Chapter 9: Price management and pricing tactics

Price

1) Importance of price

2) Price management

• Influencing factors

• Price positioning

3) Price setting

4) Alternative methods of pricing

• Break-even analysis

5) Pricing existing vs new products

6) Price as a marketing instrument

• Immediate sales tactics

• Extended sales tactics

• Limits on promotional pricing

1) Importance of price

Important in following situations

• New product intro: skimming vs penetration

• Competitor action / reaction to price change

• When the economy “changes”

• When prices of substitutes change

• With changing government regulations

• With technological breakthroughs

2) Price management

Influencing factors on price management

Price vs Quality

3) Price setting

• Determining the overall price level

• Floor and Ceiling price level

Floor (minimum)	Ceiling (maximum)
Determined by production costs No profit possible below this floor price	Determined by market demand Uniqueness of the product / perceived value No demand above this ceiling price

4) Alternative methods of pricing

• Cost-oriented or cost-based pricing

• Competition-oriented pricing

• market (demand) - oriented pricing

4) Alternative methods of pricing: Cost-oriented or cost-based pricing

• Own cost structure as the basis

• Knowledge of the cost structure is required

• Selling price = Average total cost + Margin

• Margin depends on speed of rotation (eg. margin on fast rotating mineral water is usually smaller than the margin on slow rotating exclusive wines)

• Break-even analysis

  • Profit = Total Revenue - Total Costs

  • Total Revenue (TR) = P x Q

  • Total Costs (TC) =VC x Q + FC

  • Profit = P x Q - VC x Q - FC = (P - VC) x Q - FC

  • Break-even: P and Q where TC = TR

• Target rate of return

  • Financial goal (eg. 20% on investment)

  • Added to “fixed costs” in break-even analysis

• Return on investment

  • Accounts for “turnover”

  • Number of times a company uses its investments per year

• Payback period

  • How long it takes before original investment is recovered

  • Payback period = (break even sales) / (annual demand)

4) Alternative methods of pricing: Competition-oriented pricing

• Price of competitor as the basis

• Somewhat cheaper or somewhat more expensive ?

• Procedures with competing bids (procurements)

• Entails risks from neglecting

  • Own cost structure (underestimating own costs)

  • Market demand and customer’s ability and willingness to-pay

4) Alternative methods of pricing: Market-oriented pricing

• Based on demand elasticity

• Market responsiveness to price changes

• Generic vs brand demand elasticities

• Simulation studies

5) Important considerations when pricing new products

• Price positioning strategy

• Target market choice

• Value to the consumers

• Multiple segments, versions, prices

5) Important considerations when pricing new products: Strategic options with pricing

When introducing new products to the markets

1. Skimming strategy

• High prices

• Big profit margins

• High returns on investment

• Rapid payback of investment

2. Price penetration strategy

• Low prices

• Rapid market share gain

• Stimulate product trial

Strategic options with pricing of existing products

• Build: P lower than competition

• Hold: maintain P

• Harvest: premium P

• Reposition: change P

6) Price as Marketing Instrument: Immediate sales tactics

• Off-season discounts

  • Seasonal demand

  • Offset storage costs

  • Level out productioon schedule

• Quantity discounts

  • Volume discount

• Cash discount

  • Discount for cash payment

• Special sale prices

• Discount coupons

6) Price as Marketing Instrument: Extended sales tactics

• Trade discounts

  • List price vs actual price

  • For performing a specific marketing function

• One price vs Variable price

  • Price flexibility

  • One price: inflexible, consumers’ trust

  • Variable prices: flexible, bargaining

• Pricing multiple products

  • Overall goal vs individual goal

• Price lining

  • Offering a price range: cheap to expensive version

• Resale price maintenance

  • control of the price level at retail level

  • Suggest or enforce: on-label or on-pack?

• Psychological pricing

  • Odd pricing

  • Demand curve effect

6) Price as Marketing Instrument: Limits on Promotional pricing

• Techniques at retail level

  • Loss Leader pricing (eg. Lotus (€1,79) → Colruyt (€1,89) vs Carrefour (€1,69) = loss leader pricing)

    • Pricing below costs

    • Objective = realise revenues from

      • sales other products

      • develop shopping habits

      • attract new buyers

  • Bait and Switch (2+5 in AH)

    • Price special

    • Quick supply run out

    • Convince customers to buy more expensive alternative

    • Forbidden by law

• General limitations

  • No selling at price below costs

  • Specials should be available to all interested buyers

Rules of thumb for price policy

• Put the price up when everyone else does

• Not too much at any one time

• Not too often

• Move something down when you move up

• Look after your key accounts

• Provide sound and true explanations