Pe s e w a Pr e s e n t a t i o n s
Pricing
Life Cycle Strategies
Promotion
Growth
Decline
Introduction
Product
Price
Place/Distribution
Maturity
Price, the Lifecycle and Marketing Mix
Place
Product
Skimming
Premium
Penetration
Inelastic
Elastic
Price
Promotion
Pricing Best Practices
• Develop pricing mentality
• Consistently deliver more value
• Price strategically, not opportunistically
• Know your competition
• Make pricing a process
Factors Affecting Pricing Decisions
Internal Factors
•
•
•
•
Marketing objectives
Marketing mix strategy
Costs
Organizational
considerations
• Target market
• Positioning objectives
External Factors
• Nature of the market
• Demand
• Competitors’ costs,
prices, and offers
• The economy
• Reseller needs
• Government actions
• Social concerns
Pricing Products
• The meaning and use of price
– Price—the amount of money a seller is willing to accept in exchange for a
product, at a given time, and under given circumstances.
• Price functions as an allocator of goods and services among
those who are willing and able to buy them (customers).
• Price also allocates financial resources among producers
according to how well the producers satisfy customers’ needs.
• Can firms control their prices?
– Supply—the quantity of a product that producers are willing to sell at
each of various prices.
– Demand—the quantity of a product that buyers are willing to purchase at
each of various prices.
Supply and Demand Curves
Quantity Supplied
60
Price
50
Quantity Demanded
S
Quantity
Supplied/Demanded
D
D
S
40
30
E
20
10
0
5
10 15 20 25
Millions
The upward slope means that
producers will supply more
jeans at higher prices
0
5
10 15 20 25
Millions
The downward slope means
that buyers will purchase more
jeans at lower prices
0
5
10 15 20 25
Millions
The point E indicates an
equilibrium in quantity and
price for sellers and buyers
Pricing Products (cont’d)
• Can firms control their prices? (cont’d)
– Differentiation—the process of developing and promoting differences
between one’s product and all similar products.
• Price and non-price competition
– Price competition—an emphasis on setting a price equal to or lower than
competitors’ prices to gain sales or market share.
– Non-price competition—competition based on factors other than price.
• Buyers’ perceptions of price
– Buyers will accept different ranges of prices for different products.
Pricing Objectives
• Survival
– Pricing the firm’s products (perhaps at a loss) in order to attract
customers to establish the firm in a market.
• Profit maximization
– Pricing with the intent to reap profits as large
as possible from a market—usually an unattainable goal.
• Target return on investment (ROI)
– Pricing that allows the firm to attain its profit
goal, which is a percentage of the
investments the firm has made.
•
Performing at par with competitors
Pricing Objectives (cont’d)
•Market Share Goals
–Pricing that will create sales that are
measured as a percentage of total
industry sales.
•Status Quo Pricing
–Pricing the firm’s products so
as to not disturb the stability
of prices in the industry.
Pricing Methods
• Cost-based pricing
– Markup pricing—the amount a seller adds to the cost of a product to
determine its basic selling price.
• Markup pricing can overprice or underprice a product for its
market, causing either lost sales or forgone profits.
• Markup pricing separates pricing from other business functions
that impact on marketing decisions.
Cost-based Pricing
Product
Cost
Price
Value
Customers
Pricing Methods
• Breakeven analysis
– Breakeven quantity—the number of units that must be sold for total
revenue (from all units sold) to equal the total cost (of all units).
• Fixed costs—costs that are incurred no matter how many units are
sold or produced.
• Variable costs—costs that vary with or depend on the number of
units produced.
Breakeven Analysis
Breakeven in units =
Breakeven analysis
answers the question of
what is the lowest level of
production and sales at
which a company can
break even (incur no loss
and not yet have made a
profit) on a particular
product.
Total fixed costs
Unit selling price – Unit variable costs
$120,000
Profit
Total
revenue
Costs/Revenues
Total
cost
$80,000
Breakeven
quantity
$40,000
Fixed costs
Loss
0
Variable
costs
500
667
Quantity in units
1000
Pricing Methods (cont’d)
• Consumer-based pricing
– Pricing of a product that is based on the level of customer demand for the
product and the value placed on a product by the consumer. Product prices
are high when demand is high and low when demand is weak.
Value-based Pricing
Customers
Value
Price
Cost
Product
– Price differentiation—setting different prices in segmented markets based on
segmental characteristics (e.g., time of purchase, type of customer, or
distribution channel).
Pricing Methods (cont’d)
• Competition-based pricing
– Product pricing that is based on meeting the challenge of
competitors’ prices in markets where products are quite similar or
price is an important customer consideration (engaging in price war).
Combative
Weakness
High Price
Low Efficiency
High Cost
Margin
Erosion
Combative
Strength
High Efficiency
Low Cost
Low Price
Market share
Dominance
Types of Pricing Strategies
PRICING STRATEGIES
New-Product
Pricing
Differential
Pricing
• Price skimming
• Negotiated pricing
• Penetration
• Secondary-market
pricing
pricing
• Periodic
discounting
• Random
discounting
Psychological
Pricing
• Odd-number
pricing
• Multiple-unit
pricing
• Reference pricing
• Bundle pricing
• Everyday low
prices
• Customary pricing
Product-Line
Pricing
Promotional
Pricing
• Captive pricing
• Premium pricing
• Price leaders
• Special-event
• Price lining
pricing
• Comparison
discounting
Pricing Strategies
• New-product strategies
– Price skimming—charging the highest-possible price for a product during
the introduction stage of its life cycle. Helps recover R&D costs quickly.
May encourage competitors to enter market
– Penetration pricing—setting a low price for a new product to quickly
build market share and discourage competitors. Used when setting the
standard is important. Used when the product is easily copied. May
discourage competitors to enter market.
Quality
Low
Low
High
Economy
e.g. Tesco
spaghetti
Penetration
e.g. Telewest
cable phones
Skimming
e.g. New film or
album
Premium
e.g. BA first
class
Price
High
Pricing Strategies (cont’d)
• Differential pricing
– Negotiated pricing—bargaining to establish a final price.
– Secondary-market pricing—setting one price for the primary target
market and a different price for another market.
– Periodic discounting—temporary reduction of prices on a patterned
or systematic basis.
– Random discounting—temporary reduction of prices on an
unsystematic basis.
Pricing Strategies (cont’d)
• Psychological pricing
– Odd-number pricing—setting unit prices using odd numbers that are
slightly below whole dollar/pound/euro amounts.
– Multiple-unit pricing—setting a single price for two or more units of a
product.
– Reference pricing—pricing a product at a moderate level and positioning
it next to a more expensive model or brand.
– Bundle pricing—packing two or more complementary products and
selling them for a single price.
– Everyday low prices (EDLP or also known as economy pricing)—setting a
low price for products on a consistent basis.
– Customary pricing—pricing on the basis of tradition.
Pricing Strategies (cont’d)
• Product-line pricing
– Captive pricing—pricing the basic product in a product line low, but
pricing related items at a higher level.
– Premium pricing—pricing the highest-quality or most versatile products
higher than other models in the product line.
– Price lining—setting a limited number of prices for selected groups or
lines of merchandise.
• e.g. MARS 32p, Four-pack 99p, Bite-size £1.29
• Promotional pricing
– Price leaders—products priced below the usual markup, near cost, or
below cost.
– Special-event pricing—advertised sales or price cutting linked to a
holiday, season, or event.
– Comparison discounting—setting a price at a specific level and comparing
it with a higher price.
Pricing Business Products
• Geographic pricing
– FOB (free-on-board) origin pricing—
the seller’s pricing is exclusive of delivery costs;
the buyer pays the product delivery costs.
– FOB destination pricing—the seller includes
transportation costs in the product
pricing.
• Transfer pricing
– A company’s strategy for the pricing
of internally transferred products
between organizational units.
Pricing Business Products (cont’d)
• Discounting
– Trade discounts—discounts given intermediaries or middlemen.
– Quantity discounts—discounts for large volume purchases.
– Cash discounts—discounts for prompt payment (e.g., “2/10, net 30”: a
2% discount for paying the full bill within 10 days).
– Seasonal discounts—price reductions for buyers who purchase out of
season.
– Allowances—price reductions to achieve
certain goals (i.e., to increase sales and/or
to switch customers away from competing
products) through dealer incentives or
customer trade-ins.
Responding to Competitor’s Price Changes
No
Has competitor
cut price?
Hold current price;
continue to monitor
competitor’s price
Yes
No
Reduce price
Will lower price
negatively affect our
market share & profits?
Raise perceived
quality
Yes
No
Can/should effective
action be taken?
Yes
Launch low-price
“fighting brand”
Public Policy Issues in Pricing
• Between manufacturers
– Price-fixing
– Predatory pricing
• Between manufacturers and retailers
– Retail price maintenance
– Discriminatory pricing
• Between retailers and consumers
– Deceptive pricing
• Between manufacturers and consumers
– Deceptive pricing
Ten ways to ‘increase’ prices without
increasing price
•
•
•
•
•
•
•
•
•
•
Revise the discount structure
Change the minimum order size
Charge for delivery and special services
Invoice for repairs on serviced equipment
Charge for engineering, installation
Charge for overtime on rushed orders
Collect interest on overdue accounts
Produce less of the lower margin models in the line
Write penalty clauses into contracts
Change the physical characteristics of the product