Contemporary Marketing

Lecture 6 Click to edit Master subtitle style Pricing (aka value for money aka cost to customer)

Learning objectives:
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To understand the management implications of roles of pricing and the

various different issues which need to be taken into consideration To explain the various pricing steps in the various pricing tools and techniques
To note the role new technologies in setting pricing policy To reflect on the nature of international pricing

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Pricing
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It is ..essential that managers understand how to set prices, because both undercharging (lost margin) and overcharging (lost sales) can have dramatic effects on profitability (Jobber, 2007:458)

The Role & Importance of Pricing

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Price is the only P that generates revenue Price connects customers and suppliers Price sends signals to customers about quality, exclusiveness Price can represent value for money Price is used as a competitive tool to differentiate a product and organisation, exploiting market opportunities Pricing must be consistent with all other variables in the mix.

Perspectives on Pricing Decisions

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The Economists Perspective n Where demand and supply are brought into equilibrium giving a price. The Accountants perspective n The emphasis is on recovering costs to make a profit (Rate of return). Understanding the difference between fixed, variable and marginal costs is needed The Marketers Perspective n Emphasis is on the effect of price on competitive market position and value.

The Economists Perspective

Price Elasticity
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A measure of the sensitivity of demand to changes in price.

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Price elasticity of demand =

Buyers are less price sensitive if product is unique and high in quality or image. If demand is elastic, producers will lower price and generate more total revenue through greater demand at the lower price.

Price Elasticity

Customers and price / demand Price elasticity of demand = percentage change in quantity demanded / % change in price the steeper the curve, the less sensitive demand is to price e.g car insurance

Considerations for Pricing

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Costs and prices n Total cost = sum of all fixed and variable costs times the quantity n Average cost = total cost divided by number of units produced n Fixed costs = costs that do not vary with the number of units produced or sold e.g. rent n Variable costs = costs that vary directly according to the number of units produced or sold n Marginal costs = the addition to total cost

Value for money and Price Sensitivity

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Price sensitivity refers to the effect a change in price will have on customers It will vary amongst purchasers. Those who can pass on the cost of purchase will be least sensitive and will respond more to other elements of the marketing mix .e.g. a business traveller re-price of hotel v family

Price Sensitivity
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Research on price sensitivity of customers has shown in general that: n Customers have a good concept of a just price n For special purchases, customers search for price information before buying thus becoming price aware when wanting to buy but will forget soon afterwards n Customers will often buy at what they consider to be a bargain price without full regard for their present needs and the level of the price itself. n Down payment and instalment price are more important than total price n In times of rising prices, the price image tends to lag behind the current price n If there are substitute goods, customers will be more sensitive to price. n Overtime, consumers demand patterns are likely to change. If the price of something is increased, the initial response might be a small change in demand price elasticity

Factors influencing price sensitivity

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The unique value effect the better differentiated the product, the lower the price sensitivity The substitute awareness effect the greater no of substitutes the greater the sensitivity The difficult comparison effect the more difficult the comparison, the lower the sensitivity The total expenditure effect the smaller the proportion of spend, the lower the sensitivity The end benefit effect the greater and more valued the end benefit, the lower the sensitivity The shared cost effect a buyer bearing only part of the cost pf a product will be less sensitive The sunk investment effect buyers who have already bought complimentary products will be price sensitive The price-quality effect the higher the prestige/image, the less sensitive The inventory effect buyers who hold stocks of the product are more likely to be price sensitive than are those Pettitt(2006: for Brassington & who purchase 449) immediate consumption

Factors influencing price sensitivity in B2B markets

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The total expenditure effect The penalty for failure The overall saving effect The contribution to quality effect The degree of customisation effect The end customer sensitivity The buyers ability to absorb costs The buyers ignorance effect The decision makers motivation effect cost
Brassington & Pettitt(2006:449)

Factors determining price levels

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Internal factors
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Marketing objectives Marketing Mix strategy Costs (a dominant factor) Price setting methodologies Product Portfolio strategies Competition Demand Customer perceptions Suppliers and intermediaries PEST factors

External Factors
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Considerations for pricing continued.

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Competitors and prices

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Assess existing and potential competitors pricing Be aware of monopolistic activity etc

Company Considerations and Prices

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Pricing decisions should reflect Co objectives and strategies

Considerations of pricing continued.

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Legal and regulatory Framework

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Many regulatory organisations in place e.g. Office of Fair Trading (OFT) Resale price maintenance abolished in UK in 1960s in most product areas. Duty and tax requirements e.g alcohol and tobacco
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excise duties and VAT account for 80% of the cost of a litre unleaded petrol and the actual cost of the fuel is around 8p per

Company Considerations
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Company and Marketing Objectives Set pricing objectives and policy Assess target markets Assess costs/ cost structure Select specific price Select pricing method Assess customers demand

Other factors influencing pricing decisions

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Intermediaries objectives Competitors actions and reactions Suppliers Quality, customer satisfaction and value New product pricing The economy Product range Social responsibility Government

Price Discrimination/Differential Pricing

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A firm may successfully charge higher prices for the same product to people who are willing to pay more. This could be by: n Market segment services such as cinemas/hairdressers are often available to OAPs at lower prices n Product Version software is written top down and the full version sold at a premium price. For less advanced users all the software co has to do is take features out n Time travel cos are successful price discriminators e.g. peak v off peak.

Pricing and competition

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A firm may respond to competitor price cuts by:

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Maintaining existing prices Maintaining prices but responding with a non-price counter attack Reducing prices Raising prices and responding with a non-price counter attack

Competitive Bidding
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Competitive bidding is a special case of competitor based pricing. Many supply contracts especially concerning local and national government purchases involve would be suppliers submitting a sealed bid or tender.

Pricing Methods
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Cost based methods

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Cost plus pricing

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Easy, quick, no skill needed neglects external forces, competition, other mix variables

Competitor based methods

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Going rate pricing Premium pricing Discount pricing

Cost Based Pricing Frameworks

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Cost plus pricing use more easily measurable direct cost components such as labour and raw material inputs calculated in the unit cost, then add a margin which incorporates an overhead charge and a residual profit element. Often used where overhead allocation to individual unit costs is too complex or too time consuming. Full cost pricing full average cost of production of a product including an allocation of overheads. A profit margin is then added to determine selling price often used by solicitors where the price is often determined after the work has been performed. Mark-up pricing often used by retailers and involves a fixed margin being added to the buying in price. In the UK, items such as cigarettes carry a low 5-8% margin; newspapers approx. 25%; slow moving items such as furniture 33-50%
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What are the advantages and disadvantages of cost based pricing?

Competitor Based Pricing Frameworks

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Going Rate Pricing where prices are set on the basis of what competitors are charging price stability Premium pricing Where price is et over and above the competition Discount pricing where price is et below the competition

Building Market Share?

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It has been suggested that there are three elements in the pricing decision for a new product: n Getting the product accepted; maintaining a market share in the face of competition; making a profit from the product When a firm launches a new product onto the market, it must decide on a pricing policy which lies between the two extremes of market penetration and market skimming

Product:price interaction(I)- product life cycle

Pric e

Pric e

Pric e

Pricing Methods
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Demand/Market Based methods

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Market skimming
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marketer charges high price for a new product and then lowers it as the product matures quick ROI, facilitates high image/quality setting of low prices in order to gain rapid market share should produce large volume, can prevent new entrants

Market penetration
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Market Skimming
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MS pricing is the setting of a high initial price to achieve high unit profits with the knowledge that a certain number of customers will buy at a high price. This is possible where rival firms are not expected to undercut these high prices, where the fixed costs of output are fairly low so that EOS are relatively insignificant and where the customer believes that high prices signify a quality product. Ms involves:
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Charging high prices when first launched Spending heavily on advertising and sales promotion to win customers As the product moves into the latter stages of the PLC lowering prices progressively.

The objective of MS is to gain high unit profits early in the PLC.

Market Penetration
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MP is a policy of low prices when the product is first launched in order to gain sufficient penetration in the market. It is a policy of sacrificing short term profits in the interests of the long term. Circumstances which favour a penetration policy are:
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The firm wishes to discourage rivals from entering the market Firms wishes to shorten the initial period of the PLC in order to enter the growth and maturity stages as quickly as possible There are significant EOS to be achieved from a large output.

Product Mix Pricing Strategies

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A product that is part of a product range cannot be priced in isolation from the rest of the range. E.g when Apple launched the IPOD Nano it had to carefully price-position the device against the original Ipod mobile. (product line pricing) The range has to be viewed as an entity Within an individual product line, each product offers additional features and their pricing needs to be spaced accordingly. Encourages trading up

Product:price interaction(II)- NPD process

Pric e

Pric e
Brassington & Pettitt, 2003:358

Product:price interaction(III)Innovation Adoption

Price
Number

Pric e Pric e Pric e

Tim e
Source: Reprinted with the permission of The Free Press, a division of Simon & Schuster, Inc., from Diffusion of Innovations, Third Edition by Everett M. Rogers. Copyright 1962, 1971, 1983 by The Free Press.

Managing pricing cuts & Increases

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Prices are rarely static for long Competitive pressures, new market opportunities, changing environmental conditions etc can lead to price changes. Any pricing cuts need to be considered against margin and volume e.g. if the initial gross margin was 30% and a price cut of 10% was introduced, unit sales would need to increase by 50% just to maintain original profit margins. Pricing cuts may be seen as an aggressive move by competition price ware Asda v Tesco Respond carefully to competitor pricing cuts plan it

Pricing internationally
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Firms can adopt three approaches to pricing goods exported from the home market: n Standardised ethnocentric pricing a single price is charged to recover costs and earn the return. As this is translated at local exchange rates this can lead to price volatility in local terms and a lower volume of sales than would be possible. n Adaptation or polycentric pricing each local subsidiary sets its own prices. There is no coordination. HQ has no control and grey markets can develop. n Geocentric pricing aims for a global pricing strategy but in the short term at least (e.g. introducing a new product) local subsidiaries have some autonomy.

Factors affecting International Pricing

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The Companys objectives The marketing objectives

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A co may have differing objectives in various countries

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Level of demand Intensity of competition Costs additional costs such as transportation, insurance and storage, taxes, agents fees etc. Government restrictions Intermediaries Foreign currency

Demand Based pricing

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Psychological Pricing n Relies on the customers emotive response

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Odd pricing Even pricing

Pricing Online
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Pricing structures more complex with many organisations seeking to provide alternatives eg software (http://alternativeto.net/) Pricing is becoming more transparent- sites exist to advise users against incurring unnecessary costs (http://www.saynoto0870.com/)

Online Pricing Traditional pricing mechanisms

Options for the price package include:
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Basic price Discounts Add-ons and extra products and services Guarantees and warranties Refund policies Order cancellation terms (Smith and Chaffey, 2005, p.49)

Pricing Policy
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A pricing policy should encompass:

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Responsibilities and authority for pricing decisions Discretion with regard to price discounts, special deals Procedures for responding to competitor price changes Procedures for changing prices in company Credit policy

Dynamic Pricing
Current models for dynamic pricing include:
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auctions, reverse auctions (where buyers set the price they are willing to pay and then sellers bid for their business), trading exchanges, price matching, quantity pricing,

Examples of dynamic pricing include: eBay and Priceline.com.

Web exclusive pricing discounted price

Advent 7086 Laptop

Comparative Pricing
Aims to make pricing on the internet transparent by allowing you to compare prices for goods/services from many retailers. Examples include:
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Pricerunner.co.uk Moneysupermarket.com Pricewatch.com Kelkoo.co.uk Froogle.google.co.uk USwitch.com (for utilities)

New, Boxed & End of line Scratch & dent Refurbished Ex-display Used and returned Opening Bid: 1.00 Bid Increment: 25.00 Next Bid: 475.00 No. of Bids: 17 (Bid History) Quantity: 1 Open Date: 31/10/2005 7:20 AM GMT Close Date: 06/11/2005 9:00 PM GMT Listing #: 64725370

Cashback website

E-coupons

E-coupon numbers

Voucher codes offering online price discounts

Summary
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Pricing is the only p in the Marketing Mix to generate revenue. There are various different influences to take into consideration when setting a price Price sensitivity is an issue. There are 3 key approaches to prices; cost based, competitor based, market based. Always consider the international dimension

References
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Linton & Donnelly (2009/10) Delivering customer value through marketing, BH Delivering Customer value through Marketing, BPP Study Text Jobber (2007) Principles and Practice of Marketing, 5ed. McGraw Hill