Price:
Major Pricing Strategies:
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Price: the amount of money charged for a product or a service, or the sum of the values that customers exchange for the benefits of having or using the product or service.
Major Pricing Strategies:
- Customer perceptions of the product’s value set the ceiling for prices; if customers perceive that the price is greater than the product’s value, they will not buy the product.
- Product costs set the floor for prices; if the company prices the product below its costs, company products will suffer.
Customer Value-Based
There are 2 types of value-based pricing:
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Customer Value-Based
- Setting price based on buyers’ perceptions of value rather than on the seller’s cost.
- Company first assesses customer needs and value perceptions, then sets a price based on customer perceptions of value.
There are 2 types of value-based pricing:
- Good-Value Pricing: offering just the right combination of quality and good service at a fair price.
2. Value-Added Pricing: attaching value-added features and services to differentiate a company’s offers and charging higher prices.
Cost-Based Pricing
Types of Costs
Cost-Based Pricing
- Setting prices based on the cost for producing, distributing, and selling the product plus a fair rate of return for effort and risk
Types of Costs
- Fixed costs (Overhead): costs that do not vary with production or sales level
- Variable costs: costs that vary directly with the level of production
- Total costs: the sum of ht fixed and variable costs for any given level of production
Cost-Plus Pricing (Mark-Up Pricing):
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Cost-Plus Pricing (Mark-Up Pricing): adding a standard mark-up to the cost of the product.
Competition-Based Pricing
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Competition-Based Pricing
- Setting prices based on competitors’ strategies, prices, costs, and market offerings.
- If consumers perceive that the company’s product or service provides greater value, the company can charge a higher price. If consumers perceive less value relative to competing products, the company must either (1) charge less or (2) change customer perception to charge more.
Internal Factors
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Internal Factors
1. Overall Marketing Strategy
- Before setting price, the company must decide on its overall marketing strategy
- Pricing strategy is largely determined by decisions on brand positioning (Honda developed its Acura brand to compete with European luxury-performance cars & so needed to to set prices in line with luxury performance cars)
2. Objectives
- A firm can set prices to attract new customers or to profitably retain existing ones9
- It can set prices low to prevent competition form entering the market, or set prices at competitors’ levels to stabilize the market
3. Marketing Mix
- Pricing decisions must be carefully coordinated with other marketing mix elements, because decisions made for other marketing mix variables may affect pricing decisions
- Target Costing: pricing that starts with an ideal selling price, and then targets costs that will ensure that the price is met.
- Often, the best strategy is not to charge the lowest price but rather to differentiate the marketing offer to make it worth a higher price.
- Organizational Considerations
* Who within the company should set prices?
II. External Factors
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- Pricing in Different Types of Markets
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2. The Economy
3. Other External Factors
II. External Factors
1. The Market and Demand
- Pricing in Different Types of Markets
- Pure Competition: market consists of many buyers and sellers trading in a uniform commodity such as wheat, copper, or financial securities. No single buyer or seller has much effect on the going market price. (Not much time spent on marketing strategy)
- Monopolistic Competition: market consists of many buyers and sellers who trade over a range of prices rather than a single market price. This way sellers can differentiate their offers to buyers. (Marketing matters!)
- Oligopolistic Competition: market consists of a few sellers who are highly sensitive to each other’s pricing and marketing strategies. (Rogers, Bell, Fido, Telus)\
- Pure Monopoly: market consists of one seller. (Canada Post, Hydro Quebec)
- Price-Demand Relationship: each price the company might charge will lead to a different level of demand. (For prestige (luxury) goods, higher
price = higher demand) - Price Elasticity of Demand: If demand hardly changes with a small change in price → inelastic → sellers will consider lowering theprice. If demand changes greatly → elastic.
2. The Economy
- Economic factors such as a boom or a recession, and interest rates affect pricing decisions because they affect consumer spending, consumer perceptions of the product’s price and value, and the company’s costs of producing and selling a product.
3. Other External Factors
- Resellers: how will they react? will they make a fair profit?
- Government
- Social concerns
New Product Pricing
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New Product Pricing
Market-Skimming Pricing: setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price;
Market-Penetration Pricing: setting a low initial price for a new product in order to attract a large number of buyers and a large market share. High volumes sales results in falling costs, which allows the company to lower their prices even further. The market must be highly price sensitive
Product Mix Pricing
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Product Mix Pricing
- Product Line Pricing: setting the price steps between various products in a product line based on cost differences between the products, customer evaluations of different features, and competitors’ prices. Example: A company offers some 20 different collections of bags from its laptop bags ranging from $20-$35, to it high-end luggage line, where a small suitcase retails at $500
- Optional-Product Pricing: the pricing of optional accessory products along with a main product. Example: New cars offer sound systems, Bluetooth, GPS systems, and many other options
- Captive-Product Pricing: setting a price for products that must be used along with a main product, such as blades for a razor, games for a video-game console, and ink for printers. Often, the main product is priced low while there are markups on the supplies.
- By-Product Pricing: setting a pice for by-products to make the main product’s price more competitive. ex: selling left over meat from production to dog cats food market
- Product Bundle Pricing: combining several products and offering the bundle at a reduced price. Example: fast food restaurants bundle a burger, fries and soft drink into
Price Adjustment Strategies
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Price Adjustment Strategies
1. Discount and Allowance Pricing
- Discount: a straight reduction in price on purchases during the stated period of time or on larger quantities.
- Cash discount: price reduction to buyers who pay their bills promptly (Ex: 2/10, n30)
- Quantity discount: price reduction to buyers who buy large volumes
- Seasonal discount: price reduction to buyers who buy merchandise or services out of season
- Allowance: promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturer’s products in some way.
- Trade-In Allowance: price reductions given for turning in an old item when buying a new one
- Promotional Allowance: payments or price reductions to reward dealers for participating in advertising and sales support programs
2. Segmented Pricing: Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs
- Customer-segment pricing: different customers pay different prices for the same product or service. Example: Museums charge a lower admission for students and seniors
- Product-form pricing: different versions of the product are priced differently but not according to differences in their costs. Example: 1st class and economy seating on a flight
- Location-based pricing: a company charges different prices for different locations, even though the cost of offering each location is the same. Example: seating in a sports arena
- Time-based pricing: a firm varies its different prices by the season, the month, the day, and even the hour. Example: Cheapy Tuesdays at the movie theatre
- Caution! Consumers in higher price tiers must fell that they’re getting the extra money’s worth for the higher price paid and consumers in lower price tiers must not be treated as second-class citizens!
3. Psychological Pricing: pricing that considers the psychology of prices and not simply the economics; the price is used to say something about the product. Example: a $100 bottle of perfume may contain only $3 worth of materials, but consumers are willing to pay the $100 because this price indicates something special. Example: who’s the better lawyer? the one who charges $50/hour or the one who charges $500/hour? Example: consider a TV priced at $499.99 vs. $500
- References prices: prices that buyers carry in their minds and refer to when they look at a given product. Example: a company could display its products next to more expensive ones to imply that it belongs in the same class
4. Promotional Pricing: temporarily pricing products below the list price and sometimes even below cost to increase short-run sales.
- Discounts
- Special-event pricing such as promotional pricing during November/December to attract Christmas shoppers
- Cash rebates: manufacturer send rebate directly to the customer
- Low-interest financing
- Longer warranties
- Free maintenance
- Caution! Promotional pricing used too frequently can create “deal-prone” customers who wait until brands go on sale before buying them
5. Geographical Pricing: setting prices for customers located in different parts of the country
or world
- FOB-origin pricing: goods are place free on board (FOB) = customers pays shipping
- Uniform-delivered pricing: company charges the same price plus freight to all customers, regardless of their location
- Zone pricing: all customers within a given zone pay a single total price, and more distant zone pay a higher price
6. Dynamic Pricing: adjusting prices continually to meet the characteristics and needs of
individual customers and situations. Example: consumers control pricing by bidding on
auction site such a eBay or Kijiji. Other examples include: Amazon, Ticketmaster
7. International Pricing: companies that market their products worldwide must decide what
prices to charge in the different countries in which they operate. In some cases they set a
uniform worldwide price. Pricing depends on the following factors: economic conditions,
competitive situations, laws and regulations, and development of the wholesaling and
retailing system
- Price Changes
- Initiating price changes:
- Buyer Reactions to Price changes:
- Responding to Price Changes Fighter brand:
Price Changes
Initiating price changes:
- Price cuts are needed because of (1) excess capacity (2) failing demand
- Price increases are needed to (1) improve profits and because of (2) cost inflation
Buyer Reactions to Price changes: a brand’s price and its image are closely linked, and any
price change can adversely affect how customer view the brand
Responding to Price Changes Fighter brand: adding a lower-price item to the line or creating a separate lower-price brand. They are created explicitly to win back customers who have switched to a lower-priced rival
Public Policy and Pricing
Public Policy and Pricing
- Competition Act: its purpose is “to maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy, in order to expand opportunities for Canadian participation in world markets while at the same time recognizing the role of foreign competition in Canada, in order to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy and in order to provide consumers with competitive prices and product choices”
- It prohibits:
- price fixing meaning that sellers must set prices without talking to competitors
- bid rigging: where one party agrees not to submit a bit or tender in response to a call, or agrees to withdraw a bid or tender submitted at the request of another party.
- Predatory pricing: selling below cost with the intention of punishing a competitor, or gaining higher long-run profits by putting competitors out of business
- Price discrimination meaning sellers must offer the same price terms to customers at a
given level of trade - Functional discounts: offering a larger discount to wholesalers than to retailers
- Retail price maintenance meaning a manufacturer cannot require dealers to charge a
specified retail price for its products - Deceptive pricing: when a seller states prices that are not actually available to consumers
