ba27 topic1a pricing overview part2 complete

8/3/2019 BA27 Topic1A Pricing Overview Part2 Complete

1/56

OVERVIEW: PRICING

STRATEGIES AND PROGRAMS

Topic 1

By: Mario C. Angeles UST Commerce and BA


2/56

Topics for discussions

Definition

Pricing Terms

Setting the Price

Other Pricing Methods

Different Pricing Strategies



3/56

Questions of concerns

How do consumers process and evaluate

prices?

How should a company set prices initially

for products or services?

How should a company adapt prices to

meet varying circumstances and

opportunities?

When should a company initiate a price

change?

How should a company respond to a

competitors price challenge?



4/56

Pricing defined

Price is defined as an amount

charged by a company to a

buyer in exchange for goods

or services.

A company does not set a

single price for all its products,

but formulates a pricingstructure that covers different

items in its product line.

In devising a pricing structure,

a company is mindful of

specific internal and externalfactors affecting price.

Internal Factors Affecting the

Price

1. Marketing Objectives

2. Marketing-Mix Strategy3. Costs, and

4. Organizational

Considerations

External Factors Affecting the

Price

1. Market

2. Demand

3. Competition

4. General Conditions

Synonyms for Price

1. Rent

2. Tuition

3. Fee

4. Fare

5. Rate

6. Toll

7. Premium

8. Honorarium

9. Special assessment

10.Bribe11.Dues

12.Salary

13.Commission

14.Wage

15.Tax

Common Pricing Mistakes

1. Determine costs and take

traditional industry margins2. Failure to revise price to

capitalize on market changes

3. Setting price independently of

the rest of the marketing mix

4. Failure to vary price by

product item, market segment,distribution channels, and

purchase occasion

The role of technology in

pricing trend

Information technology makes

it easier for seller to use

software that monitors

customers movements over

the Web and allows them to

customize offers and prices.

New software applications are

also allowing buyers tocompare prices online!

Result: Arms race between

merchant technology and

consumer technology!



5/56

Pricing Terms How companies price

Small companies: Prices are

often set by the boss.

Big companies: Pricing is

handled by division and

product-line managers.

Consumer psychology and

pricing

But marketers recognize that

consumers often actively

process the following:

Many economists assume that

consumers are price takers

and accept prices at face

value or as given.

1. Price information

2. Interpreting prices in terms of

their knowledge from prior

purchasing experience3. Formal communications

4. Informal communications

5. POP or online resources.

Purchase decisions are based

on how consumers perceive

prices and what they consider

to be the current actual price

NOT the marketers stated

price.

Understanding how consumers

arrive at their perceptions of

prices is an important

marketing priority.

Consider the following key topics

on pricing:

1. Reference prices

2. Price-quality inferences

3. Price endings

4. Price cues

Reference Prices

1. Fair price (what the product

should cost)

2. Typical price3. Last price paid

4. Upper-bound price (what most

consumers would pay)

5. Lower-bound price (the least

consumers would pay)

6. Competitor prices

7. Expected future price

8. Usual discounted price

There are possible consumer

reference prices

When consumers evoke one or

more of these frames of

reference, their perceived price

can vary from the stated price.

Price-Quality Inferences

Many consumers use price as

an indicator of quality.

Image pricing is especially

effective with ego-sensitive

products.

A very expensive product may

cost 10% of the price..

But for a buyer, he/she will pay

the price to communicate their

high regard for the receiver

of the product.

Some brands adopt scarcity as

a means to signify quality and

justify premium pricing.

Price Cues

Consumer perceptions of

prices are also affected byalternative pricing strategies.

Many sellers believe that

prices should end in an odd

number.

Reason: Consumers tend to

process prices in a left-to-

right manner rather than by

rounding.

Reason: with 9 endings, they

convey the notion of a

discount or bargain.

Prices ending at 0 or 5 are

also common.

It is easier for consumers to

process and retrieve from

memory.

Sale sign next to prices have

been shown to spur demand,

but only if not overused.

Question: When do we use

price cues?

1. Customers purchase iteminfrequently

2. Customers are new

3. Product designs vary over

time

4. Prices vary seasonally

5. Quality or sizes vary acrossstores.



6/56


7/56

Price Elasticity of Demand

Example 1. The price of Brand 1

detergent is expected to increase by 10%

by next month. If this happens, 15% of its

buyers are expected to shift to Brand 2, a

much cheaper brand. In this case,demand is elastic since the percentage

change in demand (15%) is greater than

the percentage change in price (10%).



8/56


Example 2. MHS is planning to lower its

tuition by 12%. If it does, it expects

enrollment to go up by 7%. Since the

percentage change in demand (7%) is

less than the percentage change inprice (12%), then demand is inelastic.



9/56


Example 3.Agua Pure is planning to

increase the price of its one-gallon purified

water from P10 to P12. if this happens, the

company estimates that demand will fall

from 100 gallons a day to 80 gallons aday. In this case, demand is unitary since

the percentage change in demand and

the percentage change in price are

equal at 20%.

Computing

Percentage Change

in Price and Demand

Percentage Change in Price New Value Base Value

Base Value= x 100%

Percentage Change in Demand =New Value Base Value

Base Valuex 100%



10/56

Effect of Demand Elasticity

on Pricing Decision

On Elastic Demand. Under elastic

demand, price plays a vital role in

consumers buying decision.

Here buyers are price-sensitive whichmeans that price is an important factor

consumers consider before buying the

product.

Again, sellers under this condition would

consider lowering their prices since thelower price will product more total

revenues for the company due to a higher

rate of increase in demand.



11/56


on Pricing Decision

On Inelastic Demand. Under inelastic

demand, buyers are not as price-sensitive

as those in elastic demand.

Consumers look for other productattributes, besides price, in making their

purchase decision.

This demand elasticity may be found in

essential goods like rice, electricity, water,

and petroleum.

Lowering prices under this condition may

produce les impact on revenues.



12/56


on Pricing Decision

On Unitary Demand. Under unitary

demand, the behavior of price and

demand is the same so that any

percentage change in price would result in

the same percentage change in thequantity of demand.

Thus, total revenues remain unchanged.



13/56


14/56

Prelim Quiz 1 coverage ends here


15/56

Other Pricing Approaches

1. New Product PricingStrategies

2. Cost-Based and Value-Based

pricing Strategies

3. Competition Based and

Product Mix Pricing

Strategies, and4. Psychological, Promotional,

and Geographical Pricing Objectives:

1. To understand the Product

Pricing Strategies2. To differentiate Cost-Based

from Value-Based pricing

Strategies

3. To explain Competition Based

and Product Mix Pricing

Strategies, and4. To discuss Psychological,

Promotional, and

Geographical Pricing



16/56

Setting the Price of a Product

Before going into the different approaches to

setting prices, it is important to review the

most basic factors affecting prices.

In setting prices, a company must considerthe following:

1. Products total cost

2. Competitors offers

3. Internal factors, and

4. External factors



17/56

New-Product Pricing StrategiesTwo pricing options for new products:

1. Set a high price (market skimming

pricing); and

2. Set a low price (market penetration

pricing)

1. Market skimming pricing is a strategy ofsetting a high price for a companys products

backed up by a strong promotional effort.

Under this approach, the company initially

sets high prices to skim revenues layer by

layer from the market.

NOTE: Though skimming pricing might lead

to lower demand, revenues are filled up by

high price.



18/56

New-Product Pricing Strategies2. Market Penetration Pricing is the

strategy of setting a low price for a

companys products also backed up by a

strong promotional support.

Under this approach, the company initially

sets a low price in order to penetrate themarket quickly and deeply to attract a large

number of buyers and capture a large

market share in the process.

NOTE: Though penetration pricing offers low

prices, revenues may be filled by moresubstantial demand.



19/56

New-Product Pricing StrategiesIt is not the question of which approach is

better but what will be the end result in terms

of profitability.

It also depends on the objectives of the

company.

The main objective of skimming pricing is

to make a swift return on investments by

offering products at a high price.

The main objective of penetration pricing

is to capture a large market share.



20/56

Market Skimming vs. Market Penetration Pricing

Market Skimming Market

Penetration

Selling Price P 400.00 per unit P 250.00 per unit

Demand 1,000 units 1,600 units

Revenues (Sales) P 400,000.00 P 400,000.00



21/56

New-Product Pricing Strategies

An alternative to the two aforementionedpricing approaches is establishing a

relationship between the price and the

quality of a product to come up with four

possible strategies.

1. Premium pricing strategy

2. Good value pricing strategy

3. Overcharging pricing strategy

4. Economy pricing strategy



22/56

New-Product Pricing Strategies

Premium pricing strategy is a strategy byselling a high-quality product at a high price.

Good value pricing strategy is a strategy

by selling a high-quality product at a low

price.

Overcharging pricing strategy is a

strategy by selling a low-quality product at a

high price.

Economy pricing strategy is a strategy byselling a low-quality products at a low price.



23/56

The Price-Quality Matrix

PremiumStrategy

OverchargingStrategy

Good Value

Strategy

Economy

Strategy

Quality

LowHigh

Low

High

Price



24/56

Cost-Based Pricing Strategies

Cost is the primary consideration under cost-

based pricing.

This strategy has three pricing

approaches:

1. Cost-plus pricing

2. Breakeven pricing

3. Target profit pricing



25/56

1. Cost-Plus Pricing

This is the simplest pricing method that

requires a standard markup in the cost of a

product.

This approach is also called markup pricing.

After determining the cost of a product, a

company simply sets price by adding a

standard mark-up (basically in percentage)

to the cost.



26/56

. Break-even Pricing

Under breakeven pricing, the selling price

enables the company to break-even.

Break-even refers to a condition where the

company neither earns profit nor incurs loss.

Three variables are needed to compute for

the break-even point:

1. Fixed costs

2. Variable costs per unit

3. Selling price



27/56


28/56

Using other formula: (Geometric)

Break-even Volume Fixed Cost

Selling Price Variable Cost per unit

=



29/56

The Break-Even Graph

P 18,000.00

0 Sales Volume360 UNITS

TR

TC

Break-Even Volume



30/56


Example 2: CompanyAwould like to

determine how many units of its product

it should sell in order to break even. The

total fixed cost amounts to

P1,000,000.00 a year. Selling price is

P300.00 per unit. Variable cost covering

direct materials and direct labor is P200per unit. How many units must be sold

so that the company will break-even?

Given:

Fixed costs = P1,000,000.00Variable cost per unit = P200.00

Selling price = P300.00 per unit

Required: Break-even volume

(quantity)

Solution:

Break-even volume = P1,000,000.00

P300.00 P200.00

Break-even volume = 10,000 units



31/56


Example 3: CompanyA estimates that

it will b able to sell only 8,000 units the

whole year due to declining demand; at

what price must the company sell its

products to break-even?

Given:

Fixed costs = P1,000,000.00

Variable cost per unit = P200.00


Required: Break-even price

Formula:

P = FC + VC

Q

Where:

P = break-even price

FC = fixed costs

VC = variable cost per unit

Q = break-even volume

Solution:

P = P1,000,000.00 + P200.00

8,000

Break-even price = P325.00 per unit



32/56

3. Target Profit Pricing

Target Profit Pricing is an approach when

the company sets a target profit to be

earned and uses breakeven analysis to

meet said target.

Under the break-even point, the companysnet income is equal to zero, the starting

point for computation.

If the company earns zero profit under the

break-even point, it needs to determine the

price at which to sell its products to achieveits target profit.



33/56

3. Target Profit Pricing

Example 4: CompanyA estimates thatit will b able to sell only 8,000 units thewhole year due to declining demand atP325.00 per unit at break-even. Thecompanys fixed cost is P1,000,000.00a year. What if thee company wants toearn a target profit of P400,000.00 forthe year(instead of break-even)?Atwhat price must CompanyA sell itsproduct so that it can achieve this targetprofit?

Given:


Target profit = P400,000.00

Current selling price = P325.00 per unit

Required: Target profit price frombreak-even point.

Formula:

TPP = TP + CSP

Q

Where:

TTP = target profit price

TP = target profit

Q = estimated quantity to be sold

CSP = current selling price

Solution:

TTP = P400,000.00 + P325.00

8,000

Target profit price = P375.00 per unit



34/56

Value-Based Pricing Strategy

Value-based pricing considers buyersperception of value as the main ingredient topricing.

In this approach, the starting point is customerperception of value, not cost.

The company initially sets a price based on itsevaluation of customer perception as regardsthe products value.

The company uses this reference price todecide about product design and other costs

incurred in production.

The reference price serves as the budgetedcost for production, which means that nevermay production cost per unit exceed thisreference price, which the company believesthe market can bear.



35/56

Competition-Based Pricing Strategy

Buying decision will always be based uponcareful analysis and evaluation of differentoffers from competing sellers.

Oftentimes, competitors prices and offersare considered benchmarks for a

companys prices and offers.

A company normally treats competitorsprices as products of collective wisdom andbrainstorming of industry experts andparticipants.

There are two approaches under thisstrategy:

1. Going-Rate Pricing

2. Sealed-Bid Pricing



36/56


Going-rate pricing is an approach whereina company bases its price largely on the

prices of competitors without due regard to

its own costs and to its own demand.

The companys price may be either more orless than, or the same as its major

competitors.

Sealed-bid pricing is an approach wherein

a company bases its prices on how it thinks

its competitors would price rather than on itsown costs or its own demand.

This is most applicable for service-oriented

enterprises like construction, catering

services, travel and tours, etc.



37/56


In going-rate pricing, the company patternsits price after that of its competitors

indicating that the competitors prices are

known to the company.

In sealed-bid pricing, the competitorsprices are not divulged to the company.



38/56

Product-Mix Pricing Strategies

There are five approaches under thisstrategy. These are:

1. Product-Line pricing

2. Optional-Product pricing

3. Captive-Product pricing

4. By-Product pricing5. Product-Bundle pricing



39/56


Product-line pricing is an approachapplicable to firms that develop product lines

rather than single products.

In this type of pricing, the firm may set

different prices for its product line depending

on its feature assortment.


l d


40/56


Optional-product pricing is an approachthat offers to sell optional or accessory

products along with a main product.

Example: The regular price of a car against

a fully-loaded price of the same car.


B M i C A l UST C d BA


41/56


Captive-product pricing is an approachwhich offer products that are essential to the

main product itself.




42/56


By-product pricing is an approach whichdeducts the proceeds of the by-product from

the main product.




43/56


Product-bundle pricing is an approachwherein a company combines several of its

products into a bundle and offers the bundle

for sale at a reduced price.




44/56

Price-Adjustment Strategies

Under this classification, companies adjustprices of their products to account for

various consumer differences and changing

situations.

Under price-adjustment strategies, two

pricing approaches are considered:

1. Price discounts and allowances

2. Segmented or differentiated pricing

3. Geographical pricing

4. Promotional pricing




45/56


Discount Pricing. This pricing strategyallows a company to reduce prices to reward

customers for certain responses like paying

promptly or promoting the companys

products or services.

Some common forms of discount pricing are:

1. Cash discounts

2. Quantity discounts

3. Seasonal discounts

4. Functional discounts

5. Allowance


By: Mario C Angeles UST Commerce and BA


46/56


Cash discount is a price reduction given tobuyers who pay their bills on time.

Quantity discounts are price reductions

given to buyers who purchase a product in

large volumes.

Seasonal discount is a price reduction

given to buyers who purchase merchandise

or services that are out of season.




47/56


Functional discount (also known as tradediscount) offered by a manufacturer to

trade-channel members if they perform

certain selling functions (selling, sorting, and

recordkeeping)

Allowance is an extra payment designed to

gain reseller participation in special

programs.

1. Trade-in allowancesare granted for

turning in an old item when buying a newone.

2. Promotional allowancesrewards

dealers for participating in advertising

and sales support programs.




48/56


Segmented Pricing. In this pricing strategy,a company offers a product in two or more

prices allowing for differences in customers,

locations, time, or products but not

necessarily based on differences in cost.

Under this approach are:

1. Customer-segmented pricing

2. Product-form pricing

3. Location pricing, and

4. Time pricing

5. Channel pricing




49/56


Customer-segment pricing is a strategy inwhich different customers pay different rates

or prices for the same product or service.

Product-form pricing is a strategy in which

different versions of a product or service

are priced differently, but not according to

differences in their costs.

Location pricing is a strategy in which

different location (place or area) are priced

differently even the cost of the product orservice is the same.

Time pricing varies the price of a certain

product according to the time or season of the

year.




50/56


Channel pricing a firm carries a differentprice depending on the distribution point.




51/56


Geographical Pricing. The companydecides how to price its products to different

customers in different locations and

countries.

1. Barter

2. Compensation deal

3. Buyback arrangement

4. Offset

Barter. The direct exchange ofgoods, with no money and no

third party involved.

Compensation deal. The seller

receives some percentage ofthe payment in cash and the

rest in products.

Buyback arrangement. The

seller sells a plant, equipment,

or technology to anothercountry and agrees to accept

as partial payment products

manufactured with the

supplied equipment.

Offset. The seller receives full

payment in cash but agrees tospend substantial amount of

the money in that country

within a stated time period.




52/56


Promotional Pricinga technique tostimulate early purchase.

1. Loss-leader pricing

2. Special-event pricing

3. Cash rebates

4. Low-interest financing5. Longer payment terms

6. Warranties and service contracts

7. Psychological discounting

(For supermarkets and

department stores) Dropping

the price on well-known

brands to stimulate additional

store traffic.

Sellers will establish special

prices in certain seasons to

draw in more customers.

Offering cash rebates to

encourage purchase of the

manufacturers products

within a specified time period.

Instead of cutting its price, the

company can offer customers

low-interest financing.

Sellers stretch loans over

longer periods and thus lower

the monthly payments.

Companies can promote sales

by adding a free or low-cost

warranty or service contract.

Companies can promote sales

by adding a free or low-cost

warranty or service contract.




53/56


However, before segmented pricing isconsidered effective, five conditions must be

met:

1. The market must be segmentable and

the different segments must show

different degrees of demand;

2. Competitors must not undersell the

company in the segment being charged

the higher price;

3. The costs of segmenting and watching

the market must never exceed the extra

income obtained from the price

difference;

4. The practice should not lead to customer

resentment and ill will; and

5. The segmented pricing must be legal!




54/56

Responding to Competitors

Price Changes

Brand leaders also face lower-

priced private-store brands.

The brand leader can respond

in several ways

Maintain price

Maintain price and add value

Reduce price

Increase price and improve

quality

Launch a low-price fighter line




55/56

Price-Reaction Program for meeting a Competitors

Price Cut

Has competitor cut

his price?

Is the price likely to

significantly hurt

our sales?

By less than 2%

Include few peso-off

coupon for the next

purchase.

Hold our price at

present level;

continue to watch

competitors price

Is it likely to be a

permanent price

cut?

How much has his

price been cut?

By 2 - 4%

Drop price by half of

the competitors

price cut.

By more than 4%

Drop price to

competitors price

No

NoNo

Yes

Yes Yes




56/56

END OF TOPIC

Next: Topic 2 Introduction to Price Advantage

y o C ge e US Co e ce

ba27 topic1a pricing overview part2 complete

Documents