session 5 pricing
DESCRIPTION
a brief idea about pricingTRANSCRIPT
Pricing: Approaches and Strategies
Session 5Chapter 10 & 11
Priceo The amount of money charged for a product, or
the sum of the values that consumers exchange for the benefits of having/using the product.
o Price and the Marketing Mix• Only element to produce revenues• Most flexible element; can be changed quickly
o Price as a tool of Competition
o Common Pricing Mistakes
Factors to Consider in Setting Price
o Marketing objectiveso Marketing mix strategieso Costso Organizational
considerations
o Market positioning influences pricing strategy
o Other pricing objectives:• Survival• Current profit maximization• Market share leadership• Product quality leadership
o Not-for-profit objectives:• Partial or full cost recovery• Social pricing
Internal Internal Factors Factors
o Marketing objectiveso Marketing mix strategieso Costso Organizational
considerations
o Pricing must be carefully coordinated with the other marketing mix elements
o Target costing is often used to support product positioning strategies based on price
o Non-price positioning can also be used
Internal Internal Factors Factors
Factors to Consider in Setting Price (contd.)
o Marketing objectiveso Marketing mix strategieso Costso Organizational
considerations
o Types of costs:• Variable• Fixed• Total costs
o How costs vary at different production levels will influence price setting
o Experience (learning) curve effects on price
Internal Internal Factors Factors
Factors to Consider in Setting Price (contd.)
o Marketing objectiveso Marketing mix strategieso Costso Organizational
considerations
o Who sets the price?• In Small companies:
CEO or top management• In Large companies:
Divisional or product line managers
o Price negotiation is common in industrial settings
o Some industries have pricing departments
Internal Internal Factors Factors
Factors to Consider in Setting Price (contd.)
o Nature of market and demand
o Competitors’ costs, prices, and offers
o Other environmental elements
o Types of markets• Pure competition• Monopolistic competition• Oligopolistic competition• Pure monopoly
o Consumer perceptions of price and value
o Price-demand relationship• Demand curve• Price elasticity of demand
External External Factors Factors
Factors to Consider in Setting Price (contd.)
o Nature of market and demand
o Competitors’ costs, prices, and offers
o Other environmental elements
o Consider competitors’ costs, prices, and possible reactions when developing a pricing strategy
o Pricing strategy influences the nature of competition• Low-price low-margin strategies
inhibit competition• High-price high-margin
strategies attract competition
o Benchmarking costs against the competition is recommended
External External Factors Factors
Factors to Consider in Setting Price (contd.)
o Nature of market and demand
o Competitors’ costs, prices, and offers
o Other environmental elements
o Economic conditions• Affect production costs • Affect buyer perceptions of
price and value
o Reseller reactions to prices must be considered
o Government may restrict or limit pricing options
o Social considerations may be taken into account
External External Factors Factors
Factors to Consider in Setting Price (contd.)
1. Cost-Based Pricing: a) Cost-Plus Pricing• Adding a standard markup to average cost, ignoring
demand, competition.• Also called Full Cost Pricing (set to cover both FC & VC) (set to cover both FC & VC)
ExampleVariable costs: Tk. 20 Fixed costs: Tk. 500,000Expected sales:100,000 units Desired Sales Markup: 20%
Variable Cost + Fixed Costs/Unit Sales = Unit CostTk. 20 + Tk. 500,000/100,000 = Tk. 25 per unit
Unit Cost/(1 – Desired Return on Sales) = Markup PriceTk. 25 / (1 - .20) = Tk. 31.25
General Pricing Approaches
b) Break-Even Analysis & Target Profit Pricing
General Pricing Approaches (contd.)
Fixed Costs
Total Costs
Revenues
Sales Volume in Thousands of Units
Thou
sand
s Ta
ka
0 10 20 30 40
1000
800
600
400
200
Break-even point
Target Profit Tk. 200,000
Quantity To Be Sold To Meet Target Profit
Fixed Costs
Total Costs
Revenues
Sales Volume in Thousands of Units
Thou
sand
s Ta
ka
0 10 20 30 40
1000
800
600
400
200
Break-even point
Target Profit Tk. 200,000
Quantity To Be Sold To Meet Target Profit
c) Contribution Pricing: Contribution = Selling Price – Variable (direct costs)Contribution = Selling Price – Variable (direct costs)o Set price to cover variable costs+ a ‘contribution’ to fixed costsSet price to cover variable costs+ a ‘contribution’ to fixed costso Similar to marginal cost pricing, or absorption cost pricingSimilar to marginal cost pricing, or absorption cost pricing
2. Value-Based Pricingo Uses buyers’ perceptions of value rather than
seller’s costs to set price.
o Measuring perceived value can be difficult!
o Consumer attitudes toward price and quality have shifted during the last decade.• Introduction of less expensive versions of
established brands has become common.
General Pricing Approaches (contd.)
3. Competition-Based Pricingo Where there is a price leader, rivals can't compete
on price • too high & lose market share• too low & price leader matches price & forces smaller
rival out of marketo So follow pricing leads of rivals with dominant
market shareo Where competition is limited, ‘going rate’ pricing
may apply – banks, petrol, supermarkets, electrical goods – similar prices all outlets
General Pricing Approaches (contd.)
o Market-Skimming Pricing• Setting a high price for a new product to skim
maximum revenues layer by layer from segments willing to pay the high price.
o Market-Penetration Pricing• Setting a low price for a new product in order to
attract a large number of buyers and a large market share.
o Relationship Pricing• Different price for different class of customers
depending on relationship and the potentiality of cross-selling or future business.
Other Pricing Approaches
o Loss Leader Pricing• Setting price below cost to attract sales elsewhere. (people
attracted to the store & buy other things). Purchases of other items more than covers ‘loss’ on item sold
o Psychological Pricing• Playing on consumer perceptions e.g. Tk. 49.99 not Tk. 50!• Links with value pricing – high value goods priced according
to what consumers THINK should be the priceo Destroyer Pricing/ Predatory Pricing
• Deliberate price cutting or offer of ‘free gifts/products’ to force rivals (normally smaller & weaker) out & prevent new entrants. Anti-competitive & illegal if proved.
Other Pricing Approaches (contd.)
o Product Line Pricing• Setting price steps between product line items.
•Line of products rather single one
o Optional-Product Pricing• Pricing optional or accessory products sold with the main product
o Product Bundle Pricing• Pricing bundles of products sold together
Product Mix Pricing Strategies
o Customer Discrimination • for students only
o Place Discrimination • service at ATM versus at counters• Rural/urban
o Time Discrimination • peak -hours/ off-peak-hours• Season/off-season
o Area Discrimination • Agri/industry/small-industry
Price Discrimination
o Initiating Price Cuts is Desirable When a Firm• Has excess capacity• Faces falling market share due to price competition• Desires to be a market share leader
o Price Increases are Desirable• If a firm can increase profit, faces cost inflation, or faces
greater demand than can be supplied.
o Alternatives to Increasing Price• Reducing product size, using less expensive materials,
unbundling the product.
Price Changes
o Buyer reactions to price changes must be considered.
o Competitors are more likely to react to price changes under certain conditions.• Number of firms is small• Product is uniform• Buyers are well informed
o Respond to price changes only if: • Market share / profits will be negatively affected if nothing is
changed.• Effective action can be taken:
• Reducing price• Raising perceived quality• Improving quality and increasing price• Launching low-price “fighting brand”
Price Changes (contd.)
o Pricing within Channel Levels• Price-fixing
• Competitors should not work with each other to set prices• Predatory pricing
• Firms should not sell below cost with the intention of punishing a competitor or gaining higher long-run profits or running a competitor out of business.
o Pricing across Channel Levels• Price discrimination• Retail price maintenance• Deceptive pricing
• Bogus reference / comparison pricing• Price confusion
Public Policy and Pricing