Pricing Chapter

Price defined
Price is the amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.

Figure 16.1 Factors affecting price decisions

Internal factors affecting price
Company’s marketing objectives
Marketing mix strategy
Costs
Organisation structure

Marketing objectives
Pricing should augment the marketing mix strategy
Marketing objectives are reflected in the pricing decisions and include
Survival
Current profit maximisation
Market share maximisation
Product-quality leadership

Marketing mix strategy
Price decisions are coordinated with product design, distribution and promotional decisions to form an effective integrated marketing programme.
Various strategies can be used depending upon the type of product and the environment in which it is involved.
Frequently pricing decisions are made first and the marketing mix evolves around that.
De-emphasis of price by using the other marketing mix tools to create non-price positions based upon differentiation and value.

Gucci’s very strong image and reputation as a prestigious brand mean that customers are willing to pay for the fashion house’s expensive fragrances.
Source: Advertising Archives. Reproduced with permission.

Costs
Types of cost
Fixed costs that do not vary with production or sales level.
Variable costs vary with level of production.
Total costs, sum of variable and fixed costs.

Costs as a function of production experience
Figure 16.3 Cost per unit as a function of accumulated production: the experience curve

External factors affecting
pricing decisions
The market and demand
Costs set the lower limit and demand sets the upper limit of price. This price-demand relationship is of fundamental importance to marketers.
External factors include the nature of the market and demand, competition and other environmental elements.

Analysing the price-demand relationship
Figure 16.4 Inelastic and elastic demand

Price influence on profits
Profit is the balance of income generated minus the costs incurred to sell the product
Many financial management ratios
Return on investment (ROI)
Return on sales
(EVA) Economic Value Added

Competitors and other
external factors impacting price
Competitors’ costs, prices and offers
Competitor price benchmarking gives a good indication of market price acceptance levels.
Economic conditions such as recession.
Resellers and intermediaries.
Governmental influences such as tariffs on imports.
Social concerns

Figure 16.5 Primary considerations in price settings
Pricing objectives

1. Cost based pricing
Cost-plus pricing
Adding a standard mark-up to the cost of the product.
Mark-up/down
The difference between selling price and cost as a percentage of selling price or cost
Break-even analysis and target profit pricing
Setting price to break even on the costs of making and marketing a product.

Figure 16.6 Break-even chart for determining target price
Table 16.2 Break-even volume and profits at different prices

2. Value based pricing
Setting price based on the buyers’ perceptions of product values rather than on the cost.
Underlying principle is to offer the right combination of quality and good service at a fair price.
Everyday low pricing is an important aspect of value pricing at the retail level.

Figure 16.7 Cost-based versus value-based pricing
Source: The Strategy and Tactics of Pricing, 3rd edn by Thomas T. Nagle and Reed K. Holden (2002), p. 4. Reprinted by permission of Pearson Education, Inc., Upper Saddle River, NJ 07458.
Cost-based vs. value-based pricing

3. Competition based pricing
Going-rate pricing
Setting price based largely on following competitors’ prices rather than on company costs or demand.
Sealed-bid pricing
Potential buyers submit sealed bids, and the item is awarded to the buyer who offers the best price.
English auction is where the price is raised until only one bidder remains.
Dutch auction is where prices start high and are lowered successively until someone buys.
Collective buying is where an increasing number of customers agree to buy as prices are lowered to the final bargain price.
Reverse auction is where the customers name the price that they are willing to pay for an item and seek a company willing to sell.

Figure 16.8 Four price-positioning strategies

Pricing for new products with
innovative features and benefits:
Market skimming pricing
Pricing strategy used for new products that have unique features and benefits over the competition.
A high price is set for the new product to skim the maximum price and generate the most profit.
Market penetration pricing
Initial low price to penetrate the market and convert as many buyers onto the new product and grab a large market share.
This is a short-term strategy that is dangerous and needs to be supported by a robust range of products to leverage against.

Product-mix pricing strategies (1)
Product line pricing
Setting the price steps between various products in a product line, based on cost differences between the products, customer evaluations of the different features and the competitors’ pricing.
Optional-product pricing
The pricing of optional or accessory products along with a main product.
Captive-product pricing
Setting a price for products that must be used in conjunction with a main product, such as blades for a razor and film for a camera.

Product-mix pricing strategies (2)
By-product pricing
Using the by-product pricing method, the manufacturer seeks markets for the by-products of the main product production and recoups costs of waste from the production process.
This may include the metal shavings from steel cutting, being gathered and processed as scrap metal.
Product bundle pricing
Strategy used to combine several products and offering the bundle of products at a reduced rate, thus leveraging the entire range of products.

Table 16.4 Product-mix pricing strategies
Product-mix pricing strategies (3)

Price adjustment strategies
Table 16.5 Price adjustment strategies

Geographical pricing (1)
Pricing based on where the customers are located.
Free on board FOB-origin pricing
Goods are placed free on board a carrier; the customer then pays the freight from the factory to the destination.
Uniform delivered pricing
Company charges the same price plus freight to all customers, regardless of their location.

International pricing
Globalisation and the development of international pricing strategies offer many challenges and complexities to companies.
Prices will be influenced by:
economic conditions
competitive situations
laws
regulations
sophistication of the retailing and wholesaler environments.