MARK101 Week 7 - Pricing Notes

Price Definition: The amount of money charged for a product or service, or the sum of the values consumers exchange for the benefits of having or using the product or service.
Price is the element of the marketing mix that produces revenue.
It is the most flexible element in the marketing mix.
Major pricing strategies:
- Customer value-based pricing
- Cost-based pricing
- Competition-based pricing

Setting the price based on buyers’ perceptions of value, rather than on the seller’s cost.
Price is set before the marketing program is set.
The company must determine how much customers value a product and are prepared to pay.
Good-value pricing: Offering the right combination of quality and good service at a fair price.
- Everyday low pricing (EDLP)
- Hi-low pricing
Value-added pricing: Attaching value-added features and services to differentiate the offering instead of cutting prices to match competitors.

Setting prices based on the costs of producing, distributing, and selling the product, plus a fair rate of return for the company’s effort and risk.
Types of costs:
- Fixed costs
- Variable costs
- Total costs
Cost-plus pricing (markup pricing): Adding a standard markup to the cost of the product (e.g., services).
Breakeven pricing (target-return pricing): Pricing to break even on costs at different sales volumes or to make a desired profit.
Breakeven Chart: Used for determining target-return price and breakeven volume.
- The chart plots total revenue, total cost, and fixed cost against sales volume.
Value-based pricing focuses on customer needs and value perceptions, setting a target price to match perceived value and then determining costs that can be incurred.
Cost-based pricing starts with designing a good product, determining product costs, and then setting a price based on cost.

Setting prices based on competitors’ strategies, costs, prices, and market offerings.
Key questions to ask:
- How does the company’s offerings compare to competitors in terms of perceived value?
- How strong are current competitors?

Price Floor: Product costs (no profits below this price).
Price Ceiling: Consumer perceptions of value (no demand above this price).
Considerations include:
- Competition and other external factors
- Competitors' strategies and prices
- Marketing strategy, objectives, and mix
- Nature of the market and demand

Overall Marketing Strategy, Objectives, Mix:
- Consider target costing, which starts with an ideal selling price based on customer-value considerations and then targets costs to ensure the price is met.
Organizational Considerations:
- Who/which department sets the price?
The Market and Demand:
- Pricing in different types of markets:
  - Pure competition
  - Monopolistic competition
  - Oligopolistic competition
  - Pure monopoly
- Analyzing the price-demand relationship:
  - The demand curve (how price charged will influence demand).
- Price elasticity of demand: Sensitivity of demand to price increases.
- The economy: Consumers still consider value when paying a price, even in tough times.
- Other external factors: Government, resellers, social concerns.
Demand Curve: A graph showing the relationship between price and quantity demanded.
Price Elasticity of Demand: Measures how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price. Formula is: $Price\,Elasticity\,of\,Demand = \frac{\%\,Change\,in\,Quantity\,Demanded}{\%\,Change\,in\,Price}$

Market-Skimming Pricing: Charging a higher price initially to benefit from segments willing to pay that price, then reducing the price (e.g., Apple).
Market-Penetration Pricing: Charging a low price initially to gain as many sales as possible (e.g., product introductions).

Product-Line Pricing: Setting prices across an entire product line (e.g., Accor hotels).
Optional-Product Pricing: Selling optional add-ons with the main product (e.g., computer cases).
Captive-Product Pricing:
- Selling products that must be used with the main product (e.g., printer cartridges).
- Two-part pricing of services (e.g., amusement parks).
By-Product Pricing: Pricing low-value by-products to get rid of them or make money from them (e.g., bark).
Product-Bundle Pricing: Pricing a bundle of products that are typically bought together (e.g., McDonald’s deals).

Discount and Allowance Pricing:
- Cash discounts
- Quantity discounts
- Trade-in allowances
Segmented Pricing:
- Customer segmented
- Location segmented
- Time-based pricing
Psychological Pricing:
- Linked to perceived quality
- Reference pricing
Promotional Pricing:
- Linked to a special day/season
Geographical Pricing:
- FOB-origin pricing: Each customer pays for their shipping.
- Uniform delivered pricing: All customers pay the same for shipping.
- Zone pricing: All customers in a zone pay the same for shipping.
- Basing-point pricing: A large city is chosen as the base point of shipping cost per customer.
- Freight-absorption pricing: Seller absorbs some/all of the shipping cost.
Dynamic and Personalized Pricing: (e.g., Uber; price comparison sites like Trivago).
International Pricing: (e.g., the EU and Coke).

Initiating Price Changes:
- Initiating price cuts: Excess capacity, decreased demand.
- Initiating price increases: Good communications, low-visibility changes first (e.g., drop discounts, unbundle offerings).
Buyer Reactions to Price Changes
Competitor Reactions to Price Changes
Responding to Price Changes

Involves evaluating whether a competitor has cut prices and the potential impact on market share and profits.
If action is required, consider options such as:
- Reducing price
- Raising perceived value
- Improving quality and increasing price
- Launching a low-price 'fighter brand'

Pricing within Channel Levels:
- Price fixing
- Predatory pricing
Pricing across Channel Levels:
- Price discrimination
- Price maintenance
- Deceptive pricing
- Scanner fraud