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Pricing

One of the 4 P's of the Marketing Mix. It means determining the price of the product a firm is selling or going to sell. The other P's are costs to the company, while pricing is revenue.

Pricing Strategy

The activity aimed at finding the optimum price of a product. It typically includes marketing objectives, consumer demand, product attributes, competitors' prices, and market and economic trends.

Objectives of Pricing Strategy

(1) To earn profits; (2) to increase sales volume; (3) company growth; (4) to maintain competitive edge; (5) survival; (6) to create a good image of the product and the company; (7) to discourage competitors from cutting prices.

Types of Pricing Strategies

(1) Penetration pricing; (2) price skimming; (3) competitive pricing; (4) product line pricing; (5) psychological pricing; (6) premium pricing; (7) optional pricing; (8) bundle pricing; (9) cost-based pricing; (10) cost-plus pricing.

Penetration Pricing

A strategy used to attract customers to a new product or service. The price is set artificially low to gain market share, then increased once share is achieved. It lures customers away from competitors. Example: Netflix.

Price Skimming

A company charges a higher price because it has a substantial competitive advantage. Named after skimming successive layers of cream (customer segments) as prices are lowered over time. The high starting price attracts new competitors, so prices eventually fall. Examples: Apple iPhone, Sony PlayStation 3 (sold at $599 in the US, later reduced to below $200).

Competitive Pricing

The company uses the prices of its competitors, assuming they have thoroughly worked out their prices. A newly launched firm avoids the trial-and-error costs of price setting by charging the same price as competitors.

Product Line Pricing

Reviewing and setting prices for multiple products in coordination with one another, so prices reflect the benefits of each part of the range. It uses sufficient price gaps between categories to show quality differences. Also called price lining. Examples: Coca-Cola, iPhone.

Price Lining

Another name for product line pricing.

Psychological Pricing

A pricing and marketing strategy based on the idea that certain prices have a psychological impact on customers. Retail prices are often "odd prices," a little less than a round number (e.g., Rs. 199, 99). The theory is that such lower prices create greater demand than if consumers were perfectly rational.

Premium Pricing

Also known as image pricing or prestige pricing. Keeping the price artificially high to create favorable perceptions among buyers. Used when there is a unique brand and a substantial competitive advantage.

Image Pricing

Another name for premium pricing.

Prestige Pricing

Another name for premium pricing.

Optional Pricing

The company sells a base product at a relatively low price but sells complementary accessories ("extras") at a higher price. It increases the amount customers spend once they start to buy.

Bundle Pricing

Selling a package or set of goods or services at a lower price than if they were bought separately. It increases profits by giving customers a discount, and attempts to capture more of the consumer surplus.

Cost-Based Pricing

The company adds a certain percentage to the cost of making the product to get a profit. It uses manufacturing cost as the basis for the final price. It is straightforward and simple.

Cost-Plus Pricing

The simplest pricing strategy, also known as mark-up pricing. It adds a markup value to the price of the product to earn profit. It ignores demand and competitors' prices, so it does not lead to the best prices.

Mark-up Pricing

Another name for cost-plus pricing.

Importance of Pricing Strategy

Price is one of the most important ways customers choose between products and services. Knowing the optimum price to maximize sales and profits is key to beating the competition.

Marketing Information System (MKIS)

A structure consisting of people, equipment, and procedures to continually gather and analyze data to provide marketing managers with the information they need to make decisions.

Tasks of the MKIS

(1) Define the information requirements of the marketer; (2) develop the needed information; (3) distribute the information at the time it is needed.

Defining Information Needs

The first task of the MKIS, involving marketing planning, marketing execution, and marketing control.

Situations of the Marketing Decision-Maker (Information Needs)

The decision-maker is: (1) fully aware of his information needs and forwards his query to the MKIS department; (2) aware of his needs but does not seek the MKIS department's help; (3) aware of some requirements but forwards an inappropriate query; or (4) not aware that useful information exists, so makes no query.

Developing Information

The second task of the MKIS. If information is not available, the department must generate it from internal sources, external sources, or both. Done through internal records, marketing intelligence, marketing research, and information analysis.

Internal Records

Records useful to marketing decision-makers: accounting records, manufacturing records, sales department records, customer service department records, and information gathered by other departments.

Marketing Intelligence

The gathering of everyday information about developments in the marketing environment.

Sources of Marketing Intelligence

Internal: company executives, engineers, scientists, purchasing agents, and salesforce. External: suppliers, resellers, customers, and competitors (through annual reports, speeches, press releases, and advertisements).

Marketing Research

Complements marketing intelligence in providing useful information to the marketing department. Defined as the systematic gathering, recording, and analyzing of data about problems relating to the marketing of goods and services.

Questions Answered by Marketing Research

Market potentials, market shares, market characteristics, sales, business trends, short-range forecast, long-range forecast, competitive products, and existing products.

Scientific Method

A decision-making approach that focuses on being objective and orderly in testing ideas before accepting them. Marketing research is undertaken using it.

Marketing Research Process

Five steps: (1) Definition of the Problem; (2) Situation Analysis; (3) Obtaining Primary Data; (4) Interpretation of Data; (5) Problem Solution.

Definition of the Problem

The first step of the research process. One must be able to distinguish between problems and symptoms.

Problem

Exists when the level of performance is less than the established objectives, or when a manager must choose between two or more alternatives.

Symptom

An outward sign that a problem exists. Healing the symptom does not cure the problem. Example: falling profit is not the problem but may be an outward sign of inefficiency in marketing operations.

Situation Analysis

An informal investigation of available information that may further define the problem and indicate what additional information is required. It uses secondary data and interviews with company officials, and analyzes the company, its market, its competitors, and the industry.

Sources of Data

Data may be collected from primary and secondary sources.

Methods of Obtaining Primary Data

Three methods: observation, survey, and experiment.

Secondary Sources

Company records, libraries, government agencies, and private research organizations.

Interpretation of Data

Bringing out the meaning of data, or converting mere data into information. Analysis can be made by tests of significance or explanation of observed differences.

Problem Solution

The last step of the research process. Alternative solutions are presented, and the net advantage of each is derived to come up with a final decision.

Information Analysis

Information from internal records and the marketing intelligence system is analyzed using the methods applied in marketing research.

Distributing Information

The last activity of an MKIS: giving information to managers for better marketing decisions. Information has value only if it reaches the right hands at the right time.