E-Marketing Unit 7 Pricing Strategies Instructor: Safaa S. Y. Dalloul
Elements of Lecture • Pricing Strategy • Definition • Role of Pricing • How Companies Price? • Pricing Strategies and Procedures • Adapting for Pricing • Price Change
Pricing • Price is not just a number on a tag or an item. • Prices were set by negotiation between buyers and sellers. "Bargaining" is still a sport in some areas.
Pricing • Today the Internet is partially reversing the fixed pricing trend. • Computer technology is making it easier for sellers to use software that monitors customers' movements over the Web and allows them to customize offers and prices.
Role of Pricing • Pricing can help a company attain its other marketing objectives.
Role of Pricing • Pricing enables the marketer to segment markets, define products, create customer incentives, and even send signals to competitors. • The pricing program should be supported with a focused plan of implementation.
Role of Pricing • Many marketing professionals argue that pricing is a valuable strategic weapon that helps companies enhance and capitalize on competitive vulnerability, and there is no question that pricing decisions have an immediate impact on a company’s bottom line.
Role of Pricing • From this perspective, it is easy to argue that to a large degree, pricing decisions can determine whether a product or a company will succeed or fail.
How Companies Price? • In small companies, prices are often set by the boss. • In large companies, pricing is handled by division and product-line managers. Even here, top management sets general pricing objectives and policies and often approves the prices proposed by lower levels of management.
How Companies Price? • In industries where pricing is a key factor (aerospace, railroads, oil companies), companies will often establish a pricing department to set or assist others in determining appropriate prices. • This department reports to the marketing department, finance department, or top management.
Consumer Psychology and Pricing • Many economists assume that consumers are "price takers" and accept prices at "face value" or as given. • Marketers recognize that consumers often actively process price information, interpreting prices in terms of • Their knowledge from prior purchasing experience • Formal communications (advertising, sales calls, and brochures) • Informal communications (friends, colleagues, or family members), and point-of-purchase or online resources.
Consumer Psychology and Pricing • Understanding how consumers arrive at their perceptions of prices is an important marketing priority. • Reference Prices • Price-Quality Inferences • Price Cues
Consumer Psychology and Pricing • Understanding how consumers arrive at their perceptions of prices is an important marketing priority. • Reference Prices: consumers may have fairly good knowledge of the range of prices.
Consumer Psychology and Pricing • Understanding how consumers arrive at their perceptions of prices is an important marketing priority. • Price-Quality Inferences: many consumers use price as an indicator of quality. High Price High Quality
Consumer Psychology and Pricing • When alternative information about true quality is available, price becomes a less significant indicator of quality. • When this information is not available, price acts as a signal of quality. Strong Demand High Market Price Lead to
Consumer Psychology and Pricing • Understanding how consumers arrive at their perceptions of prices is an important marketing priority. • Price Cues: many sellers believe that prices should end in an odd number. Many customers see a stereo amplifier priced at $299 instead of $300 as a price in the $200 range rather than $300 range.
Pricing Strategies • Price has become one of the more important marketing variables. • Despite the increased role of non-price factors in the modern marketing process, price is a critical marketing element, especially in markets characterized by monopolistic competition or oligopoly.
Pricing Strategies • Competition and buyers that are more sophisticated has forced many retailers to lower prices and in turn place pressure on manufacturers.
Pricing Strategies • Further, there has been increasing buyer awareness of costs and pricing, and growing competition within the channels, which in turn provides the consumer with even more awareness of the pricing process.
Pricing Procedure 1 • The company carefully establishes its marketing objective(s) • Survival • Maximum current profit • Maximum market share • Maximum market skimming • Product-quality leadership.
Pricing Procedure 1 • Survival • Companies pursue survival as their major objective if they are plagued with overcapacity, intense competition, or changing consumer wants. • As long as prices cover variable costs and some fixed costs, the company stays in business. • Survival is a short-run objective; in the long run, the firm must learn how to add value or face extinction.
Pricing Procedure 1 • Maximum Current Profit • Many companies try to set a price that will maximize current profits. • They estimate the demand and costs associated with alternative prices and choose the price that produces maximum current profit, cash flow, or rate of return on investment. • This strategy assumes that the firm has knowledge of its demand and cost functions.
Pricing Procedure 1 • Maximum Market Share • Some companies want to maximize their market share. • They believe that a higher sales volume will lead to lower unit costs and higher long-run profit. • They set the lowest price, assuming the market is price sensitive.
Pricing Procedure 1 • Maximum Market Skimming • Companies presentation a new technology favor setting high prices to maximize market skimming. • Sony is a frequent practitioner of market-skimming pricing, where prices start high and are slowly lowered over time.
Pricing Procedure 1 • Maximum Market Skimming • Market skimming makes sense under the following conditions: • A sufficient number of buyers have a high current demand • The high initial price does not attract more competitors to the market • The high price communicates the image of a superior product.
Pricing Procedure 1 • Product Quality Leadership • A company might aim to be the product-quality leader in the market. • Many brands strive to be "affordable luxuries"—products or services characterized by • High levels of perceived quality, Taste, and status with a price just high enough not to be out of consumers' reach.
Pricing Procedure 1 • Product Quality Leadership • BMW cars, has been able to position themselves as quality leaders in their categories, combining quality, luxury, and premium prices with an intensely loyal customer base.
Pricing Procedure 2 • The company determines the demand schedule • The company determines the demand schedule, which shows the probable quantity purchased per period at alternative price levels.
Pricing Procedure 2 • Price Elasticity of Demand • Marketers need to know how responsive, or elastic, demand would be to a change in price.
Pricing Procedure 2 • Price Elasticity of Demand • With demand curve (a), a price increase from $10 to $15 leads to a relatively small decline in demand from 105 to 100. • With demand curve (b), the same price increase leads to a substantial drop in demand from 150 to 50. • If demand hardly changes with a small change in price, we say the demand is inelastic.
Pricing Procedure 2 • Price Elasticity of Demand • If demand changes considerably, demand is elastic. • The higher the elasticity, the greater the volume growth resulting from a 1 percent price reduction. • The more inelastic the demand, the higher the company can set its price.
Pricing Procedure 2 • Estimating Demand Curves • Most companies make some attempt to measure their demand curves using several different methods. • Statistical analysis • Price experiments • Surveys
Pricing Procedure 3 • The company estimates how its costs vary • The company estimates how its costs vary at different output levels: “production levels, different marketing strategies, differing marketing offers, and target costing based on market research”
Pricing Procedure 3 • The company estimates how its costs vary • A company's costs take two forms, fixed and variable. • Fixed costs (also known as overhead) are costs that do not vary with production or sales revenue. • A company must pay bills each month for rent, heat, interest, salaries, and so on, regardless of output.
Pricing Procedure 3 • The company estimates how its costs vary • Variable costs vary directly with the level of production. • For example, each hand calculator produced by Texas Instruments involves the cost of plastic, microprocessor chips, packaging.
Pricing Procedure 3 • The company estimates how its costs vary • These costs tend to be constant per unit produced. They are called variable because their total varies with the number of units produced. (HOW)
Pricing Procedure 3 • The company estimates how its costs vary • Total costs consist of the sum of the fixed and variable costs for any given level of production. • Average cost is the cost per unit at that level of production; it is equal to total costs divided by production
Pricing Procedure 4 • The company examines competitors’ prices • The company examines competitors’ prices as a basis for positioning its own price.
Pricing Procedure 5 • The company selects one of the pricing methods • Markup pricing • Target return pricing • Perceived-value pricing, value-pricing • Going-rate pricing • Sealed-bid pricing.
Pricing Procedure 5 • Markup Pricing • The most elementary pricing method is to add a standard markup to the product's cost. • Construction companies submit job bids by estimating the total project cost and adding a standard markup for profit. • Lawyers and accountants typically price by adding a standard markup on their time and costs.
Pricing Procedure 5 • Markup Pricing • Variable cost per unit $10 Fixed cost $300,000 • Expected unit sales 50,000 • The manufacturer's unit cost is given by: • Unit cost = variable cost + fixed cost = $10 + $300,000 = $16 unit sales 50,000
Pricing Procedure 5 • Markup Pricing • Now assume the manufacturer wants to earn a 20 percent markup on sales. • The manufacturer's markup price is given by: • Markup price = unit cost/(1 - desired return on sales) = $16/(1 - 0.2) = $20
Pricing Procedure 5 • Target-Return Pricing • In target-return pricing, pricing used to achieve a planned or target rate of return on investment. • Target-return price = unit cost + (desired return * invested capital) / Unit sales • Target-return price =16$ + 0.20 * 1,000,000/ $50,000