Marketing

Pricing Strategies

What is a price?

Price is the amount of money charged for a product or

service.

has been the major factor affecting buyer choice.

is one of the most flexible marketing mix elements.

MAJOR PRICING STRATEGIES

1. Customer Value-based Pricing

uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing.

The company first assesses customer needs and value perceptions. It then sets it target price based on customer perceptions of value.

1. a. good-value pricing

Companies have changed their pricing approaches to bring them in line with changing economic conditions and consumer price perceptions.

Increasingly, marketers are adopting good-value pricing strategies—offering just the right combination of quality and good service at a fair price.

1. b. value-added pricing

Rather than cutting prices to match competitors, many companies use value added pricing.

They attach value-added features and services to differentiate their offers and thus support higher prices.

2. Cost-based Pricing

A company that uses cost based pricing sets prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for its effort and risk.

2. a. types of costs

A company’s costs take two forms.

1. Fixed costs (also known as overhead) are costs that do not vary with production or sales level.

2. Variable costs vary directly with the level of production.

Total costs are the sum of the fixed and variable costs for any given level of production.

2. b. costs at different levels of production

To price wisely, management needs to know how its costs vary with different levels of production.

2. C. costs as a function of production experience

Average cost tends to fall with accumulated production experience. This drop in the average cost with accumulated production experience is called the experience curve (or the learning curve).

Some companies have built successful strategies around the experience curve. However, a single-minded focus on reducing costs and exploiting the experience curve will not always work.

The aggressive pricing might give the product a cheap image.

2. d. cost-plus pricing

The simplest pricing method is cost-plus pricing (or markup pricing), which involves adding a standard markup to the cost of the product.

Does using standard markups to set prices make sense?

2. e. break-even analysis and target profit pricing

Another cost-oriented pricing approach is breakeven pricing, or a variation called target return pricing.

The firm tries to determine the price at which it will break even or make the target profit it is seeking.

3. Competition-based Pricing

Competition-based pricing involves setting prices based on competitors’ strategies, costs, prices, and market offerings.

Consumers will judge a product’s value based on the prices that competitors charge for similar products.

OTHER INTERNAL AND EXTERNAL CONSIDERATIONS AFFECTING PRICE DECISIONS

Internal factors include the company’s overall marketing strategy, objectives, and marketing mix, as well as other organizational considerations.

External factors include the nature of the market and demand, as well as other environmental factors.

1. Overall Marketing Strategy, Objectives, And Mix

Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective integrated marketing program.

Many firms support such price-positioning strategies with a technique called target costing. This technique starts with an ideal selling price based on customer-value considerations, and then targets costs that will ensure that the price is met.

Often, the best strategy is not to charge the lowest price but rather to differentiate the marketing offer to make it worth the higher price.

2. Organizational Considerations

Management must decide who within the organization should set prices.

In small companies, prices are often set by top management rather than by the marketing or sales departments.

In large companies, pricing is typically handled by divisional or product line managers.

In industrial markets, salespeople may be allowed to negotiate with customers within certain price ranges.

In industries in which pricing is a key factor, companies often have pricing departments to set the best prices or to help others in setting them.

Others who can influence pricing include sales managers, production managers, accountants, and finance managers.

3. The Market and Demand

Before setting prices, the marketer must understand the relationship between price and demand for the company’s product.

3.1 Pricing in Different Types Of Markets

Under pure competition, the market consists of many buyers and sellers trading in a uniform commodity, such as wheat or copper. In a purely competitive market, marketing research, product development, pricing, advertising, and sales promotion play little or no role.

Under monopolistic competition, the market consists of many buyers and sellers who trade over a range of prices rather than a single market price. Sellers can differentiate their offers to buyers via price, advertising, and personal selling.

Under oligopolistic competition, the market consists of a few sellers who are highly sensitive to each other’s pricing and marketing strategies. There are few sellers because it is difficult for new sellers to enter the market. Because there are few sellers, each seller is alert and responsive to the pricing strategies and moves of competitors.

In a pure monopoly, the market consists of one seller. The seller may be a government monopoly, a private regulated monopoly, or a private non-regulated monopoly. Pricing is handled differently in each case.

3.2 Analyzing The Price-demand Relationship

Each price the company might charge will lead to a different level of demand. The relationship between the price charged and the resulting demand level is shown in the demand curve.

The demand curve shows the number of units the market will buy in a given time period at different prices that might be charged.

In the normal case, demand and price are inversely related; that is, the higher the price, the lower the demand.

3.3 Price Elasticity Of Demand

Price elasticity is how responsive demand will be to a change in price. If demand hardly changes with a small change in price, we say

demand is inelastic.

If demand changes greatly with a small change in price, we say the demand is elastic.

The price elasticity of demand

=

% change in quantity demanded/% change in price.

What determines the price elasticity of demand?

1. The product they are buying is unique or when it is high in quality, prestige, or exclusiveness.

2. Substitute products are hard to find or when they cannot easily compare the quality of substitutes.

4. The Economy

The most obvious response to the new economic realities is to cut prices and offer deep discounts.

However, such price cuts have undesirable consequences. Lower prices mean lower margins. Deep discounts may

cheapen a brand in consumers’ eyes. Once a company cuts prices, it’s difficult to raise them again when the economy recovers.

Rather than cutting prices, therefore, many companies are shifting their marketing focus to more affordable items in their product mixes.

4. Other External Factors

Beyond the market and the economy, the company must consider several other factors in its external environment when setting prices. The company must consider what impact its prices will have on other parties in its environment.

For example, how will resellers react to various prices?

The government is another important external influence on pricing decisions.

Finally, the company’s short-term sales, market share, and profit goals may need to be tempered by broader social concerns.