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Principles of 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. Pricing.

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pricing strategies

Principles of Marketing

Unit 7

Pricing Strategies

Instructor: Safaa S. Y. Dalloul

elements of lecture
Elements of Lecture
  • Pricing Strategy
  • Definition
  • Role of Pricing
  • How Companies Price?
  • Pricing Strategies and Procedures
  • Adapting for Pricing
  • Price Change
pricing
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.
pricing1
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
Role of Pricing
  • Pricing can help a company attain its other marketing objectives.
role of pricing1
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 pricing2
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 pricing3
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
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 price1
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
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 pricing1
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 pricing2
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 pricing3
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 pricing4
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 pricing5
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 strategies1
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 strategies2
Pricing Strategies
  • Competition and buyers that are more sophisticated has forced many retailers to lower prices and in turn place pressure on manufacturers.
  • 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 procedure1
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 procedure2
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 procedure3
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 procedure4
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 procedure5
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 procedure6
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 procedure7
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 procedure8
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 procedure9
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 procedure10
Pricing Procedure

2

  • Price Elasticity of Demand
  • Marketers need to know how responsive, or elastic, demand would be to a change in price.
pricing procedure11
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 procedure12
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 procedure13
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 procedure14
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 procedure15
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 procedure16
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 procedure17
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 procedure18
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 procedure19
Pricing Procedure

4

  • The company examines competitors’ prices
  • The company examines competitors’ prices as a basis for positioning its own price.
pricing procedure20
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 procedure21
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 procedure22
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 procedure23
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 procedure24
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
pricing procedure25
Pricing Procedure

5

  • Value Pricing
  • In recent years, several companies have adopted value pricing:
  • They win loyal customers by charging a fairly low price for a high-quality offering that means : reengineering the companies operations to be low-cost without sacrificing quality.
pricing procedure26
Pricing Procedure

5

  • Value Pricing
  • Among the best practitioners of value pricing are:
pricing procedure27
Pricing Procedure

5

  • Going-Rate Pricing
  • In going-rate pricing, the firm bases its price largely on competitors' prices.
  • It is quite popular where costs are difficult to measure or competitive response is uncertain.
pricing procedure28
Pricing Procedure

5

  • Auction-Type Pricing
  • Auction-type pricing is growing more popular, especially with the growth of the Internet.
  • There are over 2,000 electronic marketplaces selling everything from pigs to used vehicles to cargo to chemicals.
  • One major purpose of auctions is to dispose of excess inventories or used goods.
pricing procedure29
Pricing Procedure

6

  • The company selects its final price
  • The company selects its final price, expressing it in the most effective psychological way, coordinating it with the other marketing mix elements, checking that it conforms to company pricing policies, and making sure it will prevail with distributors and dealers, company sales force, competitors, suppliers, and government.
price adjustment strategies
Price adjustment strategies
  • Companies will adapt the price to varying conditions in the marketplace.
  • Geographical pricingis one marketplace adjustment based on a company decision related to pricing distant customers (cash, counter trade, barter).
price adjustment strategies1
Price adjustment strategies
  • Price discountsand allowancesare a second area for adjustment where the company establishes Cash discounts.
adapting adjusting the price1
Adapting/adjusting the Price
  • Promotional pricing provides a third marketplace option, with the company deciding on loss-leader pricing, to stimulate traffic.
  • Special event pricing—to draw customers
  • Cash rebates—to encourage purchase within a specified time period
  • Low-interest financing—to facilitate purchase
adapting adjusting the price2
Adapting/adjusting the Price
  • Promotional pricing provides a third marketplace option, with the company deciding on loss-leader pricing, to stimulate traffic.
  • Longer payment terms—for lower monthly payments
  • Warranties and service contracts—added value
  • Psychological discounting—set an artificially high initial price
adapting adjusting the price3
Adapting/adjusting the Price
  • Discriminatory/Segmented pricing, the fourth option, enables the company to establish different prices for different customer segments, product forms, brand images, places, and times.
adapting adjusting the price4
Adapting/adjusting the Price
  • Customer-segment pricing—different prices for different groups for the same product or services
  • Product-form pricing—different versions priced differently
  • Image pricing—same product at two different levels
adapting adjusting the price5
Adapting/adjusting the Price
  • Channel pricing (location pricing)—same product priced differently at different locations
  • Time pricing—same product priced differently at different day, time or season.
adapting adjusting the price6
Adapting/adjusting the Price
  • Price discrimination works when:
    • Market segments show different intensities of demand.
    • Consumers in higher price tiers must feel that they’re getting their extra money’s worth for the higher prices paid.
adapting adjusting the price7
Adapting/adjusting the Price
  • Price discrimination works when:
    • Competitors can not undersell the firm in higher-price segments.
    • The costs of segmenting and reaching the market cannot exceed the extra revenue obtained from the price difference.
adapting adjusting the price8
Adapting/adjusting the Price
  • Product-mix pricing,enables the company to determine price zones for several products in a product line, as well as differential pricing for optional features, captive products, byproducts, and product bundles.
  • Product-Line Pricing— determine price steps
  • Optional-feature pricing—in addition to main product
adapting adjusting the price9
Adapting/adjusting the Price
  • Captive-product pricing—main products that require ancillary products, It is also called “Two-part pricing”—fixed fee + variablefee based on usage
  • Byproduct pricing—to recover production costs of main product
  • Product-bundling pricing—less costly when purchased together
price change
Price change
  • When a firm considers initiating a price change, it must carefully consider customerand competitorreactions.
  • Customer reactions are influenced by the meaning customers see in the price change.
  • Competitor reactions flow either from a set reaction policy or from a fresh appraisal of each situation.
price change1
Price change
  • The firm initiating the price change must also anticipate the probable reactions of suppliers, middlemen, and governments.
  • The firm encountering a competitor-initiated price change must attempt to understand the competitor’s intent and the likely duration of the change.
price change2
Price change
  • Initiating price cuts
price change3
Price change
  • Initiating price increases
price change4
Price change
  • Reactions to competitor’s price changes
price change5
Price change
  • Market Leader can respond to competitor initiated price cuts in several ways:
price change6
Price change
  • Reactions to competitor’s price changes
supporting information
Supporting Information

An escalator clause is a clause in a lease or contract that guarantees a change in the agreement price once a particular factor beyond control of either party affecting the value has been determined.

Escalator clauses are quite common in construction contracts to cover unexpected costs due to rise and fall in the prices for raw materials, fuel, and labor during the course of the construction project.