Pricing

Course: MBASubject: MM II

Unit: 3

Significance and importance of pricing for Marketer

• The pricing of your product or service is a key element in determining the profitability of your business.

• However it is not always to easy to get it right.• If your price is too high demand will reduce and you may price yourself out of the market.• If your price is too low, your sales volume may not generate enough revenue to cover the

costs associated with your business.• People may also believe that the product or service does not offer value at such a low

price.• Why Is It Important?• Pricing is a key determinant in the decision making process customers use to purchase a

product or service• It is important to establish how much your target market will pay for your product or

service.• Shows you how sensitive your customers are to changes in price.

Pricing For Different Life CyclesAt different stages of your product or service life cycle you may change your pricing strategy to suite your business needs. This includes when you are selecting which strategies to focus on.New Launch

Low price strategy – used to encourage trial of your product or service. As well as repurchase on a regular basis.High price strategy – used to generate profits to cover launch costs. Product or service may have a unique point of different.

Growth StageLow price strategy – used short term to stop new competitors entering the market.High price strategy – used to grow profits.

Decline or Maturity StageLow price strategy – used to generate enough revenue to cover costs.High price strategy – used to maximise revenue in order to fund new projects.

Price versus Non-price Competition

• In developing a marketing programme, management has to decide whether to compete primarily on the basis of price, or the non-price elements of the marketing mix. This choice obviously affects other parts of the firm’s marketing programme.

Price Competition A firm engages in price competition by regularly offering products at as low a price as possible and accompanied by a minimum of services. Discount houses and off-price retailers compete in this way.

A firm can make use of the price to compete by: 1. Changing its prices 2. Reacting to price changes made by competitors

Value Pricing: In response, many companies in diverse industries are using value pricing. This form of price competition aims to improve a product's value - that is, the ratio of its benefits to its price and related costs. Using value pricing, a firm: 1. Offers products with lower prices but the same, or perhaps added benefits; and 2. At the same time seeks ways to slash expenses so that profits don't suffer.

Proactive and Reactive Changes: After an initial price is set, a number of situations may prompt a firm to change its price. As costs increase, for instance, management may decide to raise its price rather than to maintain price and either cut quality or promote the product aggressively. Temporary price cuts may be used to sell excess inventory or to introduce a new product.

Price Wars: From a seller's standpoint, the big disadvantage in price-cutting is that competitors will retaliate - and not let up. A price war may begin when one firm decreases its price in an effort to increase its sales volume and/or market share. The battle is on if other firms retaliate, reducing price on their competing products.

Non-price Competition

In non-price competition, sellers maintain stable prices and attempt to improve their market positions by emphasising other aspects of their marketing programmes. In non-price competition, sellers attempt to shift their demand curves to the right by means of product differentiation, promotional activities, or some other technique.

With non-price competition, however, a seller retains some advantage when a competitor decides to undersell. The best approach in non-price competition is to build strong - if possible, unassailable - brand equity for the firm’s products. Two methods of accomplishing this are to develop distinctive, hopefully unique, products and to create a novel, appealing promotional programme. In addition, some firms emphasize the variety and quality of the supplementary services they offer to customers.

Process of setting a Price1. Select the pricing objective to decide where you want to position

your market offering. The five major objectives that you can pursue are survival, maximum current profit, maximum market share, maximum market skimming or product –quality leadership. Having a clearer objective makes it easier to set a price.

2. Determine the demand. The price you set will affect the demand level and impact your business objectives differently. In normal situations, price and demand are inversely related, in that the higher the price the lower the demand and vice versa.

3. Estimate the costs. While doing this, you want to charge a price that covers your cost of production, distribution and selling of the product plus a decent return for your efforts and risks.

4. Analyze competitor costs, prices, offers and possible reactions. You should consider your nearest competitor’s price, product features and evaluate them to check their worth to the customers. You can then decide to charge more, same as competitor or less.

5. Select a pricing method. When selecting, consider the cost of the product or service, competitor prices and the customer’s assessment of the unique features. The pricing method you decide should include one or more of these considerations.

6. Finally, select the price. Here, you must consider the following: 1) Impact of other marketing activities like brand quality and advertising in relation to competition.2) Companies pricing policy, 3) Impact of the price on other parties like the distributors and dealers.

Factors Affecting Demand Determination• Determining Factors of the demand In addition to the price of a good, the demanded amount depends on other factors like the

following ones:• The rent: a reduction of the rent means that we would have less to spend, reason why it

would be necessary to diminish the demand of some goods. For most of the goods, the rent diminishes the demanded amount of the good diminishes as well. These goods are denominated normal goods.But not all the goods are normal. If the demand of a good increases when the rent diminishes it wil denominate inferior goods.

• The prices of other goods: When the reduction of the price of a good reduces the demand of another one, both are denominated substitutes goods (jerseys and sweater shirts)

• When the reduction of the price of a good elevates the demand of another one, they are denominated complementary goods (gasoline and automobiles, computers and software)

• Taste of the consumer: The most evidential determination of our demand is taste or preferences. The economists normally do not try to explain the consumers taste because they are based on historical and psychological issues that are outside the field of economy. Nevertheless, they examine what happens when pleasures change.

• The expectations: Our expectations of the future can influence our present demand of a service. For example, if we expect to gain higher rent the next month, it is possible we will spend more in the present.

Pricing Methods

Penetration Pricing

• Price set to ‘penetrate the market’• ‘Low’ price to secure high volumes• Typical in mass market products – chocolate bars,

food stuffs, household goods, etc.• Suitable for products with long anticipated life cycles• May be useful if launching into a new market

Market Skimming• High price, Low volumes• Skim the profit from the market• Suitable for products that have

short life cycles or which will face competition at some point in the future (e.g. after a patent runs out)

• Examples include: Playstation, jewellery, digital technology, new DVDs, etc.

Many are predicting a firesale in laptops as supply exceeds demand.Copyright: iStock.com

Value Pricing• Price set in accordance

with customer perceptions about the value of the product/service

• Examples include status products/exclusive products Companies may be able to set prices

according to perceived value.

Copyright: iStock.com

Psychological Pricing

• Used to play on consumer perceptions• Classic example - £9.99 instead of £10.99!• Links with value pricing – high value goods

priced according to what consumers THINK should be the price

Going Rate (Price Leadership)

• In case of price leader, rivals have difficulty in competing on price – too high and they lose market share, too low and the price leader would match price and force smaller rival out of market

• May follow pricing leads of rivals especially where those rivals have a clear dominance of market share

• Where competition is limited, ‘going rate’ pricing may be applicable – banks, petrol, supermarkets, electrical goods – find very similar prices in all outlets

Price Discrimination• Charging a different price

for the same good/service in different markets

• Requires each market to be impenetrable

• Requires different price elasticity of demand in each market

Prices for rail travel differ for the same journey at different times of the day

Copyright: iStock.com

Cost-Plus Pricing

• Calculation of the average cost (AC) plus a mark up

• AC = Total Cost/Output

Target Pricing

• Setting price to ‘target’ a specified profit level• Estimates of the cost and potential revenue at

different prices, and thus the break-even have to be made, to determine the mark-up

• Mark-up = Profit/Cost x 100

The Effects of Price

• Price ElasticityPrice elasticity measures how price increases as well as decrease affect

demand for a product or service. A price increase has little to no effect if the product or service has little elasticity, while a high level of price elasticity means a slight price increase will have a major effect on the demand for the product or service. Several factors play into the price elasticity of a product or service.

• Substitutions And CompetitionThe availability and perceived quality of competing products or services will

help determine how price increases affect demand. If you are selling a product or service that has competition that consumers perceive as similar in quality, increasing your price to more than the competition will lead to a decrease in sales as consumers buy the competition's product or service. Consumers may also make substitutions for a product or a service. For example, if the price of cars increased dramatically, consumers may begin to take mass transit more, ride a bike or walk.

• TimeTime plays a factor in the effect of price increases and sales volume. The longer a price

increase exists, without the competition increasing their prices, the longer consumers have to change their behavior through buying competitive products or services or substitution. How accessible competitive goods or services, as well as substitutes are to consumers, will combine with the length of the price increase to affect sales volume. A short price increase will affect sales volume negatively less than a long-term price increase because consumers will have less time to change their behavior because of the price increase.

• Pricing StrategiesNot all companies price their products to sell the highest amount of the product or

service possible. These companies incorporate strategies using prices to sell the optimal amount of goods or services while making the maximum amount of profit per sale. Some brands use prestige pricing, where they purposely set a high price point or their product or service to communicate that the product or service is of superior quality. How you use various pricing strategies to price your product or service, though, depends on factors such as the competition, consumer's perception of your product or service and the price elasticity of the product or service. Finding the right price point increase while keeping sales volume high may require trial and error.

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