In-depth Notes on Pricing Strategies in Marketing

Pricing in Marketing

Definitions and Importance of Price

• What is Price?
  • The amount of money charged for a product or service.
  • An indicator of value and total cost of ownership.
  • Unique part of the marketing mix that generates revenue; all other aspects incur costs.

Price Endings

• Psychological Pricing: Prices ending in nine (e.g., $2.99) are perceived as smaller than the next whole number (e.g., $3.00). Factors affecting this perception include:
  1. Difference in leftmost digit
  2. Competitive pricing dynamics
  3. Product price below $20
  4. Environmental factors (e.g., shoppers’ perceptions when friends are present)
  5. Stores’ pricing strategies (good-value perception)
• Reference: Caulfield et al. (2005) on Left-Digit Effect in price cognition.

Price Ceilings and Floors

• Concepts:
  • Price ceilings: Maximum consumers are willing to pay.
  • Price floors: Minimum price sellers want to charge.
  • Overall consumer sacrifice includes money, time, and energy.

Cost Considerations

• Fixed Costs (FC):

  • Do not vary with production/sales levels.
  • Examples: Rent, salaries, depreciation.

• Variable Costs (VC):

  • Vary directly with production/sales levels.
  • Examples: Cost of goods sold, production-related costs.

• Total Costs (TC):

  • TC = FC + VC

Pricing Strategies

Demand-Oriented Pricing

• Emphasizes customer preferences over costs and competition.
• Types:
  • Skimming Pricing: High initial price, lowered over time.
  • Penetration Pricing: Low initial price to create buzz/awareness.
  • Prestige Pricing: High prices for quality/status appeal.
  • Price Lining: Different price points for product lines.
  • Target Pricing: Set to achieve specific market targets.
  • Bundle Pricing: Combined pricing for multiple products.

Cost-Oriented Pricing

• Focused on production/marketing costs with added margin for profit.
• Cost-Plus Pricing: Summing costs and adding a margin to set price.
  • Advantages: Less risky and simple.
  • Disadvantages: Ignores demand and competitors.

Profit-Oriented Pricing (PoP)

• Aims to balance costs and revenues; considers profit margins.
• Strategies:
  • Target Profit Pricing: Annual profit goals.
  • Target Return on Sales: Pricing related to sales volume.
  • Target Return on Investment: Pricing to achieve ROI objectives.

Competition-Oriented Pricing

• Setting prices based on competitors' prices and market conditions.
• Customary Pricing: Traditional standards dictate price points.
• Strategies include above, below, or at-market pricing based on competition.

Additional Factors in Pricing

• Internal Factors: Corporate strategy, marketing mix coherence, desired brand positioning.
• External Factors: Market demand, price elasticity, economic conditions, regulatory considerations.

Value-Based Pricing

• Focuses on providing a good balance of quality and service at fair prices.
• Includes strategies like Everyday Low Pricing (EDLP) and Value-Added Pricing.

Break-Even Analysis

• Determines unit volume and sales needed to be profitable given price and cost structure.

• Break-Even Pricing:

  • Analyzes fixed and variable costs to evaluate profit impacts from changes.

• Break-Even Calculation:

  • Sales Quantity, Fixed Cost, Total Revenue, Total Cost relationship visualized with a graph.

Pricing Objectives and Constraints

• Considerations in establishing pricing:
  • Pricing Objectives: Align with corporate goals.
  • Pricing Constraints: Market conditions limiting pricing strategies.

Steps to Setting Final Price

1. Select approximate price level based on orientation.
2. Set the quoted/list price (one-price vs. flexible price policy).
3. Adjust for discounts, allowances, geographical differences.
4. Monitor and make necessary adjustments as needed.