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Notes on Principles of Marketing Marketing 14th University of Dhaka
Factors Affecting Pricing Decision
though the marketer may have different objectives for different products. For instance. Below we provide a detailed discussion of both internal and external factors. While we will discuss this in more detail when we cover marketing strategy in a later tutorial. The final price for a product may be influenced by many factors which can be categorized into two main groups: • • Internal Factors .When setting price. marketers must take into consideration several factors which are the result of company decisions and actions. including price. product pricing may depend heavily on the productivity of a manufacturing facility (e. While pricing decisions are influenced by many types of objectives set up for the marketing functional area. External Factors . Internal Factors: Marketing Objectives Marketing decisions are guided by the overall objectives of the company.There are a number of influencing factors which are not controlled by the company but will impact pricing decisions.. However. human resources. while the organization may have control over these factors making a quick change is not always realistic. The four main marketing objectives affecting price include: • • Return on Investment (ROI) – A firm may set as a marketing objective the requirement that all products attain a certain percentage return on the organization’s spending on marketing the product. if necessary.g. This is most likely to occur with new products where the organizational objectives allow a new product to simply meet its .For the remainder of this tutorial we look at factors that affect how marketers set price. how much can be produced within a certain period of time). In most situations only one of these objectives will be followed. This level of return along with an estimate of sales will help determine appropriate pricing levels needed to meet the ROI objective. objectives for production.g. there are four key objectives in which price plays a central role. To a large extent these factors are controllable by the company and. can be altered. Corporate objectives can be wide-ranging and include different objectives for different functional areas (e. The marketer knows that increasing productivity can reduce the cost of producing each product and thus allow the marketer to potentially lower the product’s price. work to help achieve company objectives. etc). for now it is important to understand that all marketing decisions. Understanding these factors requires the marketer conduct research to monitor what is happening in each market the company serves since the effect of these factors can vary by market.. But increasing productivity may require major changes at the manufacturing facility that will take time (not to mention be costly) and will not translate into lower price products for a considerable period of time. Cash Flow – Firms may seek to set prices at a level that will insure that sales revenue will at least cover product production and marketing costs.
• • expenses while efforts are made to establish the product in the market. service.g. demand for product is declining) and will continue to sell the same product at a price premium for as long as some in the market is willing to buy. Such nonprice competition can help the company avoid potential price wars that often break out between competitive firms that follow a market share objective and use price as a key selling feature. marketers selling high quality products would be expected to price their products in a range that will add to the perception of the product being at a high-level.. Market Share – The pricing decision may be important when the firm has an objective of gaining a hold in a new market or retaining a certain percent of an existing market. For new products under this objective the price is set artificially low in order to capture a sizeable portion of the market and will be increased as the product becomes more accepted by the target market (we will discuss this marketing strategy in further detail in our next tutorial). Price. It should be noted that not all companies view price as a key selling feature. For instance. will deemphasize price and concentrate on a strategy that highlights non-price benefits (e. for example those seeking to be viewed as market leaders in product quality. Maximize Profits – Older products that appeal to a market that is no longer growing may have a company objective requiring the price be set at a level that optimizes profits. quality. This is often the case when the marketer has little incentive to introduce improvements to the product (e. the starting point for setting a product’s price is to first determine how much it will cost to get the product to their . firms may use price decisions to insure they retain market share in instances where there is a high level of market competition and competitors who are willing to compete on price. the final price will be impacted by how other marketing decisions are made.. etc. Some firms. Internal Factors: Costs For many for-profit companies. This objective allows the marketer to worry less about product profitability and instead directs energies to building a market for the product.). durability. is one of the key marketing mix decisions and since all marketing mix decisions must work together. of course.g. Internal Factors: Marketing Strategy Marketing strategy concerns the decisions marketers make to help the company satisfy its target market and attain its business and marketing objectives. For existing products.
customers. When analyzing cost. However. carrying out an advertising campaign and paying a service to host the company’s website.g. These costs are fixed because there is a level of commitment to spending that is largely not affected by production or sales levels. these represent costs the marketing organization incurs that are not affected by level of production or sales. parts. Variable Costs – These costs are directly associated with the production and sales of products and. electricity to run an assembly line). Most variable costs involve costs of items that are either components of the product (e. mortgage. Variable costs. For example. Typically variable costs are evaluated on a per-unit basis since the cost is directly associated with individual items.. whatever price customers pay must exceed the cost of producing a good or delivering a service otherwise the company will lose money. tend to decline as more units are produced.. office expense).. While variable costs are often determined on a per-unit basis. These costs can be divided into two main categories: • • Fixed Costs .g. a company will assign fixed cost to individual products if the company can clearly associate the cost with the product. This is due to the producing company’s ability to purchase product components for lower prices since component suppliers often provide discounted pricing for large quantity purchases. there are also marketing variable costs such as coupons.. distribution and company administration (e. Determining individual unit cost can be a complicated process. such as assigning the cost of operating production machines based on how much time it takes to produce each item. fixed costs may also exist in the form of expenditure for fielding a sales force. Alternatively. packaging) or are directly associated with creating the product (e.e. marketing. the marketer will consider all costs needed to get the product to market including those associated with production. applying fixed costs to individual products is less straightforward.. whether they produce one pen or one million they will still need to pay the monthly mortgage for the building. especially for tangible products.g. which are likely to cost the company more as sales increase (i. From the marketing side. for a manufacturer of writing instruments that has just built a new production facility. if it is too difficult to associate to specific products the company may simply divide the total fixed cost by production of each item and assign it on percentage basis. consequently.Also referred to as overhead costs. For example.g. Obviously. production workers’ cost) over the five products? In general. may change as the level of production or sales changes. if a company manufactures five different products in one manufacturing plant how would it distribute the plant’s fixed costs (e. customers using the coupon). External Factors: Elasticity of Demand .
the demand for the product is likely to decline (rise) by greater than 10%. if the price of a product increases (decreases) by 10%. the demand for the product is likely to decline (rise) by 10%. Unitary Demand – This demand occurs when a percentage change in price results in an equal and opposite percentage change in demand.e. Elasticity deals with three types of demand scenarios: • • • Elastic Demand – Products are considered to exist in a market that exhibits elastic demand when a certain percentage change in price results in a larger and opposite percentage change in demand. They must continually use market research and their own judgment to determine whether marketing decisions need to be adjusted. For inelastic markets – increasing price raises total revenue while decreasing price lowers total revenue. Understanding how price changes impact the market requires the marketer have a firm understanding of the concept economists call elasticity of demand. The logic is to see how price by itself will affect overall demand. competitors may react to the marketer’s price change by changing the price on their product. if the price of a product increases (decreases) by 10%. the demand for the product is likely to decline (rise) by less than 10%. Elasticity is evaluated under the assumption that no other changes are being made (i. Inelastic Demand – Products are considered to exist in an inelastic market when a certain percentage change in price results in a smaller and opposite percentage change in demand. “all things being equal”) and only price is adjusted. For example. For marketers the important issue with elasticity of demand is to understand how it impacts company revenue. elasticity analysis does serve as a useful tool for estimating market reaction. the chance of nothing else changing in the market but the price of one product is often unrealistic. if the price of a product increases (decreases) by 10%. Despite this. External Factors: Customer Expectations . Obviously. the marketer must understand what effect a change in price is likely to have on target market demand for a product. For example. For example.. For unitary markets – there is no change in revenue when price is changed. For example. In general the following scenarios apply to making price changes for a given type of market demand: • • • For elastic markets – increasing price lowers total revenue while decreasing price increases total revenue.Marketers should never rest on their marketing decisions. which relates to how purchase quantity changes as prices change. When it comes to adjusting price.
will include an evaluation of competitors’ offerings. Marketers must not only research competitive prices but must also pay close attention to how these companies will respond to the marketer’s pricing decisions. While on the surface online golf instruction may not be a direct competitor to a golf . When deciding on a price marketers need to conduct customer research to determine what “price points” are acceptable. External Factors: Competitive and Other Products Marketers will undoubtedly look to market competitors for indications of how price should be set.Products that offer new ways for solving customer needs may look to pricing of products that customers are currently using even though these other products may not appear to be direct competitors. the pricing of competitive products will be carefully considered. such as gasoline or airline travel. This percentage or margin between what they pay the marketer to acquire the product and the price they charge their customers must be sufficient for the distributor to cover their costs and also earn a desired profit. products that dominate markets and are viewed as market leaders may not be heavily influenced by competitor pricing since they are in a commanding position to set prices as they see fit. Distribution partners expect to receive financial compensation for their efforts. Analysis of competition will include pricing by direct competitors. For example. a marketer of a new online golf instruction service that allows customers to access golf instruction via their computer may look at prices charged by local golf professionals for in-person instruction to gauge where to set their price. particularly when Internet search tools are used. As we discussed. related products and primary products. Pricing beyond these price points could discourage customers from purchasing. On the other hand in markets where a clear leader does not exist. For instance. when it comes to making a purchase decision customers assess the overall “value” of a product much more than they assess the price. • • Direct Competitor Pricing – Almost all marketing decisions. The impact of this information on the actual setting of price will depend on the competitive nature of the market. Related Product Pricing . Firms within the marketer’s channels of distribution also must be considered when determining price. which usually means they will receive a percentage of the final selling price. For many marketers of consumer products researching competitive pricing is relatively easy.Possibly the most obvious external factors that influence price setting are the expectations of customers and channel partners. including pricing. in highly competitive industries. competitors may respond quickly to competitors’ price adjustments thus reducing the effect of such changes. Price analysis can be somewhat more complicated for products sold to the business market since final price may be affected by a number of factors including if competitors allow customers to negotiate their final price. For instance.
Consequently marketers must have a clear understanding of regulations in each market they serve. Price regulations can come from any level of government and vary widely in their requirements. Additional areas of potential regulation include: deceptive pricing. These regulations are primarily government enacted meaning that there may be legal ramifications if the rules are not followed. companies that sell accessory products for the Apple iPod may do so at a cost that is only 10% of the purchase price of the iPod. in some industries. However. For instance. For example. price discrimination. when selling beyond their home market.As we discussed in the Product Decisions tutorial. For example. the accessory at its present price would now be 20% of the of iPod price. Setting Price: Part 1 In the Pricing Decisions tutorial we provided the foundation marketers use to make pricing decisions. if Apple were to dramatically drop the price.• instructor. government regulation may set price ceilings (how high price may be set) while in other industries there may be price floors (how low price may be set). We now turn our attention to the process by which marketers determine price with a two-part look at the process marketers follow when setting product prices. Bluetooth headsets are considered complementary to the primary product cellphones. marketers may sell products viewed as complementary to a primary product. for instance by 50%. To maintain its perceived value the accessory marketer may need to respond to the iPod price drop by also lowering the price of the accessory. The central point of theses tutorials is a five-step process for setting price. This may be perceived by the market as a doubling of the accessory’s price. Finally. External Factors: Government Regulation Marketers must be aware of regulations that impact how price is set in the markets in which their products are sold. marketers for the online service can use the cost of inperson instruction as a reference point for setting price. We want to emphasize that while the process serves as a useful guide for . This is particularly a concern when selling to international markets where failure to consider regulations can lead to severe penalties. marketers must recognize that local regulations may make pricing decisions different for each market. predatory pricing and price fixing. The pricing of complementary products may be affected by pricing changes made to the primary product since customers may compare the price for complementary products based on the primary product price. Primary Product Pricing . There are also additional legal concerns when it comes to price which we will discuss in a future tutorial.
g. may apply a set percentage for each product category (e. the advantage of ease of use is sometimes offset by the disadvantage that products may not always be optimally priced resulting in products that are priced too high or too low given the demand for the product. Consequently. the process laid out here is intended to open the marketer’s eyes to the options to consider when setting price and is in no way presented as a guide for setting the "perfect" price. uses a percentage increase on top of product cost to arrive at an initial price. Setting Price Using Market Pricing . The homeowner’s selection of ceramic tile to be used in the bathroom is likely to have little effect on the labor needed to install it whether it is a low-end.. often utilized by resellers who acquire products from suppliers. cost-plus pricing also adds to the cost by using a fixed monetary amount rather than percentage. Assuming most material in the bathroom project are standard sizes and configuration. womens' clothing. a contractor hired to renovate a homeowner’s bathroom will estimate the cost of doing the job by adding their total labor cost to the cost of the materials used in the renovation.) making the pricing consistent for all like-products. automotive. the predetermined percentage may be a number that is identified with the marketing objectives (e.g. not all marketers follow this step-by-step approach. retailers) the simplicity inherent in markup pricing makes it a more attractive pricing option than more time-consuming methods. Alternatively. market research is critical to determining the optimal selling price. For resellers that purchase thousands of products (e.g. required 20% ROI). A major general retailer. Cost Pricing: Cost-Plus Method In the same way markup pricing arrives at price by adding a certain percentage to the product’s cost. For instance. such as Walmart. We will demonstrate each using an item that costs a reseller (US) $50 to purchase from a supplier and sells to customers for (US) $65. garden supplies. low priced tile or a high-end.making price decisions. Additionally it is important to understand that finding the right price is often a trial-and-error exercise where continual testing is needed. Resellers differ in how they use markup pricing with some using the Markupon-Cost method and others using the Markup-on-Selling-Price method. Cost Pricing: Markup Method This pricing method. Like all other marketing decisions.. premium priced tile.. any change in the total price for the renovation is a result of changes in material costs while labor costs are constant. However. etc. In the next two sections we cover each option.
So if this is the most logical approach why don’t all companies follow it? The main reason is that using the market pricing approach requires a strong market research effort to measure customer reaction.g. Of course this price should also help the organization meet its marketing objectives. which are presented in the form of different models (e. options include: • • • Backward Pricing Psychological Pricing Price Lining Market Pricing: Price Lining Method As we have discussed many times throughout the Principles of Marketing Tutorials. a marketer may sell a base model. different quality of basketball sneakers) or service options (e. customers may perceive they are different based on price alone.g. customers are not always knowledgeable about the product to know what an acceptable price level should be. The key is whether the prices for all products in the group are perceived as representing distinct price points (i. such as differences that are inside the product and not easily viewed (e. and the one that seems most logical given marketing’s focus on satisfying customers..Under the market pricing method cost is not the main factor driving price decisions. Consequently. marketers must appeal to the needs of a wide variety of customers. then price lining will help the customer recognize that differences do exist as long as the prices are noticeably different.. an upgraded model and a deluxe model each at a different price. especially new high-tech products. Additionally for some products.. rather initial price is based on analysis of market research in which customer expectations are measured. some marketers may forego market pricing in favor of other approaches. different hotel room options). Price lining or product line pricing is a method that primarily uses price to create the separation between the different models. If the differences in features for each model is not readily apparent to a customer. The main goal is to learn what customers in an organization’s target market are likely to perceive as an acceptable price.g.e. With this approach. For many marketers it is not feasible to spend the time and money it takes to do this right. difference between laptop computers). even if customers possess little knowledge about a set of products. For instance. . Market pricing is one of the most common methods for setting price. The difference in the "needs-set" between customers often leads marketers to realization that the overall market is really made up of a collection smaller market segments.. enough separation between each). These segments may seek similar products but with different sets of product features. For those marketers who use market pricing.
since it allows the company to not only satisfy the needs of different segments but also presents an option for a customer to "buy up" to a higher priced and more profitable model. For instance. an upgraded model may cost 10% more to produce than a base model but using the price lining method the upgraded product price may be 20% higher and thus more profitable than the base model. In many cases the cost to the marketer for adding different features to create different models or service options does not alone justify a big price difference. . The increase in profitability offered by price lining is one reason marketers introduce multiple models.Price lining can also be effective as a method for increasing profitability.
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