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Pricing strategies

Pricing strategies. Pricing It is rare to find that pricing can be achieved through the simple application of a formula, as the actions of marketers and competitors and the perceptions and behaviour of consumers all have an influence on the pricing decision.

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Pricing strategies

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  1. Pricing strategies

  2. Pricing It is rare to find that pricing can be achieved through the simple application of a formula, as the actions of marketers and competitors and the perceptions and behaviour of consumers all have an influence on the pricing decision. Skill is required to assess how both consumers and competitors will respond to a particular pricing decision in the context of a particular marketing mix.

  3. Determining a price range Figure 11.1

  4. Pricing objectives Pricing objectives need to be closely linked with organisational and marketing objectives. Some objectives may be financially based (profit or cash flow) others may be related to sales (market share, volume of sales, position in market). Pricing objectives have implications for many functional areas other than marketing, e.g. finance, production and distribution.

  5. Conflicting pricing objectives Figure 11.2

  6. Price–quality matrix Figure 11.3

  7. Pricing policies and strategies • Guide and inform the pricing decision. • Provide a framework within which consistent decision making can be made. • Help to specify the role of pricing and its use in the context of the marketing mix. • Can help to respond to competitive price threats in mass markets.

  8. Pricing strategies for new products • Important to get launch price right as it can be difficult to change it later. • Tempting to set low prices to attract new customers but this can establish attitudes and perception of the quality and positioning of the brand that can be difficult to change later. • Setting a promotional price (low entry price with increase later) can overcome the above problems. • The level of innovation can influence the price of new products.

  9. Price skimming Prices are set high to attract the least price sensitive market segments. Can appeal to opinion leaders who want to be seen to be first with any new product irrespective of price. Price skimming allows organisations to establish a quality brand image.

  10. Penetration pricing Pricing aggressively below existing competition to pare its margins for the sake of volume. A necessary strategy if cost structures require very large sales volumes to break even or to achieve economies of scale in production or marketing terms. A legitimate strategy to deny the competition volume share. A risky strategy as it can establish a poor quality brand image.

  11. Product mix pricing strategies • Products that are part of a product range cannot be priced in isolation from the rest of the range. • One product in the range may be allowed to earn a relatively low return whilst another is skimming. • Some organisations offer a basic product to which consumers can add extras, each of which adds to the basic price.

  12. Price changes • Prices are rarely static for long periods. • Decisions need to be made as to when cost inflation is passed on to the consumer. • Price changes can have a serious effect on profit margins and market stability.

  13. Price cuts • Price cuts tend to be made for tactical reasons, e.g.: • Capacity utilisation. • Gaining market dominance. • As a defence measure. • To match competitors’ actions.

  14. Price increases • Price increases are made as a result of: • Cost pressures. • Curbing demand. • Responding to competitors’ increased prices.

  15. Cost elements • Fixed - those that do not vary with output in the short term. • Variable - those that vary according to quantity produced. • Marginal - change that occurs to the total cost if one more unit is added to the production total. • Total - all the costs incurred in manufacturing, marketing, administering and delivering the product to customers.

  16. Pricing methods • Cost based. • Demand based. • Competition based.

  17. Cost based methods • Simple method. • Emphasis is on the production and marketing costs. • Analysis of these costs leads to setting a price that generates a sufficient profit. • Does not focus on the external situation. • Variations include mark up, cost plus pricing, experience curve pricing.

  18. Demand based pricing • Looks outwards from the production line. • Focuses on customers and their responsiveness to different price levels. • When linked to competition based pricing provides a powerful market oriented perspective. • When demand is strong prices go up, when it is weak, the price goes down. • Other forms of demand based pricing include psychological pricing, prestige pricing, odd-even pricing, price lining, bundle pricing, promotional pricing, and price differentiation.

  19. Competition based pricing • Considers what is happening in the market, particularly with respect to competitors. • The structure of the market and the perceived value in the market are also considered.

  20. Pricing adjustments Last steps in arriving at the final price. Figure 11.10

  21. Negotiating prices Figure 11.11

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