Chapter Ten: Price and Pricing Strategy

CHAPTER TEN

Pricing Products: Pricing Considerations and Strategies PRICE – the amount of money charged for a product or service or the sum of the values that consumers exchange for the benefits of having or using the product or service.  Fixed Priced Policies – setting one price for all buyers – a modern idea that arise with the development of large scale retailing industries.  Dynamic Pricing – the practice of charging different prices depending on individual customers and situations.  Price is the only element in the marketing mix that produces revenue, all the others are costs.  It is the most flexible of all the elements and can be changed quickly.  But pricing and price competition is the number one problem facing many marketing executives.  The most common mistakes of pricing that it is too cost oriented rather than customer value oriented, prices that are not revised with market changes, pricing that does not take the marketing mix unto account and even pricing is not varied enough for different products. FACTORS TO CONSIDER WHEN SETTING PRICES 1. Internal Factors Affecting Pricing Decisions  Marketing Objectives o Pricing Strategy – it depends on the market department o Market Position – depends on what position they have on the market like high priced or low priced. o Survival – this happened when the company is troubled with too much capacity, heavy competition or changing consumer wants like keeping the plant going but this is not plausible for long term. o Current Profit Maximization – estimate what the demand and the costs will be at difference prices and choose the price that will produce maximum current profit, cash flow or ROI. o Market Share Leadership – they set the prices as low as possible. o Product Quality Leadership – charging high price to cover higher performance quality and the high cost of R&D.  Marketing Mix Strategy o Target Costing – pricing that starts with an ideal selling price, then target costs that will ensure that the price is met. o Often the best strategy is not to charge the lowest price but rather to differentiate the marketing offer to make it worth the price.  Cost – sets the floor for the price that the company can charge for its product.

o Fixed costs o Variable costs o Total costs  Organizational Considerations o Usually top management set the prices (small companies) o But in medium or large companies, the line managers are in-charge of the pricing. o Salespeople can negotiate with customers. 2. External Factors Affecting Pricing Decisions  The Market and Demand – costs set the lower limit of prices but the market and demand set the upper limit. 4 Pricing in Different Types of Markets  Pure Competition – market consists of many buyers and sellers trading in a uniform commodity. A seller cannot charge more than the going price or less than the market price. (Pretty much charge the same price)  Monopolistic Competition – the market consists of many buyers and sellers who trade over a range of prices rather than a single market price. (Less affected by each other’s strategies, variable prices and has different offers).  Oligopolistic Competition – few sellers but are sensitive to each other’s pricing and marketing strategies but it is difficult to enter the market.  Pure Monopoly – consists of only one seller.  Consumer Perceptions of Price and Value  Analyzing the Price – Demand Relationship  Demand Curve – a curve that shows the number of units the market will buy in a given time period at different prices that might be changed.  Price Elasticity – a measure of the sensitivity of demand to changes in price.  Competitor’s Costs, Prices and Offers  Other External Factors  Economic Conditions  Resellers  Government  Social Concerns GENERAL PRICING APPROACHES 1. Cost Based Pricing  Cost-Plus Pricing – adding a standard mark-up to the cost of the product.  Break-even Pricing – setting price to break even on the costs of making and marketing a product, or setting price to make a target profit.

2. Value Based Pricing – setting price based on buyer’s perceptions of value rather than on the seller’s costs.  Value Pricing – offering just the right combination of quality and good service at a fair price.

3. Competition Based Pricing – setting prices based on the prices that competitors charged for similar products.  Sealed bid pricing – pricing a firm bases its price on how it thinks competitors will price rather than on its own costs or on the demand. NEW PRODUCT PRICING STRATEGIES 1. Market Skimming Pricing – setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price; the company makes fewer but more profitable sales. 2. 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. PRODUCT MIX PRICING STRATEGIES 1. Product Line Pricing – setting the price steps between various products in a product line based on cost differences between the products, customer evaluations of different features and competitors prices. 2. Optional Product Pricing – the pricing of optional or accessory products along with a main product. 3. Captive Product Pricing – setting a price for products that must be used along with a main product, such as blades for a razor and film for a camera. 4. By-Product Pricing – setting a price for by products in order to make the main product’s price more competitive.

5. Product Bundle Pricing – combining several products and offering the bundle at a reduced price. PRICE ADJUSTMENT STRATEGIES 1. Discount and Allowance Pricing Discounts – a straight reduction in price on purchases during a stated period of time.  Cash Discounts – a price reduction to buyers who pay their bills promptly.  Quantity Discounts – reduction to buyers who buy large volumes.  Functional/Trade Discounts – offered by the seller to trade channel members who perform certain functions.  Seasonal Discount – price reduction to buyers who buy merchandise or services out of season. Allowances – promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturer’s products in some way. 2. Segmented Pricing – selling a product or service at two or more prices, where the difference in prices is not based on differences in costs.  Customer Segment Pricing – different prices offered to customers pay for the same product or service.  Product Form Pricing  Location Pricing  Time Pricing 3. Psychological Pricing – a pricing approach that considers the psychology of prices and not simply the economics, the price is used to say something about the product.  Reference Prices – prices that buyers carry in their mind and refer to when they look at a given product. 4. Promotional Pricing – temporarily pricing products below the list price and sometimes even below costs, to increase short run sales. 5. Geographical Pricing  Free on board  Uniform Delivered Pricing  Zone Pricing  Basing Point Pricing 6. International Pricing

PRICE CHANGES After developing their pricing structure and strategies, companies often face situations on initiating price changes or respond to price changes by competitors. 1. Initiating Price Cuts  Excess Capacity  Falling Market Share  Dominate Market through lower prices 2. Initiating Price Increase  Cost inflation  Overdemand  Company’s limited capacity 3. Buyers and Competitors Reaction to Prices Changes  Being replaced by newer products  Current models are not selling well  Company is in financial trouble  Quality has been reduced  Price may go down further  Product us uniform PUBLIC POLICY & PRICING      

Price Fixing – sellers must set prices without talking to competitors Predatory Pricing – selling below the cost with an intention of punishing a competitor in order to gain higher long run profits by putting competitors out of business. Price Discrimination – ensuring that sellers offer the sale price terms to customers at a given level of trade. Retail Price Maintenance – a manufacturer mandating the retailers to sell a fixed amount. Deceptive Pricing – occurs when a seller states a price or price savings that mislead consumers or are not actually available to consumers. Price confusion – results when firms employ pricing methods that make it difficult for consumers to understand just what price they are paying.