Pricing6

PRICING …

Structure of the Session …

• Essentials about pricing

• Basic concepts revisited

• Key questions which a brand manager faces

• Recommending an approach to pricing

• Developing the pricing strategy

Essentials about pricing

• Price is the only element in the marketing mix that produces ‘revenue’; the other elements produce ‘costs’

• Also, it is one of the two mix elements (along with packaging) with a public face. The packaging says what the brand is while the price should say what it is worth or what is its value.

• Price is also the most flexible elements of the marketing mix. It can be changed quickly, unlike product features and channel commitments.

Essentials about pricing …

• Price can also convey image connotations regarding the brand to its consumers.

• Finally, price is not only absolute but comparative and is linked with the brand offer which is being made.

Basic Economic Concepts

Demand curve:

The relationship between a given set of prices and the quantity bought at each price point.

Market demand curve:

Represents the sum total of the quantity demanded by all individuals in that market at each price point.

Supply curve:

The relationship between the market price and the amount of commodity that marketers are willing to market at that price .

Basic elements of supply and demand

• Factors affecting demand:

Average income

Population

Price of related products

Preferences

‘Other’ influences on demand.

Basic elements of supply and demand (contd.)

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Quantity demanded of automobiles(millions per year)

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The role of marketing (or product differentiation)

Basic elements of supply and demand (contd.)

• Factors affecting supply:

Production availability

Cost of production (prices of inputs & technological advances)

Prices of related goods

Government policies

‘Other’ influences on supply

Elasticity of demand

• The price elasticity of demand measures how much the quantity demanded of a good changes when its price changes

Price elasticity of demand = Ep Ep = Percentage change in quantity demanded

Percentage change in price

Elasticity and revenue

Greater than one (Ep>1)

Elastic demand % change in demand greater than the % change in price

Revenues increase when price decreases or decreases when price increases

Equal to one (Ep=1)

Unit-elastic demand

% change in demand similar to the change in price

Revenues unchanged when price decreases

Less than one (Ep<1)

Inelastic demand % change in demand less than % change in (relative) price

Revenues decrease when price decreases

DescriptionValue of demand elasticity

Definition Impact on revenues

Implications on Pricing

• Consumer price value relationship needs to be assessed and price positioned accordingly.

• We need to recognise that price insensitivity can be generated

Main approaches to pricing …Main approaches to pricing …

• Premium pricing, • Penetration pricing• Economy pricing,• Price skimming

Nine Price-Quality StrategiesNine Price-Quality Strategies

Price ..

Product ..Quality

High

Low

High Low

Price Positioning Options

Premium strategy(Benz)

Penetration strategy(Motorola)

Super bargain strategy(Air Deccan)

BargainStrategy(Big Bazaar)

Average quality strategy

Overpricing strategy

EconomyStrategy

Shoddy – goods

Hit-and-run strategy

High

Medium

Low

Pro

du

cts

Qu

a li t

y

HighMediumLow

Price

Other approaches to pricing …Other approaches to pricing …

• Pschycological pricing

• Geographic pricing

• Product Line pricing

• Value pricing

• Captive pricing

• Optional procing

• Bundling

Price insensitivity can be generated

• How? : Desensitising factors can be used to diminish the impact of price changes

• Desensitizing factors may either be through an understanding of consumer behaviour / impacting consumer pschycgraphics and point-of-sale variations

• Where favourable desensitising differentials exist in a particular sale, the sale will not be lost until the price is increased more than the value of the desensitising differentials

Price insensitivity can be generated (Contd.)

• Insensitivity will tend to be greater where:

Point of Sale effectiveness

After Sales

Consumer loyalties are significant

There are multiple dimensions of product quality

Unit price is low

The product is more sophisticated or not fully understood by the consumer

Some Concepts in Pricing …Some Concepts in Pricing …

Factors Influencing PriceFactors Influencing Price

• Marketing objectives

• Marketing mix strategies

• Costs

• Organizational considerations

• Market positioning influences pricing strategy

• Other pricing objectives: Survival Profit maximization Market share leadership Product quality leadership

• Non Profit objectives: Partial or full cost recovery Social pricing

Internal Internal Factors Factors

Factors to Consider When Setting PriceFactors to Consider When Setting Price



• Costs


• Pricing must be carefully coordinated with the other marketing mix elements.

• Target costing is often used to support product positioning strategies based on price

• Non Price positioning can also be used





• Costs


• Types of costs: Variable Fixed Total costs

• How costs vary at different production levels will influence price setting

• Experience (learning) curve effects on price





• Costs


• Who sets the price? Small companies: CEO or

top management

Large companies: Divisional or product line managers

• Price negotiations



• Nature of market and demand

• Competitors’ costs, prices, and offers

• Other environmental elements

• Types of markets Pure competition Monopolistic competition Oligopolistic competition Pure monopoly

• Consumer perceptions of price and value

• Price-demand relationship Demand curve Price elasticity of demand

External External Factors Factors





• Consider competitors’ costs, prices, and possible reactions when developing a pricing strategy

• Pricing strategy influences the nature of competition Low-price low-margin strategies

inhibit competition High-price high-margin

strategies attract competition

• Benchmarking costs against the competition is recommended






• Economic conditions Affect production costs Affect buyer perceptions of

price and value

• Reseller reactions to prices must be considered

• Government may restrict or limit pricing options

• Social considerations may be taken into account


Key issues which a manager faces ..

• How should a brand be priced for the first time?

• How should the price be changed over time to meet varying circumstances and opportunities?

• When should the company initiate a price change, and how should it respond to a competitor’s price change?

Recommended approach to pricing (contd.)

Stage I : Select a market target

Stage II : Choose a Brand Position

• Need to select a price which establishes the image

• Determine the role which price has to play

Stage III : Develop a marketing mix


• Questions that need to answered are :

How should price compare with “average” prices in the industry ?

» How ‘above’ or ‘below’ ?

» Who comprises the ‘average’?

How fast will we meet price reductions or increases by rivals ?

How frequently is it advisable to vary price?

To what extent is stability of price advantageous?

How frequently should ‘price promotions’ be run?

Stage IV : Select a pricing policy


• Formulate a strategy to guide management in setting price during the time that the special situation endures.

Stage V : Determine a pricing strategy

Stage IV : Select specific price

• However, the ideal situation does not happen too often ….. What happens is :

Price calculated/selected is not in line with ideal price so hence :

» Re-examine assumptions

» Re-examine costs

» Re-examine sales plan

Finally … The Procedure for Price setting

Establish price

Select the pricing objective

Estimate costs

Estimate margins

Establish Company price

Calculate excise,local taxes and regional margins

Procedure for Price setting (contd)

Establish final price

Establish price

Compare with competition

Confirm if in line with strategy

Further …Further …

• Parity pricing , Cost + pricing … etc

• ‘Market clearing price’

• Modern pricing concepts .. ‘reference price’ , ‘EDLP’ ..