Transcript Price - Sage Publications

part three: the marketing mix
CHAPTER 10
PRICE
an opening challenge
You run a medium-sized business: a secondhand car dealership. A competitor, the
showroom on the other side of town, reduces
its prices.
Should you do the same?
What will happen if you don’t? If you do?
agenda
• pricing objectives
• pricing methods
– market-based
– cost-based
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pricing strategies
pricing tactics
changing prices
price elasticity of demand
the importance of pricing
• profits and revenues
– maximise sales revenues rather than volumes
• market share
– a low price can buy market share
• survival
– but set prices too low and the firm will not
survive
• image
– price affects image
pricing objectives
• financial
– make profit
– maximise revenue
– recover investment
– survive
• marketing
– build image
• pile it high, sell it cheap
• prestige
– positioning
– increase market share
pricing methods: market‐based
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customer value pricing
psychological price barriers
auctions
going-rate pricing
tenders
cartels
customer value pricing
• a product is only worth what someone will
pay for it
• customers place a value on the product
• companies set the price
when customer estimation of value = desired price
= a fair deal for both parties
psychological price barriers
• based on the customer’s budget for the
purchase
– e.g. customer is prepared to pay up to £35 for a
return train ticket
• price is set just below
– e.g. £34.50
• requires accurate research
auctions
• traditionally sale rooms
• currently popular on the Internet
– e.g. eBay
• bids of increasing value until all but one
buyer drop out
• can maximise price
going‐rate pricing
• based on competitors’ prices
• advantages
– can reduce price wars
– can take advantage of others’ expertise
• disadvantages
– assumes competitors have it right
– assumes competitors have a similar cost base
price followers
(takers)
price leaders
(makers)
tenders
• numerous types
– e.g. sealed bid
• lowest bid is awarded contract
• favoured by governments and other public
sector organisations
– for large orders and capital projects
cartels
• a group of competitors who collaborate to set
prices
– no real competition
– e.g. OPEC (Organization of the Petroleum
Exporting Countries)
• prices tend to be higher
• considered an anti-competitive practice in
many countries
– including the EU
pricing methods:
cost-based
cost‐based pricing
• cost plus pricing
– mark-up pricing
• based on direct costs
– full-cost pricing
• based on total costs
– contribution pricing
• based on variable cost
• target profit pricing
• based on breakeven point
pricing strategies
• new products
– market penetration
– market skimming
• general
– prestige
– pre-emptive
– product line
– price discrimination
new product pricing strategies
• market skimming
early cash recovery
encourages new competitors
raises ethical issues
• market penetration
encourages product trial
encourages retailers to build up stocks
may provoke competitive retaliation
delays cash recovery
ongoing pricing strategies
• prestige
– premium price to match prestige image
• pre-emptive
– low price to deter competition
• product line
– different price points for a range of products
• price discrimination
– same products but different prices for different market
segments
pricing tactics
• psychological pricing
– is £9.99 cheaper than £10?
• loss leaders
– a bargain draws customers in
• promotional pricing and discounts
– sales promotion
predatory pricing (destroyer or extinction)
– illegal in the UK
– an unrealistically low price to drive competition
out of the market
why change prices?
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a substantial change in business costs
an imbalance between supply and demand
a change in competitors’ marketing
a changed economic situation
– e.g. inflation
• new laws, new taxes or other government
pressure
• a change in the firm’s own marketing strategy
– e.g. as part of a repositioning exercise
price elasticity of demand
a measure of price sensitivity
if the price goes up
but there’s a relatively small fall in sales
then demand for that product is
price inelastic, i.e. changes in price
do not affect the sales volume much
so, if you wanted to increase revenue,
would you put the price up? Or down?
price elasticity of demand
a measure of price sensitivity
if the price goes up
and sales fall dramatically
then demand for that product is
price elastic, i.e. changes in price
affect sales volume disproportionately
so, if you wanted to increase revenue,
would you put the price up? Or down?
impact of price elasticity on
sales revenue
• if demand is price inelastic
– a higher price will result in a relatively small fall in
sales
– the higher price should compensate
– revenue should increase
• if demand is price elastic
– a lower price will result in a relatively large rise in
sales
– the increased sales volume should compensate
– revenue should increase
calculating price elasticity
price elasticity =
percentage change in quantity demanded
percentage change in price
if the answer >1, then demand is elastic
if the answer <1, then demand is inelastic
(if there is a minus sign, ignore it)
summary
• without a price, a product is a gift
• too high a price is unethical
– and loses sales
• too low a price is generous
– but loses profits
• prices can change over time
– new strategy, new tactics
– respond to changing market conditions
• price must fit within the marketing strategy
– e.g. it is a key contributor to image