRTP) Act, 1969 The Competition Act, 2002


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Salient features of the Competition

Act:

anti-competitive agreements

prohibition of abuse of dominantpositions by an enterprise

regulation of combinations such asacquisitions, mergers, joint ventures,

takeovers, and amalgamations


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Under the MRTP Act, acts such asmisleading consumers about theprices at which goods and services

are available in the market and falseoffers of bargain prices areconsidered to be unfair trade practices

The Consumer Protection Act, 1986(amended in 2002), also safeguards

the interests of consumers


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Predatory pricing, or selling andproviding services with the intention of

reducing competition or eliminating

competitors, is not permissible underthe MRTP Act or the Competition Act.


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Increasing Prices

Delayed quotationpricing

Escalator clauses

Unbundling

Reduction of discounts

Brand Leader Responses to


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Brand Leader Responses to

Competitive Price Cuts

Maintain price

Maintain price and add value

Reduce price Increase price and improve quality

Launch a low-price fighter line


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Marketing Debate

Is the right price a fair price?

Take a position:

1. Prices should reflect the value thatconsumers are willing to pay.

or

2. Prices should primarily just reflect the costinvolved in making a product.


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Marketing Discussion

Think of all the pricing methods

described in the chapter.As a consumer, which pricing method

do you personally prefer to deal with?

Why?

lt-16 pricing- the second p of marketing

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