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INTRODUCTION
Price is the one element of the marketing mix that produce revenue; the other element produce cost, prices
are the easiest marketing mix element to adjust; product features, channels and even promotion take more
time. price also communicating to the market the companys intended value positioning of its product or
brand.
Today companies are wrestling with a number of difficult pricing tasks
How to respect to aggressive price cutters
How to price the same product when it goes through different channels
How to price the same product in different countries
How to price on improved product while still selling the previous version
Many companies do not handle pricing well. They make these common mistakes; price is to costoriented; price is not revised often enough to capitalize on market changes; price is set independent of
the rest of the marketing mix rather than as an intrinsic element of marketing positioning strategy; and
price is not varied enough for different product item, market segmentation, distribution channels, and
purchase occasions.
Companies do their pricing in a variety of ways. In small companies, price is often set by the boss. In
larger companies, pricing is handling by division and product line managers. Even here, top
management sets general objectives and policies and often approve the prices proposed by lower level
of management.
PRICING-INTRODUCTION
Setting the right price is an important part of effective marketing. It is the only part of the marketing mix
that generates revenue (product, promotion and place are all about marketing costs).
Price is also the marketing variable that can be changed most quickly, perhaps in response to a competitor
price change.
Put simply, price is the amount of money or goods for which a thing is bought or sold.
The price of a product may be seen as a financial expression of the value of that product.
For a consumer, price is the monetary expression of the value to be enjoyed/benefits of purchasing a
product, as compared with other available items.
The concept of value can therefore be expressed as:
Todays companies try to adopt their offers and terms to different buyers. Thus a
manufacturer will negotiate different terms with different retail chains. One retailer may want daily
delivery (to keep stock lower) while an other may accept twice a week delivery in order to get a lower
price. The manufacturers costs will differ with each chain, and so will its profits.
TARGET COSTING
Costs change with production sale and experience. They can also change as a result of
concentrated efforts by designers, engineers and purchasing agents to reduce them.
MARK-UP PRICING:
The most elementary pricing method is to add a standard mark-up to the products cost.
Construction companies submit job bids by estimating the total project cost and adding a standard
mark-up for profit.
Suppose a toaster manufacture has a following cost and sale expectation
Variable cost per unit ..
Fixed cost
.
Expected unit sales .
$10
300,000
50,000
Now assume the manufacturer wants to earn a 20 % markup on sales. The manufacturers markup
price is given by:
Markup price =
unit cost
= $16
=$20
1-0.2
TARGET-RETURN PRICING:
In target return pricing the firm determines the price that would yield its target
rate of return on investment (ROI). Target pricing is used to general motors, which price its automobiles to achieve a 15-20 percent ROI.
PERCIVED-VALUE PRICING:
In increasing number of companies based their price on the customers perceived
value. They must deliver the value promised by their value proposition, and the customer must have
perceived this value. They use the other marketing mix elements, such as advertising and sales force, to
communicate and enhance perceive value in buyers mind.
VALUE-PRICING:
In recent years, several companies have adopted value pricing, in which they win loyal
customers by charging a fairly low price for a high quality offering. Among the best practitioners of
value pricing are WALL-MART, IKEA, and SOUTH-WEST airlines.
GOING RATE-PRICING:
In going rate pricing, the firm basis its price largely on competitors prices. The firm might
charge the same, more, or less than major competitors. In oligopolistic industries that sell a commodity
such as steel, paper, or fertilizers, firms normally charge the same price.
ACTION TYPE PRICING:
Is growing more popular, especially with the growth of the internet. There are over 2000
electronic market places selling everything from pigs to use vehicles to cargo to chemicals. One major
use of actions is to dispose of excess inventories or to use good. Company needs to be aware of the
three major types of actions and their separate pricing procedures
*ENGLISH ACTIONS (ascending bids)
*DUTCH ACTIONS (descending bids)
*SEALED BIDS ACTIONS
GROUP PRICING:
The internet is facilitating methods where by consumers are business buyers can join groups
to buy at a lower price. Consumer can go to volumebuy.com to buy electronics, computers,
subscriptions, and another item.
Buyer may resist accepting a sellers proposals because of the high perceive level of a 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.
THE INFLUENCE OF OTHER MARKETING MIXES ELEMENTS:
The final price must take into account the brands quality and advertising relating to competition.
*Brands with average relative quality but high relative advertising budgets were able to charge premium
prices.
IMPACT OF PRICING ON OTHER PARTIES:
Management must also consider he reaction of other parties to the contemplated price. How will
distributors and dealers feel about it? Will the sales force be willing to sale at that price? How will
competitors react? Will supplier raise their prices when they see the companys price? Will the government
intervene and prevent this price from being charged?
Costs
In order to make a profit, a business should ensure that its products are priced above their total average
cost. In the short-term, it may be acceptable to price below total cost if this price exceeds the marginal cost
of production so that the sale still produces a positive contribution to fixed costs.
(2) Competitors
If the business is a monopolist, then it can set any price. At the other extreme, if a firm operates under
conditions of perfect competition, it has no choice and must accept the market price. The reality is usually
somewhere in between. In such cases the chosen price needs to be very carefully considered relative to
those of close competitors.
(3) Customers
Consideration of customer expectations about price must be addressed. Ideally, a business should attempt to
quantify its demand curve to estimate what volume of sales will be achieved at given prices
Costs. Focus on your current and future, not historical, costs to determine the cost basis for your
pricing strategy.
2.
Price Sensitivity. The price sensitivities of buyers shift based on a number of factors and your
pricing strategy must shift with them.
Competition. Pay attention to them, but don't copy them . . . when it comes to pricing strategy
they may have no idea what they're doing.
Product Lifecycle. How you price, and what value you provide for that price, will change as you
move through the product lifecycle.
3.
4.
launch to deal with obvious bonehead pricing on their part. And remember this as well: any move you make
can be countered by them just as easily. Don't get caught in a no-win price war--which may hurt your
product, their product and devalue your marketplace.
1 ) Market-skimming pricing
The practice of price skimming involves charging a relatively high price for a short time where a new,
innovative, or much-improved product is launched onto a market.
The objective with skimming is to skim off customers who are willing to pay more to have the product
sooner; prices are lowered later when demand from the early adopters falls.
The success of a price-skimming strategy is largely dependent on the inelasticity of demand for the product
either by the market as a whole, or by certain market segments.
High prices can be enjoyed in the short term where demand is relatively inelastic. In the short term the
supplier benefits from monopoly profits, but as profitability increases, competing suppliers are likely to
be attracted to the market (depending on the barriers to entry in the market) and the price will fall as
competition increases.
The main objective of employing a price-skimming strategy is, therefore, to benefit from high short-term
profits (due to the newness of the product) and from effective market segmentation.
There are several advantages of price skimming
Where a highly innovative product is launched, research and development costs are likely to be high, as
are the costs of introducing the product to the market via promotion, advertising etc. In such cases, the
practice of price-skimming allows for some return on the set-up costs
By charging high prices initially, a company can build a high-quality image for its product. Charging
initial high prices allows the firm the luxury of reducing them when the threat of competition arrives. By
contrast, a lower initial price would be difficult to increase without risking the loss of sales volume
Skimming can be an effective strategy in segmenting the market. A firm can divide the market into a
number of segments and reduce the price at different stages in each, thus acquiring maximum profit from
each segment
Where a product is distributed via dealers, the practice of price-skimming is very popular, since high
prices for the supplier are translated into high mark-ups for the dealer
For conspicuous or prestige goods, the practice of price skimming can be particularly successful, since
the buyer tends to be more prestige conscious than price conscious. Similarly, where the quality
differences between competing brands is perceived to be large, or for offerings where such differences are
not easily judged, the skimming strategy can work well. An example of the latter would be for the
manufacturers of designer-label clothing.
2) Market-Penetration pricing
Penetration pricing involves the setting of lower, rather than higher prices in order to achieve a large, if not
dominant market share.
This strategy is most often used businesses wishing to enter a new market or build on a relatively small
market share.
This will only be possible where demand for the product is believed to be highly elastic, i.e. demand is
price-sensitive and either new buyer will be attracted, or existing buyers will buy more of the product as a
result of a low price.
A successful penetration pricing strategy may lead to large sales volumes/market shares and therefore lower
costs per unit. The effects of economies of both scale and experience lead to lower production costs, which
justify the use of penetration pricing strategies to gain market share. Penetration strategies are often used by
businesses that need to use up spare resources (e.g. factory capacity).
A penetration pricing strategy may also promote complimentary and captive products. The main product
may be priced with a low mark-up to attract sales (it may even be a loss-leader). Customers are then sold
accessories (which often only fit the manufacturers main product) which are sold at higher mark-ups.
Before implementing a penetration pricing strategy, a supplier must be certain that it has the production and
distribution capabilities to meet the anticipated increase in demand.
The most obvious potential disadvantage of implementing a penetration pricing strategy is the likelihood of
competing suppliers following suit by reducing their prices also, thus nullifying any advantage of the
reduced price (if prices are sufficiently differentiated the impact of this disadvantage may be diminished).
A second potential disadvantage is the impact of the reduced price on the image of the offering, particularly
where buyers associate price with quality.
The strategy for setting the products price often has to be changed when the product is part of a
product mix. In this case the firm looks for a set of prices that maximizes the profit on the total product
mix. Pricing is difficult because the various products have related demand and cost and face different
degrees of competition:
Product Line: Setting price steps between product line items (for example. Honda Civic is implementing
product line pricing strategy for their cars as they are offering different models of same line for different
prices with different features)
Optional Product: Pricing optional or accessory products (for example. If a person buys a new Nokias
6600 cell phone and if he also tends to pay extra amount of money for the memory card inside of it than it
is optional pricing for that product..or another example can be a person buying a personal computer and
paying extra amount of money for the video card inside of it)
Captive Product: Pricing products that must be used with the main product (for example. Colgate offering
its toothbrush along with its toothpaste.or Gillette offering set of additional blades with its razors)
By-Product: Pricing low value by product to get rid of them (for example. Many companies obtain soap
during the refining process of cooking oils and then manufactures beauty soaps and sells it along with the
cooking oils as their by-products. As Unilever is obtains Lux through Dalda)
Product Bundle: Pricing bundles of products sold together (for example Nescafe is offering its coffee
along with its cup for 100 rupees thus their offer is similar to product bundlebesides that different combo
deals of KFC which includes different offerings under one state is also an example of product bundle
pricing)
1) Discount & Allowance: reduced prices to reward customer responses such as paying early or
promoting the product. (For example. Different seasonal or occasional offers of Nike or Chen one offering
certain discount on different range of shopping)
2) Discriminatory: adjusting prices to allow for differences in customers, products, and locations (for
example. Price of Pepsi in Pearl Continental Hotel as it is much higher than its actual value in the hotel just
because of the segment and environmental change in this case the cost is the same but according to the
segment pricing is different)
3) Psychological: adjusting prices for psychological effects. Ex: $299 vs. $300 (for example. English
toothpaste reduced its prices from 12 to 10 just to attract their customers and increase their sales in this way
they implemented physiological pricing strategy besides that different offers in the market pricing like just
99 rupees or 999 rupees in various stores is also physiological pricing strategy.)
4) Value: adjusting prices to offer the right combination of quality and service at a fair price. (For
example a person shopping in Zainab market might seek value and quality at fair price. This process helps
to deliver value and satisfaction to customers.)
5) Promotional: temporarily reducing prices to increase short-run sales. (For example. Pepsi reduces its
prices during the month of Ramadan and also offers different schemes and similarly Warid Zem offers
nights free offers to their customers)
6) Geographical: adjusting prices to account for geographic location of customer. (For example. DHL
charges different rates according to the destination)
*FOB Origin Pricing: Geographical pricing strategy in which goods are placed free on board a career, the
customer pays the freight from the factory to the destination. (For example. A person buying a compact disc
from abroad in which he has to pay the transport expense for bringing it in access)
*Uniform Delivered Pricing: A geographical pricing strategy in which the company charges the same
price plus frightened to all customers, regardless of their location. (for example. every customer has to pay
a similar and specified amount of money to Nike if they are transacting from abroad)
*Zone Pricing: A geographical pricing strategy in which the company sets up to or more zones. All
customers within a zone pay the same total price; the more distant zone, the higher the price. (for example.
If Adidas is transacting with its customers from abroad regions, then they will charge freight according to
the distance of the region and as the distance will increase freight charges will also increase.)
*Basing Point Pricing: A geographical pricing strategy in which the seller designs some city as a basing
point and charges all customers the freight cost from that city to the customer. (for example. Dell computers
established their basing point in India and then delivers their products in the Asian regions charging freight
from that region)
7) International: adjusting prices in international markets. (For example. Prices of Levis or Nike might
not be same in dolmen mall and in international storesit will be definitely differing according to the
environmental offerings.)
SEGMENT
EXAMPLE
Ultimate
Gold standard
Luxury
Special need
Middle
Price alone
Rolls-Royce
Mercedes Benz
Audi
Volvo
Buick
Kia
Figure 16.1 shows nine price quality strategies. The diagonal strategies 1,5,and 9 can all co-exit in the same
market; that is , one firm offer a high quality product at a high price , another offers an average quality
product at an average price and still another offers a low quality product at a low price. All three
competitors can co-exit as long as the market consists of three groups of buyers: those who insist on
quality, those who insist on price, and those who balance the too.
Strategies 2,3and 6 are ways to attack the diagonal positions. Strategy to says Our product has the
same high quality as product 1 but we charge less. Strategy 3 says the same thing and offers and even
greater saving. If quality-sensitive customers believe these competitors, they will sensibly buy from them
and save money (unless firm earns 1s product has acquirable snob appeal.
Positioning strategies 4,7and 8 amount to over-pricing the product in relation to its quality. The customer
will feel taken and will probably complain or spread bad words of mouth about the company.
MEDIAM
LOW
HIGH
1. PREMIUM
STRATEGY
2.HIGH-VALUE
STRATEGY
3.SUPER- VALUE
STRATEGY
5.MEDIUM-VALUE
STRATEGY
6. GOOD-VALUE STRATEGY
MEDIUM
4.OVERCHARGING
STRATEGY
7. RIP-OFF
STRATEGY
8. FALSE-ECONOMY
STRATEGY
9.ECONOMY-STRATEGY
LOW
(not to mention be costly) and will not translate into lower price products for a considerable period of
time.
External Factors - There are a number of influencing factors which are not controlled by the
company but will impact pricing decisions. Understanding these factors requires the marketer
conduct research to monitor what is happening in each market the company serves since the effect of
these factors can vary by market.
Cost-Plus Pricing
Competition-Based Pricing
Going-Rate Pricing:
Firm bases its price largely on competitors prices, with less attention paid to its own
costs or to demand.
Sealed-Bid Pricing:
Firm bases its price on how it thinks competitors will price rather than on its own costs or
on demand.
A major circumstance provoking price increases is cost inflation. rising cost unmatched by
productivity gains squeeze profit margin and lead companies to regular rounds of price increases.
Companies often raise their price by more than the cost increases, in anticipation of further inflation or
government price control, in a practice called anticipatory pricing.
Maintain price: A leader might maintain its price and profit margins, believing that (1) it would
lose too much profit if it reduces its price (2) it would not lost much market share, and (3) it could
regain market share when necessary.
Maintaining price and add value: The leader could improve its products and services,
communication. The firm may find it cheaper to maintain price and spend money to improve
perceived quality then to cut price and operate at a lower margin.
Reduced price: A leader might drop its price to match the competitors price. It might do so
because (1) its cost falls with volume, (2) it would lose market share because the market is price
sensitive, (3) it would be hard to rebuild market share once it is lost. This action will cut profit in
the short-run.