SETTING THE RIGHT PRICE:CONCEPTS AND PRACTICE

Mitchell Young

Yummy Bar 12.50 kc Choco-Bar 9.90 kc

What does Price do?

Names Terms of Exchange Signifies Quality Shapes the Value of the Product

How? Motivating consumer to rethink and better

understand what they are being offered

What you need to know before determining price

1. Costs 2. Competitors 3. Customers and Value4. Corporate Strategy

Slide 16.5

Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009

The 3 C’s and Pricing Models

Models: Markup pricing Going-rate pricing Perceived-value

pricing Value pricing Premium pricing Auction-type

pricing

Costs (costs plus or markup)

= Product Cost

Analyze competitors’ costs, prices and offers

Consider the nearest competitor’s price Evaluate worth to customer for

differentiated features Judge whether the customer will be

willing to pay more Anticipate response from competition –

what would you do in competition’s place?

Where do customers perceive value?

Features Buyer’s image of

product performance

Ability to deliver on time

Warranty

Customer support Supplier reputation Trustworthiness

and Reliability Esteem End user of the

product

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Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009

Strategic Decisions: the pricing objective

Survival Maximum current profit Maximum market share Maximum market skimming Product-quality leadership

Porter’s Generic Strategies

Target Scope

Competitive Advantage

Low Cost Product Uniqueness

Broad (industry wide)

Overall Cost Leadership

Differentiation

Narrow(market segment)

Cost FocusDifferentiation

Focus

Price-adaptation strategies

Geographical pricing

Discounts/allowances

Differentiated pricing

Promotional pricing

Bundle pricing

Communicating with Customers by Using Price

Commodification = Products become “commodities” Skepticism, routinized behavior, minimal

expectations, prefer swift and effortless transactions

All product dimensions are equally palatable, differences are not worth investigating

Not about products, but about customers (vs. actual commodities)

Objective is to reengage buyer who is past caring

Tires, Explosives, Car Insurance

Using Price – Change Parameters Adjust price structure to clarify

advantages Move away from “units sold” model Examples

Goodyear, price on “miles/km” expectation, rather than engineering

Orica, price on fragmentation of rock rather than explosive

Norwich Union, insurance based on miles driven, rather than risk

Using Price - Overpricing

Thought-provoking effect of moderate overpricing (50% to 80%)

Consumer: “Why is this so much more expensive?”

Revives considerations and recall of other features

Apple computers, Starbucks, etc.

Using Price - Partitioning

Use partitioning to highlight overlooked benefits

Showing broken down pricing can cause consumers to revise behavior

Unbundling Cable television (channels, set top box,

internet) Low cost airlines (flight, luggage, food)

Using Price – Single Price Point Customer focuses on choice, rather than

price Swatch -- which is right for me? iTunes

Varying $0.89 to $1.29

Uniform $1.29

Likelihood of Purchase (1 to 5)

2.77 3.63

Songs per month

5.05 6.13

Implied annual revenue

$25.95 $49.10

Using Price – Free

Power of Free Free $10 gift certificate, or seven dollars

for a $20 gift certificate Amazon France

Shipping for 1 Franc (vs. free)

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Kotler, Keller, Brady, Goodman and Hansen, Marketing Management, 1st Edition © Pearson Education Limited 2009

Presenting the price

Anchoring Use a comparison

TiVo (VCR vs. Computer)

$200 vs. $1000 Apple iPhone

$600 to $400 Anchor high value

Price Cues ‘Left to right’ pricing

($299 versus $300) Odd number

discount perceptions vs. Even number value perceptions

‘Sale’ written next to price

Limited availability