Pricing and Place

PRICE

Definition: Price is the value placed on what is exchanged. Something of value is exchanged for satisfaction and utility, includes tangible (functional) and intangible (prestige) factors. Can be a barter.

Buyers must determine if the utility gained from the exchange is worth the buying power that must be sacrificed. Price represents the value of a good/service among potential purchases and for ensuring competition among sellers in an open market economy.

Marketers need to understand the value consumers derive from a product and use this as a basis for pricing a product--must do this if we are customer oriented.

Importance of Price to the Marketer

Often the only element the marketer can change quickly in response to demand shifts. Relates directly to total revenue TR = Price * Qtty Profits = TR - TC -effects profit directly through price, and indirectly by effecting the qtty sold, and effects total costs through its impact on the qtty sold, (ie economies of scale) Can use price symbolically, emphasize quality or bargain. Deflationary pressures, consumers very price conscious.

Pricing Objectives

The firm's pricing objectives must be identified in order to determine the optimal pricing. Common objectives include the following: Current profit maximization - seeks to maximize current profit, taking into account revenue and costs. Current profit maximization may not be the best objective if it results in lower long-term profits. Current revenue maximization - seeks to maximize current revenue with no regard to profit margins. The underlying objective often is to maximize long-term profits by increasing market share and lowering costs.

Maximize quantity - seeks to maximize the number of units sold or the number of customers served in order to decrease longterm costs as predicted by the experience curve. Maximize profit margin - attempts to maximize the unit profit margin, recognizing that quantities will be low. Quality leadership - use price to signal high quality in an attempt to position the product as the quality leader.

Survival - in situations such as market decline and overcapacity, the goal may be to select a price that will cover costs and permit the firm to remain in the market. In this case, survival may take a priority over profits, so this objective is considered temporary. Status quo - the firm may seek price stabilization in order to avoid price wars and maintain a moderate but stable level of profit.

For new products, the pricing objective often is either to maximize profit margin or to maximize quantity (market share). To meet these objectives, skim pricing and penetration pricing strategies often are employed.

Selecting a Pricing method

Markup pricing : Add all costs and to that add a standard markup (10-15%)
Target Return pricing : The price which gives the company its target rate of return on investment. (ROI) E.G -- If the cost per unit is Rs1000. Invested capital is Rs100,00,000 and expected sales is 50000 and ROI is 20% then the price is= 1000+2000000/50000=Rs. 1040

Value Pricing : More for less concept e.g Walmart, Southwest airlines, Dell computers Perceived value pricing == more for more concept e.g Mercedes, Rolls Royc, Porsche Going rate : charge as per competition . The company doesn't look at its own cost --Follow the leader

Price High Medium Low High Quality

Good value

Super value strategy Premium Strategy High value strategy

Overcharging

Medium value

Medium

Rip-off

False economy

Economy strategy

Low

Pricing Strategies

Pricing Strategies

Penetration Pricing

Penetration Pricing

Price set to penetrate the market Low price to secure high volumes Typical in mass market products chocolate bars, food stuffs, household goods, etc. Suitable for products with long anticipated life cycles May be useful if launching into a new market

Market Skimming

Market Skimming

High price, Low volumes Skim the profit from the market Suitable for products that have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out) Examples include: Playstation, jewellery, digital technology, new DVDs, etc.

Plasma screens: Currently at high prices but for how long?

Title: Thin-shaped television. Copyright: Getty Images, available from Education Image Gallery

Value Pricing

Value Pricing

Price set in accordance with customer perceptions about the value of the product/service Examples include status products/exclusive products

Companies may be able to set prices according to perceived value.

Title: BMW At The Frankfurt Auto Show. Copyright: Getty Images, available from Education Image Gallery

Loss Leader

Loss Leader

Goods/services deliberately sold below cost to encourage sales elsewhere Typical in supermarkets, e.g. at Christmas, selling bottles of gin at 3 in the hope that people will be attracted to the store and buy other things Purchases of other items more than covers loss on item sold e.g. Free mobile phone when taking on contract package

Psychological Pricing

Psychological Pricing

Used to play on consumer perceptions Classic example - 9.99 instead of 10.99! Links with value pricing high value goods priced according to what consumers THINK should be the price

Going Rate (Price Leadership)

Going Rate (Price Leadership)

In case of price leader, rivals have difficulty in competing on price too high and they lose market share, too low and the price leader would match price and force smaller rival out of market May follow pricing leads of rivals especially where those rivals have a clear dominance of market share Where competition is limited, going rate pricing may be applicable banks, petrol, supermarkets, electrical goods find very similar prices in all outlets

Tender Pricing

Tender Pricing

A European consortium led by Airbus recently won a contract to supply refuelling services to the RAF priced at 13 billion!
Title: Air refuelling. Copyright: Getty Images, available from Education Image Gallery

Many contracts awarded on a tender basis Firm (or firms) submit their price for carrying out the work Purchaser then chooses which represents best value Mostly done in secret

Price Discrimination

Price Discrimination

Charging a different price for the same good/service in different markets Requires each market to be impenetrable Requires different price elasticity of demand in each market

Prices for rail travel differ for the same journey at different times of the day
Title: Inter-City 125. Copyright: Getty Images, available from Education Image Gallery

Destroyer Pricing/Predatory Pricing

Destroyer/Predatory Pricing

Deliberate price cutting or offer of free gifts/products to force rivals (normally smaller and weaker) out of business or prevent new entrants Anti-competitive and illegal if it can be proved

Microsoft have been accused of predatory pricing strategies in offering free software as part of their operating system Internet Explorer and Windows Media Player - forcing competitors like Netscape and Real Player out of the market.
Title: Bill Gates speaks at UNIX convention. Copyright: Getty Images, available from Education Image Gallery

Absorption/Full Cost Pricing

Absorption/Full Cost Pricing

Full Cost Pricing attempting to set price to cover both fixed and variable costs Absorption Cost Pricing Price set to absorb some of the fixed costs of production

Marginal Cost Pricing

Marginal Cost Pricing

Marginal cost the cost of producing ONE extra or ONE fewer item of production MC pricing allows flexibility Particularly relevant in transport where fixed costs may be relatively high Allows variable pricing structure e.g. on a flight from London to New York providing the cost of the extra passenger is covered, the price could be varied a good deal to attract customers and fill the aircraft

Marginal Cost Pricing

Example:

Aircraft flying from Bristol to Edinburgh Total Cost (including normal profit) = 15,000 of which 13,000 is fixed cost* Number of seats = 160, average price = 93.75 MC of each passenger = 2000/160 = 12.50 If flight not full, better to offer passengers chance of flying at 12.50 and fill the seat than not fill it at all!
*All figures are estimates only

Contribution Pricing

Contribution Pricing

Contribution = Selling Price Variable (direct costs)

Prices set to ensure coverage of variable costs and a contribution to the fixed costs Similar in principle to marginal cost pricing Break-even analysis might be useful in such circumstances

Target Pricing

Target Pricing

Setting price to target a specified profit level Estimates of the cost and potential revenue at different prices, and thus the break-even have to be made, to determine the mark-up Mark-up = Profit/Cost x 100

Cost-Plus Pricing

Cost-Plus Pricing

Calculation of the average cost (AC) plus a mark up AC = Total Cost/Output

Influence of Elasticity

Influence of Elasticity

Any pricing decision must be mindful of the impact of price elasticity The degree of price elasticity impacts on the level of sales and hence revenue Elasticity focuses on proportionate (percentage) changes PED = % Change in Quantity demanded/% Change in Price

Influence of Elasticity

Price Inelastic: % change in Q < % change in P e.g. a 5% increase in price would be met by a fall in sales of something less than 5% Revenue would rise A 7% reduction in price would lead to a rise in sales of something less than 7% Revenue would fall

Influence of Elasticity

Price Elastic: % change in quantity demanded > % change in price e.g. A 4% rise in price would lead to sales falling by something more than 4% Revenue would fall A 9% fall in price would lead to a rise in sales of something more than 9% Revenue would rise

PRICING Strategies

Differential Pricing : Same brand is sold at different prices/different times to consumers. Competitive Pricing : Prices are set to exploit competitive position. Product Line Pricing : Related brands are sold at prices that exploit mutual dependencies. Promotional pricing :

Some pricing strategies in detail

Pricing

DIFFERENTIAL PRICING : 1) Periodic Discounting : - Skimming Strategy Cater to early adopters ----after that the price reduced to cater to the next group of buyers. e.g. : BPL MOBILE/ORANGE. 2) Second Market Discounting : Dumping --Firms selling Price in foreign market is below its average cost in home country. (e.g. dumping by china)

3) Customer segment pricing : different customer groups are charged different prices for the same product/service--- concessions for students/ senior citizens for rail and airfare 4) Time pricing : Prices vary by season , day or hour

Pricing

B) COMPETITIVE PRICING :

1) Penetration Pricing : Price substantially below main competitors. (AKAI, AMUL) 2) Geographic Pricing : In same country prices different to take advantage of sales tax/transportation savings.

Pricing

Product Line Pricing : 1) Complementary Pricing : Captive Pricing : Razor & Blades, Cameras & Films , Auto & Spare Parts, VCD Player & Software. Two Part Pricing : Service Industry :Fixed + variable usage fee (MTNL) Entry fee + every ride /game/place separate pricing :-- SENTOSA ISLAND (SINGAPORE)

2) PREMIUM PRICING : Basic & Deluxe Hotel

rooms, Front & rear Auditorium seats, Basic & Deluxe cars:Firms make profit on Premium versions

Pricing

Product Line Pricing 3) Product Bundling : Season pass cheaper then daily tickets Car + accessories , the price is lesser then if each item is bought separately.

4) Image Pricing :

Firms bring out an identical version of its current product with a different name/packaging and a higher price. The intention is to signal quality.

Promotional Pricing : a) Loss leader pricing : b) Off season special pricing: c) cash rebates: d) extras at same price -- e.g insurance free with car purchased or 7 year extended warranty for refrigerator at same price e) Special event pricing -- valentines day, diwali etc.

PLACE

Distribution

Retailing : Consists of the activities involved in selling goods and services to ultimate consumers. A retail sale is one in which the buyer is an ultimate consumer and the buying motive for a retail sale is always personal or family satisfaction derived from the final consumption of item being purchased. Wholesalers: Wholesaling is concerned with the activities of those persons or establishments which sell to retailers and other merchants , and/or to industrial , institutional and commercial users , but who dont sell in significant amount to ultimate consumers.

Distribution-activities that make products available to customers when and where they need them. A channel of distribution or marketing channel is a group of individuals and organizations that directs the flow of products from producers and customers. Marketing Intermediaries link producers to other intermediaries or to the ultimate users of the product. Operate between the producer and the final buyer.

Types of utility distribution offers: TIME...when the customers want to purchase the product. PLACE...where the customers want to purchase the product. POSSESSION...facilitates customer ownership of the product. FORM...sometimes, if changes have been made to the product in the distribution channel, i.e. Pepsi/Coke, concentrate to bottlers.

Each channel member has different responsibilities within the overall structure of the distribution of the system; mutual profit/success is obtained through cooperation. The distribution system: determines a product's marketing presence and the buyers' accessibility to the product entails a long-term commitment, easier to change other aspects of the marketing mix.

Functions of Intermediaries Primary role of middlemen is to transform the assortment of products made by producers in the assortments desired by consumers. Producers make narrow assortments in large quantities, consumers want broad assortments in small quantities, discrepancy in quantity and assortment.

Functions Performed by wholesalers/Retailers for manufacturers.

Market coverage: Convenience to customers Sales contact : company sales force would be calling on a relatively small number of wholesalers/retailers rather then the much larger number of customers. Inventory Holding: Stock the products of the companies that they represent.They reduce the manufacturers financial burden and risk associated with holding large inventories. Market Information: Customer Support : service, spare parts.

Functions Performed by wholesalers/Retailers for Customers

Product Availability: ready availability of range of products. Assortment,convenience: Brings together from a variety of manufacturers an assortment of products that can greatly simplify the customers selection and ordering tasks. Bulk-Breaking : Distributor buys in bulk and gives to customers in unit of one : SKU. Credit and Financial Assistance Advice and Technical Support :(installation -->A/C,PC) Customer Service : Delivery , after sales help .

Types of Channels of Distribution

Channel A:

Producer | | | | | | vConsumer e.g door to door purchases like Encyclopedias.. Services often use direct channels since the service provider, in most must be there to provide the service. Simplest method, not necessarily the most effective. Technological developments are making the direct channel more common: TV Homeshopping Catalogs, LL Bean etc. Internet, WWW When you can use the media of communication to effect exchange...

Channel B: Producer | | | | vRetailer | | | | vConsumer Large retailers, JC Penney, KMart,Big Bazaar, no discrepancy in quantity supplied and demanded. Popular for shopping goods like clothing. Automobi

Channel C: Producer | | | Wholesaler | | | Retailer | | | Consumer Smaller retailers, widely distributed products, for e.g convenience stores Channel D: Producer | | | Agent | | | Wholesaler | | | Retailer | | | Consumer Mass distribution, i.e processed food; also when there are a number of small producers etc. May be the most efficient distribution channel for consumer products. Convenience products.

Distribution Strategies

EXCLUSIVE DISTRIBUTION : Distributing through company outlets or franchisee e.g. : HONDA Showrooms:- only company products are available. INTENSIVE DISTRIBUTION : Placing the products in as many outlets as possible. Products : Soaps, cigarettes,toothpaste ,liquor, BPL MOTS etc. ( each outlet has various brands

Distribution Strategies

SELECTIVE DISTRIBUTION : Here companies select a combination of Exclusive distribution (only companys products) & Intensive Distribution (some important outlets which are multibrand outlets) e.g. SAMSUNG , VIDEOCON

Criteria for choosing Channel Partners

Financial Strength of Prospective Channel Partner : revenue, P& L statement , balance sheet etc. Sales Strength : no. of salesmen and their technical competency Product Lines: 1) Competitive products, 2) Compatible products 3) Complementary products. Reputation : 1) leadership 2) Well Established 3) Level of expertise. Market coverage : Geographic coverage , outlets per market area. Sales Performance.

Criteria for choosing channel partners

Advertising & Sales promotion programs. Ordering & Payment Procedures. Willingness to share data : a) customers b) Inventory c) sales figures. Installation & Repair services .

Factors Retailers use in choosing companies

Accepts unsold or damaged merchandise returns Has quick and easy ordering procedures Provides prompt delivery Maintains adequate supply Good reputation /Brand Name Has a large product range. Provides deliveries in lots as desired by retailer. Promotes brand on a regular basis. Provides adequate margins. Offers good schemes, quantity discounts Extends credit > 30 days. Has good competent sales team/product/technical team. Ensures prompt service Provides good store displays (POP)

Store Formats

Specialty stores: : narrow product line with deep assortment . E.g : apparel stores like Arrow, sporting goods stores like Planet Sports, furniture stores like Living Room , florists and book Stores like Strand Book Stall Department Stores : A department store carries several product lines typically clothing, home furnishings , cosmetics , shoes, household goods etc. where each line is operated as a separate department managed by specialist buyers. e.g Shoppers Stop

Supermarket : relatively large , low cost , low margin high volume self service operation designed to serve the consumers total needs for food, laundry, household-maintenance products. Approx size : 10000-25000 sq.feet with 10000 items e.g Food Bazaar

Store Formats

Convenience Stores: relatively small stores that are located near residential areas , are open long hours , seven days a week and carry as limited line of high turnover convenience items. Combination stores: represent a diversification of supermarket stores into the growing drug and prescription field.(40000-60000 sq feet area)

Hypermarket: combines supermarket , warehouse and discount store principles. Around 80000-300000 sq. feet area. They have in addition to the routinely purchased goods, items like furniture , large appliances etc. e. g Carrefour, Spencers, Big Bazaar Discount stores: sells standard merchandise at lower prices by accepting lower margins and selling higher volumes e. g Wal-mart

Store Formats

Superstore:Usually twice the size of supermarket it also offers goods and services like a dry cleaning, flower shop , bakery shop etc.(around 30000 sq. feet) Shopping mall : an arrangement of retail stores and places for leisure activities like dining (food court), entertainment (multiplex, games etc.)A mall is spread over a large area (200000 -500000) sq. feet area. Category specialists: is a discount store that offers a narrow variety but deep assortment of merchandise.Also called as specialty discount stores and as category killers e.g Ikea and ToysRus.

Store Formats

Factory outlet : owned and operated by the manufacturer selling discontinued merchandise, factory seconds, cancelled orders, over sizes/undersizes at lower prices located in the vicinity of the factory. Every day low price (EDLP) : discount stores that operate an every day low pricing strategy. Stopover store format: store which rides piggyback on another retail outlet ( e.g petrol pump) BPCL has in & out, HPCL has Convenio stores (akbarallys)