PRICING PRODUCTS: Pricing Considerations & Approaches

1. PRICING PRODUCTS: Pricing Considerations & Approaches

2. PRICE In the narrowest sense - Price is the amount of money charged for a product or service. More broadly - Price is the sum of all the values that consumers exchange for the benefits of having or using the product service. Price is the only element of marketing mix (4Ps) – • That produces revenue, all other elements represents cost • That is flexible / which can be changed quickly

3. FACTORS TO CONSIDER WHEN SETTING PRICES Internal factors Pricing decisions External factors • Marketing objectives • Marketing mix strategy • Costs • Organizational considerations • Nature of the market & demand • Competition

4. Internal factors affecting pricing decisions • Marketing objectives Survival Setting a low price to increase demand Current profit maximization Estimating the demand and costs at different prices and choose the price that will produce the maximum current profit. Market share leadership Setting prices as low as possible. Product quality leadership Charging a high price to cover higher performance quality and the high cost of R & D

5. Marketing mix strategy Price decisions must be coordinated with product design, distribution and promotion decision to form a consistent and effective marketing program.

6. Costs • Costs set the floor for the price that the company can charge for its products. • The company charges a price that covers all its costs and delivers a fair rate of return.

7. Types of costs: • Fixed costs - That do not vary with production or sales level. (rent, executive, salaries) • Variable costs - That vary directly with the level of production. • Total cost - The sum of the fixed and variable costs for any given level of production.

8. Organizational considerations In small companies - Top management In large companies - Divisional or product line managers In industrial markets - Salespeople to negotiate with customers

9. External factors affecting pricing decisions • The market and demand • Pricing in different types of markets – Pure competition Many buyers and sellers trading in a uniform commodity. Monopolistic competition Many buyers and sellers who trade over a range of prices. Oligopolistic competition Few sellers who are highly sensitive to each other’s pricing & marketing strategies. Pure monopoly One seller.

10. Analyzing the price-demand relationship The higher the price, the lower the demand (Inverse relationship) P2 P1 P2 P1 Price Q2 Q1 Q2 Q1 Quantity demanded per period Quantity demanded per period A. Inelastic demand B. Elastic demand

11. Inelastic demand - The seller will raise the price as the buyers are less price sensitive. Buyers will be less price sensitive because of – • The product’s uniqueness or quality, prestige, or exclusiveness • Availability of the substitute products • Low expenditure for a product • Shared costs Elastic demand - The seller will consider lowering their price.

12. Competitors’ costs, prices and offers If a company is aware of its competitors’ prices and offers, it can use them as a starting point for its own pricing. • If the product of a company is similar to its competitor, it will have to price close to its competitor’s price or lose sales. • If the product is not as good as its competitive product, the company will not be able to charge as much. • If the product is better than its competitor, it can charge more.

13. GENERAL PRICING APPROACHES Major considerations in setting price The company must charge the price somewhere between one that is too low to produce a profit and one that is too high to produce any demand. Product costs Competitors’ prices and other internal and external factors Consumer perceptions of value Price floor No profits below this price Price ceiling No demand above this price

14. Cost-Based Pricing Approach • Cost-Plus Pricing Adding a standard markup to the cost of the product. Example: A toaster manufacturer had the following costs & expected sales – Variable cost = TK. 10 Fixed cost = TK. 300,000 Expected unit sales = 50,000

15. The manufacturer’s cost per toaster is – Unit cost = Variable cost + (Fixed costs / Unit sales) = TK. 10 + (TK. 300,000 / 50,000) = TK. 16 Suppose the manufacturer wants a 20% markup on sales. The markup price is – Markup price = Unit cost / (1 – Desired return on sales) = TK. 16 / (1 – 0.2) = TK. 20 The price of a toaster is TK. 20 (for dealers) The profit per unit is TK. 4

16. b. Break-even analysis and Target Profit Pricing Setting price to break even on the costs of making and marketing a product; or setting price to make a profit. Break-even volume can be calculated using the following formula – Break-even volume = Fixed cost / (Price – Variable cost) = TK. 300,000 / (TK. 20 – TK. 10) = 30,000 The company must sell at least 30,000 units to break even, that is, for total revenue to cover total cost.

17. 1,000 800 600 400 200 0 Total cost (TK. 200,000) Investment = TK. 1,000,000 Required profit = (20% or TK. 200,000). In this case, it must sell at least 50,000 units at TK. 20 each. Costs in dollars (thousands) Target profit Fixed cost 10 20 30 40 50 Sales volume in units (thousands)

18. Value-based pricing Value-based pricing involves setting price based on buyers’ perception of value rather than on the seller’s costs. Difference between cost- and value-based pricing - Cost-based pricing Product Cost Price Value Customers Value based pricing Customers Value Price Cost Product

19. Competition-based pricing Competition-based pricing involves setting prices based on the prices that competitors charge for similar products. a. Going-rate pricing: A firm bases its price largely on competitors prices, with less attention paid to its own costs / to demand. b. Sealed-bid pricing: A firm bases its price on how it thinks competitors’ will price rather than on its own costs / the demand.