Pricing Products: Considerations, Approaches, and Strategy

Outline

What is price? Factors to consider when setting prices. General pricing approaches. Pricing strategies. Price changes.

The Importance of Price

To the seller... Price is revenue and profit source

What is Price?

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

In the broadest sense, price allocates resources in a free-market economy

First Channel Asia Pacific

Importance of Price
Three variables that determine profit:

Sales Volume

X Price - Cost = Profit

The Importance of Price

High rate of new product introduction Increased availability of bargain-priced dealer and generic brands

Trends in the Market

Price cutting as a strategy to maintain or regain market share

More efficient and better informed buyers

First Channel Asia Pacific

Pricing Products: Considerations, Approaches, and Strategy

What is Price? The amount of money charged for a good or service. The sum of the values customers exchange for the benefits of having or using the product or service. An important component of the Marketing Mix: the only component that generates revenue. Price, utility, and value are related. Utility is the attribute of an item that satisfy human wants. Value is the worth of a product or service. Price is the common denominator used to express value or utility. Value = Utility divided by price Price is the sum (reflection) of values. It is the sum of money buyers and sellers are willing to transact.

Pricing Products: Considerations, Approaches, and Strategy Price is the most flexible element among the other 3 Ps. It can be changed quickly (but be careful of consequences!). It is not easy to change product features, promotional campaigns, or distribution channels. Therefore, price is the number one problem facing marketers.

Pricing Products: Considerations, Approaches, and Strategy

Common Pricing Mistakes?

Too cost-oriented and does not reflect demand. Not revised enough to reflect market changes. Does not take into account the other 3 marketing mix elements. Not varied enough for different product items, market segments and purchase decisions.

Pricing Products: Considerations, Approaches, and Strategy

Factors to Consider When Setting Prices

Internal Factors:
Marketing objectives. Marketing mix strategy. Costs. Organization objectives and policies. Other Organizational considerations.

Pricing Products: Considerations, Approaches, and Strategy

Factors to Consider When Setting Prices External Factors:
Market and demand, level of competition in the market. Supply and demand. Government policies and regulations. Political stability. Consumer tastes and purchasing power. Cross selling and upselling. Pricing in different markets. Consumer perceptions of price and value. Analyzing the price-demand relationship. Price elasticity of demand. Factors affecting price sensitivity. Competitors prices and offers. Brand image, product popularity, attractive packaging, etc

Pricing Products: Considerations, Approaches, and Strategy

6 Step Price Setting Procedure Decide on pricing objective Estimate the demand for the product Estimate product cost Analyze competitors pricing Select pricing approach Decide on final price

1. 2. 3. 4. 5. 6.

Pricing Products: Considerations, Approaches, and Strategy

1. Decide on pricing objective
Survival overcapacity, excess stocks, intense competition, changing consumer needs/wants Maximize current Profit profit, cash flow, ROI Maximum sales growth sales volume, market share, lower cost, long run profit, market penetration strategy Maximum market skimming high price to skim the market. Product quality leadership higher price build on higher quality Follow the leader price slightly below market leader Status quo standardized/commodity type product

Pricing Products: Considerations, Approaches, and Strategy

2. Estimate the demand for the product. Price according to the buyers price sensitivity: Unique product less price sensitive Price-quality effect perceived quality/prestige Total expenditure purchase price is a small percentage of buyers income Substitute Awareness effect buyers are less aware of substitute products, or less easy to compare Shared cost effect when part of the cost is borne by someone else Sunkinvestment effect when product is used in conjunction with assets already bought Inventory effect when the product cannot be stored Holidaying effect less sensitive when they are tourists

Pricing Products: Considerations, Approaches, and Strategy

2. Estimate Demand Demand for new products are ESTIMATES. Test market the product in controlled market and observed the results. Price-Demand relationship depends on:
Advertising Competitor pricing Economic condition

Three Ways to Measure Demand

Statistical analysis of historical data Survey research Experiment

The Demand Curve

2.50 2.00

Price

1.50

D
1.00 .50

20

40

60

80

100

120

Quantity demanded

The Supply Curve

2.50 2.00

Price

1.50 1.00 .50

20

40

60

80

100

120

Quantity supplied

Equilibrium Price
2.50 2.00

Surplus

Price

1.50 1.00 .50

Price Equilibrium S Shortage D

20

40

60

80

100

120

Quantity demanded

Price Elasticity of Demand

Price elasticity of demand

% change in demand % change in price

Price inelasticity when price increase/decrease results in small change in demand Price elastic when price increase/decrease leads to substantial change in demand

Elasticity of Demand
Elastic Demand
Consumers buy more or less of a product when the price changes

Inelastic Demand

An increase or decrease in price will not significantly affect demand

Unitary Elasticity

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

First Channel Asia Pacific

Elasticity of Demand
Price Goes... Down Down Up Up Revenue Goes... Up Down Up Down Demand is... Elastic Inelastic Inelastic Elastic

Up or Down

Stays the Same

Unitary Elasticity

Factors That Affect Elasticity

Availability of Substitutes

Price relative to Purchasing Power Product Durability

Factors That Affect Elasticity of Demand

Products Other Uses

Factors Affecting Demand Elasticity:

Organization Factors
Product life cycle Product portfolio Product line pricing Segmentation and positioning Branding

Factors Affecting Demand Elasticity:

Customer Factors
Demand Benefits Value Distribution channel

Factors Affecting Demand Elasticity:

Market Factors
Competition Economic and regulatory environment Exchange rate Geography

Pricing Products: Considerations, Approaches, and Strategy

3. Estimate product cost Costs set the floor or base price:
Fixed costs (overheads) Variable costs Total Costs = fixed + variable cost Average cost = cost per unit at that level of production

How does cost vary with different levels of production?

Average cost falls as production gets higher Beyond a certain capacity, cost can increase due to plant becoming inefficient

Pricing Products: Considerations, Approaches, and Strategy

4. Analyze competitors pricing All things being equal, one cannot price much higher than competition. If price is too low, a price war might be triggered off. Competition can react in following ways: Hold prices the same Lower prices Fight back using tools such as discounts, larger pack size, heavier advertising, etc

Pricing Products: Considerations, Approaches, and Strategy

4. Analyze competitors pricing
How competition reacts depends on:
Price sensitivity of product (brand preference, etc) Market position (Are you stronger in market share, etc?) Price segment served (low, medium, or high market segment?) Product differentiation (degree of differentiation or commodity?) Types of competition (monopolistic, oligopolistic) Non-price options (customer financing, reduce size of item sold, etc) Quality/Service (does the market demand quality/service?)

Pricing Products: Considerations, Approaches, and Strategy

5. Select pricing approach

Cost-plus pricing: a mark-up (depends on product) is added to the cost of the product. Popular for following reasons:
Sellers more certain of cost than demand Simple because no frequent price adjustment to demand changes When industry use this method, price competition is minimized. Sellers assured of fair ROI and do not take advantage of consumers when demand changes.

Pricing Products: Considerations, Approaches, and Strategy

Break-even analysis and target profit pricing: price is set to break-even on costs or to achieve a desired profit level.
Total cost and variable cost remain constant B-E chart do not tell whether we can actually sell the expected amount. Ignores market demand at various prices. 5. Select pricing approach

Buyer-based pricing on Supply and Demand: uses the buyers perceived value, not the cost of the product. Competition-based pricing: the price is set based upon what competitors are charging. Perceived-Value pricing: see the buyers perception of value (not the product cost). Create value!

Break-Even Analysis
Total Revenue

4,000

Total Costs
Break-even point

Price
2,000

Fixed costs

1,000

2,000

3,000

4,000

5,000

6,000

Quantity

Pricing Products: Considerations, Approaches, and Strategy

6 Decide on final price
Psychological Pricing
Price is used as an indicator of quality, especially effective on ego-sensitive products (eg. Branded goods). Odd numbers pricing, eg. RM 299.90 instead of RM 300 Price consistent with company policy, image projection, and philosophy on price discount. Consider potential reaction of distributors, dealers, sales force, competition, suppliers, government, other stakeholders Weigh positive and negative consequences

Company pricing policy

Impact of price on other parties

Other Determinants of Price

Stages of the Product Life Cycle Competition Other Factors That Influence Price

Distribution Strategy

Promotion Strategy

Perceived Quality

Price and Stages in the PLC

Introductor y Stage Growth Stage Maturity Stage Decline Stage

$
High

$
Stable

$
Decrease

$
Decrease Stable High

Distribution Strategy
Convincing Distributors to Carry Product

Offer a larger profit margin

Give dealers a large trade allowance

Pricing Mix and Strategies II

Objectives The major strategies for pricing new products How companies determine pricing to maximize from the Total Product Mix. Different pricing structure for different situations and customers Reactions to price changes of its competitors

1. 2. 3. 4.

Pricing Mix and Strategies

Pricing Strategies Companies do not set a single price, but a pricing structure covering different items within a product line or different lines. Pricing structure changes through PLC to reflect changing cost and demand.

Product Positioning Decision by marketer where to target (or position) its product: Segment Examples Ultimate : Mercedes Luxury : Lexus Special Need : Volvo Middle : Corolla Convenience: Wira Me Too : Iswara Price alone : Kancil

Remarks
The ultimate brand Same quality but lower price Special needs like safety Also Peugeot 403, Sentra Mass market brand One step below Wira, Cheaper Cheaply made and sold at low price

Nine Price-Quality Strategies 1. Premium

Strategy

High Quality

2. High-Value
Strategy

3. Super-Value
Strategy

Medium 4. Overcharging 5. Medium-Value Strategy Strategy Quality Low Quality

6. Good-Value
Strategy

7. Rip-Off
Strategy High Price

8. False-economy 9. Economy
Strategy Medium Price Strategy Low Price

Pricing Mix and Strategies

1. Mercedes high quality, high price 5. Corolla good quality, mid-price level 9. Kancil low cost car and low price

2. High quality, charge less 3. High quality, great savings 6. Good quality, charge less than 5
4, 7, 8 Overprice in relation to quality. Customers may feel cheated and speak negatively against the brand.

Pricing Mix and Strategies

Pricing Strategies
New products: Prestige pricing. Market-skimming prices (skim revenue layer by layer diffusion of innovation) Market-penetration pricing (must have elasticity of demand, cost must reduce with higher volume, low price to discourage competitors)

Price Skimming
Inelastic Demand Superior Product

Situations when Price Skimming is Successful

Legal Protection of Product Technological Breakthrough Limited Production

Pricing Mix and Strategies

Pricing Strategies
Existing products: Product-Line pricing (different prices for product in the same line, eg. Camay, Zest, Ivory, Safeguard) Optional-Feature pricing (eg. Auto gear, auto-cruise) Captive-Product pricing (Gillette razor-blade, printer ink) Two-Part pricing (Monthly fee and usage fee for phone, admission fee and rides for amusement park, entrance fee and monthly fee) By-Product pricing (eg. Database of customers, industrial wastes, etc) Product-bundle pricing (bundle toothpaste and brush, bundle free delivery and installation, etc) Psychological pricing. Promotional pricing.

Pricing Adaptation Strategies (for different segments)

A. B. C. D. Geographical pricing (differing transport cost, overheads, etc) Discounts and Allowances Cash discount (2/10, net 30) Quantity discount (non-cumulative and cumulative) Functional discount (for channel members for storing, recordkeeping, etc) Seasonal Discount (based on time of purchase) Allowances (trade-in, promotional allowances for dealers) Psychological discount (Was RM 399, NOW RM 299) Promotional Pricing Loss Leader Special Event pricing Discriminatory pricing. Customer-segment pricing (students, senior citizens) Product-form pricing (single door or twin door fridge) Timing pricing (same as seasonal discount?) Location pricing (same as geographical pricing?)

Geographic Pricing
FOB Pricing Uniform Delivered Pricing Common Methods of Geographic Pricing Zone Pricing Freight Absorption Pricing

Basing-Point Pricing

Initiating Price Changes

Initiating price cuts. Excess capacity or stock. Falling market share. Drive to dominate the market through lower costs. Initiating price increases. Cost inflation Demand exceeds supply (over demand)

Customer/Buyer reactions to price changes

When price is lowered, customers perceived: Seller is clearing stocks, new better model will be introduced? The products are faulty and not selling well? The seller is in financial difficulties? Prices will go down further, lets wait? When price is increased, customer perceived: The product is popular in demand and short of stock? The product has outstanding features and is value for money? Seller is capitalizing on demand to make more profits.

Competitor reactions to price changes.

Depends on the philosophy, values, behavior (character) and financial positions of each competitor: Is our competitor more interested in profit maximization or market share? Does our competitor intend to dominate the industry? Is their financial position strong or weak? How important is the product to the company?

Companys Response to price changes.

How should we respond to price change by competitor? Answer the following questions: Why did competition change its price? To increase market share, dispose excess stocks, to clear slow-moving stocks, etc? Is the price change temporary or permanent? What will happen to our firms profit and market share if we do not respond? Are other competitors going to respond? What are the other competitors responses likely to be to each possible reaction?

Possible response to price changes by market leaders

Maintain price, when market leader believes:
It could lose too much profit if they drop price It would not lose much market share

Raise Perceived Quality (strengthen the value of its non-price value, such as image, service, etc) Reduce price, when market leader believes:
Its cost have been reduced It would lose market share as the product is pricesensitive (or elastic demand)

Launch low-price fighter product (eg. Gillette vs BIC)

Fine Tuning the Base Price

Quantity Discounts Cash Discounts Functional Discounts Seasonal Discounts

Common Tactics for Fine-Tuning the Base Price

Promotional Allowances
Rebates

Value-Based Pricing

Special Pricing Tactics

Single-Price Tactic
All goods at the same price Different customers pay different price Used by professionals with experience, training or certification Several line items at specific price points Sell product at near or below cost

Flexible Pricing
Professional Services Pricing Price Lining Leader Pricing

Bait Pricing
Odd-Even Pricing Price Bundling Two-Part Pricing

Lure customers through false or misleading price advertising Odd-number prices imply bargain Even-number prices imply quality Combining two or more products in a single package
Two separate charges to consume a single good

Pricing Strategy
Price wars

Other price reductions

Price increases