pricing 1212321231
Price is the one element of the marketing mix that produces revenue - kotler and keller
MARKETING MIX
PRODUCT
| PLACE
|
PRICE
| PROMOTION
|
MODERN MARKETING MANAGEMENT 4PS
People
Processes
Programs
Performance
HOW CONSUMERS PROCESS AND EVALUATE PRICES
Price is not just a number on a tag
It comes from many forms and performs many functions
Rent, tuition, fares, fees, rates, tolls, retainers, wages, and commissions are all the price you pay for some good or service
COMPONENTS OF PRICE
If you buy a new car, the sticker price may be adjusted by rebates and dealer incentives
Some firms allow for payment through multiple platforms such as 15k + 25k frequent flier miles for a flight
Prices were set by negotiation between buyers and sellers
Bargaining is still a sport in some areas
A CHANGING PRICING ENVIRONMENT
A combination of environmentalism, renewed frugality and concerns about jobs and home values forced many U.S Consumers and Asian Consumers to RETHINK how they spent their money
They replaced luxury purchases with basics
They buy fewer accessories
They ate at home more often and purchased espresso machines, make lattes in their kitchen instead of buying them in expensive cafe’s
In buying cars, they downsize to smaller, more fuel efficient
They even cut back spending on hobbies and sport activities
Downward price pressure from a changing economic environment coincided with some longer trends in the technological environment
The internet has been changing how buyers and sellers interact
LIST OF HOW THE INTERNET HAS BEEN CHANGING HOW BUYERS AND SELLERS INTERACT
Get instant price comparisons from thousands of vendors
Name their price and have it met
Get products free
Give certain customers access to special prices
Negotiate prices in online auctions and exchanges or even in person
HOW COMPANIES PRICE
PURCHASE DECISION - are based on how consumers perceive price and what they consider the current actual price to be - “and not on the marketer’s stated price”
CUSTOMERS HAS LOW PRICE THRESHOLD below which prices signal inferior or unacceptable quality, as well as an upper price threshold above which prices are prohibitive and the products appears not worth the money
In small companies, the boss often set prices
In large companies, division and product line managers do
Top management sets general pricing objectives and policies and often approves lower management’s proposals
When pricing is a key factor (aerospace, railroads, oil companies), companies often establish a pricing department to set or assist others in setting appropriate prices
This department reports to marketing department, finance or top management to set or assist others in setting appropriate prices
Others who influence pricing includes:
Sales managers
Production managers
Finance managers
accountants
Many companies do not handle pricing well and fall back on strategies such as:
we determine our costs and take our industry’s traditional margins
Other common mistakes are not revising price often enough to capitalize on market changes
Setting price independently of the rest of the marketing program rather than as an intrinsic element of market positioning strategy
Not varying price enough for different product items, market segments, distribution channels, and purchase occasions.
For any organization, effectively designing and implementing pricing strategies requires a thorough understanding of consumer pricing psychology and a systematic approach to setting, adapting and changing prices
CONSUMERS PSYCHOLOGY ON PRICING
Many economists traditionally assume that consumers were “price takers” and accepted price at “face value” or as given.
However, they recognize that consumers:
Often actively process price information, interpreting it from the context of prior purchasing experience, formal communications (advertising, sales calls, brochures) informal communications (friends, colleagues or family members) point of purchase or online resources and other factors
POSSIBLE CONSUMER REFERENCE PRICE
Fair price (what consumers feel the product should cost)
Typical price
Last price paid
Upper bound price (reservation price or the maximum most consumers would pay)
Lower bound price (lower threshold price or the minimum most consumers would pay)
Historical competitor prices
Expected future price
Usual discounted price
PRICE QUALITY INFERENCES
Many consumers use price as an indicator of quality.
Image pricing is especially effective with ego-sensitive products such as perfumes, expensive cars, and designer clothing.
When information about true quality is available, price becomes a less significant indicator of quality. When this information is not available, price acts as a signal of quality.
PRICE ENDINGS - many sellers believe prices should end in an odd number.
Customers see and item priced at 299 as being in the 200 rather than the 300 range; they tend to process prices “left-to-right” rather than by rounding
PRICE ENCODINGS - in this fashion is important if there is a mental price break at the higher rounded price
SALE signs next to prices spur demand, but only if not overused: total category sales are highest when some, but not all, items in a category have sale signs; past a certain point, sale signs may cause total category sales to fall.
PRICING CUES - such as sale signs and prices that end in 9 are more influential
LIMITED AVAILABILITY - can spur sales among consumers actively shopping for a product
FACTORS AFFECTING PRICE OF COMMODITIES IN THE MARKET
GOVERNMENT POLICIES - also affect prices of the commodity. Especially their export and import policy for the purchaser and seller will have a huge impact on commodity prices. SIMILAR INCREASE IN THE PRICE OF A CONTRACT.
ECONOMIC POLICIES - Prices of commodities are also affected by the economic and political events of the countries that are producing using that commodity.
LOW CONDITION OF THAT ECONOMY REDUCES THE PURCHASING POWER OF PEOPLE OF THAT COUNTRY
As a result demand for commodities will fall and it also affects overall movement of prices.
STORAGE AND TRANSPORTATION FACTORS - Almost all kinds of commodities need to be stored prior to Its distribution.
It's not another financial product so Inventory cost and storage do not affect such a large impact on the market prices
DEMAND AND SUPPLY - are the important factors that force the movement of price in the commodity market.
The rule of demand and supply plays the same role for both equity as well as commodity markets.
Demand and supply of all commodities change from time to time.
It depends upon national, seasons, and international conditions.
Inflation
Exchange rates
Productivity
WEATHER CONDITION - A number of commodities traded in these markets are agricultural goods, and the production of these goods depend on the weather.
SETTING THE PRICE
STEP 1. SELECTING THE PRICING OBJECTIVES
The company shall first decide where it wants to position its market offering.
The clearer the firm’s objectives, the easier it is to set price.
There are five (5) major objectives:
SURVIVAL
MAXIMUM CURRENT PROFIT
MAXIMUM MARKET SHARE
MAXIMUM MARKET SKIMMING
PRODUCT QUALITY LEADERSHIP
OTHER OBJECTIVES
SURVIVAL - Company set this major objectives because of
Overcapacity
Intense competition
Changing consumer wants
As long as the company charges prices that cover variable and fixed costs, the company stays in business.
Survival is a short-run objective, in the long run, firms must learn how to add value or face extinction .
MAXIMUM CURRENT PROFIT
Most of the companies try to set prices that will always maximize current profits.
Companies estimate demand and costs associated with alternative prices and choose the price that produces current profit
Cash flow or Rate of Return on Investment ( ROI)
In emphasizing current performance, the company may sacrifice long run performance
Ignores the effect of Marketing variables, competitor's reaction and legal restraints on price
MAXIMUM MARKET SHARE
Companies believe that higher sales volume will lend to lower unit costs and higher long-run profit.
Using Market-Penetration Pricing
This condition favor adopting Market Penetration Strategy
The market is highly price sensitive & low price stimulates market growth
Production and distribution fall with accumulated production experience
Low price discourages actual and potential competition.
MARKETING SKIMMING PRICING - prices start high and slowly drop overtime.
IMPORTANT SCENARIOS:
This strategy can be fatal, however, if a worthy competitor decides to price low. When Philips, the Dutch electronics manufacturer, priced it's videodisk players to make a profit on each. Japanese competitors priced low and rapidly built their market share, which in turn pushed down their costs substantially.
Moreover.consumers who buy early at the highest prices may be dissatisfied if they compare themselves to those who buy later at a lower price. When Apple dropped the iPhone's price from $600 to $400 only two months after its introduction. public outcry caused the firm to give initial buyers a $100 credit toward future Apple purchases.
IN WHAT CONDITION MARKET SKIMMING MAKES SENSE?
A sufficient number of buyers have high current DEMAND;
The unit costs of producing a small volume arc high enough to cancel the advantage of charging what the traffic will bear;
The high initial price does not attract more competitors to the market;
The high price communicates the image of a superior product;
PRODUCT QUALITY LEADERSHIP - A company might aim to be the product Quality Leader in the market.
Many brands strive to be “affordable luxuries“— products or services characterized by high levels of perceived quality, taste, and status with a price just high enough not to be out of consumers’ reach.
OTHER OBJECTIVES
Nonprofit and public organizations may have other pricing objectives:
University aims for Partial Recovery.
it may rely on private gifts and grants to cover its remaining costs.
nonprofit hospitals may aim for full cost recovery in its pricing.
A nonprofit theater company may price its productions to fill the maximum number of seats.
A social service agency may set a service price geared to client income.
STEP 2. DETERMINING DEMAND
PRICE SENSITIVITY
Each price will load to a different level of demand and have a different impact on a Company's marketing objectives.
The normally inverse relationship between price and demand is captured in a demand curve (see Figure 14.1):
The higher the price, the lower the demand.
For prestige goods, the demand curve sometimes slopes upward.
One perfume company raised its price and sold more rather than less! Some consumer1' take the higher price to signify a better product.
However, if the price is too high, demand may fall.
INELASTIC DEMAND - Inelastic demand occurs when people buy about the same amount of a product or service, no matter how much the price changes.
ELASTIC DEMAND - one in which the change in quantity demanded due to a change in price is large
Factors Leading to Less Price Sensitivity
The product is more distinctive.
Buyers are less aware of substitutes.
Buyers cannot easily compare the quality of substitutes.
The expenditure is a smaller part of the buyer’s total income.
The expenditure is small compared to the total cost of the end product.
Part of the cost is borne by another party.
The product is used in conjunction with assets previously bought.
The product is assumed to have more quality, prestige, or exclusiveness.
Buyers cannot store the product.
CONDITIONS THAT LEAD CUSTOMERS TO BE LESS PRICE SENSITIVE
There are few or no substitutes or competitors
Customers don't readily notice the higher price.
They are slow to change their buying habits
They think the higher prices are justified
Price is only a small part of the total cost of obtaining, operating, and servicing the product over its lifetime.
ESTIMATING DEMAND CURVES
SURVEYS - can explore how many units consumers would buy at different proposed prices.
Although consumers might under Male their purchase intentions at higher prices to discourage the company from pricing high, they also tend to actually exaggerate their willingness to pay for new products or services
PRICE EXPERIMENTS - can vary the prices of different products in a store or charge different prices for the same product in similar territories to sex- ho« the change affects sales An e-business could test the impact of a 5 percent price in- crease by quoting a higher price to every 40th visitor, to compare the purchase response.
STATISTICAL ANALYSIS - past prices, quantities sold, and other factors can reveal their relation- ships.
The data can be longitudinal (over time) or cross-sectional (from different locations at the same time).
PRICE ELASTICITY OF DEMAND - Marketers need to know how responsive, or elastic, demand is to a change in price.
Consider the two demand curves in Figure 14.1 In demand curve (a). a price increase from $10 to $15 leads to a relatively small decline in demand from 105 to l00. In demand curve
(b). The same price increase leads to a substantial drop in demand from 150 to 50.
If demand hardly changes with a small change in pi ice. wc say the demand is inelastic
If demand changes considerably, demand elastic.
PRICE ELASTICITY OF DEMAND - The higher the elasticity, the greater the volume growth resulting from a 1 percent price reduction.
If demand is elastic, sellers will consider lowering the price. A lower price will produce more total revenue. This makes sense as long as the costs of producing and selling more units do not in- crease disproportionately.
Price elasticity depends on the magnitude and direction of the contemplated price change. It may be negligible with a small price change and substantial with a large price change. It may differ for a price cut versus a price increase, and there may be a price indifference band within which price changes have little or no effect.
One comprehensive study reviewing a 40-year period of academic research (hat investigated price elasticity yielded interesting findings:
The average price elasticity across all products, markets, and time periods studied was -2.62. In other words, a 1 percent decrease in prices led to a 2.62 percent increase in sales.
Price elasticity magnitudes were higher for durable goods than for other goods, and higher for products in the introduction/growth stages of the product life cycle than in the mature/decline stages.
Inflation lead to substantially higher price elasticities, especially in the short run,
Promotional price elasticities were higher than actual price elasticities in the short run (although the reverse was true in the long run).
Price elasticities were higher at the individual item or SKU level than at the overall bran level,
SKU - stock keeping unit