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1 Chapter # 16 Chapter # 16 Developing pricing strategy

Mkt Mgt # chap16 Pricing

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Page 1: Mkt Mgt # chap16 Pricing

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Chapter # 16Chapter # 16

Developing pricing strategy

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Price is the amount of money charged for a product or service or the some of the values that consumer exchange for the benefits of having or using the product or service.

Fixed pricing – setting one price for all buyers

Dynamic pricing – charging different pricing depending on individual consumers and situations.

Pricing

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Importance of Pricing

• Price is the only one element of marketing mix that can generate revenue

• Most flexible element of the marketing mix

Many companies do not handle pricing well -

• One problem – Companies are too quick to reduce price to get sale rather convincing buyer that their product are worth a higher price ;

• Other mistake – pricing is too cost oriented rather customer value oriented.

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9. Economy8. False economy7. Rip-off

6. Good-value5. Medium-value4. Overcharging

3. Super-value2. High-value1. Premium

High Medium Low

Price

High

Medium

Low

Q

U

A

L

I

T

y

Nine price-quality strategies

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Setting pricing policy

Selecting the pricing objective

Determining demand

Estimating cost

Analyzing competitor’s cost, price and offer

Selecting a pricing method

Selecting the final price

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Step 1: Selecting the pricing objective

Five major objectives1. Survival - plagued with over capacity, intense

competition, or changing customer wants. Pricing cover variable cost as well as a portion of fixed cost.

2. Maximum current profit - choose the price that produces the maximum current profit, cash flow or ROI. Company may sacrifice long run performance by ignoring the effect of other mkt-mix, competitors and legal restraints.

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3. Maximum market share - higher sales volume lead to lower unit cost - higher long run profit-set lowest price due to price sensitive customer.

“Market penetration pricing”

4. Maximum market skimming - Setting a high price for a product to maximize revenues.

Conditions: sufficient buyers, production cost not high, high initial price not attract competitors, high price communicate superior image.

5. Product quality leadership - high prices to cover higher performance quality.

Step 1: Selecting the pricing objective (cont…)

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Step 2: Determining demand

A. Inelastic Demand - demand hardly changes with a small change in price.

Quantity Demanded per Period

B. Elastic Demand -demand changes greatly with a small change in price.

Pri

ce

P2P1

Q1Q2

Pri

ce

Quantity Demanded per Period

P2P1

Q1Q2

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Step 3: Estimating cost

Variable Costs

Costs that do vary directly with the level of

production.

Raw materials, packaging

Variable Costs

Costs that do vary directly with the level of

production.

Raw materials, packaging

Fixed Costs

(Overhead) Costs that don’t vary with sales or

production levels.

Salaries,Rent, interest

Fixed Costs

(Overhead) Costs that don’t vary with sales or

production levels.

Salaries,Rent, interest

Total CostSum of the fixed and variable costs for a given

level of production

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Step 3: Analyzing competitor’s costs prices and offer

The firm take the competitor’s costs, price and possible price reaction into account.

The firm first consider the nearest competitor’s price

The firm’s positive differentiations feature

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Step 4: Selecting a pricing method

Markup Pricing

Target-return Pricing

Perceived-Value Pricing

Going Rate Pricing

Auction type pricing

Group Pricing

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Simplest pricing method - adding a standard markup to the cost of the product.To illustrate mark- up cost, suppose a manufacturer had the following cost and expected sales.

Variable cost $ 10Fixed cost $ 3,00,000Expected unit sales 50,000

Unit cost = Variable cost + Fixed cost / unit sales= 10+ $ 300000/50000 = $ 16

To earn 20% mark up on sale, Mark-up Price = unit cost /1-desired return on sale

= $ 16 / 1-.2 = $ 20

Markup Pricing

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Drawback : Mark up pricing works only if that price actually brings the expected level of sales.

Mark-up pricing is still popular, because Perceived fairness to both buyers and sellers Sellers are more certain about costs than demand Minimizes price competition

Markup Pricing (cont…)

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The price that would yield its target rate of return on investment

Target-return = Unit cost+ (Desired return* invested capital)/ unit sales

Example: if unit cost is $16 and desired return is 20%, invested capital $1000000, unit sales50000

=$16+(.20*$1000000) / $50000=$20

Target-return Pricing

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Target-return Pricing (cont…)(Break even analysis)

200

400

600

800

1,000

1,200

10 20 30 40 50

Total Revenue

Total Cost

Fixed Cost

Target Profit($200,000)

Sales Volume in Units (thousands)

Break even point.

Co

st

in d

olla

r (t

ho

us

and

s)

Break even volume = Fixed cost / (price – variable cost)

= 300000/(20-10) =30000

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Perceived-Value Pricing

Perceived value is made up of several elements - buyer’s image of the product performance, the channel deliverables, the warranty quality, customer support and softer attributes such as supplier reputation, trustworthiness and esteem.Price buyer – Stripped-down product & reduce servicesValue buyer – Keep innovating new value & reaffirming their value. Loyal buyer – invest in relation building & customer intimacy.

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Going Rate Pricing

Company sets prices based on what competitors are charging.

The firm might charge the same, more or less than major competitors

In oligopolistic industries, (steel,fertilizer) firms normally charge the same price.

The smaller firms “follow the leader” changing their price when the leader changes their price without considering their demand or costs.

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Auction type pricing

English auctions – one seller & many buyer Dutch auctions – one seller & many buyer, or many

seller & one buyer Sealed-bid auctions – submit one bid and do not

know other bid.

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Step 6: selecting the final price

Psychological Pricing

Gain-and-risk-sharing pricing

The influence of other marketing -mix elements

Company pricing policies

Impact of price on other parties

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Psychological Pricing

Psychology considered not simply the economics. Price as a quality indicator

Image pricing effectively ego-sensitive products – perfume

Reference price a mental benchmark

Odd number – $299 instead of $300.

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Gain-and-risk-sharing pricing

Buyer may resist accepting a seller’s proposal because of a high perceived level of risk.

The seller has the option of offering to absorb part or all of the risk if he does not deliver the full promised value.

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The influence of other marketing -mix elements

Relationship among relative price, relative quality, and relative advertising

Average quality-high advertising-premium price

High quality-high advertising-highest prices

High price-high advertising-lifecycle stage for market leader

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Distributor and dealer

Sales force

Competitors react

Suppliers

Govt. Intervene and prevent

Impact of price on other parties

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Price adaptation strategies

Geographical Pricing Price discounts and allowances Promotional pricing Discriminatory pricing Product-mix pricing

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Geographical Pricing

Adjusting prices to account for the geographic location of customers

• Uniform -delivered pricing

• Zone pricing pricing

• Basing-point pricing &

• Freight-absorption pricing

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Price discounts and allowances

Cash discount - prompt payment-2/10,net30 Quantity discount - large volume buyers Functional discount- perform certain functions-

selling, storing, and record keeping. Seasonal discount-price reduction out of season. Allowances -

Trade-granted for turning in an old item when buying a new one.Promotional-reward for participating in ad, and sales promotion.

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Promotional pricing

Loss-leader pricing– supermarkets and department stores often drop the price to stimulate additional store traffic

Special-event pricing Cash rebates-Help clear inventories without cutting

the stated list price-specified time period. Low interest financing-Without cutting price can

offer low interest financing. Longer payment terms Warranties and service contracts Psychological discounting

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Customer segment pricing - Each segment pays different prices for same product

Product-form pricing - Product versions priced according to cost

Location pricing-Price changes with location - cost constant

Image pricing – based on image pricing

Channel pricing-price depends on whether it is purchased

Time pricing-Price for specific period

Discriminatory pricing

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Product-mix pricing

Product Line Pricing - setting price steps between product line items - between $300 to $500.

Optional-Product Pricing - pricing optional or accessory products sold with the main product - car options

Captive-Product Pricing - pricing products that must be used with the main product - film with camera.

Two-part pricing - consisting of a fixed fee plus a variable usage fee - telephone line.

By-Product Pricing - pricing by-products to make the main product price more attractive i.e. Lumber mills

Product-Bundle Pricing - combine several products in a bundle,offer at reduced price

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Initiating price cuts

Several situation leads to price cuts - excess capacity “follow the leader price” decline market share drive to dominate market share through lower cost

Price cutting strategy involves possible traps – low-quality trap fragile-market-share trap shallow-pockets trap

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Initiating price increase

The following circumstances lead to prices increases Cost inflation Over demanded

Company decide whether to increase sharply or raise it by small amount by several times.

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Reaction to price change

Customer reactions – if price cut can be interpreted in the following ways

the item is replaced by new one the is faulty & not selling well. the firm is financially trouble quality has been reduced

A price increase deter sales but carry positive some meaning – the item is hot and represent good value.

Competitor reactions Market share objective – match the price change profit-maximization objective – improving product quality or increasing advertising budget.

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Responding to competitors’ price changes

Brand leader can response several ways:

Maintain price

Maintain price and value add

Reduce price

Increase price and improve quality

launch a low-price fighter line