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Amity School of Business

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Marketing Management - II

Module - III

Ms. Manita Matharu

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Pricing Concept & Importance

Pricing = deciding what price to set for products andservices

What is a price? What the buyer is prepared to pay in exchange for a product or

service

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Not just a number on the tag or an item,it is all around:

Rent Fees

Fare Interest Toll Tax Premium Honorarium Bribe Salary Commission

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Price and the Marketing Mix

Price is a very important part of themarketing mix

Price directly influences profits bycreating revenue rather thanaffecting costs

One element of marketing mix thatproduces revenue.

All other produce cost.

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Importance of Price Helps and establishes a firms image

High price means better quality? Diamonds

Low price means more for your money?

Establishes a competitive edge

Will beat any competitors price

Helps determine profit

Revenue = price X quantity

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Price helps a business differentiate its product orservice compared with other, similar products E.g. High price = better quality?

The price that is set must be consistent with everythingelse in the marketing mix E.g. a high-priced product needs to have features/benefits that

customers feel justify paying more

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Example !!!

The black T-shirt for women looks pretty ordinary.

In fact theres not much difference in a black t-shirt sold by GAP oran ordinary discount clothing chain.

Yet a black Armani T-shirt costs $275, where as the GAP item costs$14.90 and a ordinary thing somewhere around $7.

Customers who purchase the Armani T-shirt are paying for a T-shirtmade of70% Nylon, 25% polyester and 5 % elastine. Whereas theGAP T-shirt are made mainly of cotton.

True, that Armani is a bit more stylish cut than the others and sportsa Made in Italy label, but how does it command $275 tag.

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A luxury brand Armani is mainly known for its suits,handbags and evening gowns that it sells for thousandsof dollars.

Because there are not many takers for $275 t-shirt,Armani doesn't make many, thus further enhancing theappeal for status seekers who like the idea of having alimited edition T-shirts.

Value is not only quality, function, utility, distribution, itsalso a customers perception of a brands luxuryconnotations

Arnold Aronson, Former CEO Saks Fifth Avenue.

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Market Factors Affecting Price

1. Costs and Expenses What happens when the price for a barrel of oil

goes up? Keeping customers happy

Same price but reduce size bag of chips Same price but drop features no meal on a

plane

Higher price but more features Break even point sales revenue equals costs and

expenses after this its all profit

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Market Factors Affecting Price

2. Supply and Demand

Demand elasticity Elastic demand change in price = change in

demand Leather

Inelastic demand change in price has little effecton demand Milk, Heart Transplant

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Market Factors Affecting Price3. Consumer Perceptions

A low priced item can be perceived as Cheap

A high priced item can be perceived as High quality Premium pricing Pricing a product high, eitherbecause it is of good quality or to be perceived asgood quality

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Market Factors Affecting Price4. Competition

Price vs. non-price competition

Price competition appeals on low price, when product arevery similar

Non-Price competition minimizes price as a reason forpurchase and focuses on something else, anything else

Quality

Service Convenience

Association

Brand image

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Pricing ProcessSelecting the pricing objective

Determine Demand

Estimate Cost

Analyze competitors cost,

price and offers

Selecting pricing method

Selecting the final price

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Selecting Pricing Objective

Decide where it wants to position its market offering.

A company generally pursues any of5 pricingobjectives:-

1. Survival

2. Maximum current profit

3. Maximum market share

4. Maximum market skimming

5. Product-Quality leadership

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Determine Demand

Each price leads to a different demand and had differentimpact on marketing objectives.

The relation between alternative prices and the resultingcurrent demand is captured in demand curves.

Measure the impact of price change on total revenue

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Determine Demand

Different customers have different price sensitivities and needs

In normal case demand and price and inversely related.

In case of prestige goods, demand curve sometimes slopes upward.

Some consumers take higher price as a indicator of better quality.

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Estimate Cost Demand sets a ceiling on the price the company can charge and

costs sets the floor.

Company charges a price that covers its cost of producing,distributing and selling the product, including a fair return for itseffort and risk.

Types of costs: Fixed Cost

Total Cost Variable Cost Average Cost

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Analyze Competitors Cost, Price and Offers

With a range of possible prices determined by market demand andcompany costs the firm must take competitors cost, price andpossible price reactions into account

Firm should consider the nearest competitor price.

If the firm is offering positive differentiation features not offered bycompetitor, their worth to the customer should be evaluated andadded to the competitors price and vice versa.

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Selecting a Pricing Method

Given the customers demand schedule, the cost functionand competitors prices, the company now selects a

price.

Price Setting Methods:1. Mark up Pricing2. Target Return Pricing3. Perceived Value Pricing4. Value Pricing5. Going Rate Pricing

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(1) Mark Up Pricing

Most elementary method.

Add up a standard markup to the products cost. E.g. Construction companies submit a bid by estimating total cost of

project and adding a standard markup for profit.

Generally higher on seasonal items (to cover risk of not selling),specialty item, slow moving goods, items with high storage andhandling cost and demand inelastic products.

Doesn't consider current demand, perceived value and competition.

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(2) Target Return Pricing

The firm determines the price that would yield its targetROI.

E.g. General motors has priced its products to achieve a15-20% ROI.

Target-return price = unit cost + desired return x invested capital

unit sales

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(3) Perceived Value Pricing

Base price on the basis of customers perceived value.

Made of many factors like: Buyers image of product performance The channel deliverables Warranty Quality Customer support Supplier reputation

Firms use marketing mix elements like sales force andadvertising to enhance perceived value.

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(4) Value Pricing Winning customer loyalty by charging fairly low price for high quality

offering. Its not only about setting low prices but reengineeringprocesses to become low cost producer.

This approach is used where external factors such as recession orincreased competition force companies to provide 'value' productsand services to retain sales e.g. value meals at McDonalds.

E.g. EDLP, high-low pricing

In EDLP pricingEDLP pricing, a retailer charges a constant, low price with notemporary discounts. For example: Wal-Mart, Price Club, andSaturn.

In highhigh--low pricinglow pricing, a retailer charges higher prices but then runsfrequent promotions in which prices are temporarily lowered.

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(5) Going- rate Pricing

Firm basis its price largely on competitors prices.

In industries like paper, fertilizer, steel, almost everyonehas similar prices.

Competitive response is uncertain.

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Selecting Final price

Impact of other marketing activities Brands quality, advertising.

Company pricing policy

Impact on other parties.

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Adapting the price

Companies usually don't set a single price, butrather develop a pricing structure that reflects

variations in geographical demand and cost,market segment requirements, purchase timing,delivery frequency, etc.

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Price Adaptation Strategies

1. Geographical Pricing

2. Price Discount & Allowances

3. Promotional Pricing

4. Differentiated Pricing

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1. Geographic Pricing Strategies Geographical pricing is evident where there are variations in price in

different parts of the world. For example rarity value, or whereshipping costs increase price.

F.O.B. Point-of-Production pricing: Price quoted at factory-- buyerpays transportation.

Uniform delivered pricing: Same delivered price quoted to all; worksif transportation costs small.

Zone-delivered pricing: Set same price within several zones, e.g.Maritimes, Quebec.

Freight-absorption pricing: Seller absorbs transport cost to penetratemarket.

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Free on board (freight on board) price means a pricewhich includes goods plus the services of loading thosegoods onto some vehicle or vessel at a named location,sometimes put in parentheses after the f.o.b.

Example:Fob (shipping point)-means the price is good only till the loading/shipping area. The shipment cost will be paid by thecustomer/buyer.

Fob (destination)-means the price includes the shipment cost up tothe place of the customer/buyer. The shipment cost will be paid bythe seller.

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2. Price Discount and Allowances Discount = A price reduction to buyer who pays the bill promptly.

Quantity Discount = A price reduction to those who buys largevolumes.

Functional Discount = Discount (trade discount) offered by amanufacturer to trade channel members

Seasonal Discount = A price reduction to those who buymerchandise or services out of season

Allowance = An extra payment to gain reseller participation inspecial programs. (Trade-in allowances, Promotional allowances)

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3. Promotional Pricing Pricing to promote a product is a very common

application. There are many examples of promotionalpricing including approaches such as

BOGOF (Buy One Get One Free).

Loss leader pricing

Special event pricing

Cash rebates

Longer payment terms Warranties and service contracts

Psychological discounting

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Loss LeadersA product offered at a loss to entice customers to visit a shop orwebsite.

The hope is that customers will either :

Purchase other products at the same time, Or become longtime / loyal customers to make up for the loss.

Advantages Loss leaders can be just a few products in a much wider range - but

the customer has the impression that the whole range is great value

Good method of short-term pricingDisadvantages

Customers come to expect low prices on these products

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4. Differentiated Pricing Customer Segment Pricing:

Different groups charged different prices (eg. Museums)

Product form pricing: Different versions of the product are priced differently but not

proportionately to their cost.

Channel pricing: Based on the channel

Location Pricing: E.G. Theater

Time Pricing: By season, day, hour (eg. Restaurants)

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For discrimination to work:

Market must be segmentable

Segments should show different intensities ofdemand

Competitors must not be able to undersell the firm ina high segment market.

Cost of segmenting should not be very high

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Price-Quality Strategies

Philip Kotler identified 9 price-quality strategies

PremiumHigh

Value

Super

Value

OverCharging

MidValue

GoodValue

Rip-offFalse

EconomyEconomy

High QualityHigh Quality

Low QualityLow Quality

High PriceHigh Price Low PriceLow Price

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Product Life Cycle and PricingThe Product Life Cycle

Describes how sales of a product change over time Various phases introduction; growth; maturity; decline

Price needs to change depending on the stage of the productlife cycle

E.g. launch phase For a new market with few competitors. Then price can be

high

E.g. growth phase More competitors and higher sales volume; price likely to be

lower

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Product Mix PricingPrices can be modified when a product is a part of entire product mix. Inthat case a firm searches for a price that maximizes profits of the totalmix.

Optional Feature Pricing

Captive Product Pricing

Two Part Pricing

Product Bundle Pricing

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Product Mix Pricing Optional Feature Pricing

Companies will attempt to increase the amount customer

spend once they start to buy.

Optional 'extras' increase the overall price of the productor service.

For example airlines will charge for optional extras such asguaranteeing a window seat or reserving a row of seats next to eachother.

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Product Mix Pricing Captive Product Pricing

Some products require the use of ancillary or captive

products. Manufacturers of razors, digital phones andcameras often price them low and set high markups onrazor blades and film, respectively.

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Product Mix Pricing

Captive Product Pricing

In 1996, Hewlett-Packard (HP) began drastically cutting prices in its

printers, by as much as 60% in some cases.

HP could afford to make such dramatic cuts because customerstypically spend twice as much on replacement ink cartridges, toner,and specialty paper as on the actual printer over the life of theproduct.

As the price of printers dropped, printer sales rose as did thenumber of aftermarket sales. HP now owns about 40% of theworldwide printer business. Its inkjet supplies carry 35% profitmargins and generated $2.2 billion in operating profits in 2002 over70% of the company's total.

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Product Mix Pricing

Two Part Pricing

Service firms often engage in two-part pricing, consisting

of fixed fee plus a variable usage fee.

Telephone users pay a minimum monthly fee pluscharges for calls beyond a certain area.

Amusement parks charge an admission fee plus fees forrides over a certain minimum.

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Product Mix Pricing

Product Bundle Pricing

Here sellers combine several products in the samepackage. This also serves to move old stock. Videos andCDs are often sold using the bundle approach.

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More Pricing Strategies & Application.Cost-plus pricing Setting a price by adding a fixed amount or

percentage to cost of making product

Penetration pricing Setting a very low price to gain as many sales as

possiblePrice skimming Setting a high price before other competitors come

into market

Predatory pricing Setting a very low price to knock out all othercompetition

Competitor pricing Setting a price based on competitors pricesPrice discrimination Setting different prices for same good, but to different

markets e.g. peak and off peak mobile phone calls

Psychological

pricing

Setting a price just below a large number to make itseem smaller e.g. 9.99 not 10

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Premium Pricing.Use a high price where there is a uniqueness about the product orservice. This approach is used where a a substantial competitiveadvantage exists. Such high prices are charge for luxuries such asHotel rooms, and Concorde flights

Economy Pricing.

This is a no frills low price. The cost of marketing and manufactureare kept at a minimum. Supermarkets often have economy brandsfor soups, etc

Value Pricing.

This approach is used where external factors such as recession orincreased competition force companies to provide 'value' productsand services to retain sales e.g. value meals at McDonalds.

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Penetration Pricing.The price charged for products and services is set artificially low inorder to gain market share. Once this is achieved, the price isincreased. This approach was used by Tata Sky.

Price Skimming.Charge a high price because you have a substantial competitiveadvantage. However, the advantage is not sustainable. The highprice tends to attract new competitors into the market, and the priceinevitably falls due to increased supply. Manufacturers of digitalwatches used a skimming approach in the 1970s. Once othermanufacturers were tempted into the market and the watches wereproduced at a lower unit cost, other marketing strategies and pricingapproaches are implemented.

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