Pricing Concepts and Strategies for Establishing Value
BUS-Week 7 Chapter 11: Pricing Concepts and Strategies for Establishing Value ____________________________________________________________________________________________________________________
Price is a Signal Prices can be both too high and too low Price too low may signal poor quality Price set too high might signal low value Role of Price in the Marketing Mix Price is usually ranked as one of the most important factors in purchase decisions Price is the only element in the marketing mix that generates revenue
5 Cs Pricing 1. Company Objectives Profit Orientation - Maximize profits - Target return pricing - Target profit pricing Sales Orientation Competitor Orientation Customer Orientation: matching price with customer expectation 2. Customers Price elasticity of demand: Elastic (price sensitive) Inelastic (price insensitive) Consumers less sensitive to price increases for necessities Demand Curves: knowing demand curve enables to see relationship between price and demand. Elasticity: Affected by – Cross-price elasticity – Substitution effect – Income effect Factors Influencing Price Elasticity of Demand Substitution & Income Effects: Peter, college student on a budget Old Spice Sport Deodorant user At the store he notices that Old Spice is more expensive Peter decides to give another brand a try and save money As a college student, he prefers a less expensive substitute, because it demands less of his total income. Cross-Price Elasticity Effect: Kendra, self-supporting college student Buys a new printer on sale for a great price Learns it requires special ink cartridges* that cost more than the printer Kendra is caught in a cross-elasticity trap, because her demand for one product generated demand for the other. 1
3. Costs Variable Costs: Vary with production volume Fixed Costs: Unaffected by production volume Total Cost: Sum of variable and fixed costs Break Even Analysis & Decision Making: Total Variable Cost = Variable Cost per unit X Quantity Total Cost = Fixed Cost + Total Variable Cost Total Revenue = Price X Quantity
Break-Even Point (units)
=
Fixed Costs Contribution per unit
Any point above the break-even point is profit.
4. Competition Less Price Competition Monopoly: One firm controls the market. (ex: Microsoft) Monopolistic Company: Many firms selling differentiated products at different prices. (ex: toys)
More Price Competition Oligopoly: A handful of firms control the market. (ex: Rogers Cable) Pure Competition: Many firms selling commodities for the same prices. (ex: Soft drinks)
Fewer Firms
Many Firms
5. Channel Members Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies Manufactures must protect against grey market transactions Other Influences on Pricing The Internet: Increased price sensitivity Growth of online auctions Economic Factors: Increasing disposable income Increasing status consciousness Cross shopping Increasing globalization Local economic conditions
2
Pricing Strategies 1. Cost-Based Method Start with cost All costs calculated on a per unit basis Assumes costs don’t vary for different levels of production 2. Competitor-Based Methods Set prices to signal information of how product compares with competitors Premium pricing (ex: diamond of identical quality sold at different price at Costco and Tiffany’s) 3. Value-Based Methods Setting prices that focus on the overall value of the product Consumer perceptions – Improvement value method: estimate how much more consumer are willing to pay for a relative existing product. (ex: new laptop) – Cost of ownership method: consumers may willing to pay more for a product because it will cost less to own than a cheaper alternative. (ex: solar panel-government offer lower investment) New Product Pricing Strategies Market Penetration Pricing Price skimming Psychological Factors Affecting Pricing Strategies Reference pricing: the price against which buyers compare the actual selling price of the product and that facilitates their evaluation process. External: original price and on sale price Internal: judge the price by memory Odd prices: Odd prices may be so traditional that sellers are afraid to round them off May suggest a good deal May suggest low quality Price-Quality Relationship Most inexperienced consumers use price as an indicator of quality Price becomes crucial when consumers have little knowledge about certain products/brands Everyday low pricing (EDLP) v.s. High/Low Pricing Value is created in different ways EDLP saves search costs of finding lowest overall prices (ie: Groupon, Wal-Mart) High/low provides the thrill of the chase for the lowest price Pricing Strategies must balance 5Cs
3
Pricing Tactics Pricing Strategy (Long term) vs. Pricing Tactics (Short term) B2B Pricing Tactics and Discounts Seasonal Discounts: Designed to spur buyers into purchasing merchandise early - Some vendors give them an extra discount to place orders well in advance of the selling season. Q: Why would a vendor offer a seasonal discount to retailers? A: Because they can plan their production and get the inventory out of their warehouses and into the hands of the retailers. Cash Discount: Reduced invoice cost if buyer pays prior to the end of the discount period Encourages buyers to pay before the discount period ends Seller benefits either way (ex: pay rent bill early get discount) Allowances: Lowers the final cost in return for specific behaviour Advertising allowance Listing allowance Quantity Discounts: Cumulative quantity discount Noncumulative quantity discount Uniform Delivered v.s. Geographic Pricing Addresses the impact of shipping, which is often a major cost for manufacturers
Consumer Pricing Tactics Price Lining: Marketers establish a price floor and a price ceiling and set prices in between Allows for easy comparison Price Bundling: Encourage sales of slow moving items Encourage stock up Encourage trial of new brand Incentive to purchase (ex: meals at fast-food restaurants, cell phone package, vacation package) Leader Pricing: Enticing consumers into the store with the popular aggressively priced item and hoping they will pick up other items while shopping (ex: milk, eggs, coffee, white bread)
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Consumer Price Reductions Markdowns: An integral component of high/low pricing strategy Enable retailers to get rid of slow moving or obsolete merchandise Used to generate store traffic. Quantity Discounts for Consumers: Size discount The more you buy the cheaper the unit cost Seasonal Discounts: Encourage consumers to use services or purchase products year round sellers can get rid of leftover merchandise (ex: buy wrapping paper right after Christmas-discount) Coupons and Rebates: Coupons: Retailer handles Rebate: Manufacturer issues
5
The key to successful pricing is to match the product or service with the consumer’s _______________. A) income level B) value perceptions C) shopping habits D) brand consciousness B Which of the following would NOT be associated with an internal reference price? A) The last price a consumer paid for an item B) What a consumer expects to pay for an item C) Consumer price perception regarding an item D) The overall cost of ownership of an item The redemption rate on coupons averages _____________. A) less than 2 percent B) 5 percent to 10 percent C) 20 percent to 30 percent D) over 30 percent a
d
6
Price is a Signal Prices can be both too high and too low Price too low may signal poor quality Price set too high might signal low value Role of Price in the Marketing Mix Price is usually ranked as one of the most important factors in purchase decisions Price is the only element in the marketing mix that generates revenue
5 Cs Pricing 1. Company Objectives Profit Orientation - Maximize profits - Target return pricing - Target profit pricing Sales Orientation Competitor Orientation Customer Orientation: matching price with customer expectation 2. Customers Price elasticity of demand: Elastic (price sensitive) Inelastic (price insensitive) Consumers less sensitive to price increases for necessities Demand Curves: knowing demand curve enables to see relationship between price and demand. Elasticity: Affected by – Cross-price elasticity – Substitution effect – Income effect Factors Influencing Price Elasticity of Demand Substitution & Income Effects: Peter, college student on a budget Old Spice Sport Deodorant user At the store he notices that Old Spice is more expensive Peter decides to give another brand a try and save money As a college student, he prefers a less expensive substitute, because it demands less of his total income. Cross-Price Elasticity Effect: Kendra, self-supporting college student Buys a new printer on sale for a great price Learns it requires special ink cartridges* that cost more than the printer Kendra is caught in a cross-elasticity trap, because her demand for one product generated demand for the other. 1
3. Costs Variable Costs: Vary with production volume Fixed Costs: Unaffected by production volume Total Cost: Sum of variable and fixed costs Break Even Analysis & Decision Making: Total Variable Cost = Variable Cost per unit X Quantity Total Cost = Fixed Cost + Total Variable Cost Total Revenue = Price X Quantity
Break-Even Point (units)
=
Fixed Costs Contribution per unit
Any point above the break-even point is profit.
4. Competition Less Price Competition Monopoly: One firm controls the market. (ex: Microsoft) Monopolistic Company: Many firms selling differentiated products at different prices. (ex: toys)
More Price Competition Oligopoly: A handful of firms control the market. (ex: Rogers Cable) Pure Competition: Many firms selling commodities for the same prices. (ex: Soft drinks)
Fewer Firms
Many Firms
5. Channel Members Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies Manufactures must protect against grey market transactions Other Influences on Pricing The Internet: Increased price sensitivity Growth of online auctions Economic Factors: Increasing disposable income Increasing status consciousness Cross shopping Increasing globalization Local economic conditions
2
Pricing Strategies 1. Cost-Based Method Start with cost All costs calculated on a per unit basis Assumes costs don’t vary for different levels of production 2. Competitor-Based Methods Set prices to signal information of how product compares with competitors Premium pricing (ex: diamond of identical quality sold at different price at Costco and Tiffany’s) 3. Value-Based Methods Setting prices that focus on the overall value of the product Consumer perceptions – Improvement value method: estimate how much more consumer are willing to pay for a relative existing product. (ex: new laptop) – Cost of ownership method: consumers may willing to pay more for a product because it will cost less to own than a cheaper alternative. (ex: solar panel-government offer lower investment) New Product Pricing Strategies Market Penetration Pricing Price skimming Psychological Factors Affecting Pricing Strategies Reference pricing: the price against which buyers compare the actual selling price of the product and that facilitates their evaluation process. External: original price and on sale price Internal: judge the price by memory Odd prices: Odd prices may be so traditional that sellers are afraid to round them off May suggest a good deal May suggest low quality Price-Quality Relationship Most inexperienced consumers use price as an indicator of quality Price becomes crucial when consumers have little knowledge about certain products/brands Everyday low pricing (EDLP) v.s. High/Low Pricing Value is created in different ways EDLP saves search costs of finding lowest overall prices (ie: Groupon, Wal-Mart) High/low provides the thrill of the chase for the lowest price Pricing Strategies must balance 5Cs
3
Pricing Tactics Pricing Strategy (Long term) vs. Pricing Tactics (Short term) B2B Pricing Tactics and Discounts Seasonal Discounts: Designed to spur buyers into purchasing merchandise early - Some vendors give them an extra discount to place orders well in advance of the selling season. Q: Why would a vendor offer a seasonal discount to retailers? A: Because they can plan their production and get the inventory out of their warehouses and into the hands of the retailers. Cash Discount: Reduced invoice cost if buyer pays prior to the end of the discount period Encourages buyers to pay before the discount period ends Seller benefits either way (ex: pay rent bill early get discount) Allowances: Lowers the final cost in return for specific behaviour Advertising allowance Listing allowance Quantity Discounts: Cumulative quantity discount Noncumulative quantity discount Uniform Delivered v.s. Geographic Pricing Addresses the impact of shipping, which is often a major cost for manufacturers
Consumer Pricing Tactics Price Lining: Marketers establish a price floor and a price ceiling and set prices in between Allows for easy comparison Price Bundling: Encourage sales of slow moving items Encourage stock up Encourage trial of new brand Incentive to purchase (ex: meals at fast-food restaurants, cell phone package, vacation package) Leader Pricing: Enticing consumers into the store with the popular aggressively priced item and hoping they will pick up other items while shopping (ex: milk, eggs, coffee, white bread)
4
Consumer Price Reductions Markdowns: An integral component of high/low pricing strategy Enable retailers to get rid of slow moving or obsolete merchandise Used to generate store traffic. Quantity Discounts for Consumers: Size discount The more you buy the cheaper the unit cost Seasonal Discounts: Encourage consumers to use services or purchase products year round sellers can get rid of leftover merchandise (ex: buy wrapping paper right after Christmas-discount) Coupons and Rebates: Coupons: Retailer handles Rebate: Manufacturer issues
5
The key to successful pricing is to match the product or service with the consumer’s _______________. A) income level B) value perceptions C) shopping habits D) brand consciousness B Which of the following would NOT be associated with an internal reference price? A) The last price a consumer paid for an item B) What a consumer expects to pay for an item C) Consumer price perception regarding an item D) The overall cost of ownership of an item The redemption rate on coupons averages _____________. A) less than 2 percent B) 5 percent to 10 percent C) 20 percent to 30 percent D) over 30 percent a
d
6
