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Marketing Mix - Pricing Strategy

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Session Outlines
Pricing Decisions Strategic Pricing Decisions Profit Equation Price as an Indicator of Quality / Value Setting the Price The six steps Four Main Pricing Strategies Price - Quality Strategies Pricing Methods Auction Pricing
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PRICING DECISIONS
Pricing is an art, a game played for high stakes; for marketing strategists, it is the moment of truth. All of marketing comes to focus in the pricing decision.
Pricing decisions determine the types of customers and competitors a firm attracts A single pricing error can effectively nullify all other marketing mix activities

Strategic Pricing Decisions

Influences/Constraints: Internal Marketing Objectives Positioning Marketing Strategies Costs Strengths/Weaknesses Company characteristics External Consumer attitudes Consumer demand Competition Resellers Culture Economy Legislation Set strategic pricing objective Estimate demand, price elasticity of demand and perceived value

Determine costs and their relationship to volume Examine competitors prices and costs Select a method for calculating price Set a price level

Adjust price to meet variations in demand and cost across segments, channels etc
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Marketing Mix
Revenue Producer

Cost

Product

Price

Cost

Place

Promotion

Cost

PROFIT EQUATION
Price affects the quantity sold and hence profit because it directly affects both revenues and costs:
Total Revenue Total Costs

Profit

Total Revenue

Total Costs

Profit

Unit Price

Quantity Sold

)[

Fixed Costs

Unit Variable Costs

Quantity Sold

)]
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Price
Money Charged for a Product or Service

Generates Revenue Easy to Change

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Many Names

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Why Price?
Determines the profitability of the operation
Profit per unit and more fundamentally through its impact on economies of scale Knowledge of the companies cost structure will inform the pricing decision

Influences demand level

Understanding of price elasticity is essential

Impacts on the brands positioning

Understanding the price/quality relationship is key

PRICING CONSIDERATIONS Price as an Indicator of Quality / Value

For some offerings, price influences consumers perception of quality and ultimately value Price affects consumer perceptions of prestige: As the price for an item increases, the demand for it rises

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Setting the Price The six steps in the process

6 5 4 3 2 1 Select Final Price Price Method

Competitor Analysis Estimate Costs

Determine Demand Pricing Objective

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Pricing Objectives Quantitative

Target margin Target ROI Target cash flow Target revenue Target volume Target share

Qualitative
Market image Perceived fairness Competitive parity Competitive edge Entry deterrence Survival
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Four Main Pricing Strategies

Premium Pricing
A high price is applied when product is unique and defendable advantage exists

Price Skimming
Leveraging first mover advantage

Penetration Pricing
A price set artificially low in order to gain market share

Economy Pricing
Based on cost leadership position

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Market Skimming

Applies to new, distinctive products, early in the PLC

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Penetration Pricing

Applies to large markets with elastic demand, economies of scale, intense competition

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Comparing Price - Quality Strategies

High High Price Medium Low

Premium Value

High Value

Super Value

Product Quality

Med

Overcharging

Medium Value False Economy

Good-Value

Rip-Off
Low

Economy

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Two Pricing Mistakes

Reducing Price Too Soon

Pricing Based on Cost instead of Customer Value
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Price Wars
Involves successive price cutting by competitors to increase or maintain their unit sales or market share
If competitors match the lower price, market share, sales, and profit gains could be lost The overall price level resulting from the lower price benefits none of the competitors

Coke vs. Pepsi price war in Karachi Marketers should consider price cutting only when one or more conditions exist:
The firm has a cost or technological advantage over its competitors The price cut is confined to specific products or customers and not acrossthe-board
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INDUSTRY CHARACTERISTICS AND THE RISK OF PRICE WARS

Industry Characteristics
Offering type Market growth rate Price visibility to competitors Buyer price sensitivity Overall industry cost trend Industry capacity utilization Number of competitors

Risk Level
Higher Undifferentiated Stable/Decreasing High High Declining Low Many Lower Differentiated Increasing Low Low Stable High Few
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Pricing Methods
Cost-plus/markup pricing
Common in retailing/ wholesaling when a firm faces hundreds or thousands of pricing decisions Widely used in competitive bid situations

Target return pricing

Objective is to set a price yielding a target rate of return on investment Common approach in the automobile industry Price cars to achieve a target of 15% or 20% ROI

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Pricing Methods
Competitive parity pricing
Common in mature industries where there is little product differentiation Common in oligopolistic industries (i.e. steel) Find a price that will yield a fair ROI and minimize chances of a price war

Discount/Premium pricing
Industries where significant differences between brands exist Price reflects positioning strategy i.e. hold price below or above competitors

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Pricing Methods
Perceived value pricing
Cost-oriented pricing may produce prices that are
lower than perceived value lost margin higher than perceived value lost sales Difference between the value perceived by the customer and the manufacturers cost defines the range of possible prices

Dependent on research
Customers rating of the importance of attributes Willingness to pay Expected benefits and value Performance $$$ Warranty $ Customer support $ Reputation $$

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Pricing Cues / Psychological pricing

This pricing tactic is so common, youd think customers would ignore it.
The 9 at the end of the price works in the same way as a sale sign helping customers evaluate whether theyre getting a good deal. Buyers are often more sensitive to price endings than they are to actual price changes. One study randomly mailed customers of a womens clothing catalogue different versions of the catalogue One included prices that ended in 00 cents, and the other included prices that ended in 99 cents. Found that customers who received the latter version were more likely to place an order. As a result, the clothing company increased revenue by 8%.
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Product Mix Pricing

Optional product
Pricing optional or accessory products sold with the main product i.e. camera case/bag

Captive-product
Pricing products that must be used with the main product i.e. film/memory chip/tape/batteries

By-product
Pricing low-value by-products to get rid of them and make the main products price more competitive i.e. Zoo Doo

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Product Mix Pricing

Product bundling
Combining several products and offering the bundle at a reduced price i.e. theatre season tickets

Product un-bundling
Separation of product/service features to maximize margin on value-add components i.e. Airlines

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Price Adjustments

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Auction Pricing
English auction
(ascending bids)

Dutch auction
(descending bids)

Sealed-bid auction

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Session Take Away

Pricing is interpreted both rationally and psychologically
Price is a critical component in determining positioning and brand image Acts as a signal of quality and value Is perceived relative to competitors

Successful pricing requires:

Customer insight Competitor insight Environment insight Company insight

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