Pricing Products: Pricing Pricing Products: Pricing considerations and approachesconsiderations and approachesbyby

Kotler on Marketing

Sell value, not price.

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INTRODUCTION

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Pricing involves “harvesting your profit potential”

If effective product development, promotion, and distribution sow the seeds of business success, effective pricing is the harvest

Price is the amount of money charged for a product or service. Broadly, price is the sum of all the values that consumers exchange for the benefits of having or using the product or service.

INTRODUCTIONNegotiation between buyers and

sellersFixed pricing policiesDynamic Pricing charging

different prices depending on individual customers and situations.

Pricing is the most flexible element and only element which produces revenue.

Pricing is the number one problem facing marketing executives.

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INTRODUCTIONGeneral Pricing Approaches

Cost Based Pricing

Value Based Pricing Basing prices on the product’s

perceive value In value pricing , the company

sets its target price based on customer perceptions and the product value.

The targeted value and price then drive decisions about product design and what costs can be incurring

Competition Based Pricing7-5

NEW PRODUCT PRICING STRATEGIES

Market – Skimming PricingSetting a high price for a new product

to skim maximum revenues layer by layer from the segments willing to pay the high price

The company makes fewer but more profitable sales

Market skimming makes sense only under certain conditionsThe quality and images supports higher

pricesCost of producing a smaller volume

cannot be so high that they cancel advantage of charging more

Competitors should not be able to enter the market easily and undercut the high price

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NEW PRODUCT PRICING STRATEGIES

Market Penetration PricingSetting a low price for a new product

in order to attract a large number of buyers and a large market share

The high sales volume results in falling costs, allowing the company to cut its price even further.

Several conditions must be met for this low price strategy to workThe market must be highly price

sensitiveProduction and distribution costs must

fall as sales volume increasesThe low price must help keep out the

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PRODUCT MIX PRICING STRATEGY

Product Line Pricing

Optional Product Pricing

Captive Product PricingIn case of services, this strategy

is called “Two Part Pricing”By Product Pricing

“cocoa bean shells” – Hershey claims that cocoa mulch is perfect for gardens and landscaping . It repels insects, adds protein to soil, and smells like chocolate.

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PRODUCT ADJUSTMENT STRATEGIES

Discount and Allowance PricingCash , Quantity, Functional

(trade), SeasonalSegmented Pricing

Customer segment (eg students in museums), product form pricing, location pricing, time pricing

Psychological PricingSellers consider the psychology of

prices and not simply the economics.

Reference prices , other cues Promotional Pricing (cash

rebates)Geographical Pricing

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Initiating and Responding to Price Changes

Initiating Price CutsExcess capacity, to boost

sales, falling market share, domination of marketing through lower costs

Initiating Price IncreasesCost inflation, Over demand, May increase prices visibly

or invisibly

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Initiating and Responding to Price Changes

Possible responses to higher costs or overhead without raising prices include:Shrinking the amount of product instead of raising

the priceSubstituting less expensive materials or ingredientsReducing or removing product featuresRemoving or reducing product services, such as

installation or free deliveryUsing less expensive packaging material or larger

package sizesReducing the number of sizes and models offered

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Initiating and Responding to Price Changes

Reactions to Price ChangesCustomer ReactionsCompetitor Reactions

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Initiating and Responding to Price Changes

Factors to consider before responding to price changes

Why did the competitor change the price

To take more market share? To use excess capacity? To meet changing cost conditions ? To lead an industry wide price change? Is the price change temporary or ..?

Competitors may have spend much time in preparing this decision but the company may have to react within hours or days ….

Solution ???7-13

Initiating and Responding to Price Changes

Responding to Competitors’ Price Changes

Maintain priceMaintain price but raise the

perceived value Improve communications

Reduce priceMarket is price sensitive, loose

too much share, cutting prices will reduce profits in short run,

The company must maintain its perceived quality when it reduces its prices.

Increase price and improve qualityLaunch a low-price fighter line

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