8 Pricing Decisions PDF PDF

Preview

Summary

Download 8 Pricing Decisions PDF PDF

Description

8 Pricing Decisions Price Definition: That which is given up in an exchange to acquire a good or service. Sacrifice Effect of Price • Price is what is sacrificed to get a good or service. • Sacrifice is usually money but can be time lost while waiting to acquire the good/service. • May include loss dignity for individuals who lose their jobs and must rely on charity. - Eg. Paying tuition so skipping a holiday. Information Effect of Price • Consumers don’t always choose the lowest priced product in a category because we infer quality information from price. - Higher quality = higher price. • Higher prices can convey the status of the purchaser to other people. - Eg. Rolex v Swatch both tell time but convey different meanings. Importance of Price to Marketing Managers • Prices are the key to revenues which are the key to profits for a firm. • Revenue pays for every activity of the company. • To earn a profit, managers must choose a price that is not too high or too low, that equals the perceived value to target consumers. Profit Oriented Pricing Objectives Profit Maximisation • Setting prices so that total revenue is as large as possible relative to total costs. • Profit maximisation doesn’t always mean unreasonably high prices. • Both price and profits depend on the type of competitive environment a firm faces such as whether they are in a monopoly or a competitive situation. • A firm cannot charge a price higher than the product’s perceived value. • Managers try to expand revenue by increasing customer satisfaction or reduce costs by operating more efficiently. • This can be done at the same time through customer service initiatives, loyalty programs, customer relationship management programs and allocating resources to programs that are designed to improve efficiency and reduce costs. Satisfactory Profits • Reasonable level of profits consistent with the level of risk an organisation faces. • Rather than striving for maximising profits, the organisation strives for profits that are satisfactory to stockholders and management. - Risky industry = Satisfactory profit 35%. - Low risk industry = Satisfactory profit 7%. Target Return on Investment • Measures management’s overall effectiveness in Return on = Net Profits after Taxes generating profits with the available assets. Investment Total Assets • The higher the firm’s ROI, the better off the firm is. • ROI needs to be evaluated in terms of the competitive environment, risks in the industry and economic conditions. • Ideal ROI = 10-30%. • A company with a target ROI can predetermine its desired level of profitability. Sales Orientated Pricing Objectives Market Share

Definition: A company’s product sales as a percentage of total sales for that industry. • Larger market shares can lead to higher profits due to economies of scale, market power and ability to compensate on top quality management. • Some companies prosper on low market share by competing in industries with slow growth and few product changes. Sales Maximisation • A firm with the objective of maximising sales ignores profits, competition and the marketing environment as long as sales are rising. • If a company faces an uncertain future, they might try to generate a maximum amount of cash in the short run. • Management do this by calculating which price quantity relationship generates the greatest cash revenue. Status Quo Pricing Objectives Definition: Seeks to maintain existing prices or to meet the competition prices. This requires little planning. • The industries in which these objectives are adopted, often have fewer price wars than those with direct price competition. • Leads to suboptimal pricing because the strategy ignores customers perceived value of both the firm’s goods/services offered by its competitors. • Ignores demand and costs. Price Objectives Demand Determinate’s of Price • After marketing managers establish pricing goals, they must set specific prices to reach those goals. • The price they set for each product depends on the demand for the good/service and the cost to the seller for that good/service. • When pricing goals are sales orientated, demand considerations dominate. Demand Definition: The quantity of a product that will be sold in the market at various prices for a specified period. • The quantity of a product people will buy depends on its price. • The higher the price, the fewer goods/services consumers will demand. • The lower the price, the more goods/services consumers will demand. Supply Definition: The quantity of a product that will be offered to the market by a supplier at various prices for a specified period. • At higher prices, manufacturers earn more capital and can produce more products. Elasticity of Demand Definition: Consumers’ responsiveness to changes in price. Elastic Demand: Consumer demand is sensitive to price changes. Inelastic Demand: An increase or decrease in price will not significantly affect demand for the product. Factors that Affect Elasticity • Availability of Substitutes - When many substitute products are available, the consumer can easily switch from one product to another, making demand elastic. Price Relative to Purchasing Power. • - If a price is low, it is an insignificant part of an individual’s budget so demand will be inelastic.

• Product Durability - Consumers have the option of repairing durable products (cars) rather than replacing them prolonging their useful life. - Demand is more elastic because people are sensitive to price increase. • Product’s Other Uses - The greater the number of different uses for a product, the more elastic demand tends to be. - If a product has one use, the quantity purchased will not vary as price varies. Cost Determinants of Price • Companies minimise or ignore the importance of demand and decide to price their products solely. • Prices determined strictly on the basis of costs may be too high for the target market, reducing or eliminating sales. • Cost based prices may be too low causing the firm to earn a lower return than it should. • Variable Cost: A cost that varies with changes in the level of output. • Fixed Cost: Does not change as output is increased or decreased int he short run. Markup Pricing Retail = Cost • Uses the cost of buying the product from the producer Price 1 Desired Return on Sales plus amounts for profit and for expenses not otherwise accounted for. • To use markup based on cost or selling price effectively, the marketing manager must calculate an adequate gross margin - the amount added to cost to determine price. Factors that Influence Markups • Merchandise appeal to customers • Past response to the markup. • The item’s promotional value. • The seasonality of the good.

• Fashion appeal. • Product’s traditional selling price • Competition.

Break-Even Pricing Definition: Determines what sales volume must be reached before total revenue equals total costs. Provides a quick estimate of how much at the firm must sell to break-even and how much profit can be earned if a higher sales volume is obtained. If a firm is operating close to break-even point, it will want to reduce costs or increase sales. Choosing a Price Strategy • Long term pricing framework for a good/service should be an extension of the pricing objectives. Price Strategy: A basic, long-term pricing framework that establishes the initial price of a product and the intended direction for price movements over the product life cycle. • Price strategy sets a competitive price in a specific market segment based on welldefined positioning strategy. • Company’s freedom in pricing a product and setting a price strategy depends on the market conditions and elements of the marketing mix. • If a firm launches a product resembling others on the market, pricing freedom will be restricted. • To succeed the firm would have to price close to the average market price. • A firm that introduces a totally new product with no close substitutes will have lots of pricing freedom. Price Skimming

Definition: A pricing policy whereby a firm charges a high introductory price, alongside heavy promotion. • Companies use this strategy for new products when the product is perceived by the target market as having unique advantages. • Companies use skimming then lower prices over time so slide down the demand curve. • As new models are unveiled, prices of older versions are lowered. • Price skimming works best when there is a strong demand for the good/service. - Eg. Apple iPhone. • Price skimming works effectively when a product is protection well legally, when it represents a technological breakthrough or when it has blocked the entry of competitors. • Managers follow this strategy when production cannot be expanded rapidly because of technological difficulties, shortages or constraints imposed by the skill and time required to produce a product. • A successful price skimming strategy enables managers to recover its product development costs quickly. Penetration Pricing Definition: A pricing policy whereby a firm charges a relatively low price for a product when it is first rolled out as a way to reach the mass market. • The low price is designed to capture a large share of a substantial market, resulting in lower production costs. • If a marketing manager has obtained a large market share the firm’s pricing objective, penetration pricing is a logical choice. • This pricing strategy does mean lower profit per unit so to reach the break-even point, it requires a higher volume of sales than a skimming policy. • The recovery of product development costs may be slow and the policy may discourage competition. • This pricing strategy is more effective in a price-sensitive market. • Price should decline more rapidly when demand is elastic because the market can be expanded through lower price. • If a firm has a low fixed cost structure and each sale provides a large contribution to those fixed costs, penetration pricing can boost sales and provide large increases in profit but only if the market size grows or if competitors choose not to respond. • Low prices can attract additional buyers to the market. • The increased sales can justify production expansion or the adoption of new technologies which can reduce costs. • Can be effective if an experience curve will cause costs per unit costs to go down as a firm’s production experience increases. • Penetration pricing discourages competition from entering the market. • However, the strategy means the company has to mass produce to sell a large volume of product at a low price. • If they don’t sell as many as anticipated, the company will face huge losses. Status Quo Pricing Definition: Charging a price identical to or very close to competition’s price. • Advantage of simplicity but disadvantage that the strategy may ignore demand or cost or both. Tactics for Fine-Tuning the Base Price Purpose • Stimulate demand for specific products. • Increase store patronage. • Offer a wider variety of merchandise at a specific price point. Single-Price Tactic

• Offers all goods and services at the same price. Flexible Pricing • Different customers pay different prices for essentially the same merchandise bought in equal quantities. • Often found in the sale of shopping goods, speciality merchandise and most industrial goods - Eg. Car dealers. • Allows the seller to adjust for competition by meeting another seller’s price. • Enables the seller to close a sale with price-conscious customers. • Marketing manager with status quo pricing may adopt flexible pricing. • However, can cause a lack of consistent profit margins, tendency for salespeople to automatically lower the price to make a sale and the possibility of a price war among sellers. Professional Services Pricing • Used by people with lengthy experience, training and certification by a licensing board Eg. Lawyers. • Professionals charge customers at an hourly rate but sometimes fees are based on the solution of a problem or performance of an act rather than the actual time involved. • Those who use this pricing have an ethical responsibility not to overcharge a customer as demand is highly inelastic. Price Lining • When a seller establishes a series of prices for a type of merchandise, it creates a price line. • The practice of offering a product line with several items at specific price points. - Eg. Mobile phone contracts. • Reduces confusion for both salesperson and the consumer. • The buyer may be offered a wider variety of merchandise at each established price. • Price liners enable a seller to reach several market segments. • Firm may be able to carry a smaller total inventory than it could without price lines resulting in fewer markdowns, simplified purchasing and lower inventory carrying charges. • Sellers can offset rising costs by stocking lower quality merchandise at each price point. • Sellers can change the prices but risk confusing buyers or sellers can accept lower profit margins and hold quality and prices constant. Leader Pricing • An attempt by the marketing manager to attract customers by selling a product near or even below cost in the hope that shoppers will buy other items once they are in the store. - Eg. Type of pricing appears weekly in the newspaper advertising of supermarkets. • Normally used on well known items that consumers can easily recognise as bargains. Bait Pricing • Tries to get consumers into a store through false or misleading price advertising. • Uses high pressure selling to persuade them to buy more expensive merchandise. Odd-Even Pricing • Pricing at odd-numbered prices to connote a bargain and pricing at even numbers prices to imply quality. - Eg. £9.99 makes consumers feel they are paying a lower price for a product. • Even numbered pricing is used for prestige items creating elastic demand. Price Bundling

• Marketing two or more products in a single package for a special price.

- Eg. Microsoft software packages, hotel rooms at a fixed cost.

• Can stimulate demand for the bundled items if the target market perceives the price as a good value. • Makes comparison shopping difficult since consumers are unable to determine how much they are paying for each component of the bundle. Two-Part Pricing • Establishing two separate charges to consume a single good/service. • Consumers can prefer this because they are uncertain about the number and the types of activities they might use at places - Eg. Theme park. • People who use a service often pay a higher total price. • Can increase a seller’s revenue by attracting consumers who would not pay a high fee even for unlimited use. Package Content Reduction • Manufacturers keep the price and package size the same while reducing the amount of content, increasing the price per weight. - Eg. Walker’s crisps....