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Pricing Strategies for Pricing Strategies for the Asia Pacificthe Asia PacificAsia-Pacific Marketing Asia-Pacific Marketing

FederationFederationCertified Professional Certified Professional

MarketerMarketerCopyrightCopyright

Marketing Institute of SingaporeMarketing Institute of Singapore

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OutlineOutline IntroductionIntroduction Pricing strategies and processPricing strategies and processReactions to price changesReactions to price changes Impact on discountingImpact on discounting Price warsPrice wars Yield managementYield management

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IntroductionIntroduction

We need to set price when we We need to set price when we have a new product, or when we have a new product, or when we enter a new market with an enter a new market with an existing productexisting product

How? How? Need to decide what position you Need to decide what position you

want your product to be in (see want your product to be in (see quality-price relationship—next slide)quality-price relationship—next slide)

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Price-Quality StrategiesPrice-Quality Strategies Philip Kotler identified 9 price-Philip Kotler identified 9 price-

quality strategiesquality strategies

Premium HighValue

SuperValue

OverCharging

MidValue

GoodValue

Rip-off FalseEconomy Economy

High QualityHigh Quality

Low QualityLow Quality

High PriceHigh Price Low PriceLow Price

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Pricing ProcessPricing Process1.1. Set Pricing Objectives (see next slide)Set Pricing Objectives (see next slide)2.2. Analyze demandAnalyze demand3.3. Draw conclusions from competitive Draw conclusions from competitive

intelligenceintelligence4.4. Select pricing strategy appropriate to Select pricing strategy appropriate to

the political, social, legal and the political, social, legal and economical environmenteconomical environment

5.5. Determine specific pricesDetermine specific prices

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Possible Pricing ObjectivesPossible Pricing Objectives Profit objectives e.g.Profit objectives e.g.

Targeted profit returnTargeted profit returnVolume objectives e.g.Volume objectives e.g.

Dollar or unit sales growthDollar or unit sales growthMarket share growthMarket share growth

Other objectives e.g.Other objectives e.g.Match competitors’ priceMatch competitors’ priceNon-price competitionNon-price competition

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Demand AnalysisDemand Analysis

Measure the impact of price Measure the impact of price change on total revenuechange on total revenue

Predicts unit sales volume and Predicts unit sales volume and total revenue for various price total revenue for various price levelslevels

Different customers have different Different customers have different price sensitivities and needsprice sensitivities and needs

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Impact of Cost on Pricing Impact of Cost on Pricing StrategyStrategy

Fixed and variable costs Fixed and variable costs Full-Cost PricingFull-Cost Pricing

Markup pricing, break-even pricing Markup pricing, break-even pricing and rate-of-return pricingand rate-of-return pricing

Variable-cost pricingVariable-cost pricing 3 types of relationships3 types of relationships

Ratio of fixed costs to variable costsRatio of fixed costs to variable costsEconomies of scalesEconomies of scalesCost structureCost structure

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Discussion: Impact of Ethics on Discussion: Impact of Ethics on PricingPricing

How should you price if your How should you price if your product is a life-saving drug?product is a life-saving drug?

What are the ethical considerations?What are the ethical considerations?Customers have no choiceCustomers have no choiceNeed to pay for the researchNeed to pay for the researchWhen cheaper options doesn’t workWhen cheaper options doesn’t workCompetition decidesCompetition decides

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Information Needed for Information Needed for Price ChangePrice Change

Customers’ ability & willingness to buy; Customers’ ability & willingness to buy; customer lifestyle; benefits sought; customer lifestyle; benefits sought; characteristics of the product e.g.characteristics of the product e.g.When the When the kopi tiamskopi tiams, local coffee shops in , local coffee shops in

Singapore tried to raise the price of a cup of Singapore tried to raise the price of a cup of coffee by 10 cents in March 1994, the coffee by 10 cents in March 1994, the grass-root reaction was stormygrass-root reaction was stormy

When When StarbucksStarbucks Coffee and Coffee and Spinelli’sSpinelli’s raised raised their prices in the beginning of 1998 by a their prices in the beginning of 1998 by a hefty 20%, nobody raised an eyelithefty 20%, nobody raised an eyelit

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Information Needed for Information Needed for Price Change (cont’d)Price Change (cont’d)

Need to know everything about the Need to know everything about the competitors competitors How would competitors react to our How would competitors react to our

price change? (see following slide)price change? (see following slide) In obtaining competitors’ information, In obtaining competitors’ information,

remember the value of the remember the value of the informationinformation

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New-Product Pricing New-Product Pricing StrategiesStrategies

1.1.Skimming pricingSkimming pricing Charging a high price initially and Charging a high price initially and

reducing the price over timereducing the price over time Commonly used when introducing Commonly used when introducing

new & innovative products in the new & innovative products in the ASPAC regionASPAC region

2.2.Penetration pricingPenetration pricing Charging a low price when entering Charging a low price when entering

the market to capture market sharethe market to capture market share Used when competitors are closing in Used when competitors are closing in

with similar or better productswith similar or better products

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New-Product Pricing New-Product Pricing Strategies (cont’d)Strategies (cont’d)

3.3. Intermediate pricingIntermediate pricing Pricing somewhere in between the Pricing somewhere in between the

skimming strategy and the skimming strategy and the penetration strategypenetration strategy

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Pricing Strategies for Established Pricing Strategies for Established ProductsProducts

Three strategic alternatives:Three strategic alternatives: Maintain the price if you are the leader e.g.Maintain the price if you are the leader e.g.

In 1999, Shell in Singapore maintained its price In 1999, Shell in Singapore maintained its price when other petrol companies engaged in a price when other petrol companies engaged in a price war until towards the end of the engagementwar until towards the end of the engagement

Reduce the price e.g.Reduce the price e.g. SIA regularly reduce its airfare in anticipation of SIA regularly reduce its airfare in anticipation of

the developing market situationsthe developing market situations Increase the price Increase the price

during inflation, or if demand is expected to during inflation, or if demand is expected to increase or if you wish to harvest e.g. in Indonesiaincrease or if you wish to harvest e.g. in Indonesia

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Price-Flexibility StrategyPrice-Flexibility StrategyOne-price policy—setting one One-price policy—setting one

fixed price for all marketsfixed price for all markets Flexible-price policy—setting Flexible-price policy—setting

different prices in different different prices in different markets based on:markets based on:Geographic Location,Geographic Location,Time of delivery, or Time of delivery, or The complexity of the productThe complexity of the product

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How much flexibility in price?How much flexibility in price?

Depends on the Demand-Cost Depends on the Demand-Cost gap and the influence of gap and the influence of competition, social, legal and competition, social, legal and ethical considerationsethical considerations

Example:Example: Life-saving drugs Life-saving drugs

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Product-Line PricingProduct-Line Pricing

When pricing products in When pricing products in different lines, must take different lines, must take cross-cross-elasticitieselasticities of demand across the of demand across the set of products into considerationset of products into consideration

The idea is to maximize the The idea is to maximize the profits of the entire organization profits of the entire organization rather than that of a single rather than that of a single product or a single lineproduct or a single line

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Leasing StrategyLeasing StrategyLeasing is more common for Leasing is more common for

industrial goods e.g.industrial goods e.g.Singapore Airlines sold many of Singapore Airlines sold many of

their aircraft and lease them back their aircraft and lease them back for their operationsfor their operations

There is a There is a growing trendgrowing trend toward toward leasing consumer goods as wellleasing consumer goods as welle.g. Leasing of office equipmente.g. Leasing of office equipment

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Reactions to Price ChangeReactions to Price ChangeCustomers are more sensitive to Customers are more sensitive to

price changes if the products cost price changes if the products cost a lot and/or are bought frequentlya lot and/or are bought frequently

Competitors may see each of Competitors may see each of your price change as a fresh your price change as a fresh challenge and react according to challenge and react according to its self-interest at the time. Need its self-interest at the time. Need to estimate each close to estimate each close competitor’s likely reactioncompetitor’s likely reaction

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Responding to Competitors’ Responding to Competitors’ Price ChangePrice Change

If competitors lower price for If competitors lower price for homogenous productshomogenous productsTry augmenting the productTry augmenting the product If it doesnIf it doesn’’t work or if it is not likely to t work or if it is not likely to

work, then meet the price cut head-onwork, then meet the price cut head-on

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Responding to Competitors’ Responding to Competitors’ Price Change (cont’d)Price Change (cont’d)

If competitors raise priceIf competitors raise price In a homogeneous market, follow if you In a homogeneous market, follow if you

think the whole market is likely to followthink the whole market is likely to follow In a non-homogeneous market, evaluateIn a non-homogeneous market, evaluate

The reason for the competitor price The reason for the competitor price changechange

If the price increase is temporaryIf the price increase is temporaryThe effect on your market share & profitThe effect on your market share & profitThe likely response(s) from the other The likely response(s) from the other

competitorscompetitors

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When a Market Leader is When a Market Leader is Being Attacked on PriceBeing Attacked on Price

Options available:Options available:Maintain priceMaintain priceRaise perceived qualityRaise perceived qualityMatch competitors’ priceMatch competitors’ price Increase price and improve Increase price and improve

qualityquality

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Impact of Discounting on Impact of Discounting on Brand EquityBrand Equity

Why discount?Why discount? Problems emerging with Problems emerging with

discountsdiscounts The value equation (V=Q/P)The value equation (V=Q/P)

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Price WarPrice WarPrice wars are frequent in industries Price wars are frequent in industries

wherewhereCost differentiation opportunities existsCost differentiation opportunities existsCapital is intensive and products are Capital is intensive and products are

homogeneoushomogeneousExamplesExamples: Airfares, ISP, Petrol, & Loans : Airfares, ISP, Petrol, & Loans

e.g. e.g. The Home Loan price war in Singapore in The Home Loan price war in Singapore in

Sept 2000 involving OUB, UOB, DBS among Sept 2000 involving OUB, UOB, DBS among othersothers

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Yield ManagementYield Management

What is it?What is it? Yield management goalsYield management goals Industries that benefited from Industries that benefited from

yield managementyield managementCommon variablesCommon variables