Pricing Policy

1. Pricing Policy Marketing Management

2. Agenda: Key drivers in setting prices Internal factors Company objectives Costs Positioning External factors Competition Channels Customers Other environmental elements General pricing approaches

3. What is Price? Many Names Rent Fee Rate Commission Tuition Fare Toll Premium Bribe Interest

4. What is Price? Only marketing mix element to produce revenues Most flexible element

6. Pricing Factors Internal Company goals Target profit/ROI Product positioning Costs External Channel Competition Customer value (perceived)

8. Internal factors: Costs Floor Unit cost as a function of cumulative output

11. Internal factors Product positioning Top-end � luxury/prestige signal Middle-of-the-road Bottom-end � �value-for-money�

12. External Factors: Distribution Channels Margins affect end-price Dell versus Apple Margins influence amount of push: Contribution = (RP-WP) x volume Margin-game: RP � WP (niche players) Turnover-game: volume (mass marketers)

13. External Factors: Competition Reference point Competitive response � factors: Price cut or increase Comparability of competitive offers Number of competitors & market shares Who initiates price cut (price leader versus fringe player) Profitability Emotions

14. External Factors: Customer Value Perceived value is derived from: Economic benefits (performance, productivity) Functional benefits (features) Emotional benefits (comfort, power, etc.) Value is unique to individual customer

15. General Pricing Approaches Markup pricing Target return (profit) pricing Going rate pricing Value pricing

16. Cost-based Pricing � Markup pricing Adding a standard markup to cost

18. Cost-Based Pricing Example Variable costs: $10 Fixed costs: $ 300,000 Expected sales: 50,000 units Desired Sales Markup: 20% Variable Cost + Fixed Costs/Unit Sales = Unit Cost $10 + $300,000/50,000 = $16 per unit Unit Cost/(1 � Desired Return on Sales) = Markup Price $16 / (1 - .20) = $20 Profit = $4 per unit (20% of $20) Markup Pricing

19. Advantages of Cost-Plus Pricing Legally acceptable Price always above cost If costs known, pricing task becomes quite simple

20. Break-even charts show total cost and total revenues at different levels of unit volume. The intersection of the total revenue and total cost curves is the break-even point. Companies wishing to make a profit must exceed the break-even unit volume. Cost-Based Pricing: Target Profit Pricing

22. Competition-Based Pricing: Going-Rate Pricing Price based on competitors� prices Charge same, more or less

24. Value Pricing Base price on perceived value Perceived value made up of several elements Use other marketing mix elements to communicate and enhance perceived value

25. Emerson Electric �You developed a product, looked at the costs, and said, �I need to make X,� and you marked it up accordingly � and people would buy it.�

26. Emerson Electric Now the company decides prices by figuring out how much customers are willing to pay, rather than what the products cost � and the differences can be huge.

27. Example: Pricing a new compact sensor for measuring flow of fluids Planned cost-based price: US$ 2,650 Final customer-survey-based price: US$ 3,150 (+20%)

29. Assessing Perceived Value :Survey-Based Methods Direct price response surveys (willingness-to-pay?) Purchase intention

33. Factors affecting price sensitivity: Perceptions & preferences How well differentiated? Price-quality Substitutes Awareness of substitutes Comparability Sunk cost (or switching cost)

34. Factors affecting price sensitivity Ability to pay Proportion of total budget Shared cost (3rd party?)

35. Price Sensitivity Heuristics: Customers are more price sensitive when: awareness of substitutes is high total expenditure is high (budget constraint) opportunity costs of time are low

36. New Product Pricing--Skimming: High S/T profits Reap profits pre-entry Quick recovery R&D Profits before obsolescence (patent expiration) Room for future price cuts Prestige & quality signaling Avoids cut-throat competition Lower volume --> less demanding on resources

37. New Product Pricing -- Penetration: High profit through fast sales growth Quick trial Reduction of S/T costs (experience curve) Better utilization of high fixed capacity Deters entrants

39. Product Line Pricing Setting price points between product line items Set price to maximize profits for entire product line Captive product pricing � pricing products that must be used with core product (Printers; razors; powered toothbrushes)

40. Product line pricing Loss-leaders Items priced at minimal margins or even losses Goal?

41. Psychological Price Points Artificial price points may serve as thresholds �Odd� pricing (e.g., $999) Processing of price information Signaling �good� deal

43. Bundling Offer products as a package (set menu) and price bundle lower than sum of parts Example: value meals

44. Example: Pricing Encyclopedia Buyer A�s WTP: Book: $9,000 CD: $1,000 Total: $10,000 A la carte price? Bundle price? Buyer B�s WTP: Book: $5,000 CD: $5,000 Total: $10,000

45. Pricing -- Take-Aways: Your price should be driven by all four C�s: 1) Company (Cost/Goals) 2) Channel 3) Competition (Reference) 4) Customer (Perceived Value) Pricing is not a stand-alone decision but integral part of marketing mix Pricing is part art, part science

46. Pricing -- Take-Aways: Price and value are two different concepts. Your customers may look for the �best� value. However, �best� value does not mean the lowest price.