Transcript Role of Price

NATURE AND IMPORTANCE OF PRICE
• The Many Names of Price - ???
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•
•
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Hotel
Doctor
Insurance
apartment
• What Is Price?
To the seller...
Price is revenue
and profit source
To the consumer...
Price is what you give
up to get what you want
THE PRICING EQUATION FOR CONSUMERS
PRICE = LIST PRICE - INCENTIVES & ALLOWANCES + EXTRA FEES
THE PROFIT EQUATION FOR SELLERS
Profit =
Total revenue
or
- Total cost
Profit = (Unit price × Quantity sold) −Total cost
THE PROFIT EQUATION FOR SELLERS
Profit =
Total revenue
or
- Total cost
Profit = (Unit price × Quantity sold) −Total cost
The Nature and Role of Price in The
Organisation
Definition of Price:
…..price is the amount of money charged for a product or service. …..price is the
sum of the values that consumers exchange for the benefits of having or using the
product of service (Kotler & Armstrong, 1993).
Role of Price (important to marketing decisions)
1.
2.
3.
4.
Price influences the quantity of a product purchased by a customer/consumer,
as price reflects the benefits that customers perceive they will obtain from the
product. Customers consider price of a product relative to that of competitive
offerings.
Price influences whether the sale of a product will be profitable to a marketer or
reseller.
Price communicates the value positioning of the product/service.
Price is the only element in the marketing mix that brings in the revenues – all
the rest are costs.
The Nature and Role of Price in The
Organisation
Price Decisions
# Price is the only one of the marketing mix tools that the company uses to achieve
its marketing objectives.
# Price decisions must be coordinated with product design, distribution, and
promotion decisions to form a consistent and effective marketing programme (cross
function teams in price setting).
# decisions made for other marketing mix variables may affect pricing decision, e.g.
producers using many resellers who are margins into their prices.
# decision to develop a high-quality position will mean that the seller must charge a
higher price to cover higher costs.
The Importance of Price in the Economy
# Pricing is considered by many to be the key within the capitalist system of the free
economy. (Students – required to master the different pricing regimes under all the
different economic/market structures – to examined on this)
# Market price influences wages, rent, interest, profits, etc. (factors pf production –
labour, property, capital, entrepreneurship)
# Price is a regulator of the economic system – it influences the allocation of
factors of production (high wages attract labour, high interest rates attract capital,
etc)
# Price allocates scarce resources what will produced (supply) who will get the
goods and services (demand).
Importance of price to in an organisation
Pricing……
A company must set its price in relation to the value delivered and perceived
by the customer
Higher
price
Lower
price
Lower
perceived
value
Lower
perceived
value
Price = Cost + Price
Value = Perceived benefits/price
Company
misses potential
profits
Company fails
harvest
potential profits
Importance of price to in an organisation
Pricing policy (factors)
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Selecting the pricing objective
Determining demand
Estimating costs
Analyzing competitors – costs,
prices, offers
 Selecting a pricing method
 Selecting the final price
The Pricing objective
The company first decides where its
wants to position its market offering.
The objective could be:
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
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Survival
Maximize current profit
Maximize market share
Maximize market skimming
Product – quality leadership
THE MOST COMMON MISTAKES INDENTIFIED IN HANDLING
PRICING
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Pricing that is too cost oriented

Prices that are not revised often enough to reflect market changes
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Pricing that does not take the rest of the marketing mix into account

Prices that are not varied enough for different products and market segments
WAYS TO SELECT BASE PRICE LEVELS
Demand oriented – focus on consumer preference
Cost oriented – focus on business’s expenses
Profit oriented – focus on profit
Competition oriented – focus on the marketplace players
THE ROLE OF PRICING IN THE MARKETING MIX
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Pricing plays a strategic role in organization's marketing effort i.e. combat
competition, to differentiate from similar products, to create niche market.
Strategic choices about target markets, products and distributions, set guide
for both price and promotion strategies
The quality of products and features, type of distribution channel, end-users
served, and intermediaries functions – help establish and form price range
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Responsibility for Pricing Decisions
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5.
Marketing managers – in many organizations
Chief Executive officer – manufacturing and construction companies
Marketing executives – consumer products and services
Chief executive and top management – price determination for large purchases
Non-marketing executives – industrial product companies
NB. Pricing decisions, as with other mix decisions, must be coordinated with other
decisions in the marketing programme. Operations, engineering and finance
executives, finance executives, should participate in strategic pricing decisions. If an
aspect of the marketing mix is mismanaged dire consequences ensue
THE ROLE OF PRICING IN THE MARKETING MIX
1. Product Strategy
# Pricing decision for single product generally simple and straight forward
# Not simple for a line or mix of products
# Example :- popular strategy is to price a printer, at competitive levels and set a
higher margins for supplies such as cartridges. Same principle applied to motor
vehicles which are priced in a way to sell them, but make profit over time with spares
which are highly priced.
# Prices for product in a line do not necessarily correspond to the cost
# Example :- prices in supermarkets are based on a total mix strategy rather than
individual item pricing.
#Consumers tend to associate a high price with high quality, and low price with low
quality (Is this ALWAYS TRUE????)
# Quality and features of product affect price strategy i.e. high quality ->high price=>
prestige position in market place => satisfy management’s profit performance
requirements
THE ROLE OF PRICING IN THE MARKETING MIX
2. Distribution Strategy
# Pricing influenced by the type of channel most suitable for the product, the
distribution intensity required, and channel configuration.
# when setting price consider the needs and motivation of intermediaries
# Pricing in vertically coordinated channels total channel considerations more than in
conventional channels => intensive distribution is likely to call for more competitive
pricing than does selective or exclusive distribution.
# Consideration in pricing strategy is the role and influence of various channel
members
# a firm that manages the channel usually plays key role in pricing for the entire
channel, subject to legal constraints and restrictions
THE ROLE OF PRICING IN THE MARKETING MIX
3. Promotion Strategy
# Pricing of products and services influence promotional strategy of an organization.
# High quality, high priced products are advertised in media that by association,
complement or endorse the image of product (inappropriate media lower image of
product)
# Selection of advertising media determined by the target audience to be reached
which may necessitate the use of price in the advertisement (e.g. PEP stores would
insert the price of goods in advertisements – pamphlets – that are aimed at their
target market. A company manufacturing jewellery inversely would decline to place
prices on adverts, would rather quote prices individually to create a more exclusive
image. (exclusive and expensive suggested by no price tag on product)