Slide 16 1 Price Pricing Chapter 16 Slide

Slide 16. 1 Price Pricing Chapter 16

Slide 16. 2 Introduction • Companies face dynamic pricing challenges from local and international markets and are impacted from a variety of sources including macro and micro economic issues and competitors. • Price is equated to the sum of the values that consumers exchange for the benefits of having or using the product or service. • Price is one of the most important and far-reaching of the variables that marketing managers control. Price is the only element of the marketing mix that produces revenues.

Slide 16. 3 Price defined • Price is the amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.

Slide 16. 4 Internal factors affecting price • • Company’s marketing objectives Marketing mix strategy Costs Organisation structure

Slide 16. 5 Marketing objectives • Pricing should augment the marketing mix strategy • Marketing objectives are reflected in the pricing decisions and include – – – Survival Current profit maximisation Market share maximisation Product-quality leadership Full cost recovery • Non profit hospitals – Partial cost recovery • Utilised by non profit organisations

Slide 16. 6 Marketing mix strategy • Price decisions are coordinated with product design, distribution and promotional decisions to form an effective integrated marketing programme. • Various strategies can be used depending upon the type of product and the environment in which it is involved. • Frequently pricing decisions are made first and the marketing mix evolves around that. • De-emphasis of price by using the other marketing mix tools to create non-price positions based upon differentiation and value.

Slide 16. 7 Figure 16. 1 Factors affecting price decisions

Slide 16. 8 Gucci’s very strong image and reputation as a prestigious brand mean that customers are willing to pay for the fashion house’s expensive fragrances. Source: Advertising Archives. Reproduced with permission.

Slide 16. 9 Costs • Types of cost – Fixed costs that do not vary with production or sales level. – Variable costs vary with level of production. – Total costs, sum of variable and fixed costs.

Slide 16. 10 Costs at different levels of production Figure 16. 2 Cost per unit at different levels of production

Slide 16. 11 Costs as a function of production experience Figure 16. 3 Cost per unit as a function of accumulated production: the experience curve

Slide 16. 12 External factors affecting pricing decisions External factors include the nature of the market and demand, competition and other environmental elements. • The market and demand • Costs set the lower limit and demand sets the upper limit of price. This price-demand relationship is of fundamental importance to marketers.

Slide 16. 13 Pricing in different types of market – Pure competition markets • Uniform commodity • No single buyer or seller has much effect on the market price • Marketing mix has little impact

Slide 16. 14 Pricing in different types of market – Monopolistic competition • Buyers and sellers trade over a range of prices • Emphasis upon differentiation through the marketing mix

Slide 16. 15 Pricing in different types of market – Oligopolistic competition • Few sellers highly sensitive to each other’s price and marketing strategies

Slide 16. 16 Pricing in different types of market – Pure monopoly • Single seller controlling the market

Slide 16. 17 Analysing the price-demand relationship Figure 16. 4 Inelastic and elastic demand

Slide 16. 18 Price elasticity of demand – A measure of the sensitivity of demand to changes in price. • Price elasticity of demand = % change in quantity demanded % change in price – Buyers are less price sensitive if product is unique and high in quality or image. – If demand is elastic, producers will lower price and generate more total revenue through greater demand at the lower price.

Slide 16. 19 Price influence on profits – Profit is the balance of income generated minus the costs incurred to sell the product – Many financial management ratios • Return on investment (ROI) • Return on sales • (EVA) Economic Value Added

Slide 16. 20 Competitors and other external factors impacting price • Competitors’ costs, prices and offers – Competitor price benchmarking gives a good indication of market price acceptance levels. • Economic conditions such as recession. • Resellers and intermediaries. • Governmental influences such as tariffs on imports. • Social concerns

Slide 16. 21 Pricing considerations • Companies thus set prices according to 4 sets of factors: – costs – consumer perception – competitors’ prices – societal consideration.

Slide 16. 22 Pricing objectives • Income related – • Volume related – • how many units can we sell? Competition related – • how much money can we make? what share of the available business do we want? Societal – what are our responsibilities to our customers and society as a whole?

Slide 16. 23 Pricing objectives Figure 16. 5 Primary considerations in price settings

Slide 16. 24 1. Cost based pricing • Cost-plus pricing – Adding a standard mark-up to the cost of the product. • Mark-up/down – The difference between selling price and cost as a percentage of selling price or cost • Break-even analysis and target profit pricing – Setting price to break even on the costs of making and marketing a product.

Slide 16. 25 Figure 16. 6 Break-even chart for determining target price *Assumes a fixed cost of € 300, 000 and a constant unit variable cost of € 10. Table 16. 2 Break-even volume and profits at different prices

Slide 16. 26

Slide 16. 27 2. Value based pricing • Setting price based on the buyers’ perceptions of product values rather than on the cost. • Underlying principle is to offer the right combination of quality and good service at a fair price. • Everyday low pricing is an important aspect of value pricing at the retail level.

Slide 16. 28 Cost-based vs. value-based pricing Figure 16. 7 Cost-based versus value-based pricing Source: The Strategy and Tactics of Pricing, 3 rd edn by Thomas T. Nagle and Reed K. Holden (2002), p. 4. Reprinted by permission of Pearson Education, Inc. , Upper Saddle River, NJ 07458.

Slide 16. 29 3. Competition based pricing • Going-rate pricing – Setting price based largely on following competitors’ prices rather than on company costs or demand. • Sealed-bid pricing – Potential buyers submit sealed bids, and the item is awarded to the buyer who offers the best price. • English auction is where the price is raised until only one bidder remains. • Dutch auction is where prices start high and are lowered successively until someone buys. • Collective buying is where an increasing number of customers agree to buy as prices are lowered to the final bargain price. • Reverse auction is where the customers name the price that they are willing to pay for an item and seek a company willing to sell.

Slide 16. 30 New product price setting • Setting the price for new products is complex and challenging. • Different strategies will be used if the product is an imitator of an existing product versus an innovative product that is patent protected.

Slide 16. 31 Figure 16. 8 Four price-positioning strategies

Slide 16. 32 For imitation products there are four options: • Premium pricing strategy – High quality and highest price charged. • Economy pricing – Lower quality and lower priced product. • Good value strategy – Strategy used to attack a market leader and uses a ‘strap-line’, which is an encompassing slogan used in conjunction with a brand’s name, advertising and other promotions. • Overcharging strategy – Prices charged in relation to quality.

Slide 16. 33 Pricing for new products with innovative features and benefits: • Market skimming pricing • Pricing strategy used for new products that have unique features and benefits over the competition. • A high price is set for the new product to skim the maximum price and generate the most profit. • Market penetration pricing • Initial low price to penetrate the market and convert as many buyers onto the new product and grab a large market share. • This is a short-term strategy that is dangerous and needs to be supported by a robust range of products to leverage against.

Slide 16. 34 Product-mix pricing strategies (1) • Product line pricing – Setting the price steps between various products in a product line, based on cost differences between the products, customer evaluations of the different features and the competitors’ pricing. • Optional-product pricing – The pricing of optional or accessory products along with a main product. • Captive-product pricing – Setting a price for products that must be used in conjunction with a main product, such as blades for a razor and film for a camera.

Slide 16. 35 Product-mix pricing strategies (2) • By-product pricing – Using the by-product pricing method, the manufacturer seeks markets for the by-products of the main production and recoups costs of waste from the production process. – This may include the metal shavings from steel cutting, being gathered and processed as scrap metal. • Product bundle pricing – Strategy used to combine several products and offering the bundle of products at a reduced rate, thus leveraging the entire range of products.

Slide 16. 36 Product-mix pricing strategies (3) Table 16. 4 Product-mix pricing strategies

Slide 16. 37 Price adjustment strategies Table 16. 5 Price adjustment strategies

Slide 16. 38 Discount and allowance pricing • Basic price adjustments to reward loyalty – Cash discount – Volume or quantity discount – Quantity premium – Functional discount (trade discount) – Seasonal discount – Trade-in allowance – Promotional allowance

Slide 16. 39 Segmented pricing • Segmented pricing allows for differences in customers, products and locations. The differences in prices are not based on differences in cost. – Customer-segment pricing – Product-form pricing – Location pricing – Time pricing

Slide 16. 40 Psychological pricing • A pricing approach that considers the psychology of prices and not simply the economics; the price is used to say something about the product. – Includes reference pricing, which are prices that are set in buyers’ minds and refer to when they look at a given product.

Slide 16. 41 Promotional pricing • Temporarily pricing products below the list price and sometimes even below cost, to increase short-run sales. • Dangers include creating ‘deal prone’ customers and the risk of precipitating price wars.

Slide 16. 42 Geographical pricing (1) • Pricing based on where the customers are located. • Free on board FOB-origin pricing – Goods are placed free on board a carrier; the customer then pays the freight from the factory to the destination. • Uniform delivered pricing – Company charges the same price plus freight to all customers, regardless of their location.

Slide 16. 43 Geographical pricing (2) • Zone pricing – Company sets up different trading zones. All customers within a specified zone pay the same price. The more distant the zone, the higher the price. • Basing-point pricing – Seller specifies a specific city as a basing point and charges all customers the freight cost from that city to the customer location, regardless of the city from which the goods are actually shipped. • Freight-absorption pricing – Company absorbs all or part of the actual freight charges in order to get business.

Slide 16. 44 International pricing • Globalisation and the development of international pricing strategies offer many challenges and complexities to companies. • Prices will be influenced by: – – – economic conditions competitive situations laws regulations sophistication of the retailing and wholesaler environments.

Slide 16. 45 Price changes • Initiating price cuts – Excess capacity – Follow the leader – Response to falling market share – Domination through lower costs

Slide 16. 46 Price changes • Initiating price increases – Can be extremely beneficial profit wise but care needed regarding elasticity of demand. – Cost inflation.

Slide 16. 47 Price changes • Buyer reactions to price changes – Do not interpret in a straight forward way. – Very sensitive and unexpected reactions abound.

Slide 16. 48 Price changes • Competitor reactions to price changes – Competitors more likely to react if number of firms are small and the product is uniform. – Variable response to price changes based upon the competitive market position.

Slide 16. 49 Figure 16. 9 Assessing and responding to a competitor’s price cut

Slide 16. 50 Four typical responses to a competitor’s change in price: • • Reduce price Raise perceived quality Improve quality and increase price Launch low-price ‘fighting brand’