+

The Marketing Mix

Price

Pricing
• What is meant by a pricing strategy?.
• Identify the key determinants for pricing
policy decision making.
• Identify the different methods available for
pricing products and services.
• Explore how pricing strategy fits in with
other elements of the marketing mix.
 Introduction
• Marketing is defined as:
– “The management process responsible
for identifying, anticipating and
satisfying customer requirements
profitably.”
– The key words in the definition in
relation to the Pricing Policy are:
• Customer Requirements.
• Profitability.
 Introduction

• The prices a company sets for its product

and services must strike a balance
between
– gaining acceptance with the target
customers and making a profit for the
organisation.
 Pricing Strategy

• The first thing which we must define, is

what is meant by price. Price is defined as:

– “The amount in money for which something is

offered for sale.”
 Pricing Strategy
• A Pricing Strategy is defined as:
• A plan which determines the best (at the
time of making) pricing decision.
– “The planning of prices, including the setting
of discounts, in considering items such as the
price of competitive products, manufacturing
and distribution costs, the firms growth and
profitability, customer wants, and the elasticity
of demand.”
 Pricing Strategy
• When setting prices we must consider:
– Whether to discount or not.
– The price that the competition charges.
– The cost of providing the product or service.
– The company’s market position e.g. is it a
market leader.
– The type and nature of demand e.g. if an
increase or a decrease in price will effect
amounts purchased.
– The market segments we are seeking to attract.
 Pricing Strategy
• It must be remembered, that price is a key element
in the marketing mix because -
– for a profit motivated company, it relates directly to the
total revenue, and ultimately the profit of the business.

Profits = Total Revenues – Total Costs

OR

Profits = (Prices x Quantities sold) – Total Costs

 The Key Determinants for
Pricing Strategy
• The key determinants of pricing decisions are:
– Organisational and Marketing objectives
– Pricing objectives
– Costs
– Other marketing mix variables
– Legal and regulatory issues
– Competition
– Buyers perceptions
– Consideration of intermediaries (retailers,
wholesalers)
 Firm’s overall Marketing Costs
objectives • product costs
• distribution costs
Marketing & Selling • promotional obj / costs
objectives Factors
influencing Total costs
price
Competitors’ pricing selection Legal / regulatory
behaviour and type requirements

Market demand /
perception
 Pricing Strategies

• Quantity or trade discounts

• Cash discounts
• Freight costs
• Flexible pricing
• Price lining
• Leader pricing
 Quantity or Trade Discount

• Quantity discounts:
– Deductions from a seller’s list price that are
offered to encourage customers to buy in bulk
– eg. Buy a particular resort package – children fly
free
• Trade discounts:
– Reductions from the list price offered to buyers
in payment for marketing functions that they will
perform
 Cash Discounts

• A deduction granted to buyers for paying by

cash or within a specified time.
– They are usually calculated on a net amount due
after first deducting trade and quantity discounts
from the base price.
 Flexible Price Strategy

• With a flexible – price strategy, similar

customers may each pay a different price
when buying similar quantities of a product.
– Trade-in
 Price Lining

• Involves selecting a limited number of

prices at which a business will sell related
products.
– A shoe shop which will sell several styles of
shoes at $69.95 and another group at $89.95.
 Leader Pricing

• Temporary cutting of prices on a few items

to attract customers
– Gotta Go Flights
 Activity
• You own a fast food restaurant chain and
are considering selling your product at
below cost price for a short period of time.
Why would you do this?
 Feedback

• This is known as a tactical price reduction

and may be introduced for a short period of
time, even if it does not cover all costs.
– To temporarily match the competitor's prices
– To generate substantial cash flow.
– To increase market share.
 Buyers Perceptions

• The marketer must consider the importance

of price to the customer in the target market
segments when setting prices.
• Try the following activity to illustrate this:
 Activity
• You have been given the job of pricing two new
products as follows:
• Product A – Budget hotel room  Target – Families
( lower middle to low income)
• Product B – Luxury hotel room Target – Business
People ( High to middle income )
• How important will the price be to the target customers?

• PRODUCT A
• PRODUCT B
 Feedback

• Price will be very important in both markets

as follows:
– PRODUCT A
• Price must be reasonable or cheap to reflect
the nature of the product on offer.
• Price will often be the first consideration of
the target customers – value for money is key.
 Feedback

• Price will be very important in both markets

– PRODUCT B
• Prices here will be much higher but price is just
as important to the business traveller
• It must be high enough to give a “quality”
impression but competitive in relation to other
luxury hotels.
 Feedback

• Prices of products and services are key in

both budget and luxury markets.
• It is possible to overprice and underprice in
both examples, in the eyes of the
customer.
• It is also important that the price reflects the
other elements of the marketing mix.
 Competition

• Companies who are selling products and

services in competitive markets try to win
customers over from rival companies.
• This is achieved in one of two ways:
– PRICE COMPETITION
– NON PRICE COMPETITION
 PRICE COMPETITION

• This involves offering the product or

service at a lower price than that of its
competitors products or services.
 NON PRICE COMPETITION

• This involves the company trying to

increase market share of its product or
service by
– leaving the price of its product or service
unchanged but by persuading the target
customers of the superiority or
advantages associated with it.
• Whether a firm uses price competition or
non price competition, depends on the state
of the market.
– In a very competitive market place, the firm is
more likely to have to resort to intense price
competition to sell their products and services.
– In an non-competitive market there is little to be
gained from price competition and firms tend to
concentrate much more on non price competition
(example)
 Competition
• It is always important for a firm to predict
what the competition may do if prices are
changed.
• Example:
– You are in charge of pricing of hotel rooms in
a large group in a highly competitive market.
You are considering a tactical price reduction
in an attempt to gain market share. What may
the competition do to respond?
 Competition

• They could respond to your tactical price

reduction in a number of ways:
– Do nothing (highly unlikely).
– Reduce their prices to the same level as yours (or
even lower!).
– Try and stress their advantages and superiority in
the market place.
• Their reaction will depend on
– the position they are in particularly in relation to
cost structure and market power.
– It is important, however, that you predict the
likely outcome of your temporary price
reduction.
– If the competition is very responsive, it may do
little to your overall long term market position
• merely generate some extra short term cash flow.
 Legal and Regulatory Issues

• The marketeer is often restricted in the

setting of prices by legal and regulatory
issues.
– Government intervention. Price controls.
– Legal restrictions on price fixing and collusion
• The Commerce Act 1986
– Consumer Legislation
• Fair Trading Act 1986
 The Different Methods of Pricing

• The way in which prices are derived,

depends on the company’s pricing policy.
 PRICING POLICY

• “A pricing policy is a guiding philosophy or

course of action designed to influence and
determine pricing decisions.”
• Once the company has decided on a pricing
policy, it must then choose a pricing
method.
– “A pricing method is a mechanical procedure
for setting prices on a regular basis.”
 PRICING METHODS

• Cost Orientated Pricing

• Demand Orientated Pricing
• Competition Orientated Pricing
 Cost Orientated Pricing

• This is where the price of a product or

service is calculated and a margin applied to
derive a selling price
– This is the simplest method of pricing and is
often used by companies for calculating prices.
– It has the disadvantage of not taking into account
the economic aspects of supply and demand and
often does not relate to pricing objectives
 Demand Orientated Pricing

• This method allows for high prices when

the demand is high and lower prices when
the demand is low, regardless of the cost of
the product or services.
– Demand orientated pricing allows a firm to make
higher profits as long as the buyers value the
products above the cost price.
 Competition Orientated Pricing

• The firm fixes the prices of the products

and services in relation to the competitor’s
prices.
• This has the advantage of giving the firm
the opportunity to increase sales or market
share.