Marketing Module 11

Recession

To combat the recession, consumers generally start looking for lower priced products. Companies decide to cut their prices, fearing they might otherwise lose their market share.

Captive Pricing

Game consoles being priced much cheaper than the gaming software is an example of captive pricing. In general, this strategy is applied to products and their complements. By pricing the game consoles low, the seller is trying to encourage customers to buy the product. Customers also need game software to be able to play the games, which is priced higher. In this way, the seller makes sure that customers continue to buy different game software to use with the console.

Penetration Pricing

Penetration pricing helps companies gain market share early in the game, and discourages competitors from entering the market because it does not seem lucrative. Tata Nano used this strategy to enter the Indian car market with low-priced passenger cars targeted at the middle class in India. The low price acts as a barrier to entry to other car manufacturers because they have to find ways to cover their costs and match Nano's price to enter the market.

Ethical and Legal Pricing

Price Fixing Predatory Pricing Loss Leader Pricing Price Discrimination Bait and Switch Pricing

The demand for certain products may change depending on pricing and vice versa.

True

Competition-Based Pricing

Using a competition-based pricing strategy, the company prices its products based on the competitor's product pricing. This strategy is usually implemented by companies when there are several competitors in the market selling similar products.

Excess Capicity

A business might want to increase its sales by cutting down its prices so that there is additional business coming in to make up for the excess capacity in its plants.

Arriving at the Final Price

Based on the pricing strategy they choose, the company must now decide on the final price of the product and determine the best tactics for implementation. An important consideration to remember is that the final price is never really the final price because situations evolve. Economic conditions (such as the price of inputs) change, competitors coming out with new products or adjusting the price of their offering, or the company that decides to shift the emphasis to a different product line can affect the price of a product. This is why there is never really a final price.

Demand Estimates

Because it is not possible to know the exact quantity of a product that will be demanded, demand estimates are used. These estimates can be determined in many ways, such as conducting a market survey, using forecasting methods, and so forth. Marketers should bear in mind that there are other factors that might affect demand other than pricing, and hence should factor in a buffer for the demand estimates.

Demand-Based Pricing

Demand is the driving force in a demand-based pricing strategy. When this strategy gets used, the product or service is priced depending on the intensity and nature of the demand. The demand for a product generally changes with the changes in its price. Demand and price are inversely related. If quantity remains the same, an increase in price generally leads to a decrease in demand; a decrease in price leads to an increase in demand.

Cost-based pricing is when a company sets its pricing based on buyers' perceptions rather than on the sellers' costs.

False

Predicting demand based on past historical trends is irrelevant in today's ever-changing marketing scene.

False

Customer Value-Based Pricing

In customer value-based pricing, the product or service is priced based on the perceived value of the product to the consumer, or the value it creates for the consumer. This means that the company should identify areas that add value to the customer and then communicate those values by pricing the product or service appropriately.

Evulate the Pricing Enviornment

In making pricing decisions, the external environment plays an equally important role as the internal environment of the company. Some of the factors in the external environment that may affect the pricing of the product are the economy, competition, consumer trends, regulations, technology, demographics, and so forth. For pricing the iPad, Apple might consider external factors—such as technologies like e-readers that might compete with the iPad, the going-green trend among the consumers that might encourage them to switch to e-books instead of paper books, travelers who prefer to travel light, and so on—and use this information to arrive at a price that appeals to customers. Apple should also be able to foresee and anticipate the reactions from its competitors to its pricing and be able to justify its pricing, if needed, through other means.

Reasons to cut prices

Responding to Competitors Excess Capicity Falling MArket Share Low-cost Leader Recession

Price Elasticy

The extent of change in demand at different prices is determined by the price elasticity of demand. So when determining the demand for a product, it is important to consider how sensitive the demand for the product is to the change in price. For example, movie tickets might be highly elastic whereas Tylenol pain relievers might be relatively inelastic.

Price Lining Strategy

When items in a product line are priced at different prices, the consumer has a whole range of products at different prices from which to choose. Consumers can buy the products that fit their budget and their needs. Companies like HP have a whole range of laptops at different prices and with different features. If customers are looking for a basic laptop, they can purchase a laptop at the lower end of the price range. If they want a laptop that has a few extra features to suit their need, then they can purchase the model that is priced a little higher with the extra features.

competition-based pricing strategy

whereby the cost of competing products influences the cost of their product.

Pricing Process:

1: Determine Price Objectives 2:Estimate Demand 3:Determine Costs 4: Evulate the Pricing Enviornment 5:Select A Pricing Strategy 6:Arrivaing at the final price

Determine Price Objectives

A company first has to decide what it specifically wants to achieve for the pricing process to begin. If stated clearly, the pricing objective later helps in the planning process to decide the right pricing strategy for the company, which is in line with its overall strategy. The objective might be to gain market share, increase profits, increase sales, create a competitive effect, achieve customer satisfaction, survive in the market, improve brand image, be known as a prestige product, be known as an innovator, and so forth.

Price Discrimination

A company is said to be engaging in price discrimination, if it sells products of the same quality to different buyers at different prices. This action leads to a competitive advantage for buyers who have been offered a low price and a definite disadvantage to others who have been charged a higher price. The buyers who have bought the product at a lower price are than able to resell it at a much lower price than the other buyers, leading to reduced competition. The Robinson-Patman Act prohibits price discrimination in interstate commerce. If a candy manufacturer sells its candies to Walmart at $50 for a crate, and at $80 a crate to Publix, then the candy manufacturer is engaging in price discrimination because Walmart will be able to sell the candies at a much lower price than Publix. This is unfair because Publix is at a disadvantage as far as competing with Walmart for candy sales.

Demand Curve

A demand curve can be used to plot the units of a product that a customer will buy at different prices at different periods of time. For most products and services, price and demand have an inverse relationship. However, prestige products like diamond jewelry might exhibit an increase in demand when there is an increase in prices because diamond jewelry that is priced higher is usually considered more exquisite. Also, a latte at Starbucks might continue to have the same demand or an increased demand despite increasing prices.

Optional Feature Pricing

An example of optional-feature pricing is generally used by laptop manufacturers and retailers. They offer a basic model without the additional features/software that enhances the performance of the laptop. These additional options, like antivirus software, Microsoft Office, and an extended warranty, can be purchased at a specific price. The pricing of these options, if purchased along with the laptop, is lower than the market price of these products. These optional features should be priced right so that the customer opts for these additional features.

Skimming Price

Another competition-based pricing strategy is to use a skimming price. High skimming prices generally attract many competitors because the market for the products seems lucrative. After there are many competitors, the firm that used the skim strategy reduces its prices to stay in the market. This strategy was used by Kindle in the e-reader market. Kindle was priced very high initially, but was forced to cut prices with the introduction of other e-readers like Nook, which were priced much cheaper.

Other Considerations

Basic cost-based pricing does not consider the consumer's opinion or perception about the product price. This might be a problem because the consumer might not value the product as much as the company has priced it, and hence might not buy it. The chair priced at $45 might actually be valued as $41 by the consumer. The consumer might then shop around for a chair from competitors who have chairs priced at the perceived value. A company should ensure that pricing calculated using the cost-based approach does not ignore the consumer's point of view and other market considerations. It is a good idea to use cost-based pricing in conjunction with other approaches and not on a stand-alone basis.

Bait and Switch Pricing

Businesses face temptations like the classic bait-and-switch, which is when a company advertises a product at a certain price just to get traffic in the store. When the consumers enter, it turns out the advertised product is not available, and the sale staff tries to persuade customers to buy the higher priced product. This practice is illegal. The Fair Trade Commission regulates such tactics and investigates the validity of these claims. If a car dealer advertises for a new car that is priced low and, when customers go to the showroom with the intent to buy that car, the salesman informs them that the car is sold out but a better model is available at a slightly higher cost, this practice is illegal. Also, if the specific car model is available in limited supply, this fact must be mentioned in the advertisements.

Falling Market Share

Businesses might be forced to cut their prices with the hope that the low prices will boost their sales and, hence, there will be an increase in market share.

Low-Cost Leader

Businesses might suddenly decide to be the low-cost leader in the market to increase their market share. To achieve this, they lower their prices and try to price their products below competitor prices. Wal-Mart generally adopts this strategy.

Determine Costs

Companies should make sure that the prices they charge their customers cover all the costs incurred for that product. If not, they may lose money, which is not an ideal situation for any company. There are various kinds of costs associated with running a business. The two types of costs that are considered for pricing a product are the variable costs and the fixed costs.

Price Quality Interference

Consumers generally assume that a product with higher price is of a better quality than a similar product that is priced at a lower value. This perception of the customer is usually used in the premium pricing strategy. When consumers see two brands of baby food at a store and one brand is priced much more that the other, consumers perceive the higher priced baby food to be of better quality. If they can afford the price, then these consumers definitely purchase the more expensive baby food.

Odd Pricing Strategy

Consumers might believe that they are getting a better deal when a product has odd pricing. Using this type of pricing strategy, the product is priced a little less than the next whole number. Many retailers, including JC Penney, use this strategy for almost all the products they carry. They do not price their products as whole numbers, but rather a few cents less than a whole number. This type of strategy tries to convince consumers they are paying less and getting a good bargain. Think about a price tag of $99.99 (or $99.98 or $99.97). Now think about a price tag of $100. It's only a few cents difference, but the psychological barrier is larger as the price moves into triple digits.

Raising Prices

Cost Inflation Companies sometimes raise their prices to match increasing costs. In general, they might increase the prices more than the increase in costs to deal with any further cost increase. Overdemand Overdemand If the demand for a product exceeds its supply, then the seller might increase the prices of their products. They might not increase the price directly, but may make some cutbacks through removal of discounts and promotions, or unbundling the products and charge separately for each component.

Selecting a Pricing Strategy

Cost-based pricing Setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk. Demand-based pricing When the product/service is priced depending on the intensity and nature of the demand. Competition-based pricing Setting prices based on competitors' strategies, prices, costs, and market offerings. Customer value-based pricing Setting price based on buyers'perceptions of value rather than on the seller's cost. Pricing strategy example One of the new Aston Martin models is priced at more than $200,000. The pricing strategy chosen by the company is a prestige/premium pricing strategy (a type of customer value-based strategy). The prestige pricing strategy lets Aston Martin charge a premium price for their cars because the cars are associated with prestige and high quality, and customers buying the car perceive it to be a superior, exclusive car.

Estimate Demand

The next step in the pricing process involves estimating the demand for the product at different prices.

The following are factors that companies commonly consider when making pricing decisions based on demand:

Factor #1 Companies should make pricing decisions based on the price elasticity of the product by determining whether there would be a drastic change in demand in response to the price change. Factor #2 Although the demand for toothpaste, for example, might be inelastic, the demand for a particular type of toothpaste might be elastic. Consumers might easily shift to another brand if the manufacturer of a particular brand of toothpaste increases the price because there is not much difference between one brand of toothpaste and another. Factor #3 In general, different levels of demand for a product or service occur with different price points. There are various methods available to estimate demand to help in arriving at the quantities of product that will be sold at different prices.

Fair Price/Internal Price

Fair price is the price that the customer perceives as the right price for the product. These fair prices have been arrived at by the customer based on past experience. This price is considered as a reference to judge other prices. Any brand that is priced differently than this might be viewed unfavorably. A half gallon of milk is priced within a range of $3 to $4 in most stores. If consumers see a half gallon of milk that is priced at $1, then they may not buy it because they might perceive it to be of lesser quality. On the other hand, if a half gallon of milk is priced at $6, consumers still might not buy it because they consider it to be priced unfairly. Consumers might argue that there cannot be anything so special in that milk that makes it so much more expensive than the regular brands of milk.

Inconsistent Changes in Prices

Geographical pricing involves pricing the same product differently in different geographical locations. The common reasons for this are the additional shipping costs involved in selling the products in locations that are far from the manufacturing or distribution center. This strategy might also be used when the business wants to enter a new market and decides to absorb the shipping costs Discounts and Promotions Different types of discounts—like cash discounts, volume discounts, and seasonal discounts—are offered by companies to boost sales and reward customers. Companies also offer promotional prices to customers to attract them to their stores and thereby increase their sales. Discriminatory pricing involves pricing the same product differently for different customers or locations without any cost reasons.

customer value-based pricing system

charging whatever price or value the public determines.

Basic Cost-Based Pricing

If it costs $40 to manufacture a chair, then the company uses that information as a base for pricing the chair to ensure that the manufacturing cost of the chair is always covered. The company may then add an additional amount, or mark up the cost, to arrive at the final selling price. If the company marks up the cost by $5, then the final selling price of the chair will be $45.

By-product Pricing

In an industry where manufacturing results in a by-product, it is important for the firm to price the by-product correctly so that it does not adversely affect the cost of the main product. The options are to dispose the by-product or sell it if there is a demand. For example, sugar manufacturers are left with by-products like fiber and molasses after extracting sugar from sugarcane. These by-products are usually sold as livestock feed. It is important for sugar manufacturers to sell their by-products at a reasonable price so they can charge the necessary price for the main product. In this way, they do not end up covering the cost of disposing the by-product by pricing the main product higher. Pricing the main product higher than the market value might lead to decreased demand for the product.

Customer Perspective of Value

In general, consumers perceive that a lipstick or a lotion is of a better quality if it is priced higher, especially if it also comes with other indicators of quality, like packaging and advertising that try to justify the high price. These are cues that create a perception of quality in the consumer's mind. Sellers try to increase the value of a product in the consumer's mind and then price it accordingly. If a car manufacturer prices sports car models higher than the competitor's similar sports car models, then it must justify to the consumer the added value that the car provides. Some of the indicators of higher value might be extended warranty, 24/7 customer support, and additional features. Through innovative marketing strategies and innovative product features, a seller can communicate the value of the product, and hence create a better perceived value for that product. It is important for the company to assess the value of their product accurately. If it doesn't, this might lead to over- or underpricing. If implemented correctly through innovative marketing strategies, the customer value-based pricing strategy can be beneficial to the company because it can charge higher prices for the products based on customers' high perceived value for that products.

cost-based pricing system

In other words, if it costs $100 to manufacture a leather briefcase, the company will add on to that figure so that costs are covered and some profit is earned.

Loss Leader Pricing

Loss leader pricing also involves setting very low prices, sometimes even below cost, with the intention of attracting customers to the store. After customers are in the store, the seller anticipates that they will also buy some other products along with the low-priced item. This practice is considered illegal in some states. The Unfair Sales Act prohibits wholesalers and retailers from pricing products below cost. If a retailer advertises that a case of soda, which is generally priced at $5, is being sold at $1.99, then the retailer is taking a hit because it is priced below cost. This advertisement attracts a lot of customers, and even new customers who generally do not shop at this retailer. The retailer gets a business boost because these customers also buy other products when they are in the store

Pricing Considerations

Low Prices: It might seem straightforward to many of you that if the products are priced low, there will be an increased demand for the product. This is true to the extent that the demand for the product will go up. However, this might not necessarily mean increased profits for the business. Depending on how low the prices are, the net profits may or may not be affected. High Prices: On the other hand, pricing the products too high to increase the profits might not work either. Initially it might work, especially if the product is unique and the first to enter the market (first mover advantage). However, the high profits might attract many competitors. This forces the business to cut prices to compete in the market so that it won't lose market share.

Marginal Costs

Marginal analysis helps in determining the price and quantity at which profits are maximized, using the cost and demand data for the product. Using marginal analysis, the chair manufacturer may determine that he has to sell 500 chairs at $20 per chair to maximize profits. The point at which the cost to produce one extra chair is equal to the revenue generated by selling an additional unit of the chair, is the point at which profits are maximized.

Responding to Competitors

One of the common reasons why a firm changes its product pricing is in response to its competitor cutting its own prices. This might be a difficult situation if the firm's costs are high and there is no margin to cut the prices. Cutting the prices might mean suffering a loss by selling the products below cost. The firm should try to differentiate its products from its competitors so that consumers opt for the product with new or additional features. The other option is for the firm to find innovative ideas to cut costs so that it can match the competitor's price cut. If Target wants to match Wal-Mart's prices in the baby furniture department, then they might have to find ways to increase their supply chain efficiencies to cut costs and charge lower prices.

Cost-based Pricing

One of the most straightforward pricing strategies is cost-based pricing. Here, the company calculates the price of the product based on the production cost of manufacturing the product.

Predatory Pricing

Predatory pricing is a strategy used by some companies to drive all the competitors out of business by setting really low prices for their products. The competitors that are not able to match this price soon go out of business. When there is no competition, the company increases its prices. A well-known retailer was accused of predatory pricing the books it sold because the pricing of the book was almost one-third of the price that the other retail stores charged for the same book. This accusation was dismissed by the retailer, which stated that its intent was not to drive the competition out of business, but was the result of managing their supply chains better.

Price Fxing

Price fixing is a collective decision taken by some companies to maintain the price of a product at a certain level. This defeats the idea of a market-based economy in which prices adjust themselves based on supply and demand. Consumers are forced to pay the high prices agreed on by these companies. Horizontal price fixing is when competitors making the same product determine the price each will charge. If all the calculator manufacturers decide to fix the price of scientific calculators at $150 per calculator, then all consumers are forced to pay this price because they cannot shop around for better prices as a result of the price fixing. The Sherman Antitrust Act prohibits horizontal price fixing. Vertical price fixing is when manufacturers or wholesalers force the retailers to charge a specific price for their products. For example Procter and Gamble might force Walmart to sell its new shampoo at a specific price. This suggested price might not be in line with Walmart's pricing strategy, and hence they might not want to comply with it. The Consumer Goods Pricing Act of 1976 prohibits this practice

Price Leadership

Price leadership is one form of completion-based pricing. If Aveeno prices its range of sunscreens at a particular price and all the other brands like Coppertone, Neutrogena, and Banana Boat price their sunscreens similarly, then Aveeno is said to be the price leader in the sunscreen market.

Psycological Pricing

Price-Quality Interference Fair Price/Internal Price Reference Pricing Strategy Price Lining Strategy Odd Pricing Strategy

Product Line Pricing

Product line pricing involves pricing multiple products that are similar or related. Product line pricing involves manufacturing or offering a range of products at different prices, so that customers can pick the product that best suits their needs and budget. Sony has basic cameras that are priced at $100. It also has sophisticated cameras that cost thousands of dollars. The higher the price, the more features the camera offers.

Product Bundling Pricing

Selling season passes for football games is an example of price bundling—when more than one product is sold as a single product for one price. Customers are happy because they get the tickets at a lower price than if they had to pay for the tickets individually. This also benefits the seller as they are able to sell more tickets. If instead fans chose only certain games that they want to attend, there may be less overall profit.

Price Elasticity

The concept that expresses the correlation of price and demand is the price elasticity of demand. This measures the sensitivity of consumers to changes in price, depending on how much price affects demand. In general, demand for products that are essential or have fewer substitutes (like milk, bread, and gas) are considered to have a lower elasticity (in other words, they are relatively inelastic). Consumers will not cut down or increase the amount of these products they buy even if there is a change in price. On the other hand, products that are considered luxuries, like a pricey car or a fancy phone, have a higher elasticity because these purchases might be postponed by consumers if there is an increase in price. A price reduction, on the other hand, attracts a lot more buyers.

Price Adjustment Considerations

The price of a product is rarely set in stone. In fact, there may be instances when the company is required to make changes to the product prices. Let's take a look at some reasons why companies adopt price changes, and study some of the common types of price adjustments. Companies consider changes in the competitive environment, changes in the economic environment, and changes to the company's own objectives as price adjustment decisions are made. Prices can go in one of two directions when changes are made: up or down.

Reference Pricing Strategy

The reference pricing strategy involves consumers making a judgment about a product and its quality based on its price compared with a similar product. Consumers might pick a store brand dairy creamer that has a slightly lower price than a national brand dairy creamer, assuming that the quality is almost the same because they are priced so similarly. These consumers are happy they are saving money by picking the store brand and not compromising on quality. This is also known as the assimilation effect. Consumers might purchase a much higher priced set of headphones when they see a similar set priced lower. This is called the contrast effect. In this case, consumers perceive the lower priced headphones to be of poor quality, and hence are willing to pay more to get a good set of headphones.

Fixed Costs

The rent for the manufacturing facility, the machinery used, the salary for the supervisors, and so on, are considered fixed costs because they do not vary with the number of units produced; they remain constant.

Varible Costs

To manufacture a chair, the cost of rubber, plastic, fabric, metal parts, labor, and so forth, are considered variable costs because they vary with the number of units produced.

Two-Part Pricing

Using the two-part pricing strategy, consumers face an initial fee and then an additional variable fee that depends on customer usage. This pricing strategy is used by cell phone companies. They charge a fixed price every month and include an additional charge for the extra minutes used or additional text messages. Marketers generally keep the fixed price low so that customers are attracted to using their service.