Marketing Management
PRICE AND PRICING
PRICING
Pricing is one of the four p's of the marketing mix. The other three aspects are product
management, promotion, and place.
PRICE
“In economics and business, the price is the assigned numerical monetary value of a good,
service or asset”. The concept of price is central to microeconomics where it is one of the most
important variables in resource allocation theory (also called price theory).
Price is also CENTRAL TO MARKETING where it is one of the four variables in the marketing
mix that business people use to develop a marketing plan.
PRICING DEFINED
“Is the manual process of applying value to purchase and sales orders”.
MARKETING MANAGERS MUST ADDRESS TO THE FOLLOWING –VIS-À-VIS
PRICING:
1.
2.
3.
4.
How much to charge for a product or service?
What are the pricing objectives?
Do we use profit maximization pricing?
How to set the price?: (cost-plus pricing, demand based or value-based pricing, rate of
return pricing, or competitor indexing)
5. Should there be a single price or multiple pricing?
6. Should prices change in various geographical areas, referred to as?
ZONE PRICING
1. Should there be quantity discounts?
2. What prices are competitors charging?
3. Do you use a price skimming strategy or a penetration pricing?
STRATEGY
1. What image do you want the price to convey?
2. Do you use psychological pricing?
3. How important are customer price sensitivity and elasticity issues?
A well chosen price should do THREE THINGS:
1. Achieve the financial goals of the firm (eg.: profitability)
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2. Fit the realities of the market place (will customers buy at that price?
3. Support a product's positioning and be consistent with the other variables in the
marketing mix
a. price is influenced by the type of distribution channel used, the type of
promotions used, and the quality of the product
b. price will usually need to be relatively high if manufacturing is expensive,
distribution is exclusive, and the product is supported by extensive advertising
and promotional campaigns
c. a low price can be a viable substitute for product quality, effective promotions, or
an energetic selling effort by distributors
FROM THE MARKETERS POINT OF VIEW
An efficient price is a price that is very close to the maximum that customers are prepared to pay.
In economic terms, it is a price that shifts most of the consumer surplus to the producer.
The Effective Price is the price the company receives after accounting for discounts, promotions,
and other incentives.
Premium Pricing (also called prestige pricing) is the strategy of pricing at, or near, the high end
of the possible price range.
People will buy a premium priced product because:
1. They believe the high price is an indication of good quality;
2. They believe it to be a sign of self worth - "They are worth it" - It authenticates their
success and status - It is a signal to others that they are a member of an exclusive group;
and
3. They require flawless performance in this application - The cost of product malfunction
is too high to buy anything but the best - example: heart pacemaker
PSYCHOLOGICAL PRICING
Retail prices are often expressed as odd prices: a little less than a round number, e.g. $19.99 or
£6.95. Psychological pricing is a theory in marketing that these prices have a psychological
impact that drives demand greater than would be expected if consumers were perfectly rational.
Psychological pricing is one cause of price points.
The psychological pricing theory is based on one or more of the following hypotheses:
1. Consumers ignore the least significant digits rather than do the proper rounding. Even
though the cents are seen and not totally ignored, they may subconsciously be partially
ignored. Some suggest that this effect may be enhanced when the cents are printed
smaller: $1999.
2. Fractional prices suggest to consumers that goods are marked at the lowest possible price.
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3. Now that consumers are used to psychological prices, other prices look odd.
The theory of psychological pricing is controversial. Some studies show that buyers, even young
children, have a very sophisticated understanding of true cost and relative value and that, to the
limits of the accuracy of the test, they behave rationally. Other researchers claim that this ignores
the non- rational nature of the phenomenon and that acceptance of the theory requires belief in a
subconscious level of thought processes, a belief that economic models tend to deny or ignore.
Research using results from modern scanner data is mixed.
RESEARCH SUPPORTING ODD PRICING THEORY
In a study, the perceived value of all the numbers between 1 and 100 were studied, and 77 was
shown to have the lowest perceived value relative to its actual value.
RETAILING/ODD PRICE
Retailing consists of the sale of goods/merchandise for personal or household consumption
either from a fixed location such as a department store or kiosk, or away from a fixed location
and related subordinated services. In commerce, a retailer buys goods or products in large
quantities from manufacturers or importers, either directly or through a wholesaler, and then
sells individual items or small quantities to the general public or end user customers, usually in a
shop, also called store. Retailers are at the end of the supply chain. Marketers see retailing as
part of their overall distribution strategy.
Shops may be on residential streets, or in shopping streets with little or no houses, or in a
shopping center. Shopping streets may or may not be for pedestrians only. Sometimes a
shopping street has a partial or full roof to protect customers from precipitation.
Shopping is buying things, sometimes as a recreational activity. Cheap versions of the latter are
window shopping (just looking, not buying) and browsing.
SHOPS AND STORES
There are three major types of retailing, two of which have buildings that the customer can visit
to do business with.
The first is counter-service, once the only type of shop, but now rare except for selected items.
The second, and now more widely used method of retail, is self-service.
Quickly increasing in importance are online shops, the third type, where products and services
can be ordered for physical delivery, downloading or virtual delivery.
Even though most retailing is done through self-service, many shops offer counter-service items,
e.g. controlled items like medicine and small expensive items.
Shops used to deal with just one type of article. In the nineteenth century, in France, arcades
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were invented, which were a street of several different shops, roofed over. From this there soon
developed, still in France, the notion of a large store of one ownership with many counters, each
dealing with a different kind of article was invented; it was called a department store. In cities,
these were multi-story buildings which pioneered the escalator. In the mid-twentieth century in
the United States there developed the mall, midway between the arcade and the department
store. A mall consists of several two-storey department stores linked by arcades (many of whose
shops are owned by the same firm under different names).
A recent development is a very large shop called a superstore. Local shops can be known as
brick and mortar stores in the United States.
Many shops are part of a chain: a number of similar shops with the same name selling the same
products in different locations. The shops may be owned by one company, or there may be a
franchising company that has franchising agreements with the shop owners.
Some shops sell second-hand goods. Often the public can also sell goods to such shops. In other
cases, especially in the case of a nonprofit shop, the public donates goods to the shop to be sold.
In give-away shops goods can be taken for free.
The term retailer is also applied where a service provider services the needs of a large number of
individuals, such as with telephone or electric power.
RETAIL PRICING
The pricing technique used by most retailers is cost-plus pricing.
This involves adding a markup amount (or percentage) to the retailers cost. Another common
technique is suggested retail pricing. This simply involves charging the amount suggested by the
manufacturer and usually printed on the product by the manufacturer.
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