MM Lecture 12: Price

Marketing Mix: Price! (Video: Week 13 + beginning of Week 14)

How can you define “price”?

• seller perspective: amount of money charged for a product

• buyer perspective: sum of values that the consumers gets in exchange for the benefits of having/using the product (costs) > crucial for consumer’s decision making

What is cost-based pricing?

Company looks at product features → calculates cost of promotion + channels → adds margin to costs = price (costs + margin = price) → convinces customer of benefits

→ from marketer’s point of view (inside of the company)

What is value-based pricing?

Company identifies target market → does marketing research to decide the benefits → price → price - margin = target cost → product features

→ from target customer’s point of view (outside of the company)

What do the terms “price floor” and “price ceiling” mean?

• price floor: no profits below this price

• price ceiling: no demand above this price

What are some internal factors for the pricing?

• pricing objective

• marketing mix

• costs

Explain pricing objectives (internal pricing factors)!

• survival (heavy competition or bad economic situations -> set low prices)

• profit maximization (optimal price point: supply x demand)

• market share/product-quality leadership

Explain marketing mix (internal pricing factors)!

positioning, marketing mix decisions influence price (these costs have to be covered with the price)

• target costing = setting a product’s price with target costs first and working back

Explain costs (internal pricing factors)!

price cannot be lower than costs, cost-based pricing:

• mark-up (profits that will be added to costs)

• margin (% of price representing profits)

• break-even pricing: setting number of units to break even on the costs of marketing a product

What are some external factors for the pricing?

• industry

• economic condition

• buyer

Explain industry (external pricing factors)!

=types of competition, group of sellers

• pure competition: no single buyer/seller has a big effect on the market price (lots of competitors fighting each other -> if someone drops the price, others will drop the price as well; if someone increases the price, consumers will buy the cheaper products from other competitors)

• oligopolistic competition: price is strongly affected by competition (always fluctuating) > most common

• pure monopoly: no influence from competition (price is not affected by competition because there’s only one business

Explain economic condition (external pricing factors)!

boom/recession, department stores offer luxury products > when economy is bad people are not willing to buy these expensive products

Explain buyer (external pricing factors)!

setting prices based on consumer’s perception of product benefits

• EDLP (every day low price): charging low prices constantly without price discounts > Wallmart

• High-low pricing: charging higher prices everyday but offering discounted price below EDLP temporarily (e.g. for Christmas products) -> Department stores

What are the three types of price strategies?

• ignorance

• optimization

• customization

Explain ignorance (price strategies)!

ignore competitor’s prices and stick to your own (ok when you have higher value products than competition > specialty goods)

Explain optimization (price strategies)!

set price based on amount of money consumers are willing to pay

Explain optimization (price strategies)!

offering prices based on customer characteristics

• on-linear pricing: price discount for members that pay membership fees

• bundled pricing: set price for bundled product (Happy meal McDonalds)

• multi-dimensional pricing: considering complementary product + set price of a product (cheap price for printer but high price for the ink you need to buy a lot of the times)

• structural pricing: price covers additional benefits (car + assurance > Hyundai)

What are some price adjustment strategies?

• discount

• allowance

Explain discount (price adjustment strategies)!

price reduction during certain periods (cash: SKONTO, quantity: Mengenrabatt, functional: special discount for retailers who display the product very special, seasonal: retailer gets seasonal discount when buying AC in winter)

Explain allowance (price adjustment strategies)!

money paid to buyers for performing certain functions (trade-in allowance =discount for new batteries when returning old batteries, promotional allowance (=functional discount))

What is segmented pricing?

selling the same product at different prices to different consumer groups (often in service industry)

> dependent on customer, location, time (cheaper prices for children/elderly in zoo/museum; different ticket prices for theater and football stadium; cheaper tickets for shorter movies)

What is psychological pricing?

considers the psychology of prices (399€ instead of 400€)

works for low-involvement products (everyday purchases like toothpaste rather than buying a TV)

What are some price issues?

• lost leader pricing: setting prices that don’t generate profits (extremely cheap → students come to the store just for this, buy this product and buy other products on the way out) → to draw people into the store and buy other things (these purchases make up for the loss of product profit)

• price fixing (setting prices in consultation with competition > illegal)