MARK101 Week 7 Tuesday - Pricing Notes

Price and Pricing

• Price is 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 only element of the marketing mix that produces revenue.
• Price is the most flexible element of the marketing mix.
• Major pricing strategies:
  • Customer value-based pricing
  • Cost-based pricing
  • Competition-based pricing

Customer Value-Based Pricing

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

Cost-Based Pricing

• 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
  • Variable
  • Total
• 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 breakeven on costs at different sales volumes or to make a desired profit.

Breakeven Chart

The Breakeven chart is used for determining target-return price and breakeven volume. Includes:

• Total Revenue
• Target Return
• Total Cost
• Fixed Cost

Value-Based vs. Cost-Based Pricing

Value-Based Pricing

1. Assess customer needs and value perceptions.
2. Set target price to match customer-perceived value.
3. Determine costs that can be incurred.
4. Design the product to deliver the desired value at the target price.

Cost-Based Pricing

1. Design a good product.
2. Determine product costs.
3. Set price based on cost.
4. Convince buyers of the product's value.

Competition-Based Pricing

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

Considerations in Setting Price

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

Other Considerations

• Overall marketing strategy, objectives, and mix:
  • Target costing: Starts with an ideal selling price based on customer-value considerations and then targets costs that will ensure the price is met.
• Organisational 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.
  • Analysing the price-demand relationship: the demand curve and how the price charged will influence demand.
  • Price elasticity of demand: Sensitivity of demand to price increases.
• The economy: Even in tough times, consumers still consider value when paying a price.
• Other external factors: Government, resellers, social concerns.

Demand Curve

The demand curve to demonstrate the relationship between price and quantity demanded per period.

$Q<em>1$ represents quantity demanded at price $P</em>1$, and $Q<em>2$ represents quantity demanded at price $P</em>2$.

New Product Pricing Strategies

• 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-Mix Pricing Strategies

• Product-line pricing: Setting prices across the entire product line (e.g., Accor hotels).
• Optional-product pricing: Optional add-ons sold 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).

Price-Adjustment Strategies

• Discount and allowance pricing (e.g., cash discounts, quantity discounts, trade-in allowances).
• Segmented pricing (e.g., customer segmented, location segmented, time-based pricing).
• Psychological pricing (e.g., linked to perceived quality, reference pricing).
• Promotional pricing (e.g., 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 personalised pricing (e.g., Uber; price comparison sites, e.g., Trivago).
• International pricing (e.g., the EU and Coke).

Price Changes

• 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.

Assessing and Responding to Competitor Price Changes

• Determine if a competitor has cut prices.
• Assess if lowering the price will negatively affect market share and profts.
• Determine if effective action can/should be taken:
  • Hold current price; continue to monitor competitor's price.
  • Reduce price.
  • Raise perceived value.
  • Improve quality and increase price.
  • Launch a low-price 'fighter brand'.

Public Policy and Pricing

• Pricing within channel levels:
  • Price-fixing.
  • Predatory pricing.
• Pricing across channel levels:
  • Price discrimination.
  • Price maintenance.
  • Deceptive pricing.
  • Scanner fraud.