Amity School of Business: Marketing Management - II

Amity School of Business

Marketing Management - II
PRICING Module - III
Pricing Concept & Importance

Pricing = deciding what price to set for products and services
What is a price?
What the buyer is prepared to pay in exchange for a product or service
Not just a number on the tag or an item, it is all around:

Rent Fees Fare Interest Toll Tax Premium Honorarium Bribe Salary Commission
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Price and the Marketing Mix

Price is a very important part of the marketing mix Price directly influences profits by creating revenue rather than affecting costs One element of marketing mix that produces revenue. All other produce cost.
Importance of Price
Helps and establishes a firms image High price means better quality? Diamonds Low price means more for your money? Gas Establishes a competitive edge Will beat any competitors price Helps determine profit Revenue = price X quantity
Price helps a business differentiate its product or service compared with other, similar products
E.g. High price = better quality?
The price that is set must be consistent with everything else in the marketing mix
E.g. a high-priced product needs to have features/benefits that customers feel justify paying more
Example !!!
The black T-shirt for women looks pretty ordinary. In fact theres not much difference in a black t-shirt sold by GAP or an ordinary discount clothing chain. Yet a black Armani T-shirt costs $275, where as the GAP item costs $14.90 and a ordinary thing somewhere around $7. Customers who purchase the Armani T-shirt are paying for a T-shirt made of 70% Nylon, 25% polyester and 5 % elastine. Whereas the GAP T-shirt are made mainly of cotton.
True, that Armani is a bit more stylish cut than the others and sports a Made in Italy label, but how does it command $275 tag.
A luxury brand Armani is mainly known for its suits, handbags and evening gowns that it sells for thousands of dollars. Because there are not many takers for $275 t-shirt, Armani doesn't make many, thus further enhancing the appeal for status seekers who like the idea of having a limited edition T-shirts. Value is not only quality, function, utility, distribution, its also a customers perception of a brands luxury connotations
Arnold Aronson, Former CEO Saks Fifth Avenue.
Market Factors Affecting Price

1. Costs and Expenses What happens when the price for a barrel of oil goes up? Keeping customers happy Same price but reduce size bag of chips Same price but drop features no meal on a plane Higher price but more features Break even point sales revenue equals costs and expenses after this its all profit

2. Supply and Demand Demand elasticity
Elastic demand change in price = change in demand
Steak, Leather
Inelastic demand change in price has little effect on demand

Milk, Heart Transplant
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3. Consumer Perceptions
A low priced item can be perceived as Cheap A high priced item can be perceived as High quality Premium pricing Pricing a product high, either because it is of good quality or to be perceived as good quality
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4.

Competition
Price vs. non-price competition Price competition appeals on low price, when product are very similar Non-Price competition minimizes price as a reason for purchase and focuses on something else, anything else
Quality Service Convenience Association
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Pricing Process
Selecting the pricing objective
Determine Demand
Estimate Cost Analyze competitors cost, price and offers Selecting pricing method
Selecting the final price
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Selecting Pricing Objective

Decide where it wants to position its market offering. A company generally pursues any of 5 pricing objectives:1. 2. 3. 4. 5. Survival Maximum current profit Maximum market share Maximum market skimming Product-Quality leadership
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Determine Demand
Each price leads to a different demand and has different impact on marketing objectives. The relationship between alternative prices and the resulting current demand is captured on the demand curves. Measure the impact of price change on total revenue
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Determine Demand
Different customers have different price sensitivities and needs In normal case demand and price are inversely related. In case of prestigious goods, demand curve sometimes slopes upward. Some consumers take higher price as a indicator of better quality.
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Estimate Cost
Demand sets a ceiling on the price the company can charge and costs sets the floor. Company charges a price that covers its cost of producing, distributing and selling the product, including a fair return for its effort and risk. Types of costs:
Fixed Cost Total Cost Variable Cost Average Cost
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Analyze Competitors Cost, Price and Offers

With a range of possible prices determined by market demand and company costs the firm must take competitors cost, price and possible price reactions into account Firm should consider the nearest competitor price. If the firm is offering positive differentiation features not offered by competitor, their worth to the customer should be evaluated and added to the competitors price and vice versa.
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Selecting a Pricing Method

Given the customers demand schedule, the cost function and competitors prices, the company now selects a price.
Price Setting Methods:

1. Mark up Pricing 2. Target Return Pricing 3. Perceived Value Pricing 4. Value Pricing 5. Going Rate Pricing
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(1) Mark Up Pricing

Most elementary method. Add up a standard markup to the products cost.
E.g. Construction companies submit a bid by estimating total cost of project and adding a standard markup for profit.
Generally higher on seasonal items (to cover risk of not selling), specialty item, slow moving goods, items with high storage and handling cost and demand inelastic products.
Doesn't consider current demand, perceived value and competition.
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(2) Target Return Pricing

The firm determines the price that would yield its target ROI. E.g. General motors has priced its products to achieve a 15-20% ROI.
Target-return price = unit cost + desired return x invested capital unit sales
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(3) Perceived Value Pricing

Base price on the basis of customers perceived value. Made of many factors like:
Buyers image of product performance Guarantee & Warranty Quality of product Customer support Supplier reputation
Firms use marketing mix elements like sales force and advertising to enhance perceived value.
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(4) Value Pricing

Winning customer loyalty by charging fairly low price for high quality offering. Its not only about setting low prices but reengineering processes to become low cost producer.
This approach is used where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales e.g. value meals at McDonalds. E.g. EDLP, high-low pricing In EDLP pricing, a retailer charges a constant, low price with no temporary discounts. For example: Wal-Mart, Price Club, and Saturn. In high-low pricing, a retailer charges higher prices but then runs frequent promotions in which prices are temporarily lowered.
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(5) Going- rate Pricing

Firm basis its price largely on competitors prices. In industries like paper, fertilizer, steel, almost everyone has similar prices. Competitive response is uncertain.
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Selecting Final price

Impact of other marketing activities
Branding, advertising.
Company pricing policy

Impact on other parties.
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Adapting the price

Companies usually don't set a single price, but rather develop a pricing structure that reflects variations in geographical demand and cost, market segment requirements, purchase timing, delivery frequency, etc.
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Price Adaptation Strategies

Geographical Pricing Price Discount & Allowances Promotional Pricing Differentiated Pricing
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Geographic Pricing Strategies

F.O.B. Point-of-Production pricing: Price quoted at factory-- buyer pays transportation.
Uniform delivered pricing: Same delivered price quoted to all; works if transportation costs small. Zone-delivered pricing: Set same price within several zones
Freight-absorption pricing: Seller absorbs transport cost to penetrate market.
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Price Discount and Allowances

Cash Discount = A price reduction to buyer who pays the bill promptly. Quantity Discount = A price reduction to those who buys large volumes. Functional Discount = Discount (trade discount) offered by a manufacturer to trade channel members Seasonal Discount = A price reduction to those who buy merchandise or services out of season Allowance = An extra payment to gain reseller participation in special programs. (Trade-in allowances, Promotional allowances)
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Promotional Pricing
Pricing to promote a product is a very common application. There are many examples of promotional pricing including approaches such as
BOGOF (Buy One Get One Free). Loss leader pricing Special event pricing Cash rebates Longer payment terms Warranties and service contracts Psychological discounting
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Loss Leaders
A product offered at a loss to entice customers to visit a shop or website. The hope is that customers will either :
Purchase other products at the same time, Or become longtime / loyal customers to make up for the loss.
Advantages
Loss leaders can be just a few products in a much wider range - but the customer has the impression that the whole range is great value Good method of short-term pricing
Disadvantages
Customers come to expect low prices on these products
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Differentiated Pricing
Customer Segment Pricing: Different groups charged different prices (eg. Museums) Product form pricing: Different versions of the product are priced differently but not proportionately to their cost. Channel pricing: Based on the channel
Location Pricing: E.G. Theater

Time Pricing: By season, day, hour (eg. Restaurants)
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For discrimination (pricing) to work:

Market must be segmentable Segments should show different intensities of demand Competitors must not be able to undersell the firm in a high segment market. Cost of segmenting should not be very high
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More Pricing Strategies & Application.

Cost-plus pricing Penetration pricing Price skimming Predatory pricing Competitor pricing Setting a price by adding a fixed amount or percentage to cost of making product Setting a very low price to gain as many sales as possible Setting a high price before other competitors come into market Setting a very low price to knock out all other competition Setting a price based on competitors prices
Price discrimination
Psychological pricing
Setting different prices for same good, but to different markets e.g. peak and off peak mobile phone calls
Setting a price just below a large number to make it seem smaller e.g. 9.99 not 10
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Price-Quality Strategies
Philip Kotler identified 9 price-quality strategies High Price Low Price High Value Mid Value Super Value Good Value
High Quality Premium

Over Charging Rip-off Low Quality
False Economy Economy

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Product Life Cycle and Pricing

The Product Life Cycle
Describes how sales of a product change over time Various phases introduction; growth; maturity; decline Price needs to change depending on the stage of the product life cycle
E.g. launch phase

For a new market with few competitors. Then price can be high
E.g. growth phase

More competitors and higher sales volume; price likely to be lower
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Product Mix Pricing

Prices can be modified when a product is a part of entire product mix. In that case a firm searches for a price that maximizes profits of the total mix.
Optional Feature Pricing Captive Product Pricing Two Part Pricing Product Bundle Pricing
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Amity School of Business: Marketing Management - II

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