part three: the marketing mix Chapter 10price
an opening challenge You run a medium-sized business: a second-hand car dealership. A competitor, the showroom on the other side of town, reduces its prices. Should you do the same? What will happen if you don’t? If you do?
agenda • pricing objectives • pricing methods • market-based • cost-based • pricing strategies • pricing tactics • changing prices • price elasticity of demand
the importance of pricing • profits and revenues • maximise sales revenues rather than volumes • market share • a low price can buy market share • survival • but set prices too low and the firm will not survive • image • price affects image
financial make profit maximise revenue recover investment survive marketing build image pile it high, sell it cheap prestige positioning increase market share pricing objectives
pricing methods: market‐based • customer value pricing • psychological price barriers • auctions • going-rate pricing • tenders • cartels
customer value pricing • a product is only worth what someone will pay for it • customers place a value on the product • companies set the price when customer estimation of value = desired price = a fair deal for both parties
psychological price barriers • based on the customer’s budget for the purchase • e.g. customer is prepared to pay up to £35 for a return train ticket • price is set just below • e.g. £34.50 • requires accurate research
auctions • traditionally sale rooms • currently popular on the Internet • e.g. eBay • bids of increasing value until all but one buyer drop out • can maximise price
going‐rate pricing • based on competitors’ prices • advantages • can reduce price wars • can take advantage of others’ expertise • disadvantages • assumes competitors have it right • assumes competitors have a similar cost base price followers (takers) price leaders (makers)
tenders • numerous types • e.g. sealed bid • lowest bid is awarded contract • favoured by governments and other public sector organisations • for large orders and capital projects
cartels • a group of competitors who collaborate to set prices • no real competition • e.g. OPEC (Organization of the Petroleum Exporting Countries) • prices tend to be higher • considered an anti-competitive practice in many countries • including the EU
pricing methods: cost-based cost + profit = price
cost‐based pricing • cost plus pricing • mark-up pricing • based on direct costs • full-cost pricing • based on total costs • contribution pricing • based on variable cost • target profit pricing • based on breakeven point
pricing strategies • new products • market penetration • market skimming • general • prestige • pre-emptive • product line • price discrimination
new product pricing strategies • market skimming • early cash recovery • encourages new competitors • raises ethical issues • market penetration • encourages product trial • encourages retailers to build up stocks • may provoke competitive retaliation • delays cash recovery
ongoing pricing strategies • prestige – premium price to match prestige image • pre-emptive – low price to deter competition • product line – different price points for a range of products • price discrimination – same products but different prices for different market segments
pricing tactics • psychological pricing • is £9.99 cheaper than £10? • loss leaders • a bargain draws customers in • promotional pricing and discounts • sales promotion • predatory pricing (destroyer or extinction) • illegal in the UK • an unrealistically low price to drive competition out of the market
why change prices? • a substantial change in business costs • an imbalance between supply and demand • a change in competitors’ marketing • a changed economic situation • e.g. inflation • new laws, new taxes or other government pressure • a change in the firm’s own marketing strategy • e.g. as part of a repositioning exercise
price elasticity of demand a measure of price sensitivity if the price goes up but there’s a relatively small fall in sales then demand for that product is price inelastic, i.e. changes in price do not affect the sales volume much so, if you wanted to increase revenue, would you put the price up? Or down?
price elasticity of demand a measure of price sensitivity if the price goes up and sales fall dramatically then demand for that product is price elastic, i.e. changes in price affect sales volume disproportionately so, if you wanted to increase revenue, would you put the price up? Or down?
impact of price elasticity on sales revenue • if demand is price inelastic • a higher price will result in a relatively small fall in sales • the higher price should compensate • revenue should increase • if demand is price elastic • a lower price will result in a relatively large rise in sales • the increased sales volume should compensate • revenue should increase
calculating price elasticity price elasticity = percentage change in quantity demanded percentage change in price if the answer >1, then demand is elastic if the answer <1, then demand is inelastic (if there is a minus sign, ignore it)
summary • without a price, a product is a gift • too high a price is unethical • and loses sales • too low a price is generous • but loses profits • prices can change over time • new strategy, new tactics • respond to changing market conditions • price must fit within the marketing strategy • e.g. it is a key contributor to image