Pricing

1. Pricing Pesewa Presentations

2. Introduction Growth Decline Maturity Life Cycle Strategies Promotion Product Price Place/Distribution

3. Price, the Lifecycle and Marketing Mix Place Increasing to intense competition Competition lower Product Skimming Premium Elastic Penetration Price Promotion Inelastic

4. Develop pricing mentality Consistently deliver more value Price strategically, not opportunistically Know your competition Make pricing a process Pricing Best Practices

5. Factors Affecting Pricing Decisions • Internal Factors • Marketing objectives • Marketing mix strategy • Costs • Organizational considerations • Target market • Positioning objectives External Factors • Nature of the market • Demand • Competitors’ costs, prices, and offers • The economy • Reseller needs • Government actions • Social concerns

6. Pricing Products • The meaning and use of price • Price—the amount of money a seller is willing to accept in exchange for a product, at a given time, and under given circumstances. • Price functions as an allocator of goods and services among those who are willing and able to buy them (customers). • Price also allocates financial resources among producers according to how well the producers satisfy customers’ needs. • Can firms control their prices? • Supply—the quantity of a product that producers are willing to sell at each of various prices. • Demand—the quantity of a product that buyers are willing to purchase at each of various prices.

7. Quantity Supplied Quantity Demanded Quantity Supplied/Demanded 60 Price S D D D S 50 40 30 E 20 10 0 5 10 15 20 25 0 5 10 15 20 25 0 5 10 15 20 25 Millions Millions Millions The upward slope means that producers will supply more jeans at higher prices The downward slope means that buyers will purchase more jeans at lower prices The point E indicates an equilibrium in quantity and price for sellers and buyers Supply and Demand Curves

8. Pricing Products (cont’d) • Can firms control their prices? (cont’d) • Differentiation—the process of developing and promoting differences between one’s product and all similar products. • Price and non-price competition • Price competition—an emphasis on setting a price equal to or lower than competitors’ prices to gain sales or market share. • Non-price competition—competition based on factors other than price. • Buyers’ perceptions of price • Buyers will accept different ranges of prices for different products.

9. Pricing Objectives • Survival • Pricing the firm’s products (perhaps at a loss) in order to attract customers to establish the firm in a market. • Profit maximization • Pricing with the intent to reap profits as large as possible from a market—usually an unattainable goal. • Target return on investment (ROI) • Pricing that allows the firm to attain its profit goal, which is a percentage of the investments the firm has made. • Performing at par with competitors

10. Pricing Objectives (cont’d) • Market Share Goals • Pricing that will create sales that are measured as a percentage of total industry sales. • Status Quo Pricing • Pricing the firm’s products so as to not disturb the stability of prices in the industry.

11. Cost-based Pricing Cost Price Value Customers Product Pricing Methods • Cost-based pricing • Markup pricing—the amount a seller adds to the cost of a product to determine its basic selling price. • Markup pricing can overprice or underprice a product for its market, causing either lost sales or forgone profits. • Markup pricing separates pricing from other business functions that impact on marketing decisions.

12. Pricing Methods • Breakeven analysis • Breakeven quantity—the number of units that must be sold for total revenue (from all units sold) to equal the total cost (of all units). • Fixed costs—costs that are incurred no matter how many units are sold or produced. • Variable costs—costs that vary with or depend on the number of units produced.

13. Total fixed costs Unit selling price – Unit variable costs Breakeven in units = $120,000 Costs/Revenues Profit Total revenue Total $80,000 cost Breakeven Variable quantity costs $40,000 Fixed costs Loss 0 500 667 1000 Quantity in units Breakeven Analysis Breakeven analysis answers the question of what is the lowest level of production and sales at which a company can break even (incur no loss and not yet have made a profit) on a particular product.

14. Value-based Pricing Value Price Cost Product Customers Pricing Methods (cont’d) • Consumer-based pricing • Pricing of a product that is based on the level of customer demand for the product and the value placed on a product by the consumer. Product prices are high when demand is high and low when demand is weak. • Price differentiation—setting different prices in segmented markets based on segmental characteristics (e.g., time of purchase, type of customer, or distribution channel).

15. Pricing Methods (cont’d) • Competition-based pricing • Product pricing that is based on meeting the challenge of competitors’ prices in markets where products are quite similar or price is an important customer consideration (engaging in price war).

16. Combative Weakness Combative Strength High Price Low Efficiency High Cost High Efficiency Low Cost Low Price Margin Erosion Market share Dominance

17. PRICING STRATEGIES New-ProductPricing DifferentialPricing PsychologicalPricing Product-LinePricing PromotionalPricing • • • Price skimming • Negotiated pricing Odd-number • Captive pricing Price leaders • • Penetration pricing • Secondary-market • Premium pricing Special-event pricing • pricing Multiple-unit • pricing Price lining • Periodic pricing • Comparison discounting • Reference pricing discounting • Random • Bundle pricing discounting • Everyday low prices • Customary pricing Types of Pricing Strategies

18. Pricing Strategies • New-product strategies • Price skimming—charging the highest-possible price for a product during the introduction stage of its life cycle. Helps recover R&D costs quickly. May encourage competitors to enter market • Penetration pricing—setting a low price for a new product to quickly build market share and discourage competitors. Used when setting the standard is important. Used when the product is easily copied. May discourage competitors to enter market.

19. Quality Low High Economy e.g. Tesco spaghetti Penetration e.g. Telewest cable phones Low Price Skimming e.g. New film or album Premium e.g. BA first class High

20. Pricing Strategies (cont’d) • Differential pricing • Negotiated pricing—bargaining to establish a final price. • Secondary-market pricing—setting one price for the primary target market and a different price for another market. • Periodic discounting—temporary reduction of prices on a patterned or systematic basis. • Random discounting—temporary reduction of prices on an unsystematic basis.

21. Pricing Strategies (cont’d) • Psychological pricing • Odd-number pricing—setting unit prices using odd numbers that are slightly below whole dollar/pound/euro amounts. • Multiple-unit pricing—setting a single price for two or more units of a product. • Reference pricing—pricing a product at a moderate level and positioning it next to a more expensive model or brand. • Bundle pricing—packing two or more complementary products and selling them for a single price. • Everyday low prices (EDLP or also known as economy pricing)—setting a low price for products on a consistent basis. • Customary pricing—pricing on the basis of tradition.

22. Pricing Strategies (cont’d) • Product-line pricing • Captive pricing—pricing the basic product in a product line low, but pricing related items at a higher level. • Premium pricing—pricing the highest-quality or most versatile products higher than other models in the product line. • Price lining—setting a limited number of prices for selected groups or lines of merchandise. • e.g. MARS 32p, Four-pack 99p, Bite-size £1.29 • Promotional pricing • Price leaders—products priced below the usual markup, near cost, or below cost. • Special-event pricing—advertised sales or price cutting linked to a holiday, season, or event. • Comparison discounting—setting a price at a specific level and comparing it with a higher price.

23. Pricing Business Products • Geographic pricing • FOB (free-on-board) origin pricing—the seller’s pricing is exclusive of delivery costs; the buyer pays the product delivery costs. • FOB destination pricing—the seller includes transportation costs in the product pricing. • Transfer pricing • A company’s strategy for the pricingof internally transferred products between organizational units.

24. Pricing Business Products (cont’d) • Discounting • Trade discounts—discounts given intermediaries or middlemen. • Quantity discounts—discounts for large volume purchases. • Cash discounts—discounts for prompt payment (e.g., “2/10, net 30”: a 2% discount for paying the full bill within 10 days). • Seasonal discounts—price reductions for buyers who purchase out of season. • Allowances—price reductions to achieve certain goals (i.e., to increase sales and/or to switch customers away from competing products) through dealer incentives or customer trade-ins.

25. Hold current price; continue to monitor competitor’s price No Has competitor cut price? Yes Reduce price No Will lower price negatively affect our market share & profits? Raise perceived quality Yes No Launch low-price “fighting brand” Can/should effective action be taken? Yes Responding to Competitor’s Price Changes

26. Public Policy Issues in Pricing • Between manufacturers • Price-fixing • Predatory pricing • Between manufacturers and retailers • Retail price maintenance • Discriminatory pricing • Between retailers and consumers • Deceptive pricing • Between manufacturers and consumers • Deceptive pricing

27. Ten ways to ‘increase’ prices without increasing price • Revise the discount structure • Change the minimum order size • Charge for delivery and special services • Invoice for repairs on serviced equipment • Charge for engineering, installation • Charge for overtime on rushed orders • Collect interest on overdue accounts • Produce less of the lower margin models in the line • Write penalty clauses into contracts • Change the physical characteristics of the product