Chapter 10 Notes

Understanding Pricing Price relates to the amount of money charged for a product or a service or the sum of the value that buyers exchange for the benefits of having or using the product or service Price is the element that... Creates revenue in the marketing mix Is the most flexible in the marketing mix Can create the most problems for the marketing personnel if not carried out correctly Factors to Consider when Setting Prices Understanding the value the customer would gain Cost of the product and its operations Relationship between price and demand in the market place The marketing strategy pursued by the organization Type of market structure it operates in Competitor activity in the market Marketing environmental forces that affect the company Value-Based Pricing Price setting based on the buyer's perceptions of value rather than on the seller's cost Variations of value-based pricing options: Good Value Pricing Offering just the right combination of quality and good service at a fair price E.g. McDonald's "value menu" Everyday Low Pricing (EDLP) A pricing strategy that charges comparatively low prices all the time, with few or no "sales" E.g. Walmart Value-Added Pricing A strategy of developing features that add value to the market offering, rather than cutting the price E.g. Stag umbrellas in India adding value in spite competitor cutting their prices Value-based pricing is setting the price based on the buyers perceptions of value rather than on the seller's cost

Value perception in the market place set price ceiling (highest possible price) Cost-Based Approach to Pricing Cost based pricing is a pricing strategy that takes the product costs into consideration in setting the prices The cost based approach would set the price floor (lowest possible price) the company can charge its product However these approaches fail to consider customer value and relationships between price and demand for a product Cost-based pricing has many methods in setting the price of a product Cost-Plus Pricing Made up of fixed and variable costs Under this technique the total cost per unit is marked up by a percentage of profit expected Break-Even Pricing Breakeven in the point of sales where the organization does not achieve any profit or loss At this point the company recovers its variable and its fixed costs Using this pricing method, the marketing managers calculate the price at which the company will break even on the product Break-even volume = Fixed costs ÷ (price - variable costs) Relationship between Price and Demand Each price the company charges will lead to a different level of demand This is due to the inverse relationship between price and quantity demanded The demand curve will highlight this relationship graphically The degree to which the level of responsiveness between price of a product and its quantity demanded is explained by the concept of price elasticity How Marketing Strategy Affects Pricing Decisions All the elements of the marketing mix must work together Before setting the price for a product, the company must consider the target market, product positioning, and other marketing-related decisions taken Other factors that influence pricing decisions may include survival, profit maximization, market share, customer retention, etc. Factors to Consider When Setting Prices Customer perceived value Costs (fixed and variable) Relationship between price and demand

Marketing strategy Type of market Pricing of competitive products The marketing environment Market Structures and Pricing Pure Competition The company has to take the price determined by the market Monopolistic Competition Through differentiation, the company can set different prices for different segments Oligopolistic Competition Consists of few sellers who are highly sensitive to each other's pricing and marketing strategies Pure Monopoly Depending on the nature of ownership and regulations, they may pursue different pricing strategies How Competition Affects Pricing Decision A company's pricing strategy will be affected by the nature of competition it faces The competitors offer, the positioning in terms of customer value will lead to the alteration of the company's pricing A company may need to identify the impact made by the strongest competitors in adjusting its prices How the Marketing Environment Affects Pricing Economic conditions such as inflation and economic recessions will have a direct impact on pricing decisions Government regulations influence pricing The social climate and various trends will have a direct impact in pricing decisions Strategic Pricing Decisions Market Skimming Pricing Setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the price Works for new products which are innovative This is explained based on the behaviour pattern of innovators and early adaptors E.g. Apple's iPhone Market Penetration Pricing Market penetration pricing is a strategy that sets a low price fora new product in order to attract a segment of buyers, then raises the price

The intension with the lower initial price is that the product can penetrate the market quickly and be adopted leading to a higher market share This strategy would work if the market is price sensitive Prestige Pricing Used to set prices for luxury products Unlike in the market skimming strategy, the high prices set for the product in the beginning would remain as it is E.g. Rolex, Jaguar Product Line Pricing Relates to setting the price steps between products in a product line based on cost differences and customer perceptions of the value Presents different versions... Optional-Product Pricing The pricing of optional or accessory products along with a main product E.g. Pricing a computer system with an array of processors, hard drives, keyboard options, etc. Captive-Product Pricing Setting a price for a product that must be purchased along with a main product E.g. Printers and cartridges, consoles and games Byproduct Pricing Products that are created through the production process Using byproduct pricing, the company seeks a market for these byproducts to help offset the costs of disposing of them Bundle Pricing Setting one price for a set of products The price is only valid if all the products in the set are purchased E.g. Rogers blundering prices for internet, cable, and phone services Price Adjustment Strategies Discount and Allowance Pricing Adjusting the original price to reward customers for various responses Discount relates to a price off from the list price Different forms include: Cash discount - price reduction from the bill Functional discount - price reduction given to the trade Allowances are another form of a reduction from list price

Different forms include: Trade in allowances - price reduction for turning an old item in when buying a new one Promotional allowances - rewards to encourage dealer participation in advertising programs Segmented Pricing Setting different prices for different segments Approaches in segmented pricing include: Customer segment pricing - different customers pay different prices for the same product E.g. Tariff rates for cell phone, peak and off-peak pricing Locational segmentation pricing - different prices for different locations E.g. ticket prices for theatres For this pricing technique to work, there should be clear differences between segments Psychological Pricing Setting the price based on the psychological effect on the customer Considers the psychological effect of price on the consumer and not simply the economics Consumers usually perceive higher-priced products as having higher quality Consumers use price less when they can judge quality of a product Promotional Pricing Temporary price reductions below list prices to create buying excitement and ugency Uses a loss leader which is a retail pricing strategy in which a popular item is priced below cost to attract customers hoping that they will buy many other items If used too frequently, it will train customers to wait until products go on sale before buying them Geographic Pricing Setting prices depending on the customer's location FOB pricing - does not include shipping charges and the prices are quoted up to a particular location Uniform delivered pricing - charging the same price for the product regardless of the location Zone pricing - sets different prices for different zones Basing point pricing - prices include delivery up to a designated location and charges the shipping cost from that location to eht customer's location

customer's location Freight absorption pricing - vendor absorbs all or part of the actual freight charges to get the desired business Dynamic Pricing Adjusting prices continuously to meet the characteristics and needs of individual customers and situations Uses technology and internet to execute Allows customers to compare prices with multiple vendors May be controversial where a customer gets a discount because he or she happened to call at the right time International Pricing Pricing set based on the international scale of operations Prices charged in different countries may differ due to economic and competitive conditions, laws and regulations, differences in retailing and customer environments International prices will also have to consider tariffs between countries In setting prices competitively, companies could be charged with dumping - charging less than the goods costs or less than it charges in its home market Initiating Price Changes Price Cuts Excess capacity Falling market share Dominate market through lower costs Price Increases Cost inflation Over-demand Cannot supply all customers' needs Responding to Price Changes by Competition Specific factors to consider: Reasons for the price change Is the price change temporary? Permanent? Repercussions of not responding What would be the reactions from other competitors? Broader issues: Stage in the life cycle Possible customer reactions Other marketing mix issues Public Policy and Pricing In Canada, the Competition Act defines what is legal in pricing tactics

tactics Laws are different in Canada and the US Price fixing, price discrimination, and deceptive pricing are illegal Predatory pricing (to drive competitors out of business) is illegal Companies must offer the same price to retailers regardless of their size Companies cannot dictate the price a retailer sells their product for

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