Marketing Chapter 12

Pricing Objectives

1. Profit-Orientated pricing Objectives

When a firms focus is maximizing profits by setting prices so that revenue will be as high as possible relative to total costs resulting in satisfactory profits.

Target return on investments

2. Sales oriented pricing objectives

Is based on market share or rand values.

Market share > the firms product sales as a percentage of total sales in the industry. Larger market share have indeed meant higher profits

Sales maximization > rather than striving for market share, one firms tryst to maximize sales WHICH IGNORES profits competition and the marketing environment just as long as sales are increasing.

3. Status quo Pricing Objectives

Is an attempt to maintain existing prices or to meet the competitions prices. This category has a major advantage of needed little planning

Demand and supplu

Demand:

The quantity of a product that will be sold in the market at various prices for a specified period

Economic theory > As price increases, demand decreases (visa versa)

Supply:

The quantity of a product that will be offered by a supplier at various prices for a specified period.

Economic Theory > as price increases, Supply increases BECAUSE! The higher the price charged, the more goods the supplier can manufacture.

Elasticity

Elasticisity of demand: the responsiveness or sensitivity to changes in price

elastic demand: when consumers buy more or less of a product when the price changes

Inelastic demand: an increase/decrease in price will not significantly effect demand for the product.

Unitary elasticity: an increase in sales offsets a decrease in prices so that the total revenue remains the same

Factors that affect elasticity

1. Availability of Substitutes

2. Price Relative to purchasing power

3. Product durability

4. A products other uses

How costs can be used to determine prices

1. Mark-up Pricing

Markup-up pricing > is the cost of buying the product from the producer + amounts for profit and expenses not accounted for. The total cost thus determines the selling price.

2. Profit Maximization Pricing

This occurs when Marginal revenue = marginal costs

3. Break even pricing

Break even analysis determines what sales volume must be reached before the firm breaks even and no profits are earned.

It provides a quick estimate of how much the firm must sell to break even and how much profit can be earned if a higher sales volume is produced

Stages in the product life cycle

1. Introductory stage

Companies set high prices for brand new products to recover development costs, then gradually lower them later

2. Growth stage

Prices starts to stabilizing, fewer competitors enter the market and production becomes more efficient

3. Maturity

Prices drop due to heavy competition causing weaker companies to fail, leaving surviving companies to charge similar prices.

4. Decline stage

As demand fades, the surviving companies jusy charge the same prices because lowering the prices won’t bring in any new customers

How to set a Price on a Product

Step 1: Formulate pricing Objectives

Choose between

Profit-orientated pricing objectives

Sales-orientated pricing objectives

Status quo

Step 2: Estimate demand, costs and profits

Estimate total revenue at various prices, then determine the corresponding costs for each price

Then estimate how much profit and market share can be earned at each price.

Step 3: Choose a price strategy

• Price Skimming > launching ur products at high prices ti maximize profits from consumers who really want it first, then lower the price later

• Penetration pricing > launching your price at a very low price to get as many people as possible to try it quickly and steal customers away from competitors

• Status quo > charging prices very close to competitors prices

Legality and ethics of price strategies

1. Price fixing

An agreement between 2 or more firms on the price they gonna charge for the product

2. Predatory Pricing

Charging a very low price to drive out competitors out of business, once competitors are out — prices increases

Step 4: Fine Tune the base

Tactics to fine tune the base

1. Discounts, allowances and rebates

• Quantity discounts

• Cash discounts

• Seasonal discounts

• Promotional allowances > payment to a retailer for promoting the manufacturers products

• Rebate > refund

• Functional > when intermediaries performs a service on behalf of the manufacturer

Trade loading

When a manufacturer temporarily lowers their prices to pull in wholesalers + retailers to buy more products than can be sold in a reasonable time.

Geographic pricing

• FREE ON BOARD (FOB)

The buyer takes over the shipping costs and risks as soon as the product leaves the sellers factory

• Uniform delivery

Everyone pays the exact same delivery price no matter where they live

• Zone pricing

The company divides the map into different areas, and each area pays different prices depending on which area they in.

• Freight Absorption pricing

The seller pays for the shipping costs to offer competitive prices to distant customers

• Basing point pricing

The shipping fee is calculated from 1 specific standard location, even if the product actually ships from warehouse close by

Special pricing tactics

1. Single price tactic: 1 price for each product

2. Flexible pricing: price changes according to demand, customers pay different prices for the same product.

3. Price lining: offering a product line with several items at specific price points (R40, R60, R90)

4. Leader pricing: offering prices near to or even below

5. Bait pricing: false or misleading advertising

6. Odd-even pricing: 100 vs 99.99

7. Price Bundling: marketing products as a package

8. Two-part pricing: establishing 2 separate charges to a consumer. Eg. A gym fee plus a fee to use a machine.

9. Product-line pricing: setting prices for an entire product line

Relationships between products

• Complementary > items are complementary if an increase in the one product, increases the DEMAND for the other

EXAMPLE: the sales of a tennis shirt depends on the demand for tennis shorts.

• Substitute products > if buyers buy 1 item in the line, they are less likely to buy a second item in the line

• Neutral Relationship > the demand for 1 product is unrelated to the demand for another.

Pricing during economic times: During inflation

1. Cost-Orientated Tactics

• Culling products with a low profit margin from the product line.

• -delayed quotation pricing [ the price is not set until the item is completed or delivered]

• Escalator Pricing [allows for price increases based on the cost of living index or some other formare depenula]

2. Demand-Orientated Tactics

• Price Shading > using discounts to increase the demand for 1 or more products

Tactic ls to demand more inelastic demand:

• Cultivating selected demand = targeting customers who will pay extra for superior quality

• Creating unique offerings= designing distinctive, unique products /services fitting buyers lifestyle and preferences

• Changing package size = shrink products sizes, but keep the same price.

• Heightening buyer dependence = For example: many SA banking clients are dependent on their banks bc they provide them with more services other thank banking (insurance + investment advice)

During Recession

Tactics:

Value pricing > stresses customers that they are getting good value for their money

Price bundling/Unbundling > stimulates demand during recession. Eg adding a feature to a bundle.

Tactics to use with suppliers:

• Renegotiating contracts with suppliers

• Offer help to suppliers

• Keeping the pressure on

• Paring down suppliers