What is price?

Sum of all the values that consumers exchange for

the benefits of having or using the product or

service. Major factor affecting buyer choice Direct link between the product and profits Only element in the marketing mix that produces revenues; all others represent costs. Least sustainable advantage?

A well-designed pricing mechanism should do the following:

Discriminate between customers according to market segments (Customers) Coordinate incentives across intermediaries and consumers (Collaborators) Effectively deal with competition (Competitors) Integrate with the firms other marketing efforts (Company)

Pricing strategy

Pricing Considerations
Internal considerations
o Firm objectives (survival, market share, profit maximization or product quality leadership) o Marketing program o Production costs
Cost plus (i.e. full cost + mark up as % of full cost) Mark-up (i.e. direct cost + mark up as % of direct cost)

External considerations
o Consumer demand (Elasticity analysis) o Competition (Pure/dynamic parity) o Legal aspects (price controls & taxation)

Demand type
ELASTIC

What happens
percentage change in price causes a much higher percentage change in demand
percentage change in price causes a much smaller percentage change in demand

Occurs when
products have many substitutes and consumption is discretionary

Recommended pricing strategy

Lower price to sell more

INELASTIC

Raise prices to products have earn more profits few if any substitutes and consumption is necessary

General pricing approaches

Cost-based
Based on product considerations Adds a standard markup

Value-based

Begins with the customer and ends with the product Uses buyers perceptions of value as key to pricing Based on what is happening in the industry Uses the collective wisdom of the industry

Competitionbased

Cost-Based Pricing

Value-Based Pricing

Product
Cost Price Value Customers

Customer
Value Price Cost Product

High or low price?

The decision to price high or low depends on whether the firm wishes to penetrate (i.e. obtain high market share with low margins) or skim (i.e. obtain low market share with high margins) High prices should be supported with marketing efforts that communicate product benefits (intensive selling) Low prices should be supported with a plan that focuses on general awareness and productive capacity

New Product Pricing Strategies

Market Skimming
Setting a High Price for a New Product to Skim Maximum Revenues from the Target Market. Results in Fewer, But More Profitable Sales. Use under these conditions:
o Products quality and image must support its higher price. o Costs cant be so high that they cancel the advantage of charging more. o Competitors shouldnt be able to enter market easily and undercut the high price.

New Product Pricing Strategies

Use under these conditions:

Market Penetration
Setting a Low Price for a New Product in Order to Penetrate the Market Quickly and Deeply. Attract a Large Number of Buyers and Win a Larger Market Share.

o Market must be highly price-sensitive so a low price produces more market growth. o Production/distribution costs must fall as sales volume increases. o Must keep out competition and maintain its low price position or benefits may only be temporary.

Product Mix-Pricing Strategies

Product Line Pricing
Involves setting price steps between various products in a product line based on:
o Cost differences between products, o Customer evaluations of different features, and o competitors prices.

Product Mix - Pricing Strategies

Optional-Product pricing
o Pricing optional or accessory products sold with the main product o e.g. smartphone accessories

Captive-Product pricing
o Pricing products that must be used with the main product o e.g. printer cartridges

Product Mix- Pricing Strategies

By-Product
o Pricing lowvalue byproducts to get rid of them and make the main products price more competitive. o i.e. sawdust

Product Mix- Pricing Strategies

ProductBundling
o Combining several products and offering the bundle at a reduced price. o i.e. amusement park tickets

Segmented Pricing
Selling Products At Different Prices Even Though There is No Difference in Cost
Customer - Segment Product - Form Location Pricing Time Pricing

Psychological Pricing
Considers the psychology of prices and not simply the economics. Customers use price less when they can judge quality of a product. Price becomes an important quality signal when customers cant judge quality; price is used to say something about a product.

Promotional pricing

Promotional Pricing
Loss Leaders Special-Event Pricing Cash Rebates Low-Interest Financing Longer Warranties
Temporarily pricing products below list price to increase short-term sales through:

Free Merchandise
Discounts

Discount and Allowance Pricing

Adjusting Basic Price to Reward Customers For Certain Responses
Cash Discount Quantity Discount
Functional Discount

Seasonal Discount Trade-In Allowance

Promotional Allowance

Other Price Adjustment Strategies

Geographical Pricing
Adjusting Prices to Account for the Geographical Location of Customers. i.e. FOB-Origin, UniformDelivery, Zone Pricing, Basing Point, & Freight-Absorption.

International Pricing

Adjusting Prices for International Markets. Price Depends on Costs, Consumers, Economic Conditions, Competitive Situations & Other Factors.