Marketing Management - Class 6

What is price?

It is the one element of the marketing mix that produces revenue.

• It is easy to adjust

• Communicates the intended value proposition of its brand or product

• It is difficult to determine the ‘right’ price

• Is something even the consumer can play with (compare, bidding, free software)

What is consumer psychology and pricing?

Consumers are not price takers -> They actively process price information and arrive at a perception of prices. Through reference pricing, image pricing and pricing cues.

What is reference pricing?

Comparing an observed price to an internal reference price.

• Fair price

• Last price paid

• Upper/lower-bound price (max/min they would pay)

• Expected future price

• Usual discounted price

As a marketer you can try to influence this reference price (previously higher price, cutting high price in smaller pieces,…)

What is image pricing?

Price as indicator of quality

- Exclusive brands or products

What is pricing cues?

Prices ending in odd numbers e.g. $2,9 9 → “9” suggests a discount

- “Sale”

- Works best when pricing information is low e.g. buying something for the first time

What are the steps to setting the price?

1. Pricing objective= What do you want to reach when setting the price?

Short-term profit: Maximize current profits by estimating demand and costs. Risk of neglecting long -term performance, effects of other marketing variables, competitor’s reactions, legal restraints on price.

• Example - When they need cash, getting summer clothes out of stock after summer

Market penetration: Maximize market share by setting a very low price. Consumers should be price sensitive. Competition is scared by lower prices

• Example - Netflix offering affordable subscription plans at launch, then gradually increasing them.

Market skimming: Skim the cream of the market by setting a higher price which is only affordable for the customers with the highest willingness to pay. Market introduction (get the early adopters). Lowering the price gradually

• Example - Apple releasing new iPhone at premium prices, then gradually decreasing them

Quality leadership: Maximize the quality of offering by setting a higher price

• Example - Patagonia

2. Determining demand= Estimating demand curves (economics). The relationship between price and quantity demanded. By looking at past market research.

Price elasticity of demand:

• Inelastic demand (price sensitive) - Eg. medication, fuel prices

• Elastic demand (price sensitive) - Eg. clothing

3. Estimating costs= Different types of costs

• Price floor - break even (not making any profits)

• Price ceiling - How much a customer is willing to pay

Your profits should always cover the costs.

4. Competitor analysis= What price will the company set?

• Depends on your end goal, do you want to higher, lower or keep it the same. (competition will look at you too, discount actions)

5. Pricing method= Based on the 3 C’s model (cost, customer and competition) you will decide the best price method

• Markup - apply fixed percentage on costs to determine price. → Costs = $10 & Price = $15→ Mark-up of 50%

• Target-return - determine the price based on the target return of investments (ROI). How much money do I want to make on the total I invested. Not taking into account demand & competition → e.g. often in regulated industries (utilities)

• Economic-value-to-consumer - The value the customer expects for the product and their willingness to pay. Companies must deliver the value promised by their value proposition.

• Value - Becoming a low -cost producer to lower the price but without impacting the quality (IKEA)

• Competitive - Base prices on competitors’ prices.

• Auction - Base prices on bids of customers

6. Setting the final price = Price discrimination - When a company sells a product or service at two or more prices that do not reflect a proportional difference in costs

• Customer-segment pricing - Movie theaters offering discounted tickets to students, seniors, or children.

• Product-form pricing - A software company like Adobe charging different prices for Adobe Photoshop (basic vs. professional versions), even though the underlying product is the same.

• Channel pricing - A book priced higher at a local bookstore compared to the same book available at a discount on Amazon.

• Location pricing - Starbucks charging different prices for a coffee in New York City compared to a smaller town, reflecting the higher operating costs in urban locations.

• Time pricing - Airlines charging higher prices for flights during peak seasons or holidays and offering lower prices for off -

  peak flights.

How do you initiate and respond to price changes?

Price cuts:

• Excess capacity

• Lower price>increase market share>lower unit costs

• Be careful not to impact the quality perception

• Price wars

Price increases:

• Cost inflation

• Anticipatory pricing