Pricing

1
Pricing

• MKT4806 Product and Brand Management
• Reference
• Lehmann Winer, Product Management 4th Edition,
  McGraw-Hill, 2005.Chapter 10 Pricing Decision
• Keller, K. L. , Strategic Brand Management. 2nd
  Edition, Prentice Hall. 2003.
• Kotler, P Keller, K.L., Marketing Management
  12e, 12th Edition, Prentice Hall, 2005

Lecture note by Polboon Nuntamanop
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Concepts related to price and pricing

• Industrial product VS consumer products
• Economic Theory Demand Supply
• Perceived Value
• Product Life Cycle
• Cost, price Pricing structure
• Pricing strategy

3
Price perception

• Industrial products (raw materials)
• Costs to next steps production
• Saving to next steps production
• Overall cost of production
• Added-value to the end-product.
• Consumer products
• Perceived value of the product.
• Relative price compared to other substitutes.

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How a customer considers about pricing when
buying a product?

• Compare Price and perceived value or the
  benefits gained.
• Compare price to a Reference point, such as
  price in the past or price of other products or
  alternatives.

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Price VS Perceived Value

• Perceived value ? the value of the benefits from
  the product/service in consumers mind.
• It include both product actual value and
  emotional value gain from using the
  product/service.
• The perceived value of a product/service differs
  from consumer to consumer.

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Roles of marketing strategy in pricing

• Marketing Strategy
• Market segmentation
• Product Positioning

• Marketing Strategy Implementation
• Marketing Mix

Marketing Strategy gives general guidelines for
whether a price should be high or low
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Influences on pricing decisions

• Psychological aspects
• Reference prices
• Price VS perceived quality and Perceived value
• Other emotional value.
• Pricing objectives
• Industry conditions
• Costs
• Product Life Cycle
• Threat of new entrants
• Power of buyers ( choices)
• Competition situation
• Substitute products
• Capacity situation (Supply)

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Economic TheoryDemand Supply
Price
Short-term
High
Supply
Px2
Optimum price
Px1
Costs
Demand
Quantity
0 Q1 Q2.
High
Supply line As price goes up, producer is
willing to supply more. Demand line as price
goes down, the demand quantity is higher
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Perceived Value

• ? The value of the product perceived by the
  consumers. It can be lower or higher than actual
  price.
• Relations among perceived value, price and
  variable cost
• Perceived value gt price gt variable cost.
• Price gt Perceived value gt variable cost.
• Price gt variable cost gt perceived value.

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Pricing

• What to consider?
• Perceived Value
• Reference points
• Variable costs
• Marginal costs
• Fixed costs
• Fixed operation costs
• RD costs

Price B? (Increase)
Price A?
Price C? (Decrease)
Profit
Variable costs
Fixed costs
(Include RD costs?)
An example of a product
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Perceived value and price

• Perceived Value
• Reference points
• Variable costs
• Marginal costs
• Fixed costs
• Fixed operation costs
• RD costs

Perceived valuegtpricegtVariable cost
Perceived value A
Price
Profit
Variable costs
Fixed costs
Possible Additional gain
(Include RD costs?)
An example of a product
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Perceived value and price
Price gt Perceived valuegtVariable cost
Perception Of the price being higher than its
value. Price becomes an issue.
Price
Perceived value A
Variable costs
Possible Action 1. Increase perceived value 2.
Drop the price to the perceived value point.
Fixed costs
(Include RD costs?)
An example of a product
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Perceived value and price
Price gt Variable cost gt Perceived value
Price
Perception Of the price being too high than its
value
Variable costs
Perceived value A
Dropping The price to perceived value point
would not help as it is lower than variable
costs.
An example of a product
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Reference Prices

• External (contextual)
• ? Observed price (posted at the point of
  purchase)
• Internal (temporal)
• ? Mental prices used to assess an observed price.

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Reference Prices - examples

• The fair price, realizing the costs.
• The price frequently charged.
• The last price paid.
• The price of brand usually bought.
• The average price charged for similar products.
• The expected future price.
• The typical future price.
• The upper amount someone would pay.
• A lowest amount a customer would pay.

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Product Life Cycle
High competition Low or no growth of
demand Demand shifting / switching New
technology Product is outdated Etc.
What can happen?
Sales
High
Mature
Decline
Growth
Introduction
Low
Time
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Costs Price structure
RD costs
Perceived value ??
PRCING
Total costs
Variable costs production, Part of selling
expenses, etc.
Other fixed / semi-fixed costs operation costs,
HR, Fixed selling, marketing costs.
RD costs Spread out for X years
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Pricing Structure
Buyer Of finished products
Production
Operation
End users of The product
Wholesale
Retail
Price to users
Retail margin incentive to distribute
Wholesale margin incentive to distribute
Listed price to trade
Margin
Total costs
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Pricing Objectives

• Price based on marketing objectives
• Maximum profit
• Market penetration
• Skimming (Prestige pricing)
• Quick profit (expect short product life cycle)
• Brand or Product positioning
• Customer value costs
• Return on investment
• Stability

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Pricing Strategy

• Cost-plus pricing
• Perceived-value pricing
• Competitive pricing
• Multiple pricing
• Life-cycle pricing
• Auction

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Pricing Tactics

• Product line pricing
• Bundling pricing
• Odd-ending pricing
• Volume discount incentive
• Promotion pricing (Value pricing)
• Complementary pricing ( fixed costs)
• Everyday low pricing
• Price Discrimination
• Hidden Price Increase
• Periodic discounts

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Conclusions

• Perceived value which is closely related to brand
  perception and perceived quality is the most
  important key driver.
• Factors to consider for price strategy decisions
• Perceived value of our products
• Costs to customers.
• Perceived value of competitive products
• Reference price points competitors, substitutes,
  or other alternatives
• Product life cycle.
• Total revenue ( price X volume) VS margin per
  unit.
• Long-term business stability

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Product Pricing - Actions

• Build / strengthen BRAND to keep high perceived
  value.
• Be truthful about our products actual value to
  users.
• Keep high quality.
• Monitor quality and actual benefits to users.
• Monitor relative benefits to compare actual
  values.
• Aware of the product life cycle, replace new
  products in time before the product lost its
  momentum.
• Keep brand positioning.
• Aim to total revenue and total profit (price
  per unit X sales volume) rather than emphasizing
  on unit profit rate.

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Price Setting

• Understand market environment to understand the
  factors which may influence buying decisions.
• Understand the trade structure of that particular
  product/service.
• Understand costs structure of the
  product/service.
• Understand the product life cycle.
• Understand/set marketing strategy of the product
  and marketing mix.
• Set price strategy.
• Decide distribution strategy for this particular
  product.
• Price setting, start with cost to users, the
  price which the user has to pay.
• Calculate retail trade margin. Should know
  industrial expected retail trade margin for
  products sold in the same shop.
• Calculate expected wholesaler margin.
• Estimate price, calculate margin over x year.
• Set the price. (Listed Price)