Transcript Topic 9 Pricingx

Pricing Policy
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Understand the relationship between pricing, customer value,
competitiveness & profitability; particularly the need for a
market-led approach to price setting.
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Be able to differentiate between pricing policy and pricing
tactics
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Describe how factors outside the organisation (particularly
market structures) affect pricing policy
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Understand the critical importance of management
accounting principles to pricing policy with special emphasis
on the benefits of adopting a contribution-based costing
system
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Outline a practical market-led approach for price positioning
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Comprehend certain commonly-encountered terms in the
pricing field
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Price is the only element of the marketing mix that
generates revenue (all others are costs)
Pricing policy must be tied to business and marketing
plans (not delegated to sales force, accounting
department etc)
Policy needs to be implemented in flexible & adaptive
ways (the environment is always changing)
Pricing policy requires a sound management
accounting system! Vitally important!!!
Pricing policy enormously helped by sound target
market and positioning
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Pricing policy flows onto pricing tactics.
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Pricing policy includes:
Decision making guidelines
Flows from strategic plans
Reflects target market (s)
Reflects market positioning
Reflects marketing mix design
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Day-to-day pricing decision making
Flexibility & adaptation
Situational contingent e.g.
negotiating a deal
Offering a discount & discount type
Loss-leader products & promotions
Price adjustments
Account reviews
Cost-Volume-Profit analysis
NOTE: Logically, making sound & intelligent
tactical decisions is impossible without policy
guidelines: Know your market, position well
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The freedom of a business to set prices
autonomously varies according to the type of
market the business operates in at the
macro-level!
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Many customers and many sellers
Uniform, commodity product (e.g. potatoes, wool,
cement, telecom shares)
Established market price: cannot sell above and
pointless to sell below (price taker)
Freedom for buyers and sellers to enter and exit
market
Existence of ‘lead steers’ or ‘drovers’ – actions
trigger price changes
Very limited requirement/scope for marketing
Emphasise low costs, productivity, continuity of
demand
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Few sellers and many buyers
Sellers are very sensitive to each other’s prices
Market structure promotes pricing-parity, price
signalling and leader-follower relationships
(Cartel-collusion???)
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Product is commoditised as it lacks meaningful
differentiation between providers e.g. petrol, air
travel, pizza
Marketing aims to foster brand preference on
image and loyalty factors – avoiding price
competition
Internal productivity is vitally important for profits
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One seller – regardless of the number of buyers (supplier
capture)
Seller sets price according to range of policy guidelines
Government departments: passports, licences
Regulated: Lotto, electricity, ACC, ship survey, NZQA
Private: Microsoft, Rolls Royce, orthodontics, Blackball
Hilton
Private monopolies almost always based upon UNIQUE
competitive advantage e.g. location, patented
technology
Marketing tends to emphasise non-price factors
Pricing policy for private monopolies tends to be “ What
the market will bear: - DANGER = Marketing Myopia
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AKA “Domesticated market”, “Monopolistic
competition”
Many buyers and sellers trading across
number of market segments in a given
category
Price structures reflect segment demand
differences and differentiation efforts
Most common form of market structure
Marketing emphasises differentiation and
price and non-price factors (ENTIRE
Marketing Mix)
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Basic Concepts:
SALES REVENUE = UNIT SALES X
UNIT PRICE
VARIABLE COSTS = DIRECT COSTS OF
UNITS (Direct labour, materials,
selling) Change with production & sales rates
FIXED COSTS = OVERHEAD EXPENSES. Do not
change as production & sales change
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Overheads are allocated to products on basis
of some arbitrary formula
Product Costs are therefore increased
artificially
Prices are therefore increased and distorted
Profit picture for product is also distorted
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CONTRIBUTION METHOD – RECOMMENDED
 Overheads are kept separately – not
allocated arbitrarily
 Sales Revenue minus Variable (Direct) Cost
= “Contribution”
 Contribution is carried over to Overheads
 Provided a product covers its Variable Costs
and makes a Contribution to Overheads …..
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Example: Home Business March 2009
Sales Revenue
$1,000
100%
Less Variable Costs $350 (35%)
CONTRIBUTION
$650 (65%)
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Total Overheads
Less Contribution
Overheads Remaining
$1280
100%
$650 (51%)
$630 (49%)
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MAIN LEARNING POINTS
Overhead allocations are necessarily arbitrary
 Overhead allocations = artificially distort product
costs
 Distorted product costs distort pricing processes
 Arbitrary overhead allocations invite internal
“political” behaviours – each product/department
argues why its overhead charge should be reduced
 Arbitrary overhead allocations reduce incentive to
keep overhead expenses under control – passed on
and charged out.
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PRICE OBJECTIVES (Marketing & Business)
Positioning (Marketing Strategy)
Business objectives and strategy (e.g. Profit
& Market share)
Organisational Conditions (e.g. financial
health)
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2. TARGET MARKET PRICE ELASTICITY
 “Price Ceiling” factor
 Price elasticity (Price in relation to Demand)
 Engel’s Law
 Price Perceptions (e.g. reference prices,
price-value estimates, competitive price
awareness)
 Consumer behaviour (e.g. brand loyalty,
habit, and involvement)
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3. COMPANY COST STRUCTURE
 Firm’s cost structure
 Reliability of management accounting
systems
 Anticipated cost changes (e.g. economies of
scale, experience curve effects, forex
exposure, productivity gains)
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4. COMPETITIVE CLIMATE
Market structure (e.g. monopoly, perfect
competition)
Robustness of Sustainable Competitive
Advantages
Competitive intensity
Prevalence of price-led competitive tactics (e.g.
“Loud-shout” selling & discounting)
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Pricing is based on company costs:
1. COST-PLUS PRICING
 Very simple and popular – add a standard
mark-up onto costs
 Widely used: retailing, construction,
professional services, custom
manufacturing
 PROS: Easy to manage, costs are known,
price stability, fair to buyers and sellers
 CONS: Demand & competition downplayed, assumes costs are known, inflexible
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2. TARGET RATE OF RETURN
 Set prices at level that (hope!) will produce
level of profit sought
 Popular in B2B industries, SOE’s, community
organisations, ‘user pays’ services – city
councils
 PROS: As per Cost-plus – esp. dominant
supplier
 CONS: Competitive environment, vulnerable
to low cost competitors, demand
conditions.
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 GENERALLY
MARKETERS DO
NOT RECOMMEND COSTBASED PRICING POLICIES –
TOO INWARD LOOKING –
“MYOPIC” – COMPLACENT …
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Pricing is based on what target customers
view as “good value for money”. (Market
Orientated!!)
Great use of Non-Price variables in the
Marketing Mix
Prices aligned with customers’
expectations, needs, experiences, and
attitudes.
Prices embody competitive positioning … …
… parallel value offerings
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Pricing involves customer and competitive
research
 Pricing involves close attention to “Mixing the
Marketing Mix”… Integration!!
“Price Bundling” – lots of features for one price
“Price Unbundling” – standard + optional extras
“Price Staircasing” – through product range
“Traffic Builders” – loss leaders
“Trading Up & Down” – as per staircasing
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GENERALLY MARKETERS
RECOMMEND VALUE-BASED
PRICING POLICIES BUT … …
… !!!
COMPLEXITY, COSTING
PROBLEMS, EXCESSIVE
FLEXIBILITY
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1. ECONOMIC VALUE
B2B equivalent of Value Pricing – business
customers perceptions of value for money
plus supplier choice e.g. Commercial
Software, industrial equipment, packaging,
transport services)
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2. COMPETITIVE PARITY (“GOING RATE”)
Set prices generally/closely in line with rival
players (e.g. oligopoly, close competition)
Individual firm can charge slightly more of
less from “sector norm” prices.
Very popular – established markets, demand
elasticity = ‘wild card’, promote stability –
avoid price wars, not upset other players,
collective wisdom, fair to buyers and sellers
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3. SEALED BID OR TENDERS
Price quote is based on what competitors
might or could offer for the job
Not too high ---- not too low
Works best for busy firm with good reputation,
business networks and excellent costing &
operations systems… … beat the odds with
many tenders offers in play at any one time.
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GENERALLY MARKETERS
RECOMMEND FACTORING IN
COMPETITION BUT … … !!!
MUST ALSO TAKE ACCOUNT OF
VALUE PROVIDED BY
COMPETITIVE ADVANTAGE
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Major growth trend since late 1970’s
Take the adversarial factor out of pricing: “I
win: You lose”, playing suppliers off against
each other.
AIM: Work out a collaborative pricing policy
that promotes long-term mutual value for
both supplier and customer: co-destiny,
partnership, value and risk sharing.
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1. “KEY ACCOUNT”
 Key customers have ‘special relationship’
therefore work out price policy that is best
to keep that relationship mutually
appealing.
 Move focus to innovation, cost-reduction,
product design, enhanced competitiveness,
etc. (We Both Win)
 (Aggressive price dickering spoils the
partnership and diverts energy)
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2. VALUE CHAIN COLLABORATION
Suppliers-firms-retailers link up to work
towards common business objectives.
Time based opportunities, big league
competitors, innovation, huge synergy
potential.
Prices reflect shared risks and rewards
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GENERALLY MARKETERS
RECOMMEND THIS APPROACH
BUT … … !!!
EVERYTHING DEPENDS ON
INTEGRITY, TRUST ETHICS &
SHARED VALUES
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