Bus169 Kotler Chapter 10

Pricing : Pricing : Considerations Considerations & Approaches& Approaches

Chapter Objectives1. Explain the benefits of value-based pricing.

2. Discuss how marketing objectives, marketing-mix strategy and costs and other company factors affect pricing decisions.

3. List and discuss factors outside the company that affect pricing decisions.

4. Explain how price setting depends on consumer perceptions of price and on the price-demand relationship.

5. Describe the major strategies for pricing new products.

6. Comprehend the way in which companies establish a set of prices that maximises the profits from the total product mix.

7. Explain how companies adjust their prices to take into account different types of customers and situations.

What is Price?

• In simple terms, price is the amount of money the seller charges for the product (goods or services).

• For the consumer, it is the total of values he/she gives up in exchange for the benefits of having or using the product.

• Price is the only element of the marketing mix that produces revenue for the seller.All other elements represent costs.

Cont’d

• A company does not usually set a single price, but rather a pricing structure that covers different items in its product line.

• A company will often adjust product prices to reflect changes in its business costs, and to respond to variations in market situations and in buyer demand.

• To the seller, price is the source of revenue

• To the buyer, price is the cost of exchange

Considerations in Setting Price

Cont’d

• The price a company charges will usually fall somewhere between a price that is too high to produce any demand (‘ceiling’), and a price that is too low to produce any profit (‘floor’).

• The company must consider a number of internal and external factors, including marketing strategy and mix; the nature of demand; competitors’ strategies and prices.

• Customers will decide whether the price of a product is correct. Decisions should, therefore, start with customer value.

Cont’d

• Value-based pricing is setting the price based on the buyers’ perceptions of value, rather than on the seller’s costs.

• Good-value pricing is offering just the right combination of quality and service that customers want, at a fair price.

• Value-added pricing refers to a firm including value-added features/ services to differentiate its offerings. This supports higher prices.

Internal Factors to Consider

• Marketing objectives– Survival short-term– Current profit maximisation short-term– Market-share leadership long-term– Product-quality leadership long-term– Other objectives

• Marketing-mix Strategy– Price must be closely linked to other elements

A firm must be clear in its marketing objectives and in its desired ‘positioning’

Cont’d

• Cost Based Pricing

– Fixed costs– Variable costs– Total costs (fixed + variable)– Costs at different levels of production – Costs as a function of production experience

Costs will determine the ‘price floor’for a product

Cost Per Unit at Different Levels of Production

Cost Per Unit as a Function of Production Experience

Cont’d

• Cost-plus pricing– Adding a ‘mark up’ to the base cost of the product.

• Breakeven analysis– Assessing the selling price at which a firm can fully

recover its costs (break even) of manufacturing and marketing its product. Identifies the anticipated total cost/ total revenue at different sales volumes.

• Target Profit pricing– Setting a selling price above the breakeven point,

so that a desired level of profit can be achieved.

Breakeven chart

Selling price is $20. Projected Cost is $16.

External Factors to Consider

• The Market and Demand

– Pricing for different types of markets

– Consumer Perceptions of Price and Value

– Price/ Demand Relationship

– Price Elasticity of Demand

– Competitors’ Prices and Offers

– Other External Factors (e.g. reseller margins)

The level of demand will determine the

‘price ceiling’ for a product

Demand

• DEMAND– the quantity of a product that will be

bought in a market at various specific prices

• SUPPLY– the quantity of a product that will be

offered to a market at various specific prices

• Pure competition – when the market consists of many buyers and sellers

trading in a uniform product, where no single buyer or single seller has much effect on the price that can be charged in that market.

– Sellers will be influenced by their competitors.

• Monopolistic competition– when the market consists of many buyers and sellers,

and a range of prices occurs because sellers are able to differentiate their product offering to the buyers.

– Sellers not heavily influenced by competitors.

Pricing for Different Types of Markets

• Oligopolistic competition – when the market consists of a few sellers who

are highly sensitive to each other’s pricing and marketing strategies. Often only a few sellers, because it is difficult for new firms to enter the market. Product can be uniform or non-uniform.

• A pure monopoly – when there is only one seller. The seller may be

a government monopoly; a private regulated monopoly; or a private, non-regulated monopoly.Pricing would be handled differently in each case.

Cont’d

Price-Demand Relationship

• The demand curve shows the number of units the market will buy in a given time period at different prices.

• ‘Price elasticity’ is the measure of the likely change in demand for a product as a result of a change in the price.

Two Hypothetical Demand Schedules

Hypothetical Examples of Demand Curves

Effects of ‘non-price’ variables

Inelastic and Elastic Demand

Price Elasticity of Demand

• How the Demand for a product will be affected by a change in the Price of that product

• INELASTIC– A percentage increase, or decrease, in the price will

produce a smaller percentage change in demand

• ELASTIC– The percentage change in quantity purchased will

be much greater than the % change in price

Cont’d

• INELASTIC– PRICE goes DOWN Revenue goes

DOWN– PRICE goes UP Revenue goes UP

• ELASTIC– PRICE goes DOWN Revenue goes UP– PRICE goes UP Revenue goes DOWN

The more ‘inelastic’ the demand, the more the seller benefits from an increase in product price

Competitors’ Strategies and Prices

• A firm must consider its competitors’ prices, and any possible reactions to the firm’s own pricing moves, in order to select the most appropriate price between the two extremes of ‘floor price’ and ‘ceiling price’.

• A firm needs to study the price and quality of each competitor’s offer. This can be done in a number of ways including, comparison shopping; examining the competitors’ products and pricing; speaking to consumers.

New-Product Pricing Strategies: Pricing an ‘Innovative’ Product

• Market-skimming pricing:

Setting a relatively high price for a new product to skim maximum revenue from those segments willing to pay the high price. The firm will make fewer, but more profitable, sales.

• Market-penetration pricing:

Setting a relatively low price for a new product in order to attract a large number of buyers and gain a greater market share.

New-Product Pricing Strategies: Pricing an ‘Imitative’ New Product

• A company that plans to develop an imitative product faces a product-positioning decision.

• It must decide where to position the product in terms of both quality and price.

• It must consider the level of competition, and the size and potential growth of the market.

Nine Price/Quality Strategies

Product-Mix Pricing Strategies

• Product-Line Pricing– Setting ‘price steps’ between product line items.

• Optional-Product/ Service Pricing– Pricing optional products sold with the main product.

• Captive-Product Pricing– Pricing products that must be used with the main product.– Two-part pricing is a strategy for pricing services in which

price is broken into a fixed fee plus a variable usage rate.

• By-Product Pricing– Price by-products to help price main product competitively.

• Product-Bundle Pricing– Pricing bundles of products that are sold as a package.

Price-Adjustment Strategies

• Discount pricing and allowances: cash discounts; quantity discounts; functional discounts; seasonal discounts & allowances.

• Segmented pricing: setting different prices for different clients; places; or times.

• Psychological pricing: adjusting the price to better communicate the product’s intended competitive position. Also known as odd-even pricing, to imply low price or high quality

• Promotional pricing: loss-leader pricing; special event pricing; psychological discounting.

• Value pricing: offering quality at fair price.• Geographic pricing: special pricing for distant

customers, such as uniform delivered pricing; zone pricing; and freight absorption pricing.

• International pricing: the company adjusts its price to meet the different conditions and buyer expectations in different world markets.

Cont’d