Lesson 9 Lecture

9.1 Introduction

Pricing is a very important factor for both the buyer (customer) and the seller (firm).

For the customer, price is a measure of the value of the product – or their
“willingness to pay”.

For the seller, price is the basis of revenue and therefore along with both cost and
capacity utilization/capital efficiency is a key ingredient to firm profit. So then how do
marketers make these very important decisions? Before launching into some further
discussion I do want to reinforce that to the cluster price is a measure of the total
value of the product to the respective consumers.

Understanding pricing

There has been a significant shift in pricing over recent years and there are many
reasons why this has occurred:

 Changed economic situation - with less disposable incomes consumers have

become more price conscious and have been willing to trade down and be more
demanding in pricing
 Improved education and access to information  – rightly or wrongly consumers now
feel more empowered to make well developed pricing decisions and part of this is the
access to comparative pricing via the internet and of course, the many sales
catalogues we receive on a regular basis
 Competition – hyper-competition in some industries has resulted in the price of many
items falling, often very soon after the product is launched – competitors offer a
cheaper alternative and customers become more knowledgeable about the true
value of the product and key characteristics of the product.
 Free/Public Domain – especially in the software sector there are now many “free”
alternatives" to regular fully fledged software solutions
 Internet

The following is a list of typical pricing mistakes made by marketers:

- Determine costs and take traditional industry margins

- Failure to revise price to capitalize on market changes

- Setting price independently of the rest of the marketing mix

- Failure to vary price by product item, market segment, distribution channel, and
purchase occasion.

Related to all the above might be the failure to fully understand the value of the
product to the target customers – and to be ignorant of what competitors are doing in
the marketplace.
Consumer psychology and pricing

Price/Quality Inferences

Impacting on all pricing considerations of customers is the trade-off between price

and quality. We all do this when making purchase decisions – we might pay a higher
price in return for an expectation of better quality and vice-versa.

There will be times when a consumer might “trade down” and take a low cost carrier
flight – paying a lower price but equally having lower expectations than if on a full
service airline. In other situations, the decision might be to trade up and fly a regular
full service airline – a higher price is paid willingly knowing that the quality and
overall value of the flight will be higher.

Given this, it is very important that the price charged by the supplier does have a
relationship to the value/produce deliverables of the product. A higher price implicitly
says to the consumer that the product has some premium attributes – product/image
etc.  Failure to meet these expectations is a very common and very costly mistake!

Price Ending

Oh for the psychology of $10.00 vs. $9.95 vs. $9:99!

We know that consumers are very motivated by price discounts, BOGOF’s (buy one
– get one free/extra volume) and the suggestion that the product is on sale. Often
the product that is listed for “sale “might be sold at a price very near (or even above)
the regular list price.  But customers get motivated by the sense that they are getting
a bargain.

Rightly or wrongly marketers will use a mix of these “signals” to motivate sales.

It is widely used by marketers seeking to get short term boosts in sales – “how to sell
more of the same product to the same customers” – a market penetration strategy.

Set the price - part 1

There are six key steps in setting the price:

- Select the price objective

- Determine demand

- Estimate costs

- Analyze competitor price mix

- Select pricing method

- Select final price

These will be further discussed in the next two videos

Set the price -- part 2

Competitors

No man is an island and this includes firms! A firm needs to be very aware of many
factors associated with competitors, with price being just one of these.

Firms need to be aware of their competitor’s:

- Current  pricing strategy and price points

- Likely future price points

- Cost structure (helping to identify the pain threshold of competitors!)

- Likely competitor response to the firm’s pricing decision – now and subsequently

There are several pricing methods companies can use, including markup pricing,
target-return pricing, perceived-value pricing, value pricing, EDLP, going-rate pricing,
and auction-type pricing.

Most firms will use a mix of these approaches when considering the price(s) to be
set for a product. (Note that the above is a mix of both internal and external factors –
marketers must balance these two usually conflicting factors.)

Ultimately, a price needs to be set for a product!  Or at least an estimate of the price
to be sought from consumers. So while all the above factors need to be considered,
there are perhaps a few final checklist type factors to consider before the final price
is agreed to.

Adapt the price

Companies usually set a pricing structure that reflects variations in geographical

demand and costs, market-segment requirements, purchase timing, order levels,
and other factors. Several price-adaptation strategies are available: (1) geographical
pricing, (2) price discounts and allowances, (3) promotional pricing, and (4)
discriminatory pricing.

A price decrease might be brought about by excess plant capacity, declining market
share, a desire to dominate the market through lower costs, or economic recession.
A price increase might be brought about by cost inflation or overdemand. Companies
must carefully manage customer perceptions when raising prices.