SLIDE principles of marketing chapter 6

LEARNING OBJECTIVES  Answer the question “What is a price?” and discuss the importance of pricing in today’s fastchanging environment  Internal and external considerations affecting price decisions  Major pricing strategies  New product pricing strategies  Product mix pricing strategies  Price adjustment strategies  Price changes WHAT IS A PRICE?  Definition of price  In the narrowest sense, price = the amount of money charged for a product or a service  More broadly, price = the sum of all the values that customers give up to gain the benefits of having or using a product or service IMPORTANCE OF PRICING  Importance of pricing  The only element in the marketing mix that produces revenue; all other elements represent costs  One of the most flexible marketing mix elements  A key strategic tool for creating and capturing customer value  Have a direct impact on a firm’s financial performance  Play a key role in creating customer value and building customer relationships FACTORS AFFECTING PRICE DECISIONS INTERNAL FACTORS EXTERNAL FACTORS Overall marketing strategy Nature of the market Marketing objectives Marketing mix PRICE DECISIONS Demand Costs Competitors' strategies and prices Organizational considerations Other environment forces 2.1 EXTERNAL FACTORS  EXTERNAL FACTORS  Types of markets 2.1 EXTERNAL FACTORS  EXTERNAL FACTORS  Demand curve • The demand curve shows the number of units the market will buy in a given time period at different prices that might be charged • In the normal case, all else being equal, demand and price are inversely related PRICE • Each price the company might charge will lead to a different level of demand P2 P1 Q2 Q1 2.1 EXTERNAL FACTORS  Price elasticity of demand • Price elasticity of demand – a measure of the sensitivity of demand to changes in price • Formula: Price elasticity = of demand % Change in Quantity Demanded % Change in Price 2.1 EXTERNAL FACTORS  COMPETITORS’ STRATEGIES & PRICES  OTHERS • The economy • Resellers • Government • Social concerns PRICING STRATEGIES PRICE CEILING Consumer perceptions of value No demand above this price PRICE Competition and other external factors PRICE FLOOR No profits below this price 10 CUSTOMER VALUE– BASED PRICING  Competitors’ strategies and prices  Marketing strategy, objectives, and mix  Nature of the market and demand COMPETITION-BASED PRICING Product costs COST-BASED PRICING PRICE ADJUSTMENT STRATEGIES  Discount  A straight reduction in price on purchases during a stated period of time or of larger quantities  Forms of discounts: Cash discount Quantity discount A price reduction to buyers who pay their bills promptly A price reduction to buyers who buy large volumes 33 Functional/ trade discount A price reduction to trade-channel members who perform certain functions, such as selling, storing, and record keeping Seasonal discount A price reduction to buyers who buy merchandise or services out of season PRICE ADJUSTMENT STRATEGIES  Allowances  Promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturer’s products in some way  Types of allowances: • Trade-in allowance: Price reductions given for turning in an old item when buying a new one (automobile; other durable goods) • Promotional allowance: Payments or price reductions that reward dealers for participating in advertising and salessupport programs 34 PRICE ADJUSTMENT STRATEGIES  Segmented pricing  Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs  Conditions: • The market must be segmentable • Segments must show different degrees of demand • The costs of segmenting and reaching the market cannot exceed the extra revenue obtained from the price difference • The segmented pricing must also be legal  Segmented prices should reflect real differences in customers’ perceived value 35 PRICE ADJUSTMENT STRATEGIES  Segmented pricing  Forms: Customer-segment pricing Different customers pay different prices for the same product or service 36 Product-form pricing Different versions of the product are priced differently but not according to differences in their costs Location-based pricing Time-based pricing A company charges different prices for different locations, even though the cost of offering each location is the same A firm varies its price by the season, the month, the day, and even the hour PRICE ADJUSTMENT STRATEGIES  Psychological pricing  Pricing that considers the psychology of prices and not simply the economics; the price is used to say something about the product  Reference price • Prices that buyers carry in their minds and refer to when looking at a given product 37 PRICE ADJUSTMENT STRATEGIES  Promotional pricing  Temporarily pricing products below the list price, and sometimes even below cost, to increase short-run sales  Forms: Discount 38 Special-event pricing Cash rebate Low-interest financing Longer warranty Free maintenance PRICE ADJUSTMENT STRATEGIES  Geographical pricing  Setting prices for customers located in different parts of the country or world • Should the company risk losing the business of more-distant customers by charging them higher prices to cover the higher shipping costs? • Should the company charge all customers the same prices regardless of location?  Strategies: FOB-origin pricing 39 Uniform-delivered pricing Zone pricing Basing-point pricing Freightabsorption pricing PRICE ADJUSTMENT STRATEGIES  Geographical pricing  Strategies: • FOB-origin pricing: Pricing in which goods are placed free on board a carrier; the customer pays the freight from the factory to the destination • Uniform-delivered pricing: Pricing in which the company charges the same price plus freight to all customers, regardless of their location • Zone pricing: Pricing in which 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 • Basing-point pricing: Pricing in which the seller designates some city as a basing point and charges all customers the freight cost from that city to the customer • Freight-absorption pricing: Pricing in which the seller absorbs all or part of the freight charges in order to get the desired business 40 PRICE ADJUSTMENT STRATEGIES  Dynamic pricing  Adjusting prices continually to meet the characteristics and needs of individual customers and situations  Examples: • E-commerce • Auction • Customize offers and prices based on the specific characteristics and behaviors of individual customers 41 PRICE ADJUSTMENT STRATEGIES  International pricing  For companies that market their products internationally  Prices to charge in different countries: • Set a uniform worldwide price • Adjust their prices to reflect local market conditions and cost considerations  Price determinants: • • • • • • • 42 economic conditions competitive situations laws and regulations nature of the wholesaling and retailing system consumer perceptions and preferences marketing objectives in various world markets costs PRICE CHANGES PRICE CHANGES 43 Initiating price increases Initiating price cuts Responding to price changes Competitor reactions Buyer reactions Initiating price changes Responding to a price change by a competitor INITIATING PRICE CHANGES  Initiating price cuts  Situations: • Excess capacity • Falling demand in the face of strong price competition or a weakened economy  Aims: • Boost sales and market share • Dominate the market through lower costs 44  Initiating price increases  Situations: • Cost inflation => declining profit margins • Over-demand  Aims: • Pass cost increases along to customers • Improve profits INITIATING PRICE CHANGES  Buyer reactions  Customers not always interpret price changes in a straightforward way  A brand’s price and image are often closely linked  Competitor reactions  Competitors are most likely to react when: • the number of firms involved is small • when the product is uniform • when the buyers are well informed about products and prices  Competitors can interpret a company price cut in many ways  The company must assess each competitor’s likely reaction 45 RESPONDING TO PRICE CHANGES  Responding to price changes  How a firm should respond to a price change by a competitor?  Issues to consider: • Why did the competitor change the price? • Is the price change temporary or permanent? • What will happen to the company’s market share and profits if it does not respond? • Are other competitors going to respond? • Company’s situation and strategy • Possible customer reactions to price changes 46 RESPONDING TO PRICE CHANGES Has competitor cut price? No Hold current price; continue to monitor competitor’s price No Reduce price Yes Will lower price negatively affect our market share and profits? Raise perceived value Yes Improve quality and increase price No Can/should effective action be taken? 47 Yes Launch low-price “fighter brand” ... of having or using a product or service IMPORTANCE OF PRICING  Importance of pricing  The only element in the marketing mix that produces revenue; all other elements represent costs  One of. .. will lead to a different level of demand P2 P1 Q2 Q1 2.1 EXTERNAL FACTORS  Price elasticity of demand • Price elasticity of demand – a measure of the sensitivity of demand to changes in price... AFFECTING PRICE DECISIONS INTERNAL FACTORS EXTERNAL FACTORS Overall marketing strategy Nature of the market Marketing objectives Marketing mix PRICE DECISIONS Demand Costs Competitors' strategies