Price strategy

Pricing Strategy
how does a company decide what price to charge for its products and services?
what is “the price” anyway? doesn’t price vary across situations and over time?
some firms have to decide what to charge different customers and in different situations
they must decide whether discounts are to be offered, to whom, when, and for what reason

The Meaning of Price
we generally think of price in monetary terms
may be more useful to think of what it costs us to acquire something of value
the costs may be monetary or non-monetary
we need to think in terms of time and effort, as well as the monetary costs

The Customer Wants Value
price is not always an important factor in influencing a sale; the customer wants more than a low price, may be willing to pay more
the customer considers what he or she gets for the price paid; the seller must offer value
price of a product or service communicates a message to the consumer about quality
what causes them to conclude that they “paid too much” or “got a great deal”?

The Consumer’s View of Price
some consumers are very interested in getting a low price and pay close attention to price; they are price sensitive. But, this is variable and personal
many are interested in other elements of the purchase, including brand, quality, etc.
there is a tendency to link quality with price
consumers are often prepared to pay more if they expect to get added value
adding value doesn’t mean dropping price

Pricing Objectives
a firm may have several pricing objectives
to achieve a certain return on sales
to maximize short-term or long-term profits
to increase sales to a certain level
to achieve a target share of the market
to maintain price stability in the market
to meet competitors’ prices
the latter two may involve nonprice competition

Factors Affecting Price
pricing must take the customer into account
how price elastic is demand?
do customers have an expected price in mind?
for some products, demand is inverse; if price is increased, sales will actually increase
how is the competition likely to respond?
price must be consistent with and support other elements of the marketing mix

Cost as a Determinant of Price
the cost of producing or offering the product or service must be considered in setting price
while easy to calculate, cost-plus pricing is not usually practical and is not often used
occasionally, a firm will sell below cost
occasionally also, a firm will price so as to recover marginal (variable) costs only
when would such approaches be used?

Mark-Up Pricing by Retailers and Wholesalers

Costs and Break-Even Analysis
cost is viewed as a floor under a firm’s price
many firms do not have particularly good cost data and may not know what it costs to produce a product or service
the break-even point is where total revenue equals total costs; will be different for each price -- lets a firm see what it will need to sell
break-even analysis is not a pricing strategy, but can offer useful information

Estimating Costs:
Fixed costs - are those costs that do not vary with production or sales revenue.
Variable costs - are those costs that vary directly with production.
Total costs = Fixed Cost + Variable Cost
(for a given level of production.)

Break-Even Chart for Futon Factory

Practical Aspects of Pricing
price can not be set solely on cost; customer, market, and competition must be considered
costs are important in that they affect margin
price is often affected by positioning strategy
may have no choice but to match competition
positive image may allow price to be set higher
price is linked to ability to compete on nonprice factors, such as excellent service

Market-Based Pricing
some firms are forced to price to meet competition, especially where larger firms are price leaders and products undifferentiated
others will price below competition in a discount situation to gain a competitive advantage; have to keep costs down to do this
occasionally firms price above competition where their products are distinctive or where they have been able to add value for customers

Price Competition
some firms choose to compete primarily on price; this assumes that consumers are mainly interested in getting the lowest prices
competing on price implies
offering low prices and minimal service levels
relying on price to change the consumer’s perception of value, without changing other factors
reacting to competitive price changes with changes of one’s own

Nonprice Competition
some firms feel price is the main competitive tool, that customers always want low prices
other firms are looking for ways to add value, thereby being able to avoid low prices
sometimes prices have to be changed in response to competitive actions
many firms would prefer to engage in nonprice competition by building brand equity and relationships with customers

Moving Off Price Competition
in recent years some firms have moved away from competing mainly on price
value pricing implies that the firm tries to offer the best price possible, but also adds other benefits to increase perceived value, while keeping its costs as low as possible
relationship pricing simply means giving the best prices to the firm’s better customers as an incentive for them to remain loyal

Market-Entry Pricing Strategies
could set the initial price high to “skim the cream” before competition arrives; allows the firm to recover R&D costs, used when product is distinctive and demand inelastic
with “market-penetration” pricing, price is set low at the start to deter competition; demand is elastic and competition is expected
in practice, firms tend to use a combination of these strategies; different for each segment

Discounts and Allowances
quantity or volume discounts reward large purchases and encourage repeat buying
trade discounts granted as compensation for services performed usually by intermediaries
cash discounts encourage speedy payment and enhance the seller’s cash flow
other discounts are awarded to encourage purchases at certain times of year or to compensate resellers for promotional efforts

Parts of a Cash Discount

Pricing and the Law
certain pricing policies may be considered illegal For Example in Canada:
predatory pricing is intended to drive competitors out of the market
price discrimination must be a practice to be considered illegal
promotional allowances must be granted proportionally to all purchasers

Questionable Pricing Practices
resale price maintenance involves a supplier requiring that intermediaries sell a product at a certain price: illegal in Canada, firms are allowed to specify a “suggested” retail price
some firms reduce prices, possibly even below cost, to attract customers; this form of “loss-leader” pricing is not illegal unless it persists for a long time with the goal of eliminating competition (predatory pricing)

Geographic Pricing Strategies
shipping costs will often require that different prices be charged in different regions
if price is f.o.b. plant, buyer pays the freight
uniform delivered pricing means that all buyers pay the same, regardless of location
zone-delivered pricing sets different prices for different regions, depending on shipping costs
under freight-absorption pricing, seller will pay some of the shipping costs for the buyer

Special Pricing Strategies
firms may adopt a one-price strategy or charge different prices to different customers
price lining involves setting prices at a small number of fixed levels within a company
the psychology of pricing suggests that price will convey a message about the product or service being sold; odd pricing is often used to suggest a bargain, while even pricing is used more in prestigious, fashion stores