Why has No One thought about THIS yet?

• Assignment Discussion & Peer-Grading

• Describe a product (or service), which does
not exist on the market today, BUT would
benefit consumers, and has potential for
commercialization.
• Who are your potential consumers (i.e., your target market)?
• What benefit/value does your product provide to the consumers?
• What is the best way to inform consumers, promote & advertise it?
• What should your price be? Why?
• How do you propose to distribute your product?
• What do you think are the major challenges/ possible problems with
bringing this product to the market?
Lecture 10 , Chapter 13

Pricing Programs
Lecture Objectives
• Develop an understanding of various pricing
concepts
• Understand how companies go about with
Setting the Price
• Understand how companies go about with
Adapting the Price
• Understand how companies go about with
Initiating and Responding to Price Changes
Chapter Questions
• What are the different types of pricing
programs?
• What are a firm’s objectives behind choosing
a specific type of a pricing program?
• What are the key elements that may influence
the success of a given pricing program?
• How does pricing contribute to the overall
success of a firm’s marketing program?
Understanding Pricing
• A changing pricing environment has lead to
pricing practices become significantly
different. Above all, changing technological
environment has majorly impacted pricing
decisions…..

HOW?!
Here’s How Buyers Are Behaving…!
• Get instant price comparisons from
thousands of vendors
• BOTS

• Name their price and have it met

• Get products free – $0.00 is the future of

business!!
 Classification Of The Priceless Economy
• Freemium: What's free: Web software and services,
some content. Free to whom: users of the basic
version.
• Advertising: What's free: content, services,
software, and more. Free to whom: everyone
• Cross-subsidies: What's free: any product that
entices you to pay for something else. Free to whom:
everyone willing to pay eventually, one way or
another.
• Gift economy: What's free: the whole enchilada, be
it open source software or user-generated content.
Free to whom: everyone.
Consumer Psychology and Pricing
• Purchase decisions are based on how
consumers perceive prices and what they
consider the actual price to be.
• Understanding how consumers arrive at their
perceptions of prices is an important
marketing priority
• There are 3 key considerations that go
behind how consumer perceptions are built
• Reference Prices: Fair Price, Typical Price,
Last Price Paid, Upper/Lower-Bound Price,
Historical Competitor Prices, Expected
Future Price, Usual Discounted Price
• Price-Quality Inferences: Many consumers
use (high) price as an indicator of (good)
quality
• Price-Endings: Sale signs and prices ending
in”9” are popular as are those ending with 0
and 5, which helps consumers process and
retrieve money. Limited availability (today
only!) can also spur sales
Steps In Setting A Pricing Policy
1. Selecting the Pricing Objective
2. Determining Demand
3. Estimating Costs
4. Analyzing Competitor’s Costs, Prices, and
Offers
5. Selecting a Pricing Method
6. Selecting the Final Price
Marketing Strategies and Possible Pricing
Objectives
1. Primary-demand strategies
• Increase Number of users
• Increase rate of purchase
2. Selective-demand strategies
• Expand served market
• Acquire competitors’ customers
• Retain/expand current customer demand
Selecting the Pricing Objective
• Maximum Current Profit
• Maximum Market Share – Market Penetration
Pricing
• Maximum Market Skimming – Price
Skimming / Premium Pricing
• Product-Quality Leadership
Penetration Pricing
• Designed to use low prices as the major
basis for stimulating primary demand and
enhancing number of customers
• Low prices discourages actual and potential
competition
• Requires for consumers to be highly price
sensitive
• The company must sell higher-margin
complimentary products.
• Works well with firms who have economies
of scale.
• How has McDonalds fulfilled (nearly) all the
requirements of penetration pricing through
this offer?
Premium Pricing Program
• Companies unveiling a new technology favor
setting a high price to maximize market
skimming
• This strategy works best when
• A sufficient number of buyers have a high current
demand
• The initial high price does not attract more
competition
• The high price signals the image of superior
quality
• Apple is a frequent practitioner of market-
skimming pricing, WITH A TWIST
Comparing the 2 Price Options
• Penetration Pricing: low margin but high volume –
good if "economies of scale" in production costs –
capture a large share of the market (first mover
advantage) – dissuades entry (but easily copied
unless you have prod. adv.) – dangerous if there is a
strong price-quality association – limits flexibility
because consumers react more strongly to price
increases than price decreases
• Skimming (Prestige Pricing): high margins at
expense of volume – good early in product life cycle,
because "early adopters" are less price sensitive –
good if there is little risk of competition – good if
there is a strong price-quality association – more
flexibility because price can be reduced
Determining Demand
• Price Sensitivity: Generally speaking,
customers are less price sensitive to low-
cost items or items they buy infrequently;
other factors include:
• High product distinction, slow to changing
purchase habits, cannot store the product
• Price Elasticity of Demand: Marketers need
to know how responsive, or elastic, demand
is to change in price
What Is Price-Elasticity of Demand?
• Price elasticity of demand, ‘e’ is measured by
%change in quantity divided by % change in
price.

EFFECT ON TOTAL REVENUE OF:

Value of ‘e’ Type of Elasticity Price Increase Price Decrease
e > -1 Inelastic Increases Decreases
E = -1 Unitary elastic No change No change
E < -1 Elastic Decreases Increases
Factors underlying the Elasticity of
demand
• For the Market
• Presence of a large number of alternates
which can be substituted for the product
e.g. Meat market
• Number of potential buyers exceed the
number of actual buyers due to high price
e.g. jewelry market
• Rate of consumption in these cases can
be increased by lowering prices.
Continued…
• For the Company
• Buyers are aware of a large number of
alternatives to the brand e.g. telecom
brands
• Quality differences do NOT exist or are not
perceived e.g. Premium lawns
• The supplier or brand can be changed
easily and with minimal efforts or costs
e.g. (consumer) bank accounts
How To Estimate Price Elasticity
• Historical Ratios / Statistical Analysis
• Surveys
• Price Experiments
Estimating Cost Factors
• Types of Cost & Levels of Production
• Overhead / Fixed Costs
• Variable Cost
• Target Costing
• Accumulated Production: A decline in
average costs with accumulated production
experience is called the learning curve or the
experience curve
Competitive Factors
• The effect of Price-Ups – How Unilever
tricked P&G in an artificial price war!
• Generally speaking, there are two points to
keep in consideration
1. Increase in Price-oriented advertising
leads to greater price sensitivity among
consumers
2. Increase in non-pricing advertisement
leads to lower price sensitivity.
Selecting the Pricing Method
Selecting the Pricing Method
• Markup Pricing
• Perceived Value Pricing
• Value Pricing
• EDLP
• High-low Pricing
• Going-rate Pricing
• Auction-type pricing
Selecting the Final Price
• Impact of Other Marketing Activities
• Company Pricing Policies
• Impact of Price on other parties
Adapting the Price
• Geographical Pricing, based on differences
in currency
Promotional Pricing
• Psychological discounting
• Special event pricing
Differentiated Pricing / Price
Discrimination
• Customer-segment pricing
• Product-form pricing
• Channel-pricing
• Location Pricing
• Time Pricing
Initiating & Responding to Price Changes
• Initiating Price Cuts can lead to possible
traps such as:
• Low-quality trap
• Fragile market-share trap
• Shallow-pockets trap
• Price-war trap
• Initiating Price Increases is a valid move for
the company in the following scenarios:
• Unbundling
• Reduction of discounts (B2B)
• This move should be done on a low,
incremental basis as opposed to sharp
increases.
Additional Price Considerations
• Political-Legal environment
• International Considerations
• Price Elements of Other Marketing Programs
(MARKED) Project Update 2 – Instructions
• Carry out an interview with your point of contact and
get an overview of where they would like to see their
business go in the next 5 years.
• Please make a video recording of the session,
excerpts of this are to be played in class next week
• Using the information received and the concepts
studied so far, develop an initial tentative outline of
how you can help them achieve that
• A formal written submission is due, alongside an
informal presentation focusing on the video
• For students who had their initial proposals turned
down, prepare to present on the points which were
expected from you in the 1st update.
Quiz II – BBA 6B
• Q1. Compare and Contrast Market Skimming
with Market Penetration pricing. Illustrate
each strategy with a relevant example. (2
marks)
Quiz II – BBA 6B
• Q2. List each of the six different types of New
Product classifications, explaining each with
a relevant example. (3 marks)