Price and pricing What will we learn? ¡What is a price? ¡How should a company set prices initially for products or services? ¡How do consumers process and evaluate prices? ¡How should a company adapt prices to meet varying circumstances and opportunities? ¡When should a company initiate a price change? ¡How should a company respond to a competitor’s price challenge? ¡ Price - definition ¡ The amount of money charged for a product or service, or the sum of all the values that consumers/customers exchange for the benefits of having or using the product or service. ¡ ¡Rent ¡Fee ¡Rate ¡Commission ¡Assessment ¡Tuition ¡Fare ¡Toll ¡Premium ¡Retainer • Bribe • Salary • Wage • Interest • Tax Price ¡critical marketing mix variable ¡„one price for all“ – end of the 19th cent. – large-scale retailing ¡(historically: bargaining, negotiation – „acceptable price“ – different prices – need, bargaining skills…) q produces revenue – the only element of MKT mix q very flexible element in the marketing ¡ mix q relates directly to microeconomics ¡ supply versus demand analysis ¡ breakeven analysis ¡ price elasticity ¡+PSYCHOLOGY!!!! – MORE COMPANY COST ORIENTED ¡ Factors to Consider When Setting Prices Target Market Positioning Objectives Internal Factors Affecting Pricing Decisions Marketing objectives that affect pricing decisions Marketing Objectives Survival Low Prices to Cover Variable Costs and Some Fixed Costs to Stay in Business. Current Profit Maximization Choose the Price that Produces the Maximum Current Profit, Cash Flow or ROI. Market Share Leadership Low as Possible Prices to Become the Market Share Leader. Product Quality Leadership High Prices to Cover Higher Performance Quality http://www.whitehallprinting.com/pricing.html http://www.kaufland-online.cz/Site/start.htm http://louisvuitton.com/web/index.jsp http://www.pg.com/en_US/index.jhtml http://www.realestatedeveloper.com Marketing Mix variables that affect pricing decisions Marketing-Mix Strategy Product Design and Quality Distribution Promotion Non-Price Factors Consistent and effective marketing programme!!! PORTER GENERIC STRATEGIES: Price positioning Non-price positioning Types of cost factors that affect pricing decisions Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production COSTS set the floor for the price Organizational considerations: ¡??? Who, when, how, what… External Factors Affecting Pricing Decisions Setthe upper limit of prices Benefits of owing product? Consumer perception Pure competition, pure monopoly??? Benefits??? Character of competition Nature of consumption, hierqarchy of needs… Consumer psychology, demand and pricing ¡Reference Prices = buyers carry in their mind l“Fair price” lTypical price lLast price paid lUpper-bound price lLower-bound price lCompetitor prices lExpected future price lUsual discounted price ¡ ¡Price-quality inferences ¡Price endings ¡Price cues “Left to right” pricing ($299 versus $300), odd number (1,3, 5…) discount perceptions, even number value perceptions, ending prices with 0 or 5, “Sale” written next to price lCustomers purchase item infrequently lCustomers are new lProduct designs vary over time lPrices vary seasonally lQuality or sizes vary across stores ¡ ¡ When? ¡Price sensitivity ¡Estimating demand curves ¡Price elasticity of demand ¡ DEMAND Demand Curves Quantity Demanded per Period A. Inelastic Demand - Demand Hardly Changes With a Small Change in Price. P2 P1 Q1 Q2 Quantity Demanded per Period P’2 P’1 Q1 Q2 B. Elastic Demand - Demand Changes Greatly With a Small Change in Price. Pricing methods ¡= setting the price – three sets of factors: ¡Costs ¡consumer(customer´s ) perception ¡Competitor´s price ¡ ¡ ¡Cost-based approach (cost+, BEA, TPP) ¡ ¡ Buyer-based approach (perceived value) ¡ ¡ Competition-based approach (going-rate, ¡ sealed –bid) ¡ Major considerations in setting price fig10 PRICING OBJECTIVES PRICING OBJECTIVES ENVIRONMENTAL ANALYSIS CORPORATE OBJECTIVES PROFIT ORIENTATED VOLUME ORIENTATED COST ORIENTATED COMPETITION ORIENTATED Minimizes Price Competition Perceived Fairness to Both Buyers and Sellers Sellers Are More Certain About Costs Than Demand Cost-Plus Pricing = adding a Standard Markup to the Cost of the Product WHY? BEA and TPP ¡Break-Even Analysis and Target Profit Pricing lBreak-even charts show total cost and total revenues at different levels of unit volume. lThe intersection of the total revenue and total cost curves is the break-even point. lCompanies wishing to make a profit must exceed the break-even unit volume. ¡ ¡Break-Even Analysis and Target Profit Pricing ¡ Fixed Costs Total Costs Revenues Sales Volume in Thousands of Units Thousands of Dollars 0 10 20 30 40 1000 800 600 400 200 Break-even point Target Profit $200,000 Quantity To Be Sold To Meet Target Profit Value-Based Pricing Cost-Based Pricing Value-Based Pricing Demand Based Pricing ¡ qperceived value ¡requires detailed knowledge of buyer behavior and demand elasticity ¡only true profit maximizing strategy ¡ignores costs and competitors ldemand differential lprice discrimination lyield maximization pricing ¡sell at multiple prices to multiple segments ¡not based on marginal costs of dealing with each ¡daily, weekly, or seasonal pricing ¡geographic, physical, or electronic barriers ¡ Competition-Based Pricing PRICING AND PRODUCT ØDefine the entire product/service offering ØWhat differentiates it ? ØWhat is the perceived value ? ØDo specific features add value ? ØQuality, support, warranty, etc. ¡ PRICING AND POSITIONING ØPricing reinforces Positioning. Ø ØPricing is a competitive weapon. Ø ØPricing ties together your product offering. Ø ØPrice from the customer’s viewpoint. ¡ Pricing and Promotion ØPricing is a tool in promoting the product. ØUse Pricing to encourage initial trials and maintain customer loyalty. ØUse Promotions to test Pricing sensitivities. ¡ Pricing strategies ¡Premium pricing ¡Uses a high price, but gives a good product/service exchange e.g. Concorde, The Ritz Hotel ¡Penetration pricing ¡offers low price to gain market share - then increases price ¡e.g. France Telecom - to attract new corporate clients (or Telewest cable) ¡Economy pricing ¡placed at ‘no frills’, low price ¡e.g. Soups, spaghetti, beans - ‘economy’ brands ¡ ¡ ¡ ¡ ¡Optional product-pricing ¡e.g. optional extras – BMW, SKODA famously under-equipped ¡Captive product pricing ¡products that complement others ¡e.g Gillette razors (low price) and blades (high price) ¡Product-bundle pricing ¡sellers combine several products at the same price ¡e.g software, books, CDs. ¡Promotional pricing = temporarily pricing below the list price to increase short-run sales ¡BOGOF („buy one, get one free“) e.g. toothpaste, soups, etc ¡ http://www.freeukoffers.com/offers/boots.html http://www.countrywidekennels.co.uk/products_category.asp?cat=45 http://www.newlanarkweddings.co.uk/wedding_packages/optional_extras/ ¡Price skimming ¡where prices are high - usually during introduction ¡e.g new albums or films on release ¡ultimately prices will reduce to the ‘parity’ ¡Psychological pricing ¡to get a customer to respond on an emotional, rather than rational basis ¡.e.g 99p not £1.01 ‘price point perspective ¡Product line pricing ¡rationale of a product range ¡e.g. MARS 32p, Four-pack 99p, Bite-size £1.29 ¡Pricing variations ¡ ‘off-peak’ pricing, early booking discounts,etc ¡e.g Grundig offers a ‘cash back’ incentive for expensive goods ¡ http://www.barcelona-on-line.es/Marketing/AdvanceBooking/eng.asp http://www.renault.co.uk/cars/compare.aspx http://www.bata.cz/kategorie/web-katalog-damska-obuv ¡Geographical pricing ¡different prices for customers in different parts of the world ¡e.g.Include shipping costs, or place onPLC ¡Value pricing ¡usually during difficult economic conditions ¡e.g. Value menus at McDonalds ¡ Differentiated pricing and price discrimination ¡Customer-segment pricing ¡Product-form pricing ¡Image pricing ¡Channel pricing ¡Location pricing ¡Time pricing ¡Yield pricing How to improve profit performance? ØIncrease price ØCut Variable Cost ØIncrease Volume ØCut Fixed Cost ¡ ØShift in Supply Curve lchange in cost lchange in expectations of cost lchange in price of other goods sold l ØShift in Demand Curve lchange in income lchange in price of related goods lchange in price expectations lchange in taste l ØIncrease in demand versus increase in quantity demanded ¡ PRICING AND PROFITABILITY $Understand the entire cost structure behind your product or service. $Target your product line profitability and manage it. $Pricing strategy needs to assure long term profitability. $Be able to recognize a bad deal and walk away. ¡