global pricing
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Global Pricing
Dmytro Pustovalov
Tariq Aziz
Kirillos Fiodorov
02/05/2012
Agenda
Factors to consider in setting a price
Pricing Methods
Pricing Strategies
Pricing Tactics
Factors to consider in setting a price
Price
• The amount of money charged for a product, or the sum of the values that consumers exchange for the benefits of having/using the product or service.
Price is …main element to produce revenues ….most flexible element …a tool of competition ….can be changed quickly
Factors to consider in setting a price
Pricing Policy and Decision
Cost of the Product
Economic Conditions
Company Objectives
Customer Needs and
Characteristics
Competition
Four views of price
Economists view Price is set by the forces of supply and demand
Accountant’s view
Price should cover costs so that a profit can be made
Customer’s view Price has to represent good value
Marketer’s view Pricing is an opportunity to gain a competitive advantage
Factors to Consider in Setting Price
• Marketing objectives
• Marketing mix strategies
• Costs
• Organizational considerations
• Market positioning influences pricing strategy
• Other pricing objectives:
– Survival
– Current profit maximization
– Market share leadership
– Product quality leadership
• Not-for-profit objectives:
– Partial or full cost recovery
– Social pricing
Internal Factors
• Marketing objectives
• Marketing mix strategies
• Costs
• Organizational considerations
• Pricing must be carefully coordinated with the other marketing mix elements
• Target costing is often used to support product positioning strategies based on price
• Non-price positioning can also be used
Internal Factors
Factors to Consider in Setting Price (contd.)
• Marketing objectives
• Marketing mix strategies
• Costs
• Organizational considerations
• Types of costs:
– Variable
– Fixed
– Total costs
• How costs vary at different production levels will influence price setting
• Experience (learning) curve effects on price
Internal Factors
Factors to Consider in Setting Price (contd.)
• Marketing objectives
• Marketing mix strategies
• Costs
• Organizational considerations
• Who sets the price?
– In Small companies: CEO or top management
– In Large companies: Divisional or product line managers
• Price negotiation is common in industrial settings
• Some industries have pricing departments
Internal Factors
Factors to Consider in Setting Price (contd.)
• Nature of market and demand
• Competitors’ costs, prices, and offers
• Other environmental elements
• Types of markets
– Pure competition
– Monopolistic competition
– Oligopolistic competition
– Pure monopoly
• Consumer perceptions of price and value
• Price-demand relationship
– Demand curve
– Price elasticity of demand
External Factors
Factors to Consider in Setting Price (contd.)
• Nature of market and demand
• Competitors’ costs, prices, and offers
• Other environmental elements
• Consider competitors’ costs, prices, and possible reactions when developing a pricing strategy
• Pricing strategy influences the nature of competition
– Low-price low-margin strategies inhibit competition
– High-price high-margin strategies attract competition
• Benchmarking costs against the competition is recommended
External Factors
Factors to Consider in Setting Price (contd.)
• Nature of market and demand
• Competitors’ costs, prices, and offers
• Other environmental elements
• Economic conditions – Affect production costs – Affect buyer perceptions of
price and value
• Reseller reactions to prices must be considered
• Government may restrict or limit pricing options
• Social considerations may be taken into account
External Factors
Factors to Consider in Setting Price (contd.)
Pricing Methods
Pricing Method
Cost-Oriented Method
• Focus on cost, not market condition
Market-Oriented Method
• Focus on both – market conditions and costs
Cost-Oriented Method
Markup pricing – adding markup to
unit cost of product
• Information needed: fixed cost, variable cost, expected sales, markup
• Appeal is simplicity
• Risks: overpricing and underpricing
Standard pricing - charging the same
price in all countries
• Drawbacks: lacks marketing orientation, difficult to implement
• Advantage: firm won’t be blamed for price discrimination
Target return pricing - setting a target rate
or return
• Information needed: total investment, desired target return, unit cost, expected sales
• Drawbacks: lacks marketing orientation, sales and cost estimates must be accurate
Market-Oriented Method
Market-based pricing
• - may attract accusations of unfair pricing and encourage the practice of gray marketing (buying in low-price countries, selling in high-price countries)
Strategic pricing
• setting minimum standard price while giving local managers freedom to charge more
Pricing Strategies
Penetration Pricing
Penetration Pricing
• Price set to ‘penetrate the market’ • ‘Low’ price to secure high volumes • Typical in mass market products – chocolate bars,
food stuffs, household goods, etc. • Suitable for products with long anticipated life
cycles • May be useful if launching into a new market
Market Skimming
Market Skimming
High price, Low volumes
Skim the profit from the market
Suitable for products that have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out)
Examples include: iPhone, PlayStation, jewellery, digital technology, new DVDs, etc.
Value Pricing
Value Pricing
• Price set in accordance with customer perceptions about the value of the product / service
• Examples include status products/exclusive products
Companies may be able to set prices according to perceived
value.
Tender Pricing
Tender Pricing
• Many contracts awarded on a tender basis
• Firm (or firms) submit their
price for carrying out the work
• Purchaser then chooses
which represents best value • Most government contracts
Price Discrimination
Price Discrimination
• Charging a different price for the same good/service in different markets
• Requires different price elasticity of demand in each market
• Air/rail – First class
– Business class
– Economy class
Prices for the flight differ for the same journey at different class
Marginal Cost Pricing
Marginal Cost Pricing
• Marginal cost – the cost of producing ONE extra or ONE fewer item of production
• MC pricing – allows flexibility
• Particularly relevant in transport where fixed costs may be relatively high
• Allows variable pricing structure – e.g. on a flight from London to New York – providing the cost of the extra passenger is covered, the price could be varied, a good deal to attract customers and fill the aircraft.
• Get one extra student and get fees discount.
Target Pricing
Target Pricing
• Setting price to ‘target’ a specified profit level
• Estimates of the cost and potential revenue at different prices, and thus the break-even have to be made, to determine the mark-up
• Mark-up = Profit/Cost x 100
• This strategy is used by many clothes retailers where they can add upto 60% mark-up on the basic cost of the clothes. So even with a 50% sales offer they still make a profit!
Pricing tactics
Pricing tactics
Unlike pricing strategies, these refer to the short run
Predatory
pricing (illegal)
Psychological pricing
Loss leaders
Promotional pricing and discounts
Price wars
Predatory pricing
• Predatory pricing occurs when a dominant company incurs losses with the purpose of removing a competitor and/or deterring other potential competition
• This anti- competitive practice is used when competitors threaten to reduce market share and profitability
• Illegal if it can be proved
Microsoft – have been accused of predatory pricing strategies in offering
‘free’ software as part of their operating system – Internet Explorer and Windows Media Player - forcing
competitors like Netscape and Real Player out of the market
Price wars
Competitive price reductions by firms in a competitive industry
Each seeks to increase market share by price reduction but the result is destroying a price level
The process continues until weaker firms go out of business
Price wars might be seen as good for customers in the short run but it is harmful in the long run if competition is reduced
Psychological pricing
• In this case consideration is given to the psychology of prices and not simply the economics of pricing
• Charging at a price which ends in 99p is a way of deceiving people into believing that the product is cheaper than it really is
Psychological pricing
• Prestige Pricing – sets a higher than average
price to suggest status
Psychological pricing
• Multiple-Unit Pricing – 3 for $.99
• Suggests a bargain and helps increase sales volume.
• Better than selling the same items at $.33 each.
Psychological pricing
• Everyday Low Prices (EDLP) – set on a consistent basis
Loss leaders
• A loss leader is a product prominently displayed and advertised and price below the normal price and even below cost to the seller
• A product which is sold at a low (even loss making) price in order to encourage customers to buy other full price products from the business along with the loss leader product
• Loss leaders are widely used by supermarkets to draw in customers from competitors
• The aim is to encourage people to buy complementary goods at full price
Promotional pricing and discounts
Type of discount
Who for?
Cash For those who pay cash
Quantity For customers who buy large volumes (bulk buying)
Trade Intermediaries in the trade
Seasonal For buying off peak or out of season
Promotional Temporary pricing of products below list price to increase short run sales
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