Pricing

Price

Definition: The amount of money charged for a product. Most flexible element of marketing mix Gets us into the most trouble Price is dynamic because of environmental influences

Factors to consider when setting prices

Internal Factors Internal Factors

Pricing Pricing Decisions Decisions

External Factors External Factors

Internal Factors Affecting Pricing Decisions

Marketing Objectives Marketing-Mix Strategy Costs Organizational Considerations

Marketing Objectives that Affect Pricing Decisions

Low Prices to Cover Variable Costs and Low Prices Costs and Low Prices to Cover Variable Costs and Some Fixedto Cover VariableBusiness. Costs to Stay in Business. Some Fixed Costs to Stay in Business. Some Fixed Costs to Stay in Some Fixed Costs to Stay in Business.

Survival Survival Survival Survival Low Prices to Cover Variable Costs and Current Profit Maximization Current Profit Maximization

Marketing Marketing Objectives Objectives

Choose the Price that Produces the Choose the Price that Produces the Maximum Current Profit, Cash Flow or ROI. Maximum Current Profit, Cash Flow or ROI.

Market Share Leadership Market Share Leadership

Low as Possible Prices to Become Low as Possible Prices to Become the Market Share Leader. the Market Share Leader.

Product Quality Leadership Product Quality Leadership

High Prices to Cover Higher High Prices to Cover Higher Quality and Guest Service Levels Quality and Guest Service Levels

Marketing Mix Variables that Affect Pricing Decisions

Companies Will Consider Price Along With All the Other Marketing-Mix Elements When Developing the Marketing Program. Price Must be Coordinated With:

Product Design Product Design

Non-Price Non-Price Factors Factors

Marketing-Mix Strategy

Distribution Distribution

Promotion Promotion

Types of Cost Factors that Effect Pricing Decisions

Fixed Costs Fixed Costs (Overhead) (Overhead) Variable Costs Variable Costs
Costs that do vary Costs that do vary directly with the directly with the level of production. level of production. Raw materials Raw materials

Costs that dont Costs that dont vary with sales or vary with sales or production levels. production levels. Executive Salaries Executive Salaries Rent Rent

Sum of the Fixed and Variable Costs for a Given Sum of the Fixed and Variable Costs for a Given Level of Production Level of Production

Total Costs Total Costs

Organizational Considerations That Effect Pricing Decisions

Who sets prices Who sets prices

Many hospitality and travel companies now Many hospitality and travel companies now use revenue management departments use revenue management departments

External factors

External Factors Nature of market and demand Competition Environment factors

Market and Demand Factors that Affect Pricing Decisions

Costs set lower limits Market and demand set upper limits

Marketers must understand the relationship between price and demand for a product

Price Elasticity of Demand

A. Inelastic Demand Demand Hardly Changes With a Small Change in Price. P2 P1

Price

Q 2 Q1 Quantity Demanded per Period B. Elastic Demand Demand Changes Greatly With a Small Change in Price.

Price

P2 P1

Q2 Q1 Quantity Demanded per Period

Competition

Competitors prices and their possible reactions need to be considered when setting prices

Steps in Setting Price

Select the price objective Determine demand Estimate costs Analyze competitor price mix Select pricing method Select final price

Step 1: Selecting the Pricing Objective

Survival Maximum current profit Maximum market share Maximum market skimming Product-quality leadership

Step 2: Determining Demand

Price Sensitivity Estimating Demand Curves Price Elasticity of Demand

Step 3: Estimating Costs

Types of Costs Accumulated Production Activity-Based Cost Accounting Target Costing

Tata motors developed Nanoits small car with a target price

Step 5: Selecting a Pricing Method

Markup pricing Target-return pricing Perceived-value pricing Value pricing Going-rate pricing Auction-type pricing

Markup pricing
The most elementary pricing method is to add a standard markup to the production costs VC= Rs 10 FC= Rs 3,00,000 Expected unit sales= 50,000 Unit cost = variable cost + fixed cost unit sales 20 % markup price Mrkup price = unit cost (1- desired return on sales)

Target-return pricing

In Target-return pricing the firm determine the price that would yield its target rate of ROI

Target-return price = desired return x invested capital

unit cost+

unit sales

Figure 14.6 Break-Even Chart

Auction-Type Pricing

English auctions Dutch auctions Sealed-bid auctions

Step 6: Selecting the Final Price

Impact of other marketing activities Company pricing policies Gain-and-risk sharing pricing Impact of price on other parties

Price-Adaptation Strategies
Geographical Pricing Discounts/Allowances Promotional Pricing Differentiated Pricing

Price-Adaptation Strategies
Countertrade Barter Compensation deal Buyback arrangement Offset Discounts/ Allowances Cash discount Quantity discount Functional discount Seasonal discount Allowance

Promotional Pricing Tactics

Loss-leader pricing Special-event pricing Cash rebates Low-interest financing Longer payment terms Warranties and service contracts Psychological discounting

Special festival pricing by Coca-Cola on the occasion of Ramzan in Pakistan.

Differentiated Pricing

Customer-segment pricing Product-form pricing Image pricing Channel pricing Location pricing Time pricing Yield pricing

Setting Initial Product Prices

Market Skimming Market Skimming

> Setting a high price for a new product to skim maximum revenues from the target market. > Results in fewer, more profitable sales. > Popular night club charges a high cover charge

Market Penetration Market Penetration

> Setting a low price for a new product in order to attract a large number of guests. > Results in a larger market share. > New Marriott