Pricing Strategies and Considerations

Pricing: Capturing Customer Value

Week and Topics

The lecture covers pricing strategies, their importance, and how they are affected by internal and external factors. Readings are primarily from Chapter 9 of Armstrong et al.

Topics include:

  • Marketing environment.

  • Consumer behavior.

  • Marketing analytics.

  • STDP (Segmentation, Targeting, Differentiation, Positioning) strategy.

  • Product, promotion, price, and place.

  • Services and new product development.

  • Sustainable marketing.

Learning Objectives

  1. Identify pricing strategies and discuss the importance of understanding customer value perceptions, company costs, and competitor strategies.

  2. Define external and internal factors affecting pricing decisions.

  3. Describe strategies for pricing new products.

  4. Explain how companies maximize profits from the product mix.

  5. Discuss how companies adjust prices for different customers and situations.

  6. Discuss issues related to initiating and responding to price changes.

Introduction

  • Value-seeking customers put pressure on companies to offer lower prices.

  • Cutting prices isn't always the best solution as it can erode profits and brand value.

  • The goal is to find a price that allows the company to make a fair profit based on the customer value created.

What is Price?

Price can be defined in two ways:

  • Narrow Definition: The amount of money charged for a product or service.

  • Broad Definition: The sum of all the values customers give up to gain the benefits of having or using a product or service.

Major Pricing Strategies

Consumer perceptions of value set the ceiling for prices, while product costs set the floor. Internal and external factors such as competitors' prices, marketing strategy, and supply and demand must be considered when setting prices.

The major pricing strategies are:

  • Customer-value based pricing

  • Cost-based pricing

  • Competition-based pricing

Customer-Value Based Pricing

  • Based on buyers’ perceptions of value rather than the seller’s cost.

  • Price is considered along with other marketing mix variables before setting the marketing program.

  • Good-value pricing: Offering the right combination of quality and good service at a fair price.

  • Value-added pricing: Attaching value-added features and services to differentiate offerings and support higher prices, rather than cutting prices to match competitors.

Cost-Based Pricing

  • Based on the costs of producing, distributing, and selling products, plus a fair rate of return.

  • Main approaches:

    • Cost-plus pricing (markup pricing): Adding a standard markup to the cost of the product.

    • Breakeven pricing (target return): Setting the price to break even on the costs of making and marketing a product, or to make the desired profit.

Value-Based vs. Cost-Based Pricing

  • Cost-based pricing: Design a good product, determine product costs, set price based on cost, and convince buyers of the product's value.

  • Value-based pricing: Assess customer needs and value perceptions, set target price to match customer-perceived value, determine costs that can be incurred, and design product to deliver desired value at target price.

Breakeven Chart

(Figure 9.3) A breakeven chart helps determine the target-return price and breakeven volume.

Competition-Based Pricing

Based on competitors’ strategies, costs, prices, and market offerings. Consumers judge product value by comparing prices of similar products.

Other Internal and External Considerations Affecting Price Decisions

Marketers must consider the total marketing strategy and mix when setting prices. Pricing can:

  • Attract new customers or retain existing ones.

  • Deter competitors from entering the market.

  • Stabilize the market by matching competitors’ prices.

  • Retain loyalty and support of resellers.

  • Avoid government intervention.

  • Create excitement for a brand.

  • Help sales of other products.

New Product Pricing Strategies

  • Market Skimming: High initial prices to ‘skim’ revenue layer by layer from the market.

  • Market Penetration: Low initial prices to penetrate the market quickly.

Example: LG SIGNATURE Wallpaper OLED TV at 19,999 vs. TCL 32S305 720p Roku Smart LED TV at 199.99.

Product Mix Pricing Strategies

  • Product-line pricing: Setting prices across an entire product line.

  • Optional-product pricing: Pricing optional or accessory products sold with the main product.

  • Captive-product pricing: Pricing products that must be used with the main product.

  • By-product pricing: Pricing low-value by-products to get rid of them or to make money on them and the main products.

  • Product-bundle pricing: Pricing bundles of products sold together.

Price Adjustment Strategies

  • Discount and allowance pricing: Reducing prices to reward customer responses, such as volume purchases, paying early, or promoting the product.

  • Segmented pricing: Adjusting prices to allow for differences in customers, products, or locations.

  • Psychological pricing: Adjusting prices for psychological effect.

  • Promotional pricing: Temporarily reducing prices to increase short-term sales.

  • Geographical pricing: Adjusting prices to account for the geographic location of customers.

  • Dynamic pricing: Adjusting prices continually to meet the characteristics and needs of individual customers and situations.

  • International pricing: Adjusting prices for international markets.

Big Mac Index

The Big Mac index measures Purchasing Power Parity (PPP) between countries by converting average national Big Mac prices to U.S. dollars for comparison.

Price Changes

Consider competitor and buyer reactions when initiating price changes, including price cuts and increases.

Assessing and Responding to Competitor Price Changes

(Figure 9.5) Decision flow:

  1. Has competitor cut price?

  2. If yes, will lower price negatively affect our market share and profits?

  3. If yes, can/should effective action be taken?

  4. Possible actions: hold current price, reduce price, raise perceived value, improve quality and increase price, launch low-price 'fighter brand'.

Unit Pricing in Australia

Unit pricing is a labeling system that helps compare prices and find the best value for money on groceries using standard units of measurement.

Public Policy and Pricing

(Figure 9.6) Public policy issues in pricing.

Within-Channel Issues

  • Price fixing: Talking to competitors to fix prices.

  • Predatory pricing: Selling below cost with the intention of punishing or eliminating a competitor.

Across-Channel Issues

  • Price discrimination: Offering different prices or trading terms to different customers.

  • Resale price maintenance: Manufacturers cannot require retailers to charge specified prices.

  • Deceptive pricing: Stating or advertising prices that are not available to the customer (i.e., ‘bait’ pricing).

Price – Marketing Metrics

It is important to measure marketing activities, including:

  • Pricing and breakeven analysis

  • Sales

  • Gross margins

  • Profitability

  • Relative price

  • Price elasticity

  • Optimal price

Next Steps

  • Keep up with readings and preparations.

  • Attend seminars.

  • Check for updates on CloudDeakin.

  • Progress the marketing mix strategies for the assignment.

  • Next week’s topic: Distribution: Delivering Customer Value (Chapter 17).