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Pricing

The Marketing MixPrice

• What is meant by a pricing strategy?.• Identify the key determinants for pricing

policy decision making. • Identify the different methods available for

pricing products and services.• Explore how pricing strategy fits in with

other elements of the marketing mix.

Introduction

• Marketing is defined as:– “The management process responsible

for identifying, anticipating and satisfying customer requirements profitably.”

– The key words in the definition in relation to the Pricing Policy are:• Customer Requirements.• Profitability.

Introduction

• The prices a company sets for its product and services must strike a balance between – gaining acceptance with the target

customers and making a profit for the organisation.

Pricing Strategy

• The first thing which we must define, is what is meant by price. Price is defined as:

– “The amount in money for which something is offered for sale.”

Pricing Strategy

• A Pricing Strategy is defined as:• A plan which determines the best (at the

time of making) pricing decision. – “The planning of prices, including the setting

of discounts, in considering items such as the price of competitive products, manufacturing and distribution costs, the firms growth and profitability, customer wants, and the elasticity of demand.”

Pricing Strategy

• When setting prices we must consider:– Whether to discount or not.– The price that the competition charges.– The cost of providing the product or service.– The company’s market position e.g. is it a

market leader.– The type and nature of demand e.g. if an

increase or a decrease in price will effect amounts purchased.

– The market segments we are seeking to attract.

Pricing Strategy

• It must be remembered, that price is a key element in the marketing mix because -– for a profit motivated company, it relates directly to the

total revenue, and ultimately the profit of the business.

Profits = Total Revenues – Total Costs

Profits = (Prices x Quantities sold) – Total Costs

OR

The Key Determinants for Pricing Strategy

• The key determinants of pricing decisions are:– Organisational and Marketing objectives– Pricing objectives– Costs– Other marketing mix variables– Legal and regulatory issues– Competition– Buyers perceptions– Consideration of intermediaries (retailers,

wholesalers)

Factorsinfluencing

priceselection

Firm’s overallobjectives

Marketing & Sellingobjectives

Marketing Costs• product costs• distribution costs• promotional obj / costsTotal costs

Competitors’ pricingbehaviour and type

Market demand / perception

Legal / regulatoryrequirements

Pricing Strategies

• Quantity or trade discounts• Cash discounts• Freight costs• Flexible pricing• Price lining• Leader pricing

Quantity or Trade Discount

• Quantity discounts: – Deductions from a seller’s list price that are

offered to encourage customers to buy in bulk– eg. Buy a particular resort package – children fly

free

• Trade discounts:– Reductions from the list price offered to buyers

in payment for marketing functions that they will perform

Cash Discounts

• A deduction granted to buyers for paying by cash or within a specified time.– They are usually calculated on a net amount

due after first deducting trade and quantity discounts from the base price.

Flexible Price Strategy

• With a flexible – price strategy, similar customers may each pay a different price when buying similar quantities of a product.– Trade-in

Price Lining

• Involves selecting a limited number of prices at which a business will sell related products.– A shoe shop which will sell several styles of

shoes at $69.95 and another group at $89.95.

Leader Pricing

• Temporary cutting of prices on a few items to attract customers– Gotta Go Flights

• You own a fast food restaurant chain and are considering selling your product at below cost price for a short period of time. Why would you do this?

Activity

Feedback

• This is known as a tactical price reduction and may be introduced for a short period of time, even if it does not cover all costs. – To temporarily match the competitor's prices– To generate substantial cash flow.– To increase market share.

Buyers Perceptions

• The marketer must consider the importance of price to the customer in the target market segments when setting prices.

• Try the following activity to illustrate this:

• You have been given the job of pricing two new products as follows:

• Product A – Budget hotel room Target – Families ( lower middle to low income)

• Product B – Luxury hotel room Target – Business People ( High to middle income )

• How important will the price be to the target customers?

• PRODUCT A• PRODUCT B

Activity

Feedback

• Price will be very important in both markets as follows:– PRODUCT A

• Price must be reasonable or cheap to reflect the nature of the product on offer.

• Price will often be the first consideration of the target customers – value for money is key.

Feedback

• Price will be very important in both markets – PRODUCT B

• Prices here will be much higher but price is just as important to the business traveller

• It must be high enough to give a “quality” impression but competitive in relation to other luxury hotels.

Feedback

• Prices of products and services are key in both budget and luxury markets.

• It is possible to overprice and underprice in both examples, in the eyes of the customer.

• It is also important that the price reflects the other elements of the marketing mix.

Competition

• Companies who are selling products and services in competitive markets try to win customers over from rival companies.

• This is achieved in one of two ways:– PRICE COMPETITION– NON PRICE COMPETITION

PRICE COMPETITION

• This involves offering the product or service at a lower price than that of its competitors products or services.

NON PRICE COMPETITION

• This involves the company trying to increase market share of its product or service by – leaving the price of its product or service

unchanged but by persuading the target customers of the superiority or advantages associated with it.

• Whether a firm uses price competition or non price competition, depends on the state of the market. – In a very competitive market place, the firm is

more likely to have to resort to intense price competition to sell their products and services.

– In an non-competitive market there is little to be gained from price competition and firms tend to concentrate much more on non price competition (example)

Competition

• It is always important for a firm to predict what the competition may do if prices are changed.

• Example:– You are in charge of pricing of hotel rooms in

a large group in a highly competitive market. You are considering a tactical price reduction in an attempt to gain market share. What may the competition do to respond?

Competition

• They could respond to your tactical price reduction in a number of ways:– Do nothing (highly unlikely).– Reduce their prices to the same level as yours

(or even lower!).– Try and stress their advantages and superiority

in the market place.

• Their reaction will depend on – the position they are in particularly in relation

to cost structure and market power. – It is important, however, that you predict the

likely outcome of your temporary price reduction.

– If the competition is very responsive, it may do little to your overall long term market position

• merely generate some extra short term cash flow.

Legal and Regulatory Issues

• The marketeer is often restricted in the setting of prices by legal and regulatory issues. – Government intervention. Price controls. – Legal restrictions on price fixing and collusion

• The Commerce Act 1986– Consumer Legislation

• Fair Trading Act 1986

The Different Methods of Pricing

• The way in which prices are derived, depends on the company’s pricing policy.

PRICING POLICY

• “A pricing policy is a guiding philosophy or course of action designed to influence and determine pricing decisions.”

• Once the company has decided on a pricing policy, it must then choose a pricing method. – “A pricing method is a mechanical procedure

for setting prices on a regular basis.”

PRICING METHODS

• Cost Orientated Pricing• Demand Orientated Pricing• Competition Orientated Pricing

Cost Orientated Pricing

• This is where the price of a product or service is calculated and a margin applied to derive a selling price– This is the simplest method of pricing and is

often used by companies for calculating prices.– It has the disadvantage of not taking into account

the economic aspects of supply and demand and often does not relate to pricing objectives

Demand Orientated Pricing

• This method allows for high prices when the demand is high and lower prices when the demand is low, regardless of the cost of the product or services. – Demand orientated pricing allows a firm to

make higher profits as long as the buyers value the products above the cost price.

Competition Orientated Pricing

• The firm fixes the prices of the products and services in relation to the competitor’s prices.

• This has the advantage of giving the firm the opportunity to increase sales or market share.