PRICING

Price Quality Strategies

quality

Super value

High value

Premium

Good value

Medium value

Overcharging

Economy

False economy
Price

Rip off

Price brings in the revenues

This is the only element in the marketing mix that brings in the revenues. All the rest are costs Price communicates the value positioning of the product.

What is price elasticity?

This determines the changes in demand with unit change in price If there is little or no change in demand, it is said to be price inelastic. If there is significant change in demand, then it is said to be price elastic.

Demand is likely to be less elastic when

There are few or no substitutes Buyers readily do not notice the higher price Buyers are slow to change their buying habits Buyers think that the higher prices are justified

Pricing policy
Selecting the pricing objective Determining demand Estimating costs Analyzing competitors costs, prices, offers Selecting a pricing method Selecting the final price

The pricing objectives

Short-term profit maximization Short-term revenue maximization Maximize quantity Maximize profit margin Differentiation Survival

Short-term profit maximization - it may not actually be the optimal approach for long-term profits. This approach is common in companies that are trying to sustain as cash flow is the overriding consideration. It's also common among smaller companies hoping to attract venture funding by demonstrating profitability as soon as possible. Short-term revenue maximization - This approach seeks to maximize long-term profits by increasing market share and lowering costs through economy of scale. For a well-funded company, or a newly public company, revenues are considered more important than profits in building investor confidence. Higher revenues at a slim profit, or even a loss, show that the company is building market share and will likely reach profitability. Amazon.com, for example, posted record-breaking revenues for several years before ever showing a profit, and its market capitalization reflected the high investor confidence those revenues generated.

Maximize quantity - There are a couple of possible reasons to choose the strategy. It may be to focus on reducing long-term costs by achieving economies of scale. This approach might be used by a company well-funded by its founders and other "close" investors. Or it may be to maximize market penetration - particularly appropriate when you expect to have a lot repeat customers. The plan may be to increase profits by reducing costs, or to up-sell existing customers on higher-profit products down the road.

Maximize profit margin - This strategy is most appropriate when the number of sales is either expected to be very low or sporadic and unpredictable. Examples include custom jewelry, art, hand-made automobiles and other luxury items. Differentiation - At one extreme, being the low-cost leader is a form of differentiation from the competition. At the other end, a high price signals high quality and/or a high level of service. Some people really do order lobster just because it's the most expensive thing on the menu. Survival - In certain situations, such as a price war, market decline or market saturation, you must temporarily set a price that will cover costs and allow you to continue operations.

Considerations in setting price

Customer perceptions of value Price ceiling
No demand above this price

Other Internal & External considerations

Product costs

Marketing strategy, objectives & mix

Price floor
Nature of the market & demand Competitors strategies & prices
No profits below this price

PRICING METHODS
1. Cost-plus pricing

2. Market based/Competitive pricing

3. Target return pricing 4. Value-based pricing 5. Psychological pricing 6. Break-even pricing

Cost Plus/ Mark-Up Pricing

Setting prices based on the costs for producing, distributing and selling the product plus a fair rate of return for effort and risk. Set the price at your production cost, including both cost of goods and fixed costs at your current volume, plus a certain profit margin. For example, your widgets cost $20 in raw materials and production costs, and at current sales volume (or anticipated initial sales volume), your fixed costs come to $30 per unit. Your total cost is $50 per unit. You decide that you want to operate at a 20% mark-up, so you add $10 (20% x $50) to the cost and come up with a price of $60 per unit. Production cost = Cost of goods + Fixed Costs + Profit

Value Based Pricing

Setting prices based on buyers perceptions of value rather than on the sellers cost. Price your product based on the value it creates for the customer. This is usually the most profitable form of pricing, if you can achieve it. Let's say that your widget above saves the typical customer $1,000 a year in, say, energy costs. In that case, $60 seems like a bargain - maybe even too cheap. If your product reliably produced that kind of cost savings, you could easily charge $200, $300 or more for it, and customers would gladly pay it, since they would get their money back in a matter of months.

Value based pricing Vs Cost based pricing

Product

Cost

Price Cost-based pricing

Value

Customers

Customers

Value

Price

Cost

Product

Value-based pricing

Target Return Pricing Target return pricing Pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met. Set your price to achieve a target return-on-investment (ROI). For example, let's use the same situation as above, and assume that you have $10,000 invested in the company. Your expected sales volume is 1,000 units in the first year. You want to make up all your investment in the first year, so you need to make $10,000 profit on 1,000 units, or $10 profit per unit, giving you again a price of $60 per unit.

Market Based/ Competitive Pricing

Based on Industry standards.

Break even Pricing

Types of Costs 1.Fixed costs (overhead): costs that do not vary with production or sales level. e.g. rent, salary etc.

2.Variable costs: costs that vary directly with the level of production. e.g. packaging, trims etc.
3.Total costs: the sum of the fixed & variable costs for any given level of production. Experience curve (learning curve): the drop in the average per unit production cost that comes with accumulated production experience. Break-even pricing (target profit pricing): setting prices to break even on the costs of making & marketing a product; or setting prices to make a target profit.

Break even Pricing

Break-Even Volume = Fixed Cost

Price Variable Cost

Break-even Point = Fixed Costs

(Unit Selling Price-Variable Costs)

Pricing Strategies

Pricing Strategies
New-Product Pricing Strategies Product Mix Pricing Strategies Price Adjustment Strategies Price Changes

New-Product Pricing Strategies

Market-skimming
Market-skimming pricing is a strategy with high initial prices to skim revenue layers from the market Product quality and image must support the price Buyers must want the product at the price Costs of producing the product in small volume should not cancel the advantage of higher prices Competitors should not be able to enter the market easily

Market-penetration
Market-penetration pricing sets a low initial price in order to penetrate the market quickly and deeply to attract a large number of buyers quickly to gain market share Price sensitive market Inverse relationship of production and distribution cost to sales growth Low prices must keep competition out of the market

Product Mix Pricing Strategies

Product Line pricing : Setting the price steps between various products in a product line based on cost differences between products in the line, customer evaluation of their features, and competitors prices. Optional-product pricing: takes into account optional or accessory products along with the main product. Captive-product pricing: involves products that must be used along with the main product. E.g. blades for a razor. By-product pricing: refers to products with little or no value produced as a result of the main product. Producers will seek little or no profit and will accept any price that covers more than the cost of storing and delivering them. Product bundle pricing: combining several products & offering the bundle at a reduced price.

Price-Adjustment Strategies

Discount and allowance pricing reduces prices to reward customer responses such as paying early, volume purchases & off-season buying. Discount : a straight reduction in price on purchases during a stated period of time.

Allowance: promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturers products in some way.

Discounts and Allowances

Early payment Off season Bulk purchase Retail discount Cash discount Trade in allowance

Price-Adjustment Strategies
Segmented pricing is used when a company sells a product at two or more prices where the difference in prices is not based on differences in costs.

Psychological pricing a pricing approach that considers the psychology of prices & not simply the economics; the price is used to say something about the product. Positioning - If you want to be the "low-cost leader", you must be priced lower than your competition. If you want to signal high quality, you should probably be priced higher than most of your competition. Popular price points - There are certain "price points" (specific prices) at which people become much more willing to buy a certain type of product. For example, "under $100" is a popular price point. "Enough under $20 to be under $20 with sales tax" is another popular price point, because it's "one bill" that people commonly carry. Meals under $5 are still a popular price point, as are entree or snack items under $1 (notice how many fast-food places have a $0.99 "value menu"). Dropping your price to a popular price point might mean a lower margin, but more than enough increase in sales to offset it.

Reference prices prices that buyers carry in their minds & refer to when they look at a given product.

Price-Adjustment Strategies
Psychological pricing - consumer's perception of your price, figuring things like:

Positioning - If you want to be the "low-cost leader", you must be priced lower than your competition. If you want to signal high quality, you should probably be priced higher than most of your competition.
Popular price points - There are certain "price points" (specific prices) at which people become much more willing to buy a certain type of product. For example, "under $100" is a popular price point. "Enough under $20 to be under $20 with sales tax" is another popular price point, because it's "one bill" that people commonly carry. Meals under $5 are still a popular price point, as are entree or snack items under $1 (notice how many fast-food places have a $0.99 "value menu"). Dropping your price to a popular price point might mean a lower margin, but more than enough increase in sales to offset it.

Price-Adjustment Strategies
Promotional pricing: temporarily pricing products below the list price & sometimes even below cost to increase short-run sales. Geographical pricing: setting prices for customers located in different parts of the country or world.

Four Major Pricing Strategies

Premium Pricing Use a high price where there is a uniqueness about the product or service. E.g. Luxury Penetration Pricing The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased. Economy Pricing. This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. E.g. Supermarkets often have economy brands for soups, spaghetti, etc.

Price Skimming. Charge a high price because you have a substantial competitive advantage. However, the advantage is not sustainable. The high price tends to attract new competitors into the market, and the price inevitably falls due to increased supply. E.g. Manufacturers of digital watches used a skimming approach in the 1970s. Once other manufacturers were tempted into the market and the watches were produced at a lower unit cost, other marketing strategies and pricing approaches are implemented. Mobile handsets etc

Price Changes

Price Changes
Has competitor cut price?

No

Hold current price, continue to monitor competitors price

Yes
Will lower price negatively affect our market share & profits?

No Reduce price
Raise perceived value
Improve quality & increase price Launch low-price fighting brand

Yes
Can/ should effective action be taken?

No
Yes

Assessing & responding to competitor price changes