Pricing: A Strategy Marketing Decision

1. Pricing: A Strategy Marketing Decision With Duane Weaver

2. OUTLINE What is Price? Factors to consider when setting prices Value Based Cost Based Target Profit Based Price and Demand (Elasticity) Market Structure and Pricing Strategic Pricing Decisions Public Policy and Pricing

3. What is Price? • Pricerelates to the amount of money charged for a product or a service or the sum of the value that buyers exchange for the benefits of having or using the product or service • Price is the element that • Creates revenue in the marketing mix • Is the most flexible in the marketing mix • Can create most problems for the marketing personnel if not carried out correctly.

4. Factors to Consider when Setting Prices Understanding the value the customer would gain Cost of the product and its operations Relationship between price and demand in the market place The marketing strategy pursued by the organization Type of market structure it operates in Competitor activity in the market Marketing environmental forces that affect the company

5. Value-Based Pricing • Price setting based on the buyer’s perceptions of value rather than on the seller’s cost • Variations of value-based pricing options • Good-value pricing, such as everyday low pricing (EDLP) • Value-added pricing

6. Cost-Based Approach to Pricing Cost based pricing is a pricing strategy that takes the product costs into consideration in setting the prices. The cost based approach would set the price floor (the lowest possible price) the company can charge its product. However these approaches fail to consider customer value and relationships between price and demand for a product. Cost based pricing has many methods in setting the price of a product.

7. Cost-Based Pricing • Cost plus pricing • Cost is made up of variable cost and fixed cost per unit • Adds a mark up to the cost in arriving at the price • Breakeven pricing (see p. 398) • Calculating the price at which the company breakeven on the product

8. Target Profit Pricing • This is an extension from the breakeven pricing method. • The organization could add the targeted profit to the break even amount and could identify how many units it needs to sell to achieve the intended target profit. • Target profit volume = (fixed costs + target profit ) ÷ (price – variable costs)

9. Relationship between Price and Demand (Price Elasticity) Each price the company charge will lead to a different level of demand. This is due to the inverse relationship between price and quantity demand. The demand curve will highlight this relationship graphically. The degree to which the level of responsiveness between price of a product and its quantity demanded is explained by the concept of price elasticity. (Fig. 10.4)

10. in-class notes Factors to Consider When Setting Prices • Customer perceived value • Costs (fixed and variable) • Relationship between price and demand • Marketing strategy • Type of market • Pricing of competitive products • The marketing environment

11. Market Structures and Pricing Pure Competition – The company has to take the price determined by the market Monopolistic Competition – Through differentiation, the company can set different prices for different segments Oligopolistic Competition – consist of few sellers who are highly sensitive to each others pricing and marketing strategies Pure Monopoly – Depending on the nature of ownership and regulations, they may pursue different pricing strategies

12. Strategic Pricing Decisions Market skimming pricing (or price skimming) Setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the price Market penetration pricing (or penetration pricing) a strategy that sets a low price for a new product in order to attract a segment of buyers, then raises the price. Prestige pricing is used to set prices for luxury products. Unlike in the market skimming strategy, the high prices set for the product in the beginning would remain as it is. in-class notes

13. Strategic Pricing Decisions Product line pricing Relates to setting the price steps between products in a product line based on cost differences and customer perceptions of the value. Captive-product pricing (see next slides) By-product pricing (see next slides) Bundle pricing (see next slides) in-class notes

14. Forms of Product line Pricing(1 of 2) • Relates to setting the price steps between products in a product line based on cost differences and customer perceptions of the value. • Optional-product pricing - The pricing of optional or accessory products along with a main product. E.g. pricing a computer system with an array of processors, hard drives etc. • Captive product pricing - Setting a price for a product that must be purchased along with a main product. E.g. – printers and cartridges, consoles and games

15. Forms of Product Line Pricing(2 of 2) • By product pricing – products that are created through the production process. Using by-product pricing, the company seeks a market for these by-products to help offset the costs of disposing of them. • Bundle pricing- Setting one price for a set of products. The price is only valid if all the products in the set are purchased. E.g. Rogers bundling prices for internet, cable and phone services.

16. Price Adjustment Strategies Discount and Allowance Pricing – adjusting the original price to reward customers for various responses. Segmented Pricing – setting different prices for different segments Psychological Pricing – setting the price based on the psychological affect on the customer Promotional Pricing – temporary price reductions below list prices to create buying excitement and urgency Geographic Pricing – setting prices depending on the customers location (FOB, Zone, Basing Point, Freight Absorption) Dynamic Pricing – adjusting prices to meet the characteristics and needs of individual customers International Pricing – pricing set based on the international scale of operations in-class notes

17. Reasons forInitiating Price Changes • Price Cuts • Excess capacity. • Falling market share. • Dominate market through lower costs. • Price Increases • Cost inflation. • Over-demand. cannot supply all customers’ needs.

18. Public Policy and Pricing in-class notes In Canada, the Competition Act defines what is legal in pricing tactics Laws are different in Canada and the U.S. Price fixing, price discrimination, and deceptive pricing are illegal Predatory pricing (to drive competitors out of business) is illegal Companies must offer the same price to retailers regardless of their size Companies cannot dictate the price a retailer sells their product for

19. Thank you for your time!