ABM 224 Marketing Mix PRICING
After studying this chapter you should be able to: Realize the importance of price and understand its role in the marketing mix. Understand the characteristics of the different pricing objectives that companies can adopt. Identify many of the influences on marketers pricing decisions.
MARKETING MIX. PRODUCT PRICE AND PRICING Price value in exchanging market of products/services. Price products value, which in market could be defined as pushing process for presenting products to consumers. (Ph. Kotler, H. Amstrong, J. Sonders, V. Wong).
The Importance of Price and Pricing Decisions Price Elasticity of Demand: The responsiveness of demand to price changes. Price promotions and reductions are so common that the sales price is the norm!
The price of a product will depend on: The cost to make it The amount of profit desired The price competitors charge The objectives of the business The price customers are willing to pay Is there a high demand? Is demand sensitive to changes in price? Price
Price leaders and takers Price leader businesses that dominate the market can often dictate the price charged for a product. Other businesses follow this lead. Price taker businesses have to charge the market price. This is often the case where there are many small firms competing against each other.
The Five Cs of Pricing, factors influencing price decesions
Customers Customer expectations and willingness to pay are important influences on pricing decisions. Target costing: 1. The profit margin the company desires. 2. The features sought by customers. 3. The prices that will be attractive to potential buyers.
Channels of Distribution Prices must be set so that other members of the channel of distribution earn adequate returns on sales of the firm s products.
Competition Prices charged by competing firms and the reaction of competitors to price changes influence pricing decisions.
Compatibility The price of a product must be compatible with the overall objectives of the firm.
PRICING STRATEGIES
Discussion Outline 1. New-Product Pricing Strategies 2. Product Mix Pricing Strategies 3. Price Adjustment Strategies 4. Price Changes 11-3
New-Product Pricing Strategies Pricing Strategies Market skimming pricing Market penetration pricing 11-4
New-Product Pricing Strategies Pricing Strategies Market skimming pricing is a strategy with high initial prices to skim revenue layers from the market Commonly used as a market entry price for distinctive goods or services with little or no initial competition. Product quality and image must support the price Buyers must want the product at the price Costs of producing the product in small volume should not cancel the advantage of higher prices Competitors should not be able to enter the market easily 11-5
New-Product Pricing Strategies Pricing Strategies Market penetration pricing sets a low initial price in order to penetrate the market quickly and deeply to attract a large number of buyers quickly to gain market share Everyday Low Pricing strategy devoted to continuous low prices as opposed to relying on short-term, price-cutting tactics Price sensitive market Inverse relationship of production and distribution cost to sales growth Low prices must keep competition out of the market, but can also easily be outcompeted or hurt product quality image. 11-6
Competitive New-Product Pricing Strategies Pricing strategy designed to deemphasize price as a competitive variable by pricing a good or service at the general level of comparable offerings. Forces firms to compete based on non price variable in the marketing mix.
Skimming Penetration Competitive Loss leader Pricing strategies and tactics Launching with a high price when there is little competition, then reducing the price later. Often used with technology. A low price is charged initially to penetrate the market and build brand loyalty. The price is then increased e.g. introductory offers on magazines. A similar price is charged to that of competitors products. Products may be sold at a price lower than the cost to produce it. Often used by supermarkets to encourage people into the store where it is hoped they will buy other products.
Pricing strategies and tactics Psychological Differential Cost plus pricing Strategic pricing A price is set which customers perceive as lower than it is e.g. K39.99 instead of K40. Prices make some products more appealing than the other- Different prices are charged for the same product e.g. bus fares for children are cheaper than adult prices. An additional mark-up is added to the cost of producing a good or service. Price is set to position an exclusive product or brand to make it more desirable for consumers, generate demand or demonstrate value.
Product Mix Pricing Strategies Pricing Strategies Product line pricing Optional product pricing Captive product pricing By-product pricing Product bundle pricing 11-7
Product-Mix Pricing Strategies The firm looks for a set of prices that maximizes the profits on the total product mix. Five product mix pricing situations Product line pricing the products in the product line Optional product pricing optional or accessory products Captive product pricing - complementary products By-product pricing by-products Product bundle pricing several products 11-21
Product-Mix Pricing Strategies Product line pricing takes into account the cost difference between products in the line, customer evaluation of their features, and competitors prices. the price differences represent the perceived quality differences Normal Hair K3900 Anti-dandruff K4900 Hair Fall Defense K4900 Oily Hair K3990 11-22
Product-Mix Pricing Strategies Optional product pricing takes into account optional or accessory products along with the main product. Decide which items to include in the base price and which to offer as options New car with ordinary rims K5,900,000 New car with sports rims K6,000,000 11-23
Product-Mix Pricing Strategies Captive product pricing involves products that must be used along with the main product. Price the main, or driver product low and seek high margins on the supplies For services: two-part pricing is where the price is broken into fixed fee and variable usage fee. Decide how much to charge for the basic service and how much for the variable usage The fixed amount should be low enough to induce usage of the service; profit can be made on the variable fees Example razor, game console, printer, theme parks. 11-24
Product-Mix Pricing Strategies By-product pricing refers to products with little or no value produced as a result of the main product. Producers will seek little or no profit Producers should accept any price that covers more than the cost to cover storage and delivery. Example Meat, by product bone meal for dogs 11-25
Product-Mix Pricing Strategies Product bundle pricing combines several products and offer the bundle at a reduced price. Price bundling can promote the sales of products 1 bottle: K2770 Bundled 2 bottles: K4090 11-26
Price Adjustment Strategies Companies adjust basic prices to account for various customer differences and changing situations. Discount and allowance pricing - reduces prices to reward customer for certain responses i.e paying early Segmented pricing - sells a product at two or more prices even though the difference is not based on cost Psychological pricing - sellers consider the psychology of prices -, reference pricing Promotional pricing- sale, loss leader Geographical pricing - International pricing - prices are set in a specific country based on country-specific factors. 11-27
Price Changes Initiating Pricing Changes Price cuts is a reduction in selling price. Excess capacity Increase market share Price increases is an increase in selling price Cost inflation Increased demand and lack of supply Buyers Interpretation to Price Changes Price cuts New models will be available Models are not selling well Quality issues Price increases Product is hot Company greed 11-28
Price Changes Responding to Price Changes Questions Why did the competitor change the price? Is the price cut permanent or temporary? What is the effect on market share and profits? Will competitors respond? Solutions Reduce price to match competition Maintain price but raise the perceived value through communications Improve quality and increase price Launch a lower-price fighting brand 11-29
Public Policy and Pricing Pricing Within Channel Levels Price fixing: Sellers must set prices without talking to competitors. Predatory pricing: Selling below cost with the intention of punishing a competitor or gaining higher long-term profits by putting competitors out of business. 11-30
Public Policy and Pricing Pricing across Channel Levels Retail (resale) price maintenance is when a manufacturer requires a dealer to charge a specific retail price for its products. Deceptive pricing occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers. Scanner fraud: Failure of the seller to enter current or sale prices into the computer system. Price confusion results when firms employ pricing methods that make it difficult for consumers to understand what price they are really paying. 11-31
End of Lecture Pricing