Emran Malik

WHAT IS PRICE?

Price

Price is that which is given up in an exchange to acquire a good or service.

THE IMPORTANCE OF PRICE

To the seller... Price is revenue

To the consumer... Price is the cost of something

Price allocates resources in a free-market economy

THE IMPORTANCE OF PRICE TO MARKETING MANAGERS

PRICING STRATEGY

how does a company decide what price to charge for its products and services? what is the price anyway? doesnt price vary across situations and over time? some firms have to decide what to charge different customers and in different situations they must decide whether discounts are to be offered, to whom, when, and for what reason

THE MEANING OF PRICE

we generally think of price in monetary terms may be more useful to think of what it costs us to acquire something of value

the costs may be monetary or non-monetary

we need to think in terms of time and effort, as well as the monetary costs the consumer often vows never to go back because its not worth the _______

THE CUSTOMER WANTS VALUE

price is not always an important factor in influencing a sale; the customer wants more than a low price, may be willing to pay more the customer considers what he or she gets for the price paid; the seller must offer value price of a product or service communicates a message to the consumer about quality

what causes them to conclude that they paid too much or got a great deal?

THE CONSUMERS VIEW OF PRICE

some consumers are very interested in getting a low price and pay close attention to price; they are price sensitive. But, this is variable and personal many are interested in other elements of the purchase, including brand, quality, etc. there is a tendency to link quality with price consumers are often prepared to pay more if they expect to get added value adding value doesnt mean dropping price

MARKETING MIX
Revenue Producer

Cos t

Product

Price

Cos t

Place

Promotion

Cos t

PRICING
Forms

Price
Components

Functions

$31. 50

$33. 50

Bargainin g

PROFIT MAXIMIZATION

Profit Maximization

Setting prices so that total revenue is as large as possible relative to total costs.

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RETURN ON INVESTMENT
Return on Investment

Net profit after taxes divided by total assets.

ROI =

Net Profit after taxes Total assets

12

CHANGING PRICE ENVIRONMENT Buyers

Ill pay $235.00 Instant Price Comparisons

Get Products Free Name Your Own Price

CHANGING PRICE ENVIRONMENT $29. $19. $24. Sellers

99 99

99

Selective Pricing

Negotiate Prices

Monitor Customers

HOW COMPANIES PRICE

Product-line Managers (w/guidance)

Small Business Owner

Pricing Department

CONSUMER PSYCHOLOGY AND PRICING

Price-Quality Inferences

Reference Prices

99 $1.
Price Endings

A BLACK T-SHIRT

Armani - $275

Gap - $14.90

H&M - $7.90

PRICE - QUALITY STRATEGIES

Price
High
Medium

Low
Super Value

High
Product Quality

Premium Value

High Value

Med

Overcharging

Medium Value

Good-Value

Low

Rip-Off

False Economy

Economy

SETTING THE PRICE

6 5 3 1 Select Final Price Price Method

4 Competitor Analysis Estimate Costs 2 Determine Demand Pricing Objective

Costs that dont vary with sales or production levels. Executive Salaries Rent

Fixed Costs (Overhead)

Variable Costs
Costs that do vary directly with the level of production. Raw materials

Total Costs
Sum of the Fixed and Variable Costs for a Given Level of Production

SELECTING THE PRICING OBJECTIVE

Survival Maximum Current Profit Maximum Market Share Maximum Market Skimming Product-Quality Leadership Other Objectives

DEMAND AND SUPPLY

Demand

The quantity of a product that will be sold in the market at various prices for a specified period.
The quantity of a product that will be offered to the market by a supplier at various prices for a specific period.

Supply

DETERMINING DEMAND

Price sensitivity Estimating demand curves Price Elasticity of Demand

Inelastic and Elastic Demand

ELASTICITY OF DEMAND
Elastic Demand
Consumers buy more or less of a product when the price changes An increase or decrease in price will not significantly affect demand

Inelastic Demand

Unitary Elasticity

An increase in sales exactly offsets a decrease in prices, and revenue is unchanged

ELASTICITY OF DEMAND

Elasticity (E)

Percentage change in quantity demanded of good A Percentage change in price of good A

If E is greater than 1, demand is elastic. If E is less than 1, demand is inelastic. If E is equal to 1, demand is unitary.

FACTORS THAT AFFECT ELASTICITY

Availability of Substitutes Price relative to Purchasing Power Factors That Affect Elasticity of Demand Product Durability Products Other Uses

HOW DEMAND AND SUPPLY ESTABLISH PRICE

Price Equilibrium
The price at which demand and supply are equal.

Elasticity of Demand

Consumers responsiveness or sensitivity to changes in price.

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EQUILIBRIUM PRICE
2.50 2.00 Price 1.50 Price Equilibrium S Shortage D 120 D Surplus S

1.00
.50 0

20

40

60

80

100

Quantity demanded

ESTIMATING COSTS
Demand

Price Ceiling Price

Price Floor

Profit Costs

ESTIMATING COSTS
Types of costs

Fixed Costs (overhead)

Variable Costs

Total Costs

Costs at Varying Levels of Production

ESTIMATING COSTS
Accumulated Production
Experience Curve
(Learning Curve)

ESTIMATING COSTS
Target Costing

Market research

Design engineers

The Experience Curve

ANALYZING COMPETITORS OFFERS

Price Costs Reaction

Worth to Customer

SELECTING A PRICING METHOD

Pricing Methods Markup Target-return Perceived-Value Value Going-rate Auction-type

MARKUP PRICING
Variable cost per toaster $10 Fixed costs $300,000 Expected unit sales 50,000

TARGET-RETURN PRICING

FACTORS TO CONSIDER WHEN SETTING PRICES

Break-Even Analysis and Target Profit Pricing
break-even= fixed cost volume (price-variable cost)

10-20

Target-Return Pricing

PERCEIVED-VALUE PRICING
Customers perceived-value
Performance $$$ Warranty $ Customer support $ Reputation $$

VALUE PRICING
THOUSANDS OF

EDLP

Level of Qualit y

LOW PRICES EVERY DAY

throughout the store

P C 1 1

P C 2 2

Pricing
Low

High

GOING-RATE PRICING

Commodities

Follow the Leader

AUCTION PRICING
English auction
(ascending bids)

Dutch auction
(descending bids)

Sealed-bid auction

DEFINITIONS
Market-Skimming
Setting

Pricing

a high price for a new product to skim maximum revenues layer by layer from segments willing to pay the high price.

DEFINITIONS
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

Product
Setting

Line Pricing

price steps between product line items.

Price points

PRODUCT MIX PRICING STRATEGIES

Optional-Product Pricing

Pricing optional or accessory products sold with the main product Supplemental software, digital cameras, and printers sold with a new PC are examples

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PRODUCT MIX PRICING STRATEGIES

Captive-Product Pricing

Pricing products that must be used with the main product High margins are often set for supplies Services: two-part pricing strategy Fixed fee plus a variable usage rate

PRODUCT MIX PRICING STRATEGIES

By-Product Pricing
Pricing

of low-value by-products to get rid of them

PRODUCT MIX PRICING STRATEGIES

Product Bundle Pricing

Pricing

bundles of products sold together Common in fast food industry

High Price
(No possible demand at this price)

Ceiling price

Three Cs Model for Price Setting

Customers assessment of unique product features

Orienting point Competitors prices and prices of substitutes Costs Floor Price Low Price
(No possible profit at this price)

SETTING THE PRICE

Pricing Procedure

Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price

Survival Maximize current profits Maximize market share

Penetration strategy Skimming strategy

Market skimming

Product quality leaders Partial cost recovery

SETTING THE PRICE

Pricing Procedure

Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price

Understand factors that affect price sensitivity Estimate demand curves Understand price elasticity of demand

Elasticity Inelasticty

MARKETING STRATEGIES
Conditions Under Which Consumers are Less Price Sensitive:

Product is more distinctive Buyers are less aware of substitutes Buyers cannot easily compare quality of substitutes The expenditure is a lower part of buyers total income The expenditure is small compared to the total cost

Part of the cost is borne by another party The product is used with assets previously bought The product is assumed to have more quality, prestige, or exclusiveness Buyers cannot store the product

MARKETING STRATEGIES
Conditions Under Which Demand is Less Elastic:

There are few or no substitutes Buyers do not readily notice the higher price

Buyers are slow to change their buying habits and search for lower prices Buyers think higher prices are justified

SETTING THE PRICE

Pricing Procedure

Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price

Types of costs and levels of production must be considered Accumulated production leads to cost reduction via the experience curve Differentiated marketing offers create different cost levels

SETTING THE PRICE

Key Pricing Terms:

Fixed

costs: do not vary directly with changes in level of production Variable costs: vary with production Total costs: sum of fixed and variable costs a given level of production Average cost: cost per unit at a given level of production

SELECTING THE FINAL PRICE

Impact on others

Brand Qualit y

Pricing Policies Gain-and-risk-sharing

SETTING THE PRICE

Pricing Procedure

Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price

Firms must analyze the competition with respect to:

Costs Prices Possible price reactions

Pricing decisions are also influenced by quality of offering relative to competition

SETTING THE PRICE

Pricing Procedure

Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price

Price-setting begins with the three Cs Select method:

Markup pricing Target-return pricing Perceived-value pricing Value pricing Going-rate pricing Auction-type pricing Group pricing

SETTING THE PRICE

Pricing Procedure

Requires consideration of additional factors:

Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price

Psychological pricing Gain-and-risk-sharing pricing Influence of other marketing mix variables Company pricing policies Impact of price on other parties

ADAPTING THE PRICE

Geographic Pricing Price Discounts and Allowances

Differentiated Pricing

Promotional Pricing

ADAPTING THE PRICE

Geographical Pricing
Barter
Compensation

deal Buyback arrangement Offset

PRICE CHANGES
Initiating Price Cuts is Desirable When a Firm:

Has excess capacity Faces falling market share due to price competition Desires to be a market share leader

PRICE CHANGES

Price Increases are Desirable:

If a firm can increase profit, faces cost inflation, or faces greater demand than can be supplied.

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ADAPTING THE PRICE

Price Discounts and Allowances:

Cash discounts Quantity discounts Trade-in allowances

Functional discounts Seasonal discounts Promotion allowances

ADAPTING THE PRICE

Promotional Pricing Tactics:

Loss-leader pricing Special-event pricing Cash rebates Low-interest financing

Longer payment terms Warranties and service contracts Psychological discounting

ADAPTING THE PRICE

Discriminatory Pricing Tactics:

Customer segment pricing Product-form pricing Image pricing

Channel pricing Location pricing Time pricing

ADAPTING THE PRICE

Price discrimination works when:

Market

segments show different intensities of demand Consumers in lower-price segments can not resell to higher-price segments Competitors can not undersell the firm in higherprice segments Cost of segmenting and policing the market does not exceed extra revenue

ADAPTING THE PRICE

Product-Mix Pricing Tactics:

Product-line pricing Optional-feature pricing Captive-product pricing

Two-part pricing By-product pricing Product-bundle pricing

DEALING WITH PRICE CHANGES

Raising Prices

Cutting Prices

Competitor Moves

PRICE CHANGES

Methods of Increasing Price

Eliminating

discounts Adding higher-priced units to the product line

Alternatives to Increasing Price

Reducing

product size Using less expensive materials Unbundling the product

PRICE CHANGES

Buyer reactions to price changes must be considered.

PRICE CHANGES
Competitors

are more likely to react to price changes under certain conditions.

Number

of firms is small Product is uniform Buyers are well informed

PRICE CHANGES

Respond To Price Changes Only If:

Market

share / profits will be negatively affected if nothing is changed. Effective action can be taken:

Reducing price Raising perceived quality Improving quality and increasing price Launching low-price fighting brand

INITIATING AND RESPONDING TO PRICE CHANGES

Strategic Options Include:

Maintain

price and perceived quality; selectively prune customers Raise price and perceived quality Partially cut price and raise quality Fully cut price, maintain perceived quality Maintain price, reduce perceived quality Introduce an economy model

INITIATING AND RESPONDING TO PRICE CHANGES

Key Considerations

Circumstances leading to price cuts:

Initiating price cuts Initiating price increases Reactions to price changes Responding to competitors price changes

Excess plant capacity Declining market share Attempt to dominate the market via lower costs Price/quality perceptions Low prices dont create market loyalty Competition may match or beat price cuts

Price cutting traps:

INITIATING AND RESPONDING TO PRICE CHANGES

Key Considerations

Circumstances leading to price increases:

Initiating price cuts Initiating price increases Reactions to price changes Responding to competitors price changes

Cost inflation Overdemand

Methods of dealing with overdemand:

Delayed quotation pricing Escalator clauses Unbundling Reduction of discounts

INITIATING AND RESPONDING TO PRICE CHANGES

Key Considerations

Initiating price cuts Initiating price increases Reactions to price changes Responding to competitors price changes

Firms must monitor both customer and competitor reactions Competitor reactions are common when:

Few firms offer the product The product is homogeneous Buyers are highly informed

INITIATING AND RESPONDING TO PRICE CHANGES

Key Considerations

Initiating price cuts Initiating price increases Reactions to price changes Responding to competitors price changes

The degree of product homogeneity affects how firms respond to price cuts initiated by the competition Market leaders can respond to aggressive price cutting by smaller competitors in several ways

INITIATING AND RESPONDING TO PRICE CHANGES

Market Leader Responses to Competitor Initiated Price Cuts:

Maintain price and profit margin Maintain price, add value

Increase price, improve quality Launch a low-price fighter line

Reduce price