Principles of Marketing “ Pricing Products: Pricing Strategies”

Principles of Marketing

“ Pricing Products: Pricing Strategies”

Fundamentally in managing the price element of a company’s

marketing mix, management of a firm first must decide on its pricing goal and then set the

base price for a good or a service. The final task is to the design pricing strategies that

are compatible with the rest of the marketing mix

Price Vs Non-price competition

Price competition: A company engages in price competition by regularly offering products priced as low as possible and typically accompanies by few if any services. (think value pricing not just price)

Non-price Competition: Here sellers maintain stable prices and attempt to improve their market positions by emphasizing other aspects of their marketing programs. (think brand equity)

Market Entry Strategies In preparing to enter the market with a new product,

management must decide which of these strategies to choose:

a) Market-Skimming Pricing - Setting a high price for a new product to skim maximum revenues layer by layer from segments willing to pay the high price; the price set is set at its highest possible level that the most interested will pay for the new product. The company makes fewer but more profitable sales.- This strategy is used because it provides healthy profit margins to recover costs of high R&D.- Demand is curtailed to a level that does not outstrip the firm’s production capacity.- It provides flexibility because it is much easier to lower an initial price that meets consumer resistance than it is to raise an initial price that has proven to be too low to cover costs.

Market Skimming is suitable under these conditions:

- The new product has distinctive features strongly desired by consumers.

- Demand is fairly inelastic.- The new product is protected through entry

barriers such as patents.

b) Market Penetration Pricing- Here a low initial price is established for a new

product. The price is low in relation to the target market’s range of expected prices

- The primary aim of this strategy is to penetrate the mass market immediately and in doing so generate substantial sales volume and a large market share.

This strategy is used if the following conditions exits:

- A large market exists for the product.

- Demand is highly elastic.- Substantial reductions in unit

costs can be made through large scale operations.

- Fierce competition already exists in the market.

Product Mix Pricing Strategies

1) Product Line Pricing: Setting the price steps between various products in a product line based on cost differences between the products, customer evaluations of different features and competitors prices.

2) Optional product pricing: The pricing of optional or accessory products along with a main product (in automobiles).

Product Mix Pricing Strategies

3) Captive Product Pricing: Setting a price for products that must be used along with the main product such as Energizer batteries and the Energizer recharger.

4) By product Pricing: Setting a price for by products in order to make the main product’s price more competitive e.g. cream and butter from skimmed milk.

5) Product Bundle Pricing: Combining several products and offering the bundle at a price like deals from Mr. Burger. This helps promote sales of products consumers might not otherwise buy.

Price Adjustment Strategies

1) Discount and Allowance Pricing: Discount is a straight reduction in pricing during a stated period of time, discounts come in these forms;

- Cash discount – 2/10, net 30 meaning that although payment is due with in 30 days, the buyer can deduct 2 percent if the bill is played within 10 days.

- Quantity discount – buy two get one free- Functional discount – provided to channel members from

sellers usually called trade discount- Seasonal discount – price reduction to buyers who buy good

and merchandise out of season, like sale on winter clothes at mother care during summer.

- Allowances are promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturers products in some way.

Price Adjustment Strategies

2) Segmented Pricing: Selling a product or service at two or more prices where he difference in price is not based on cost.

- Customer segment pricing – PIA charges a lower fare from students

- Product form pricing – N series Mobile phones in Nokia are priced differently due to the difference in their features.

- Location pricing – front seats in a theater or in the stadium are more expensive than other seats.

- Time pricing – Tickets for Lahore at the time of Basant are as expensive as a return ticket from Dubai.

Segmented pricing is also called yield or revenue management – its means selling the right product to the right person at the right

time.

Price Adjustment Strategies

- For segmented pricing to be effective:

1. The market must be segment able

2. The segments should show different degrees of demand

3. The cost of segmenting and watching the market should not exceed extra revenue obtained

4. Segmented pricing must be legal

Price Adjustment Strategies

3) Psychological Pricing – Here sellers consider the psychology of prices and not simply economics. Customers perceives a product with a high price to have high quality

- Reference pricing – the prices that buyers carry in their mind and refer to when they look at a product, this reference may be formed by looking at current prices, remembering past prices and assessing the buying situation. E.g. a product sold at Agha’s might signal that its worth a higher price.

Price Adjustment Strategies

Good Pricing Cues:1. Sale Signs , the most straightforward retail pricing

cue, but overuse may create suspicion in the buyer’s mind

2. Prices ending in 9: if you compare Rs 300 to Rs 299.9, although the price difference is just .1 , the psychological difference is much greater

3. Signpost Pricing ( loss-leader pricing) – When sellers offer selected signpost items to buyers at or below cost hoping to make money on the shoppers other purchases.

4. Pricing Matching Guarantees – Here stores promise to meet or beat competitors price.

Price Adjustment Strategies

4) Promotional Pricing : Companies temporarily reduce their prices to create excitement and urgency, these may be

- Loss leader pricing- Cash rebates- Special Event pricing- But promotional pricing can be easily copied if

used too frequently , it can make the buyers deal prone and erode the value of a brand, it can get addictive for the company which wont know how to get out of this loop. It can also lead to industry price wars.

Price Adjustment Strategies

4) Geographical Pricing :

a) FOB origin Pricing – A geographical pricing strategy in which goods are placed Free on Board (FOB) a carrier; the customer pays the freight from the factory to the destination. Not too attractive for distant customers.

b) Uniform delivered Pricing – Here the company charges the same price plus freight to all customers regardless of location, freight charge is set at average freight cost henceforth customers in close proximity are at a disadvantage

Price Adjustment Strategies

4) Geographical Pricing :c) Zone Pricing – The company sets up two or more

zones. All customers within a zone pay the same total price; the more distant the zone, the higher the price.

d) Basing-point pricing – Here the seller designates some city as a basing point and charges all customers the freight cost from that city to the customer.

e) Freight Absorption pricing – Here the seller absorbs all or part of the freight charges in order to get desired business.

Price Adjustment Strategies

c) Basing-point pricing-

PSO oil tanker charges

Khi to Lhr Rs 4000

Khi to Landhi Rs 4000

Khi to Murree Rs 4000

Base point is Karachi and this is done in order to keep costs uniform and to eliminate price

competition.

Price Adjustment Strategies

5) International Pricing : This is base don the economic conditions , competitive situations law and regulations and the wholesaling and retailing system of a country.

Price Changes1. Initiating Price Cuts – Usually done to deal with

excess capacity, may lead to price wars. A company may also cut prices in a drive to dominate the market through lower costs.

2. Initiating Price Increases – Caused by cost inflation , to give it a sense of fairness price increase should be supported by communicating to the customer why the increase took place and slowly increasing prices by eliminating discounts or curtailing production of low margin products.

Price cuts may be viewed with suspicion if its on a prestige good, similarly price increase could

trigger something about quality to the buyers.

Responding to Price Changes

Has competitor cut price?

Will lower price negatively

affect our market share or polls?

Can/should effective action be taken?

Hold current price;continue

to monitor competitors price

Reduce price

Raise perceived quality

Improve quality and

increase price

Launch low-price “fighting brand”

yes

No

yes

No

No

yes

Public Policy and Pricing

- Price fixing- Predatory pricing – selling below costs to drive out

competitors- Price discrimination – offering same price to all

retailers - Retail price maintenance – sellers cannot require

dealers to charge a specific price for its product- Deceptive pricing – When a seller states prices or

price savings that mislead consumers or are not actually available to consumers.