pricing
seller perspective
- a distinctive and highly visible element of the marketing mix - is a revenue generator in the marketing mix - must give out signals consistent with other elements of the marketing mix - requires an understanding of customers and environment
benefits of price skimming
- developing costs are returned fairly quickly and competitors may not enter the market as their own R&D costs will have to be covered in some other way - in electronic markets it works even better if product is protected by patents
customer perspective
- expect price to reflect product quality - expect tangible aspects to be related to price, e.g. pay more for leather seats - expect price to be linked to highly regarded brands - represents the costs to the consumer - price is affected by buying power
price elasticity of demand
= a measure of sensitivity of demand to changes in price
reference prices
= a price band that consumers judge the price against. these are customer's price expectations. if low = poor quality; if high = overpriced
discount
= a straight reduction in price on purchases during a stated period of time or on larger quantities
pricing cues
= a way for customers to estimate the reference prices. customers do this as they never know the true cost of the product/service. include sales sign, odd-number pricing
dynamic pricing
= adjusting prices continually to meet the characteristics and needs of individual customers and situations, p 345
prestige pricing
= applies in service industries because customers are buying a promise. services cannot be exchanged if the expectation is not fulfilled. ongoing strategy through PLC.
full cost pricing (cost-plus pricing)
= calculating the cost of manufacturing the product including distributed fixed costs and R&D costs then adding a fixed percentage of profit to arrive at the price. estimate sales volume! Considerations: - volume falls, price rises - illogical to estimate volume before setting price - focus on internal cost rather than willingness to pay - maybe technically difficult to allocate a fair proportion of overheads
odd-number pricing
= customers round down, so products may appear cheaper. '99' endings work better than '0' endings; dependent on culture, e.g. poland
elastic demand
= even small difference in price leads to substantial shift in quantity demanded, e.g. farming
strategic pricing
= for long-term gain. positioning is based on price, as a low cost
sales sign
= indicates to consumers that they may get a bargain. may increase the desirability of the product. can instigate previously unwanted purchases
odd-even pricing
= practice of ending with an odd number, consumers perceive price to be lower. research has shown thta '99' ending increase sales by 8%. BUTpeople tend to try a new product rather when it end in an even number. does not necessarily work in all cultures, e.g. has negative effect in POland
reference prices
= prices that buyers carry in their minds and refer to when evaluating a given product. customers rely on cues that signal whether the price is high or low, e.g. dales sign, price-matching guarantees
psychological pricing
= pricing that considers the psychology of prices and not simply the economics. The price is used to say something about the product; higher prices are thought to indicate higher quality
allowance
= promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturer's products in some waym e.g. advertising and sales support programmes
inelastic demand
= q sold is affected only sloghtly by price fluctuations, e.g. banking
segmentation pricing
= selling a product at 2 or more prices unrelated to costs but simply based on customers' willingness to pay. customer-segmented, e.g. students, product/form pricing: first class economy class, location-based segmentation, e.g. university fees for international students, time-based pricing, booking tickets airfare
product mix pricing strategies
= set of prices that maximises profits in the total product mix. various products have related demand and costs and face different degrees of competition
competition-based pricing
= setting prices based on competitor's strategies, prices, costs and market offerings. dependent on perceived value of companies' products
cost-based pricing
= setting prices based on the costs of producing, distributing and selling the product plus a fair rate of return for effort and risk. Least customer-oriented. can give an indication of the minimum price that needs to be charged in order to break even
geographical pricing
= setting prices for customers located in different parts of the worls, p. 344
tactical pricing
= short-term advantageseekinf, attracts customers using temporary price reductions'dsicoutns/deals
promotional pricing
= temorary reduction in price below standard retail price. used to increase awareness of a product. includes sales discounts, low interest rates in financing and cost rebates, special-event pricing, longer warranties etc. BUT can creat deal-prone customers who wait for deals
penetration pricing
NP pricing strategy, setting a low price for a new product to attract a large number of buyers and gain large market share, e.g. IKEA. could help to deny competition a proportion of market share
price skimming
NP pricing strategy: starting out with a high price for the product, then reducing it progressively as sales level off. relies on 2 factors: 1) not all customers have the same perception of value for money 2) company has a technological lead over the opposition which can be maintained for a long time to satisfy the market. Usually carried out by firms which have developed a technically advanced product; cost of production is usually high, low profits. once the most innovative customers have bought the product, competition will enter the market and the price can be dropped to skim the next layer of customers at which points profits will rise. At some point only replacement sales or sales to late adopters will be made
supply and demand
classical economists assumes that prices would automatically be set by the laws of ____ __ ___. but the model has a number of flaws as it assumes that: - customers know where they can buy the cheapest product - they are rational they only buy based on price - suppliers are producing identical products - people buy more from a product if it is cheaper - suppliers are in perfect competition
meet-the-competition strategy
competitor-based pricing strategy, advantage of avoiding price wars and stimulating marketing competition in other areas of marketing hence maintaining profitability
undercut-the-competition strategy
competitor-based pricing strategy, common among retailers who have little control over product features and promotion. some multinational firms have the capacity to undercut competitors since they operate in low-wages countries or are large enough to use wide-spread automation. danger of starting price wars
predatory pricing
competitor-based pricing strategy: priced below production costs. goal is to bankrupt the competition so that market can be taken over entirely. Illegal in international markets, 1970s Japanese car manufacturers entering the European market. used by large firms entering a new market. eventually, this methods is customer-oriented as value for money will increase. however, once market has been taken over, prices will rise to compensate losses
penetration pricing
competitor-based pricing strategy: used when a firm wants to capture large part of the market quickly. relies on the assumption that a lower price is perceived as offering better value for money. lower price than competitors even if it cuts profits. danger is that competitiors may be able to sustain price war for a long time and bankrupt the firm. usually better to compete in quality/delivery etc.
fixed costs
costs that do not vary with production or sales level
variable costs
costs that vary directly with production or sales level
market-based pricing
different pricing in different markets; pure competition, monopolistic competition, oligopolistic competition, pure monopoly
inventory effect
factors affecting consumer price sensitivity: higher price sensitivity if product can be stored as a hedge against future price increases
substitute-awareness effect
factors affecting consumer price sensitivity: lower price sensitivity if customers are relatively unaware of competition, competing brands or substitute products
difficult-comparison effect
factors affecting consumer price sensitivity: lower price sensitivity if it is difficult to objectively compare the quality or performance of competitors
price-quality effect
factors affecting consumer price sensitivity: lower price sensitivity if product is perceived to provide high quality, prestige or exclusiveness
unique-value effect
factors affecting consumer price sensitivity: lower price sensitivity if product is perceived to provide unique benefits, there are no acceptable substitutes
end-benefit effect
factors affecting consumer price sensitivity: lower price sensitivity if the expenditure is a relatively small proportion of the total cost of the end product
total-expenditure effect
factors affecting consumer price sensitivity: lower price sensitivity when expenditure of the product is a relatively low proportion of the total income
shared-cost effect
factors affecting consumer price sensitivity: lower price sensitivity when part of the cost is shared with another party
sunk-investment effect
factors affecting consumer price sensitivity: lower price sensitivity when the purchase is necessary to gain full benefit from assets previously bought
price leaders
firms with large market shares may have enough control over their distribution system and production capacity within their industries to become __ ___ = can raise prices without starting price wars/losing substantial market share. Sometimes support competitors to avoid attention from monopoly regulators
break-even pricing
form of cost-based pricing: setting price to break even on the costs of making and marketing a product or setting price to meet target return. total revenues mirrir total costs. selling prices lower than BEP = losses; higher = profits. much depends on price elasticity and competitor's price
demand-oriented pricing
form of customer-based pricing: most customer-oriented in that it providescustomers with the products for the prices they are willing to pay. Depends on how price-sensitive consumers are: price elasticity of demand!
value-oriented pricing
form of customer-based pricing: prices are set based on customers' perceptions of specific product attribute values, e.g. brand image. Determinationof value is undertaken using customer research first. Setting prices that capture perceived value rather than the seller's cost. price is considered along with all other marketing mix variables BEFORE the marketing programme is set. value, however, is subjective
value-added pricing
form of value oriented pricing: attaching value-added features and services to differentiate a company's offers and charging a higher price
good-value pricing
form of value oriented pricing: offering just the right combination of quality and good service at a fair price, e.g. after recession firms may introduce less-expensive versions of their products, e.g. cars or redesign existing brands to offer more quality for a given price
lowering
if demand is elastic, seller will consider ____ their prices to get more total revenue. buyers are less price sensitive if the products are unique, high in quality, cannot easily be compared, low expenditure compared to income
price adjustment strategies
includes discounts, allowances, segmentation pricing, psychological pricing, odd-even pricing and promotional pricing
New-product pricing strategies
including price skimming and penetration pricing; introductory stage of product is especially challenging
pricing methods
mechanical ways to set up price
pricing strategies
medium to long-term, affects market and corporate strategy
good value for money
pricing is dependent on how the customers react to the prices set. consumers do not usually buy the cheapest products but those that represent ___ ___ __ ___. marketers have to decide which price will be regarded as this while still allowing the company to make money. the main pricing methods used by firms are cost-based, competitor-based and customer-based
product bundle pricing
product mix pricing strategies: combining several products and offering the bundle at a reduced price. Amazon.com. fast food restaurants
optional product pricing
product mix pricing strategies: offering to sell optional products along with the main product. they are sold to maximise the turnover of the main product, e.g. extra luggage, ice cube makers. firms must decide which items to include in the base price and which to offer as options
by-product pricing
product mix pricing strategies: setting a price for a by-product in order to make the main product;s price more competitive. helps offset disposal costs, can turn out to be profitable
captive product pricing
product mix pricing strategies: setting price for products that must be used along with a main product such as blades for a razor or games for a video game console. usually main products are prices low, but high mark-ups on the supplies, two-part pricing. Gilette
product line pricing
product mix pricing strategies: setting the price steps between various products in a product line based on cost differences between the products, customers' evaluations of different features and competitors' prices. managers establish price points for different custmers in their line, think about the product protfolio, e.g. car manufacturers, hotel chains
external influences on price
reference prices, pricing cues, sales sign, odd-number pricing
pricing tactics
short term, limited impact beyond product being priced
customer-based pricing
takes account for customer needs and wants
price
the amount of money charged for a product or service or the sum of the values that customers exchange for the benefits of having or using the product or service
value
the regard that something is held to deserve. importance or worth, material or monetary worth. the worth of something compared to its price.
quality
the standard of something as measured against other things of the same or similar kind. General excellence, archaic high social standard
dumping
ultimate predatory pricing, selling prices below the costs of production, e.g. in communist countries with desperate need for hard currency. illegal in international markets but difficult to prove