Pricing

PRICING Understanding and capturing customer value

Chapter Questions• How do consumers process and evaluate prices?

• How should a company set prices initially for products or services?

• How should a company adapt prices to meet varying circumstances and opportunities?

• When should a company initiate a price change?

• How should a company respond to a competitor’s price challenge?

WHAT IS A PRICE?

• In the narrowest sense, price is the amount of money charged for a product or service.

• More broadly, price is the sum of all the values that customers give up in order to gain the benefits of having or using a product or service.

• Price is the only element in the marketing mix that produces revenue.

• Price is one of the most flexible marketing mix elements.• Pricing Rests on Value; Capturing Value is Its

Purpose

FACTORS TO CONSIDER WHEN SETTING PRICES

• Customer Perceptions of Value the customer will decide whether a product’s price is right.

• Value-based pricing uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing.

• Price is considered along with the other marketing mix variables before the marketing program is set.

• Cost-based pricing is product driven. • “Good value” is not the same as “low price.”

Changed pricing environment • pricing strategies are changing due to the change in

technology and trend in market• differentiated products also changed the mindset of the

consumers now a days• Internet revolution and its impact over the fixed pricing

decisions – thousands of vendors offering prices to one product one platform to compare the price of a product from various sellers Free products- McDonalds, Mad Over Donuts are few examples

offered free breakfast ranges and donuts

Two types of value-based pricing are good-value pricing and value-added pricing.

1. Good-Value Pricing:- Good-value pricing is offering just the right combination of quality and good service at a fair price.

• Everyday low pricing (EDLP)- EDLP involves charging a constant, everyday low price with few or no temporary price discounts.

• High-low pricing- involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items.

• Value-Added Pricing- Value-added pricing is the strategy

of attaching value-added features and services to differentiate their offers and thus support higher prices.

Types of Costs

• Fixed costs (also known as overhead) are costs that do not vary with production or sales level.

• Variable costs vary directly with the level of production. They are called variable because their total varies with the number of units produced.

• Total costs are the sum of the fixed and variable costs for any given level of production.

Common Pricing Mistakes

• Determine costs and take traditional industry margins

• Failure to revise price to capitalize on market changes

• Setting price independently of the rest of the marketing mix

• Failure to vary price by product item, market segment, distribution channels, and purchase occasion

Copyright © 2009 Dorling Kindersley (India) Pvt. Ltd. 14-10

When to Use Price Cues

• Customers purchase item infrequently

• Customers are new• Product designs vary over time

• Prices vary seasonally

• Quality or sizes vary across stores

Steps in Setting PriceSelect the price objective

Determine demand

Estimate costs

Analyze competitor price mix

Select pricing method

Select final price


Step 1: Selecting the Pricing Objective

• Survival• Maximum current profit

• Maximum market share

• Maximum market skimming

• Product-quality leadership

Step 3: Estimating Costs

Types of Costs

Target Costing

Accumulated

Production

Activity-Based

Cost Accounting

Tata motors developed ‘Nano’its small car with a target price

Price-Adaptation Strategies

Geographical Pricing

Discounts/Allowances

Differentiated Pricing

Promotional Pricing

Price-Adaptation Strategies

Countertrade• Barter• Compensation deal• Buyback arrangement• Offset

Discounts/ Allowances• Cash discount• Quantity discount• Functional discount• Seasonal discount• Allowance


Promotional Pricing Tactics

• Loss-leader pricing• Special-event pricing• Cash rebates• Low-interest financing• Longer payment terms• Warranties and service

contracts• Psychological

discounting

Special festival pricing by Coca-Cola on the occasion of Ramzan in Pakistan.


Differentiated Pricing

• Customer-segment pricing

• Product-form pricing• Image pricing• Channel pricing• Location pricing• Time pricing• Yield pricing

Pricing for rural markets • A large proportion have a low and seasonal income• Several approaches adopted by retailers and companies to address this

• Rural retailers often extend credit• Retailers also “break the bulk” and sell in loose form, in small quantities

• Companies use a similar strategy by introducing “low-unit packing” or LUP

• Companies also develop low-priced products with a target price for rural markets

• Companies might offer refill packs or recyclable and reusable packs

Increasing Prices

Delayed quotation pricing

Escalator clauses

Unbundling

Reduction of discounts

Pricing

Business

goodvalue pricing

pricing rests

highlow pricing

valuebased pricing

valueadded pricing value

products price

atarget price

costbased pricing