Transcript Pricing for value

Kotler, Brown, Burton, Deans, Armstrong
Marketing 8e
Chapter 12: Pricing for value
Chapter Objectives
1.
2.
3.
4.
Explain how marketing
objectives, marketing mix
strategy, costs and other
company factors affect pricing
decisions.
List and discuss factors
outside the company that
affect pricing decisions.
Explain how price setting
depends on consumer
perceptions of price and on
the price-demand
relationship.
Compare the five general
pricing approaches.
5.
6.
7.
8.
Describe the main strategies for
pricing new products.
Explain how companies find a set
of prices that maximises the
profits from the total product
mix.
Explain how companies adjust
their prices to take into account
different types of customers and
situations.
Explain why companies decide to
change their prices.
Introduction
• Price is the amount of money charged for a
product or service
• Price has many names—rent, tuition, fee, fare
tariff, rate, interest and so on
• Is a main factor affecting consumer choice
• Only element in the marketing mix that produces
revenue—all others are costs (investments)
• Is the ‘easiest’ element of the marketing mix to
change and use in tactical ploys
Factors affecting price decisions
Factors to consider when setting prices
• Internal factors affecting pricing decisions:
– Marketing objectives—product strategy (target
market and positioning) must be decided before
setting the price
• Survival—set low prices hoping to spark demand
• Current profit maximisation—long run ignored
• Market-share leadership—low prices hoping that
larger share will lower costs and increase profits
• Product-quality leadership—higher prices
• Other objectives—barrier to entry, keep loyal
customers, sales promotions
Factors to consider when setting prices
• Marketing mix strategy:
– Price is only one aspect of the marketing mix
– Price decisions must be coordinated with product
design, distribution and promotion decisions to
form a consistent and effective marketing
program.
– Decisions in these areas can affect price
• High quality product requires higher price to recoup
higher costs
– Price can be crucial for positioning
Factors to consider when setting prices
• Marketer must consider the total marketing
mix when setting prices
– If product is positioned on non-price factors then
decisions about quality, promotion and
distribution will strongly affect price
– If price is a critical positioning factor then price
will strongly affect the other marketing mix
elements
Costs
• Costs set the floor for the price that the company can
charge for its products.
• The company wants to charge a price that covers all its
costs for producing, distributing and selling the product
and also delivers a fair rate of return for its effort and
risk.
• Costs may be an important element in the pricing
strategy.
• Lower costs may mean lower prices, greater sales and
profits.
The economics of information-based products
• Information goods such as software, books,
movies and music have a different cost
structure from tangible products.
• Most of the production costs are fixed costs
that cannot be recovered if production is
stopped.
• The variable costs for producing additional
copies are very low.
Organisational considerations
• Management must decide who within the
organisation should set prices.
• In small companies, price setting is often
handled by top management.
• In large companies, price setting is typically
handled by divisional or product line
managers.
• Sadly, marketers can be left out of pricing
decisions
External factors affecting pricing decisions
• The market and demand
– Pricing in different types of markets
– Consumer perceptions of price and value
– Price and consumption
– Price elasticity of demand
– Competitor’s prices and offers
– Other external factors
The market and demand
• Pure competition: The market consists of many buyers and sellers
trading in a uniform commodity. No single buyer or seller has much
effect on the going market price.
• Monopolistic competition: The market consists of many buyers and
sellers. A range of prices occurs because sellers can differentiate their
offers to the buyers.
• Oligopolistic competition: The market consists of a few sellers who are
highly sensitive to each other’s pricing and marketing strategies. The
product can be uniform or non-uniform. The sellers are few because it
is difficult for new sellers to enter the market.
• A pure monopoly: This consists of one seller. The seller may be a
government monopoly, a private, regulated monopoly or a private,
non-regulated monopoly. Pricing is handled differently in each case.
Consumer perceptions of price and value
• Pricing requires more than technical expertise. It requires
creative judgment and awareness of buyers’ motivations.
• The key to effective pricing is the same one that opens doors
in other marketing functions—a creative awareness of who
buyers are, why they buy and how they make their buying
decisions.
• The recognition that buyers differ in these dimensions is as
important for effective pricing as it is for effective promotion,
distribution or product development.
• Consumers decide whether a price is right
Pricing and consumption
• Evidence suggests that consumption of a
product or service increases at the time when
consumers actually pay for it
– A study shows that consumption at a health club
closely followed the timing of payments, then
declined steadily until the next payment.
Analysing the price-demand relationship
• Each price the company might charge will lead
to a different level of demand.
• The relationship between the price charged
and the resulting demand level is shown in the
demand curve—see next slide
Two hypothetical demand
schedules
Demand curves
All other factors have
to be held constant—if
raised advertising then
is the sales increase
due to the price or
advertising changes?
Demand curve shift
Shift caused by
improvement in the
economy or increased
advertising spend
Elasticity
Price elasticity of demand
= % change in quantity demanded / % change in price
Competitors’ prices and offers
• Competitors’ prices and their reactions to
other companies’ pricing must be
considered.
• Each company must learn the price and
quality of their competitors’ offers which
may provide a basis for its own strategy.
Other external factors
• Economic conditions can have a strong impact
on the outcomes of the company’s pricing
strategies.
– Inflation, boom or recession and interest rates
• Impact on members in the value chain
• Government
– Trade Practices Act
– Australian Competition and Consumer
Commission
General pricing approaches
• The price the company charges will be
between one that is too low to produce a
profit and one that is too high to produce
any demand.
• Product costs set a floor to the price;
consumer perceptions of the product’s value
set the ceiling.
• The company must consider competitors’
prices and other external and internal
factors to find the best price between these
two extremes.
Major considerations in setting
price
General pricing approaches
•
•
•
•
Cost-plus pricing
Break-even analysis and target profit pricing
Value-based pricing
Competition-based pricing
– Economic value pricing
– Going-rate pricing
– Sealed-bid pricing
•
Relationship pricing
– Special relationship
– Enrichment
– Shared risk and reward
Cost-plus pricing and break-even analysis
• The simplest pricing method is cost-plus
pricing adding a standard mark-up to the cost
of the product
• The company tries to determine the price at
which it will break-even or make the target
profit it seeks.
• Target pricing uses the concept of a break-even chart. A
break-even chart shows the total cost and total revenue
expected at different sales volume levels—see Appendix 2
p. 660 onwards
Cost-based pricing
Value-based pricing
• Value-based pricing uses buyers’ perceptions
of value, not the seller’s cost, as the key to
pricing
• The company uses the non-price variables in
the marketing mix to build up perceived value
in the buyers’ minds
• Price is set to match the perceived value.
Value pricing
Competition-based pricing
• Economic-value pricing
– For many industrial products, the costs perceived
by customers extend well beyond the price
charged.
– An industrial purchaser perceives the cost of
equipment as including installation, maintenance,
training and use of consumables, as well as the
basic purchase price.
– Equipment purchases are evaluated over their
economic lives and comparisons between
competitors go beyond straight price assessment.
Costs over the product’s life-cycle
Competition-based pricing
• Going-rate pricing
– The company bases its price largely on competitors’ prices, with
less attention paid to its own costs or demand.
– The company might charge the same, more or less than its major
competitors.
– In oligopolistic industries that sell a commodity such as steel,
paper or fertiliser, companies normally charge the same price.
– The smaller firms follow the leader—they change their prices
when the market leader’s prices change, rather than when their
own demand or cost changes.
Competition-based pricing
• Sealed-bid/tenders
– Using sealed-bid pricing, a company bases its price on how it
thinks competitors will price rather than on its own costs or
demand. The company wants to win a contract, and winning
the contract requires pricing lower than other companies.
– However, the company cannot set its price below a certain
level. It cannot price below cost without harming its position,
but the higher it sets its price above its costs, the lower its
chance of getting the contract.
Performance-based pricing
• Becoming more popular in service industries
• Can be protection for the
– Seller—paid when all services delivered and
– Buyer—not have to pay when services not
delivered
• Forces parties to be more explicit about
objectives, limitations, issues and so on
• Improves communications which often leads
to relationship pricing
Three levels of relationship
Deeper relationships that
take advantage from the
interactivity
Could be an alliance or JV
New-product pricing strategies
• Companies bringing out an innovative, patent-protected
product tend to adopt either
– Market-skimming pricing—many companies that invent new
products set high prices initially to ‘skim’ revenue layer by layer
from the market.
– Marketing-penetration pricing—companies may initially set a
low initial price in order to penetrate the market quickly.
• Pricing an imitative new product—the company must
decide where to position the product on quality and
price—see the next slide.
Nine price/quality strategies
Newcomer must consider market size and growth
in each box and the competitors it will face
Product mix pricing strategies
Product mix and service mix pricing strategies (1)
• Product/service-line pricing
– Companies usually develop product lines rather
than single products
– Management must determine what price steps to
set between the various models of the products
• Optional product/service pricing
– Companies offer to sell optional or accessory
products or services along with their main product
Product mix and service mix pricing strategies (2)
• Captive product/service pricing
– Companies that make products that must be used
along with a main product use this strategy
– In services, this is called two-part pricing, where
the price of the service is broken into a fixed fee
plus variable usage rate.
• By-product pricing
– Many companies produce by-products in the
production process—sales help reduce the costs
of main products and make their main products’
price more competitive
Product mix and service mix pricing strategies (3)
• Product/service-bundle pricing
– Many companies use product/service bundle
pricing in order to reduce price and attract more
customers
– An airline that provides a package ticket, which
includes free accommodation and breakfast
• This may stop the customer from switching to the
competitors
• However, the bundle pricing must be low enough to
attract buyers.
Price adjustment strategies
Price-adjustment strategies
• Discount pricing and
allowances—adjust the basic
price to reward customers for
certain responses, such as
early payment of bills, volume
purchases and buying offseason.
• Cash discounts—a price
reduction to buyers who pay
their bills promptly.
• Quantity discount—a price
reduction for large volumes.
• Functional discounts—a
reduction offered by the seller
to trade channel members,
retailers and wholesalers who
perform functions such as
selling, storing and record
keeping.
• Seasonal discounts—price
reduction for out of season
purchases.
• Allowances—trade-in
allowances and promotional
allowances.
Segmented pricing
• In segmented pricing, the company sells a product or
service at two or more prices even though the
difference is not based on differences in costs:
– Customer segment pricing—different segments pay different
prices—seniors pay less
– Product-form pricing—different versions of the product are
priced differently, but not according to differences in their
costs—DVD recorders with different hard drives
– Location pricing—different locations are priced differently
even though the cost of offering each location is the same—
airline seats
– Time pricing—prices are varied seasonally, by the month, by
the day and even by the hour—off-peak times
Psychological pricing
• Price indicates something about the product.
• Many consumers use price to judge quality.
• In psychological pricing, sellers consider the psychology
of prices and not simply the economics.
• Another aspect of psychological pricing is reference
prices—prices that buyers carry in their minds and refer
to when they look at a given product.
– The reference price might be formed by noting current prices,
remembering past prices or assessing the buying situation.
Promotional pricing
• Companies temporarily price their products below list price
and sometimes even below cost.
• Stores often price a few products as loss leaders to attract
customer to the store in the hope they will buy other items
at normal mark-ups.
• Special-event pricing takes place during certain seasons to
draw more customers, such as in January to attract
Christmas shoppers back.
• Heavy discounting can reduce brand equity in the long run
Value pricing and geographical
pricing
• Value pricing starts with the customer and the benefits
the product creates relative to key competitors.
• Geographical pricing is a decision about how to price
products to different customers in different parts of the
country.
• International pricing—companies that market their
products internationally must decide what prices to
charge in the different countries in which they operate
– In some cases, a uniform price is set worldwide but most
companies adjust their prices to reflect local market conditions.
Price flexibility on the Net
• The internet provides opportunities to test
prices, segment customers and adjust to
changes in supply and demand.
• Prices can be changed with speed.
• Online prices are not always lower than in
offline stores.
• Good examples of internet pricing strategies
are eBay and Priceline.com
Price changes
• Companies may need to initiate price changes and this
may be due to:
– Excess capacity, competition, etc.
– Factors such as inflation and rising costs.
• Buyer reactions to price changes:
– Customers do not always put a straightforward interpretation on price
changes, believing that the change indicates something about the
product quality.
• Competitor reactions to price changes:
– Competitors are most likely to react when the number of firms
involved is small, when the product is uniform and when the buyers
are well informed—see next slide.
Responding to competitor’s price change
Steps to effective pricing
• Determine the value the
• Measure and monitor the net
customer places on the
prices obtained in the
product.
market—know the effects of
price changes, discounts, etc.
• Assess the different value
by different market
• Assess customers’ emotional
segments.
responses to prices.
• Determine price sensitivity. • Determine whether the
market segment or key
• Identify the best pricing
customer provides sufficient
structure.
returns in relation to costs to
• Take account of
serve.
competitors’ likely
reactions.
Summary
• Despite the increased role of non-price factors
in the modern marketing process, price
remains an important element of the
marketing mix.
• Many internal and external factors influence
pricing decisions.
• In the end, the consumer decides whether the
company has set the right price and they may
differ in the values they assign to different
product features.