Fundamentals of Marketing - Pricing
Types of Cost
Fixed Cost/Overhead: Costs that do not change with the level of production or sales.
Examples: rent, salaries, permanent staff, insurance.
Variable Costs: Costs that vary directly with the level of production or sales.
Examples: raw materials, commissions, packaging.
Total Costs: Fixed Costs + Variable Costs
Break-Even Volume = Fixed Cost / (Price - Variable Cost)Break-Even Volume = 300,000 / (20 - 10) = 30,000$$
Market Skimming Pricing
High initial prices to skim revenues from various segments.
Product’s quality and image must support higher prices.
Enough buyer base.
Cost of producing smaller volumes should not be high.
Barrier to entry.
Market Penetration Pricing
Low price to penetrate the market quickly & deeply.
Price Sensitive Market.
Production & Distribution costs must decrease with an increase in sales volume.
Maintain low price position against competitors.
Product Mix: Product Line Pricing
Marketers must determine the price of different products in product line.
Perceived product value should justify the cost of product.
Product Mix: Optional-Product Pricing
Marketers must price accessories and add-ons that are often sold with new products.
Base product pricings.
Accessories and add-on pricings.
Product Mix: Captive-Product Pricing
Products that must be used alongside main products.
Fixed Fees + variable usage rate.
Product Mix: By-Product Pricing
Rather than disposing of the by-products, seek a market for it.
Consider the cost of offsetting the by-product.
Example: Biofuel from whisky by-products.
Product Mix: Product Bundle Pricing
Bundling products that go well together.
Combo Meal Deal, TV service, phone service, internet.
Cost of bundle should be lower than the cost of individual products when sold separately.
Price Adjustment: Discount & Allowance Pricing
Discount Pricing: Price Reduction
Quantity discount (buy in bulk)
Functional Discount (trade channel partners)
Seasonal Discount (out of season discount)
Allowances: Reduction from list price
Trade-in allowances (exchange old iPad for a new)
Promotional Allowances (for distributors)
Price Adjustment: Segmented Pricing
Company sells a product or service at two or more prices.
Based on Customer Segments:
Students
Senior Citizens
Based on Location:
Museums, Cinemas, Retail Stores
Price Adjustment: Psychological Pricing
Price as an indicator of quality.
Reference Pricing (£0.99 or £1).
Reference Price: £299 or £300.
Price Adjustment: Promotional Pricing
Temporarily price reduction to create buying excitement and urgency.
Discounts
Flash Sales
Low-Interest Financing
Longer Warranties
Free Maintenance
Price Adjustment: Geographical Pricing
Setting Prices for customers located in different parts of the country or world.
Geographical Policy.
Price Adjustment: Dynamic & Online Pricing
Dynamic Pricing: Adjusting prices continually to meet the characteristics and needs of individual customers.
Online: Different prices on different websites.
Offline: Uber.
Price Adjustment: International Pricing
Companies must decide whether to keep uniform pricing or take local market and cost considerations.
Examples: Clothing, Fast Food.
Buyer Reactions to Price Changes
Positive Reactions:
Brand is getting exclusive or premium.
Customers are getting a better deal.
Negative Reactions:
Brand is becoming greedy.
Offering lower quality.
Less Exclusive.
Brand Switching.
Public Policy and Pricing
Price Fixing: Sellers collude with competitors to decide and fix a price.
Predatory Pricing: Selling below cost with the intention of punishing a competitor.
Deceptive Pricing: Seller states a price that is misleading or not available to customers.