5-*Bismillahir Rahmanir Rahim

11-*Chapter 10 & 11Pricing

11-*10-*What is Price?Price is the amount of money charged for a product or service. The sum of all the values that consumers give up in order to gain the benefits of having or using a product or service.Price is the only element in the marketing mix that produces revenue; all other elements represent costs.

11-*10-*Factors to Consider Setting Prices A companys pricing decisions are affected by both internal company factors and external environment factorsCustomer value Value-oriented pricing strategies: value-based, good-value, and value-added pricingProduct Costs Cost-based pricing strategies: cost-plus pricing, break-even pricing and target profit pricingInternal Company marketing objectives; marketing mix strategy and organizational factorsExternal The nature of market and demand, competition, the economy, reseller needs, and government actions

11-*10-*Factors to Consider Setting Prices Customer Perception of ValueEffective customer-oriented pricing involves understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value.Value-based pricing uses the buyers perception of value, not the sellers cost, as the key to pricing. Price is considered before the marketing program is set.Value-based pricing is customer-driven.Cost-based pricing is product-driven.

11-*10-*Factors to Consider Setting Prices Customer Perception of ValueGood-value pricing offers the right combination of quality and good service to fair price.Existing brands are being redesigned to offer more quality for a given price or the same quality for less price.Everyday low pricing (EDLP) involves charging a constant everyday low price with few or no temporary price discounts.High-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items.

11-*10-*Factors to Consider Setting Prices Customer Perception of ValuePricing power is the ability to escape price competition and to justify higher prices and margins without losing market share (especially important in B2B).Value-added pricing attaches value-added features and services to differentiate offers, support higher prices, and build pricing power.

11-*10-*Factors to Consider Setting Prices Company and Product CostsCost-based pricing involves setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for its effort and risk.Types of costsFixed costsVariable costsTotal costs

11-*10-*Factors to Consider Setting Prices Company and Product CostsFixed costs are the costs that do not vary with production or sales level Rent; Utilities, Interest and Executive salariesVariable costs are the costs that vary with the level of production Packaging; Raw materialsTotal costs are the sum of the fixed and variable costs for any given level of production.Average cost is the cost associated with a given level of output.Experience or learning curve is when the average cost falls as production increases because fixed costs are spread over more units.

11-*10-*Factors to Consider Setting Prices Company and Product Costs - Cost-based pricingCost-plus pricing adds a standard markup to the cost of the product.Break-even pricing is the price at which total costs are equal to total revenue and there is no profit.Target profit pricing (a variation of break-even) is the price at which the firm will break even or make the profit it is seeking.

11-*10-*Factors to Consider Setting Prices Other Internal and External Considerations Affecting Price DecisionsCustomer perceptions of value set the upper limit for prices, and costs set the lower limit.Companies must consider internal and external factors when setting prices.

11-*10-**Price pressures

11-*10-*Factors to Consider Setting Prices Other Internal Considerations AffectingMarketing strategy, objectives, and marketing mixGeneral pricing objectives include:SurvivalProfit maximizationMarket share leadershipCustomer retention and relationship buildingAttracting new customersOpposing competitive threatsIncreasing customer excitementOrganizational considerationsWho should set the priceWho can influence prices

11-*10-*Factors to Consider Setting Prices Overall Marketing Strategy, Objectives and MixTarget costing starts with an ideal selling price based on consumer value considerations and then targets costs that will ensure that the price is met.Non-price strategies differentiate the marketing offer to make it worth a higher price.

11-*10-*Factors to Consider Setting Prices Other External Considerations The market and demandTypes of markets: Sellers pricing freedom variesPure competitionMonopolistic competitionOligopolistic competitionPure monopolyAnalyzing the price-demand relationshipCompetitors strategies and pricesOther environmental factors: economic conditions, government actions, social concerns

11-*10-*Factors to Consider Setting Prices Types of MarketsPure competition is a market with many buyers and sellers trading uniform commodities where no single buyer or seller has much effect on market price.Monopolistic competition is a market with many buyers and sellers who trade over a range of prices rather than a single market price with differentiated offers.Oligopolistic competition is a market with few sellers because it is difficult for sellers to enter who are highly sensitive to each others pricing and marketing strategies.Pure monopoly is a market with only one seller. In a regulated monopoly, the government permits a price that will yield a fair return. In a non-regulated monopoly, companies are free to set a market price.

11-*10-*Factors to Consider Setting Prices Analyzing the Price-Demand RelationshipBefore setting prices, the marketer must understand the relationship between price and demand for its products.The demand curve shows the number of units the market will buy in a given period at different prices.Normally, demand and price are inversely related.Higher price = lower demandFor prestige (luxury) goods, higher price can equal higher demand when consumers perceive higher prices as higher quality.

11-*10-*Factors to Consider Setting Prices Price Elasticity of DemandPrice elasticity of demand illustrates the response of demand to a change in price.Inelastic demand occurs when demand hardly changes when there is a small change in price.Elastic demand occurs when demand changes greatly for a small change in price.

11-*10-*Factors to Consider Setting Prices Price Elasticity of DemandFactors affecting price elasticity of demandBuyers are less price sensitive whenUnique productHigh in quality, prestigeSubstitute products are hard to findTotal expenditure is low relative to incomeSellers consider lowering prices if the demand is elastic

11-*10-*Factors to Consider Setting Prices Competitors Strategies and PricesComparison of offering in terms of customer valueStrength of competitorsCompetition pricing strategiesCustomer price sensitivity

11-*Chapter 11

New-Product Pricing StrategiesProduct Mix Pricing StrategiesPrice Adjustment StrategiesPrice ChangesPublic Policy and Pricing

11-*New-Product Pricing StrategiesTwo Broad StrategiesMarket skimming pricing set a high initial priceMarket penetration pricing set a low initial price

11-*New-Product Pricing StrategiesMarket skimming pricing is a strategy with high initial prices to skim revenues layer-by-layer from the market.Product quality and image must support the price.Buyers must want the product at the price.The costs of producing a smaller volume cannot be so high that they cancel the advantage of higher prices.Competitors should not be able to enter the market easily and undercut the high price.

11-*New-Product Pricing StrategiesMarket penetration pricing sets a low initial price in order to penetrate the market quickly and deeply to attract a large number of buyers quickly to gain market share.Price sensitive marketProduction and distribution costs must fall as sales volume increasesLow prices must keep competition out of the market.

11-*The firm looks for a set of prices that maximizes the profits on the total product mix.Five product mix pricing situationsProduct line pricing the products in the product lineOptional product pricing optional or accessory productsCaptive product pricing - complementary productsBy-product pricing by-productsProduct bundle pricing several productsProduct-Mix Pricing Strategies

11-*Product-Mix Pricing StrategiesProduct line pricing takes into account the cost difference between products in the line, customer evaluation of their features, and competitors prices. the price differences represent the perceived quality differences

11-*Product-Mix Pricing StrategiesOptional product pricing takes into account optional or accessory products along with the main product. Decide which items to include in the base price and which to offer as options

11-*Product-Mix Pricing StrategiesCaptive product pricing involves products that must be used along with the main product.Price the main, or driver product low and seek high margins on the suppliesFor services: two-part pricing is where the price is broken into fixed fee and variable usage fee.Decide how much to charge for the basic service and how much for the variable usageThe fixed amount should be low enough to induce usage of the service; profit can be made on the variable fees

11-*Product-Mix Pricing StrategiesBy-product pricing refers to products with little or no value produced as a result of the main product. Producers will seek little or no profitProducers should accept any price that covers more than the cost to cover storage and delivery.

11-*Product bundle pricing combines several products and offer the bundle at a reduced price.Price bundling can promote the sales of products

Product-Mix Pricing Strategies

11-*Price Adjustment StrategiesCompanies adjust basic prices to account for various customer differences and changing situations.Discount and allowance pricingSegmented pricingPsychological pricingPromotional pricingGeographical pricingDynamic pricingInternational pricing

11-*Discount and allowance pricing reduces prices to reward customer for certain responses such as paying early, volume purchases, and off-season buying.DiscountsCash discount for paying promptlyQuantity discount for buying in large volumeFunctional (trade) discount for selling, storing, distribution, and record keepingAllowancesTrade-in allowance for turning in an old item when buying a new onePromotional allowance to reward dealers for participating in advertising or sales support programsPrice Adjustment Strategies

11-*Segmented pricing is used when a company sells a product at two or more prices even though the difference is not based on cost.Adjust basic prices to allow for differences in customers, products, and locationsAirlines, hotels and restaurants revenue management or yield managementTo be effective:Market must be segmentableSegments must show different degrees of demandWatching the market cannot exceed the extra revenue obtained from the price differenceMust be legalPrice Adjustment Strategies

11-*Customer segment pricing is when different customer pay for different prices for the same product or service.Product form segment pricing is when different versions of the product are priced differently but not according to differences in cost.Location pricing is when the product is sold in different geographic areas and priced differently in those areas even though the cost is the same. Time pricing is when a firm varies its prices by the season, the month, the day, and even the hour.Price Adjustment Strategies

11-*Price Adjustment StrategiesPsychological pricing occurs when sellers consider the psychology of prices and not simply the economics.Reference prices are prices that buyers carry in their minds and refer to when looking at a given product.Noting current pricesRemembering past pricesAssessing the buying situations

11-*Promotional pricing is when prices are temporarily priced below list price or cost to increase demand.Loss leadersSpecial event pricingCash rebatesLow interest financingLonger warranteesFree maintenanceRisks of promotional pricingUsed too frequentlyCopies by competitors can create deal-prone customers who will wait for promotions and avoid buying at regular price.Creates price wars.

Price Adjustment Strategies

11-*Price Adjustment StrategiesPromotional PricingLoss leaders are products sold below cost to attract customers in the hope they will buy other items at normal markups.Special event pricing is used to attract customers during certain seasons or periods.Cash rebates are given to consumers who buy products within a specified time.Low interest financing, longer warrantees, and free maintenance lower the consumers total price.

11-*Geographical pricing is used for customers in different parts of the country or the world.FOB pricingUniformed delivery pricingZone pricingBasing point pricingFreight absorption pricingPrice Adjustment Strategies

11-*Price Adjustment StrategiesFOB (free on board) pricing means that the goods are placed free on board a carrier. At that point the title and responsibility passes to the customer, who pays the freight from the factory to the destination.Uniformed delivery pricing means the company charges the same price plus freight to all customers, regardless of location. Zone pricing means that the company sets up two or more zones where customers within a given zone pay a single total price.Basing point pricing means that a seller selects a given city as basing point and charges all customers the freight cost associated from that city to the customer location regardless of the city from which the goods are actually shipped.Freight absorption pricing means that the seller absorbs all or part of the actual freight charge as an incentive to attract business in competitive markets.

Chapter QuestionsDefine price.Discus the internal and external factors to be considered for setting price.Explain the New-Product Pricing Strategies.Discuss the Product Mix Pricing StrategiesExplain the elements of Price Adjustment Strategies.

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