Pricing Approaches and Strategies Price o The amount

Pricing: Approaches and Strategies

Price o The amount of money charged for a product, or the sum of the values that consumers exchange for the benefits of having/using the product or service. o Price and the Marketing Mix • Only element to produce revenues • Most flexible element • Can be changed quickly o Price as a tool of Competition o Common Pricing Mistakes

Factors to Consider in Setting Price Inte rnal Fac to rs o o Marketing objectives Marketing mix strategies Costs Organizational considerations o Market positioning influences pricing strategy o Other pricing objectives: • • Survival Current profit maximization Market share leadership Product quality leadership o Not-for-profit objectives: • Partial or full cost recovery • Social pricing

Factors to Consider in Setting Price (contd. ) Inte rnal Fac to rs o o Marketing objectives Marketing mix strategies Costs Organizational considerations o Pricing must be carefully coordinated with the other marketing mix elements o Target costing is often used to support product positioning strategies based on price o Non-price positioning can also be used

Factors to Consider in Setting Price (contd. ) Inte rnal Fac to rs o o Marketing objectives Marketing mix strategies Costs Organizational considerations o Types of costs: • Variable • Fixed • Total costs o How costs vary at different production levels will influence price setting o Experience (learning) curve effects on price

Strategic Impact & Cost Analysis: Pareto Law Effect Citi. Bank NA Example o If you successfully improve 20% of the most important problems, you will gain the same effect as you would by improving the rest 80%. This represents a big advantage with respect to cost versus effect. 80% 20% No. of Services 80% No. of Customers Customer Accounts for purification Service Range for Rationalization o There are only few things that are really important. Customer Revenue o 80% of Cost Structure on staff and even Marketing Expenses is caused by 20% of Accounts for their Low Deposits and high Transaction Volume. Service Revenue Customer/ Service for Elimination Figure: Customer/Service Revenue Matrix For an Effective Cost-Structure: o 20% of the Customers and 20% of the Services contribute 80% of Revenue. o Rationalize 80% services & Purify 80% Accounts as they contribute only 20% of revenue. o Eliminate Services & Accounts in the Bottom-Right-Cell as they are certainly running at a loss.

Factors to Consider in Setting Price (contd. ) Inte rnal Fac to rs o o Marketing objectives Marketing mix strategies Costs Organizational considerations o Who sets the price? • In Small companies: CEO or top management • In Large companies: Divisional or product line managers o Price negotiation is common in industrial settings o Some industries have pricing departments

Factors to Consider in Setting Price (contd. ) Exte rnal Fac to rs o Nature of market and demand o Competitors’ costs, prices, and offers o Other environmental elements o Types of markets • Pure competition • Monopolistic competition • Oligopolistic competition • Pure monopoly o Consumer perceptions of price and value o Price-demand relationship • Demand curve • Price elasticity of demand

Factors to Consider in Setting Price (contd. ) Exte rnal Fac to rs o Nature of market and demand o Competitors’ costs, prices, and offers o Other environmental elements o Consider competitors’ costs, prices, and possible reactions when developing a pricing strategy o Pricing strategy influences the nature of competition • Low-price low-margin strategies inhibit competition • High-price high-margin strategies attract competition o Benchmarking costs against the competition is recommended

Factors to Consider in Setting Price (contd. ) Exte rnal Fac to rs o Nature of market and demand o Competitors’ costs, prices, and offers o Other environmental elements o Economic conditions • Affect production costs • Affect buyer perceptions of price and value o Reseller reactions to prices must be considered o Government may restrict or limit pricing options o Social considerations may be taken into account

General Pricing Approaches 1. Cost-Based Pricing: a) Cost-Plus Pricing • Adding a standard markup to cost • Ignores demand competition • Popular pricing technique because: • It simplifies the pricing process Price • competition may be minimized • It is perceived as more fair to both buyers and sellers Example Variable costs: Tk. 20 Expected sales: 100, 000 units Fixed costs: Tk. 500, 000 Desired Sales Markup: 20% Variable Cost + Fixed Costs/Unit Sales = Unit Cost Tk. 20 + Tk. 500, 000/100, 000 = Tk. 25 per unit Unit Cost/(1 – Desired Return on Sales) = Markup Price Tk. 25 / (1 -. 20) = Tk. 31. 25

General Pricing Approaches (contd. ) b) Break-Even Analysis & Target Profit Pricing o Break-even charts show total cost and total revenues at different levels of unit volume. o The intersection of the total revenue and total cost curves is the break-even point. o Companies wishing to make a profit must exceed the break-even unit volume. Revenues Thousands Taka 1000 Target Profit Tk. 200, 000 800 Total Costs Break-even point 600 400 Fixed Costs 200 0 10 20 30 40 Sales Volume in Thousands of Units Quantity To Be Sold To Meet Target Profit

General Pricing Approaches (contd. ) 2. Value-Based Pricing o Uses buyers’ perceptions of value rather than seller’s costs to set price. o Business-to-business firms seek to retain o Measuring perceived value pricing power can be difficult. • Value-added strategies can help o Consumer attitudes toward price and quality have o Value pricing at the shifted during the last retail level decade. • Everyday low pricing • Introduction of less expensive versions of established brands has become common. (EDLP) vs. high-low pricing

General Pricing Approaches (contd. ) 3. Competition-Based Pricing • Also called going-rate pricing • May price at the same level, above, or below the competition • Bidding for jobs is another variation of competition - based pricing • Sealed bid pricing

Other Pricing Approaches o Market-Skimming Pricing • Setting a high price for a new product to skim maximum revenues layer by layer from segments willing to pay the high price. o Market-Penetration Pricing • Setting a low price for a new product in order to attract a large number of buyers and a large market share. o Market Rate Pricing • Ceding the initiative to the key competitors to set the price. • Dangerous for leaving the strategic initiative to competitors • Potential threat of ‘Sudden Price Shift’ by newer, or ‘Changes in delivery system capability’. o Relationship Pricing • Different price for Different class of customers depending on relationship and the potentiality of cross-selling or future business.

Product Mix Pricing Strategies o Product Line Pricing • Setting price steps between product line items. • Line of products rather single one • Price points o Optional-Product Pricing • Pricing optional or accessory products sold with the main product o By-Product Pricing • Pricing low-value by-products to get rid of them o Captive-Product Pricing • Pricing products that must be used with the main product • High margins are often set for supplies • Services: two-part pricing strategy • Fixed fee plus a variable usage rate o Product Bundle Pricing • Pricing bundles of products sold together

Price Adjustment Strategies S trate g ie s o o Discount / allowance Segmented Psychological Promotional o Types of discounts Cash discount and • Quantity discount • • Functional (trade) discount • Seasonal discount o Allowances • Trade-in allowances • Promotional allowances

Price Adjustment Strategies (contd. ) S trate g ie s o o Discount / allowance Segmented Psychological Promotional o Types of segmented pricing strategies: • Customer-segment • Product-form pricing • Location pricing • Time pricing o Also called revenue or yield management o Certain conditions must exist for segmented pricing to be effective

Conditions Necessary for Segmented Pricing Effectiveness o Market is segmentable o Pricing must be legal o Lower priced segments are not able to resell o Costs of segmentation can not exceed revenues earned o Competitors can not undersell segments charging higher prices o Segmented pricing must reflect real differences in customers’ perceived value

Price Adjustment Strategies (contd. ) S trate g ie s o o Discount / allowance Segmented Psychological Promotional o The price is used to say something about the product. • Price-quality relationship • Reference prices • Differences as small as five cents can be important • Numeric digits may have symbolic and visual qualities that psychologically influence the buyer • Odd • rounding

Price Adjustment Strategies (contd. ) S trate g ie s o o Discount / allowance Segmented Psychological Promotional o Temporarily pricing products below the list price or even below cost o Loss leaders • Special-event pricing • Cash rebates • Low-interest financing, longer warranties, free maintenance o Promotional pricing can have adverse effects

Promotional Pricing Problems o Easily copied by competitors o Creates deal-prone consumers o May erode brand’s value o Not a legitimate substitute for effective strategic planning o Frequent use leads to industry price wars which benefit few firms

Price Discrimination o Customer Discrimination • for students only o Product-form Discrimination • Telecom products o Place Discrimination • service at ATM versus at counters o Time Discrimination • peak -hours/ off-peak-hours

Price Changes o Initiating Price Cuts is Desirable When a Firm • Has excess capacity • Faces falling market share due to price competition • Desires to be a market share leader o Price Increases are Desirable • If a firm can increase profit, faces cost inflation, or faces greater demand than can be supplied. o Methods of Increasing Price o Alternatives to Increasing Price • Reducing product size, using less expensive materials, unbundling the product.

Price Changes (contd. ) o Buyer reactions to price changes must be considered. o Competitors are more likely to react to price changes under certain conditions. • Number of firms is small • Product is uniform • Buyers are well informed o Respond to Price Changes only if: • Market share / profits will be negatively affected if nothing is changed. • Effective action can be taken: • • Reducing price Raising perceived quality Improving quality and increasing price Launching low-price “fighting brand”

Public Policy and Pricing o Pricing within Channel Levels • Price-fixing • Competitors can not work with each other to set prices • Predatory pricing • Firms may not sell below cost with the intention of punishing a competitor or gaining higher long-run profits or running a competitor out of business. o Pricing across Channel Levels • Price discrimination • Retail price maintenance • Deceptive pricing • Bogus reference / comparison pricing • Scanner fraud • Price confusion