Pricing Strategies

Factors Affecting Price Decisions Internal Factors

Marketing ObjectivesMarketing Mix StrategyCostsOrganizational considerationsExternal Factors

Nature of the market and demandCompetitionOther environmental factors (economy, resellers, government) PricingDecisionsCHPT: 14-*

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MarketingObjectives

SurvivalLow Prices to Cover Variable Costs andSome Fixed Costs to Stay in Business.Current Profit Maximization Choose the Price that Produces the Maximum Current Profit.Market Share LeadershipLow as Possible Prices to Becomethe Market Share Leader.Product Quality LeadershipHigh Prices to Cover Higher Performance Quality and R & D.

Internal Factors Affecting Pricing Decisions: Marketing ObjectivesCHPT: 14-*

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Market andDemand Competitors Costs, Prices, and OffersOther External FactorsEconomic ConditionsReseller NeedsGovernment ActionsSocial ConcernsExternal Factors Affecting Pricing Decisions

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Pure CompetitionMany Buyers and Sellers Who Have Little Effect on the Price

Monopolistic CompetitionMany Buyers and Sellers Who Trade Over a Range of PricesPricing in Different Types of Markets\Market and Demand Factors Affecting Pricing Decisions

Oligopolistic CompetitionFew Sellers Who AreSensitive to Each Others Pricing/ Marketing StrategiesPure MonopolySingle Seller

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Major Considerations in Setting Price

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Price Setting

Selecting the Pricing objectiveDetermining DemandEstimating CostsAnalyzing Competitors Costs, Prices and offersSelecting a Pricing MethodSelecting the final priceAdapting the price.

Pricing Strategies

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Cost-Based Pricing

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Setting PricesSealed-BidCompany Sets Prices Based on What They Think Competitors Will Charge.Going-Rate Company Sets Prices Based on WhatCompetitors Are Charging.

Competition-Based Pricing

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Value Pricing

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Old Russian Proverb

There are two fools in every market one who asks too much and one who asks too little

What is a value proposition?An overall mixture of benefits you offer a customer with a product or service solution.

That means customers compare the perceived worth of your solutions to the price you ask for it.

If your price is higher than the perceived worth, your quantity demanded suffers, If you price your solution below the perceived worth, you miss out on money customers were willing to pay

Value PricingPrice set in accordance with customer perceptions about the value of the product/service

Offering value at a low price.

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Contd..Shift from cost based to value based pricing

What factors differentiate your product from the competition?How much those difference are really worth to the customer?How much of a price premium (if any) you should be able to sustain over the competitors?What improvements to your product would add the most value from the customers perspective?

Example Tata Motors launched a compact sedan called Tata Indigo CS with a base price under Rs4.5 Lac sometime back.

Mc Donalds offer Value Menus.

Applications When you want to gain market share, obtain market acceptance of a new product.

Retail Set up EDLP by Walmart.

Loss Leader

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Loss LeaderGoods/services deliberately sold below cost to encourage sales elsewhere

One of the oldest marketing tricks is selling a product at cost or even a loss in what is called the Loss leader" strategy

For example, in 2011, Amazon advertised its new online music service by offering Lady Gaga's new album for $0.99 -- a $3 million loss to the company.

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Contd.

Loss leader can backfire. In Amazon's case, the initial offering drew thousands of new customers to its website, but crashed the company's servers -- Amazon successfully relaunched the deal the following week.

Although Amazon absorbed the cost of the Lady Gaga deal, a small business might not be able to recover from running out of the product, or failing to entice customers to purchase other profitable items.

Applications

Unwanted Merchandise/ Slow moving itemsAttracting CustomersBrand BuildingTracking Advertising

Examples When Apple Inc reduces the prices on its latest products, savvy Apple watchers know a new release is just around the corner

Even e-commerce effectively uses loss-leader pricing to attract customers. The next time you visit a website to take advantage of a discount offered on shoes, notice the "customers also looked at these products" messages showing other shoes and accessories you might find attractive.

Contd.Advertising a loss-leader product at a price that will certainly attract customers.

Coupled with a coupon that can be traced to a particular newspaper shows how well your ads are targeting by the amount of merchandise that is sold.

Psychological Pricing

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Psychological PricingUsed to play on consumer perceptions

Classic example - Rs9.99 instead of Rs10.

Links with value pricing high value goods priced according to what consumers THINK should be the price

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Contd..Psychological pricing is a pricing tactic that is designed to appeal to customers who use emotional rather than rational responses to pricing messages

ContdSometimes prices are set at what seem to be unusual price points

For example, why are DVDs priced at 12.99 or 14.99? The answer is the perceived price barriers that customers may have. They will buy something for 9.99, but think that 10 is a little too much.

So a price that is one pence lower can make the difference between closing the sale, or not!

The main advantage of psychological pricing is that it allows a business to influence the way that customers view a product without the need to actually change the product.

Going Rate (Price Leadership)

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Going Rate (Price Leadership)In case of price leader, rivals have difficulty in competing on price too high and they lose market share, too low and the price leader would match price and force smaller rival out of market

May follow pricing leads of rivals especially where those rivals have a clear dominance of market share

Where competition is limited, going rate pricing may be applicable banks, petrol, supermarkets, electrical goods find very similar prices in all outlets

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New Product Pricing StrategiesMarket Skimming

Setting a High Price for a New Product to Skim Maximum Revenues from the Target Market.Results in Fewer, But More Profitable Sales.

Use under these Conditions:Products Quality and Image must support its higher Price.Costs cant be so high that they cancel the advantage of charging More.Competitors shouldnt be able to enter market easily and undercut the high price.

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New Product Pricing StrategiesMarket Penetration

Setting a low price for a new product in order to Penetrate the market quickly and deeply.

Attract a large number of buyers and win a larger market Share.Use Under These Conditions:Market must be highly Price-sensitive so a low price produces more market growth.Production/ Distribution Costs must fall as sales volume increases.Must keep out competition & maintain its low price position or benefits may only be temporary.

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Product Mix-Pricing Strategies:Product Line PricingInvolves setting price steps between various products in a product line based on:Cost differences between products,Customer evaluations of different features, and competitors prices.

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Contd.Companies with more than one product within the same line use a product line pricing strategy

What this means is that different products on a line will have different prices depending on their features or benefits

The price on each product in the line is set with that price's impact on the sales and profitability of other items in the line in mind

One goal of this pricing method is to maximize overall profits

Examples In Automobiles , price range in a given line from base model to top end models with difference in features.

Product Mix- Pricing StrategiesOptional-ProductPricing optional or accessory products sold with the main product. i.e. camera bag.Captive-ProductPricing products that must be used with the main product. i.e. film.

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ContdKotler defines captive-product pricing as, Setting a price for products that must be used along with a main product

Producers of captive products often price the main product low and then set high markups on the supplies or expendable products.

Many companies make very low margins on the main products but are able to make very high margins on the expendable secondary products (Kotler)

Contd..Could you give some examples???

Razor blades, Printers, and Theme parks as examples of companies that use captive product pricing

Contd.

Logic - once customers make an initial investment in a base product, they must buy additional components to get value from their purchase

Contd.The first benefit of captive pricing is the ability to attract a sizable customer base because initial purchases are at low price points

Repetitive revenue, stable profit margins and potential customer loyalty

By keeping customers hooked to your products and brand, you also have greater opportunity to market and promote new versions or unrelated products to them

Contd. A portion of the audience may feel duped by the lure of a low-priced product only to pay perpetually to use it

Negative brand attitudes can fester.

Additionally, the provider must maintain strong investment and commitment to offer the components and products necessary.

Product Bundle Pricing Defined as combining several products and offering the bundle at a reduced price

Contd

Contd..For example, a camera retailer may offer a discounted price when customers purchase both a digital camera and a how-to photography DVD that is lower than if both items were purchased separately.

In this example the retailer may promote this as: Buy both the digital camera and the how-to photography DVD and save 25%.

Contd.Marketer is presenting a price adjustment without the perception of it lowering the price of the main product.

Optional Pricing Companies will attempt to increase the amount customer spend once they start to buy. Optional 'extras' increase the overall price of the product or service.

Airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.

Mobile handsets with Service connection.

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