An introduction to pricing
Hoorcollege marketing blok 2 week 5
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Interactieve Media
Learning goals
 By the end of this week’s colleges and the reading
you should:
 Understand the roles of pricing in the marketing mix
 Be aware of the factors that affect the price set
 Understand the strategies available to marketers when
setting prices
 Know some of the tactics available for changing prices
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Agenda
 The importance of price
 What is price?
 Factors that influence pricing decisions
 Setting prices: pricing strategies
 Tactics for changing price
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The importance of price
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Price is important
 Price is one of the most important factors in the buying
decision
 If it is perceived as too high by the target customer, demand will
be low
 Price is the only income generator in the marketing mix
 If the price is too low, profits will not be optimal
 Price suggests a positioning to the consumer
 If the price is out of step with the rest of the marketing mix it will
weaken the offer
 Price is what the customer pays in the exchange process
 The customer must feel they are getting a fair deal
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What is price?
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What is a price?
 All products and services have a price
 Gratis is also a price
 A price the thing (usually money) that is charged in
exchange for a product or service
 More broadly a price is the sum of all values that
consumers exchange for the benefits of having or
using a product or service
 This might include things such as extra warranty and cost
of ownership
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Perception (perceptie) is very
important
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Cool!
If the consumer feels the
price is too high they will
try to find an alternative or
may even go without
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Perception of what is “too much” (or
too little) varies by consumer
Waste
of
money
Cool!
US$ 23,000
Knowing what your target customer understands
as valuable is essential to setting a price
What’s in it for them?
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Factors affecting price setting
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Price setting can be complex
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But in most cases there are two key
factors
 The highest price that can
be charged is the maximum
the target customer
perceives as being “worth it”
 The minimum is (usually)
what is necessary not to
lose money
 The other factors affect
where you can sit between
these two
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Setting prices: pricing strategies
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Deciding strategy
 In order to set a price you first need to understand
 What the target customer sees as the maximum price that
is “worth it”
And
 What your minimum price is based on the costs you have
 Then you decide you pricing strategy
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New product or new price?
 A new price might be for a new product or for an
existing one
 Deciding the price of a new product tends to be
different from changing the price of an existing
product
 With new products you often have less information
to work with
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New product pricing
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New product pricing
 Two types of “new” product
 Imitative products
 Products that the consumer can compare easily with another
offer meeting the same need
 Innovative products
 Products that the consumer cannot compare with another
solution
 These are rarer than many think
 Each requires a different approaches
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Imitative products
 The issue you here is how to position the product
against existing offers
 There are two variables involved
 Relative price compared to alternatives
 Relative quality compared to alternatives
 These offer 4 possible strategies
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Price positioning strategies for
imitative products
Relative Price
High
Low
High
Premium
strategy
Good-value
strategy
Low
Overcharging
strategy
Economy
strategy
Relative
Quality
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Beware of being a “me too” offer
Relative Price
High
High
Low
Premium
strategy
Good-value
strategy
Relative
Quality
Me
too
Low
Overcharging
strategy
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Economy
strategy
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Innovative products
 These products have no reference
 Although they may be an innovative replacement for an
existing offer
 Price is set based on an deep understanding of the
target customer’s idea of value
 There are two main strategies
 Market-skimming pricing
 Market-penetration pricing
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Market-skimming
 This involves setting the starting price high to skim
layers of the market
 The price must be dynamic and adjusted over time to
maintain sales
 Stage 1
 Set a price that is just “worth it” for some segment (usually
innovators) of the market
 Stage 2
 As sales slow down because the market segment is
saturated or competitors enter the market the price is
reduced for the next segment (early adopters)
 And so on...
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Market-skimming for & against
Advantages
Risks
 Positions product in terms of
 Failure to react to product
life cycle development
 Uniqueness
 Quality
 Allows quicker recovery of
development costs
 Setting the price too high
 Over-estimating the target
customer’s sense of what
is valuable
 Product not really unique
 Fast competitor reaction
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Market-penetration
 This involves setting a price that is low enough to
attract large numbers of buyers
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Conditions favouring marketpenetration
 Price sensitive market
 Production and distribution costs will fall as a result
of high volumes
 The low price helps keep competition out of the
market
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Advantages of penetration
 Develop a market for a new offer quickly
 Take advantages of economies of scale
 Keep competition out of the market
 Develop dominant market position
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Market-skimming versus penetration
 Market-skimming works
best when:
 The product is genuinely
unique
 Competitors cannot copy
the product quickly
 E.g. it is protected by a
patent
 The product offers real
value to some market
segments
 The market is not price
sensitive
 Production and distribution
costs will not fall quickly
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 Market penetration works
best when:
 The market is price
sensitive
 Production and distribution
costs will fall based on
increased volumes
 The product is easily
copied
 The value of the product is
less clear
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“Normal” pricing
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There is no such thing as “normal”
pricing, but
 Pricing existing or updated products is easier (a little
like imitative new products)
 There are 13 different strategies
 These can sometimes be used in combinations
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“Normal” pricing strategies
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“Gratis” pricing isn’t really gratis
Even when it’s gratis, someone has
to pay
This
had
better
be
worth it!
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Gratis…
Cool!
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Ways of keeping things “gratis”
 Advertising
 Selling database customer information
 Selling-up
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Some tactics for changing price
These really are used
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Changing price is sometimes
necessary…but risky
 A price rise can mean
 Angry customers
 Potential reduction in market share if competitors do not
increase
 A price decrease can mean
 A potential decrease in profit
 Image problems
 Sometimes it is better not to change price, but find a
more creative way to handle the price
 This may not be the case for economy brands
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Some ways to avoid increasing price
 Change the product (e.g. make it smaller)
 Bundle the product
 Separate extras and make the options
 Change discount to intermediaries
 Charge for deliver and extras
 Move away from lower margin products in line-up
 Offer “prompt payment” discounts
 Late payment penalties
 Change minimum order size
 Leave the market
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Some ways to avoid decreasing price
 Short-term promotions
 Bundle pricing
 Value packs
 Increase warranty
 Increase intermediary discounts
 Extend payment terms
 Increase product quality
 Offer better service
 Leave the market
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Summary
 Price is the only element of the marketing mix that
makes money
 Poor pricing can ruin your marketing mix
 Pricing of new products is more complex than
existing products
 Where possible avoid changing price
 Unless you are a economy brand
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