MARKETING MANAGEMENT Developing Pricing Strategies and Programs What

MARKETING MANAGEMENT Developing Pricing Strategies and Programs

What is Price? Price: is the sum of all values that consumers exchange for the benefits of having or using the product or service. 14 -2

Price has many names: • • • Rent Tuition Fare Rate Commission Wage • • • Fee Dues Interest Donation Salary 14 -3

Steps in Setting Pricing 14 -4

Setting the Pricing Steps 1. 2. 3. 4. 5. 6. Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price • Survival • Maximize current profits • Maximize market share – Penetration strategy • Market skimming – Skimming strategy • Product quality leaders • Partial cost recovery 14 -5

Setting the Pricing Steps 1. 2. 3. 4. 5. 6. Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price • Understand factors that affect price sensitivity • Estimate demand curves ü Statistical analysis ü Price experiments ü Surveys • Understand price elasticity of demand ü Elasticity ü Inelasticity 14 -6

Consumers are less price sensitive when: • Product is more distinctive • Buyers are less aware of substitutes • Buyers cannot easily compare quality of substitutes • The expenditure is a lower part of buyer’s total income • The expenditure is small compared to the total cost • Part of the cost is borne by another party • The product is used with assets previously bought • The product is assumed to have more quality, prestige, or exclusiveness • Buyers cannot store the product Internet increases customers’ price sensitivity 14 -7

Inelastic & Elastic Demand 14 -8

Demand is less elastic under these conditions: • There are few or no substitutes/competitors • Buyers do not readily notice the higher price • Buyers are slow to change their buying habits and search for lower prices • Buyers think higher prices are justified 14 -9

Setting the Pricing Steps 1. 2. 3. 4. 5. 6. Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price • Types of costs and levels of production must be considered • Accumulated production leads to cost reduction via the experience curve • Differentiated marketing offers create different cost levels (Activitybased cost ABC) 14 -10

Setting the Price Key Pricing Terms: § Fixed costs/overhead: costs that don’t vary with production or sales revenue. § Variable costs: vary with the level of production. § Total costs: sum of fixed and variable costs at a given level of production § Average cost: cost per unit at a given level of production = total cost/quantity of production. 14 -11

Cost per Unit as a Function of Accumulated Production: The Experience Curve 14 -12

Setting the Pricing Steps 1. 2. 3. 4. 5. 6. Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price • Firms must analyze the competition with respect to: ü Costs ü Prices ü Possible price reactions • Pricing decisions are also influenced by quality of offering relative to competition 14 -13

Setting the Pricing Procedure 1. 2. 3. 4. 5. 6. Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price • Price-setting begins with the three “Cs” • Select pricing method: – – – Markup pricing Target-return pricing Perceived-value pricing Value pricing Going-rate pricing Auction-type pricing 14 -14

Pricing Methods: 1. Markup pricing Standard markup add to the product cost 2. Target-Return Pricing pricing used to achieve a planned or target rate of return on investment 14 -15

Pricing Methods: 3. Perceived-Value Pricing • Companies base their price on the customer’s perceived value. • The key to perceived-value pricing is to deliver more value than the competitor and to demonstrate this to prospective buyers. • There are three groups of buyers : ü Price buyers ü Value buyers ü Loyal buyers 14 -16

Pricing Methods: 4. Value Pricing • Win loyal customer by charging a fairly low price for a high-quality offering, that means : reengineering the companies operations to be low -cost without sacrificing quality. 5. Going-Rate Pricing • The firm bases its price largely on competitors’ prices. (smaller firms “follow the leader”). • It is quite popular where costs are difficult to measure or competitive response is uncertain. 14 -17

Pricing Methods: 6. Auction-Type Pricing • • One major purpose of auctions is to dispose of excess inventories or used goods. Three major types of auctions: 1 - English auctions (ascending bids). 2 - Dutch auctions (descending bids). 3 - Sealed-bid auctions. 14 -18

Setting the Pricing Steps 1. 2. 3. 4. 5. 6. Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price • Requires consideration of additional factors: – Impact of other marketing mix variables – Company pricing policies – Gain-and-risk-sharing pricing – Impact of price on other parties 14 -19

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