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

5
(No Transcript)
6
Pricing Factors

• Internal
• Company goals
• Target profit/ROI
• Product positioning
• Costs
• External
• Channel
• Competition
• Customer value (perceived)

7
(No Transcript)
8
Internal factors Costs

• Floor
• Unit cost as a function of cumulative output

9
Cost Per Unit at Different Production Levels
10
Cost Per Unit As a Function of Accumulated
Production
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

17
(No Transcript)
18
Markup Pricing

• 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)

19
Advantages of Cost-Plus Pricing

• Legally acceptable
• Price always above cost
• If costs known, pricing task becomes quite simple

20
Cost-Based Pricing Target Profit Pricing

• 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.

21
Break-Even Chart for Determining Target Price
22
Competition-Based Pricing Going-Rate Pricing

• Price based on competitors prices
• Charge same, more or less

23
Cost-Based Versus Value-Based Pricing
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)

28
(No Transcript)
29
Assessing Perceived Value Survey-Based Methods

• Direct price response surveys (willingness-to-pay?
  )
• Purchase intention

30
(No Transcript)
31
(No Transcript)
32
(No Transcript)
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 RD
• Profits before obsolescence (patent expiration)
• Room for future price cuts
• Prestige quality signaling
• Avoids cut-throat competition
• Lower volume --gt 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

38
(No Transcript)
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

42
(No Transcript)
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 As WTP
• Book 9,000
• CD 1,000
• Total 10,000
• A la carte price?
• Bundle price?

• Buyer Bs WTP
• Book 5,000
• CD 5,000
• Total 10,000

45
Pricing -- Take-Aways

• Your price should be driven by all four Cs
• 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.