Lecture 6 MBA Pricing Vers 3

8/4/2019 Lecture 6 MBA Pricing Vers 3

1/48

Click to edit Master subtitle style

Contemporary Marketing

Lecture 6Pricing (aka value for money aka cost to customer)


2/48

Learning objectives:

n To understand the managementimplications of roles of pricing and thevarious different issues which need tobe taken into consideration

n To explain the various pricing steps inthe various pricing tools andtechniques

n To note the role new technologies insetting pricing policy

n To reflect on the nature of internationalpricing


3/48

Pricing

n It is ..essential that managersunderstand how to set prices,

because both undercharging (lostmargin) and overcharging (lostsales) can have dramatic effects on

profitability(Jobber, 2007:458)


4/48

The Role & Importance ofPricing

n Price is the only P that generatesrevenue

n Price connects customers and suppliersn Price sends signals to customers about

quality, exclusivenessn Price can represent value for moneyn Price is used as a competitive tool to

differentiate a product and organisation,exploiting market opportunities

n Pricing must be consistent with all othervariables in the mix.


5/48

Perspectives on PricingDecisions

n The Economists Perspective

n Where demand and supply are brought intoequilibrium giving a price.

n The Accountants perspective

n The emphasis is on recovering costs tomake a profit (Rate of return).Understanding the difference between fixed,variable and marginal costs is needed

n The Marketers Perspective

n Emphasis is on the effect of price oncompetitive market position and value.


6/48

The Economists Perspective


7/48

Price Elasticity

n A measure of the sensitivity of demandto changes in price.

n Price elasticity of demand =

n Buyers are less price sensitive if productis unique and high in quality or image.

n If demand is elastic, producers will lowerprice and generate more total revenuethrough greater demand at the lowerprice.


8/48

Price Elasticity

Customers and price / demand Price elasticity of demand = percentage change

in quantity demanded / % change in price the steeper the curve, the less sensitive demand

is to price e.g car insurance


9/48

Considerations for Pricing

n Costs and prices

n Total cost = sum of all fixed and variablecosts times the quantity

n Average cost = total cost divided bynumber of units produced

n Fixed costs = costs that do not vary withthe number of units produced or sold e.g.

rentn Variable costs = costs that vary directly

according to the number of units producedor sold

n Marginal costs = the addition to total cost


10/48

Value for money and PriceSensitivity

n Price sensitivity refers to the effecta change in price will have on

customersn It will vary amongst purchasers.Those who can pass on the cost of

purchase will be least sensitiveand will respond more to otherelements of the marketing mix.e.g. a business traveller re-price ofhotel v famil


11/48

Price Sensitivity

n Research on price sensitivity of customers has shown ingeneral that:

n Customers have a good concept of a just pricen For special purchases, customers search for price

information before buying thus becoming price awarewhen wanting to buy but will forget soon afterwardsn Customers will often buy at what they consider to be a

bargain price without full regard for their present needsand the level of the price itself.

n Down payment and instalment price are more importantthan total price

n In times of rising prices, the price image tends to lagbehind the current price

n If there are substitute goods, customers will be moresensitive to price.

n Overtime, consumers demand patterns are likely tochange. If the price of something is increased, the initialresponse might be a small change in demand priceelasticity


12/48

Factors influencing pricesensitivity

n The unique value effect the better differentiated the product, thelower the price sensitivity

n The substitute awareness effect the greater no of substitutes thegreater the sensitivity

n The difficult comparison effect the more difficult the comparison,the lower the sensitivity

n The total expenditure effect the smaller the proportion of spend,the lower the sensitivity

n The end benefit effect the greater and more valued the endbenefit, the lower the sensitivity

n The shared cost effect a buyer bearing only part of the cost pf aproduct will be less sensitive

n The sunk investment effect buyers who have already boughtcomplimentary products will be price sensitive

n The price-quality effect the higher the prestige/image, the lesssensitive

n The inventory effect buyers who hold stocks of the product aremore likely to be price sensitive than are those who purchase forimmediate consumption

Brassington & Pettitt(2006: 449)


13/48

Factors influencing pricesensitivity in B2B markets

n The total expenditure effectn The penalty for failuren

The overall saving effectn The contribution to quality effectn The degree of customisation effectn The end customer sensitivity

n The buyers ability to absorb costsn The buyers ignorance effectn The decision makers motivation effect

cost

Brassington & Pettitt(2006:449)


14/48

Factors determining pricelevels

n Internal factorsn Marketing objectivesn Marketing Mix strategy

n Costs (a dominant factor)n Price setting methodologiesn Product Portfolio strategies

n External Factorsn Competition

n Demandn Customer perceptionsn Suppliers and intermediariesn PEST factors


15/48

Considerations for pricingcontinued.

n Competitors and pricesn Assess existing and potential

competitors pricingn Be aware of monopolistic activity etc

n Company Considerations andPricesn Pricing decisions should reflect Co

objectives and strategies


16/48

Considerations of pricingcontinued.

n Legal and regulatoryFrameworkn Many regulatory organisations in

place e.g. Office of Fair Trading (OFT)n Resale price maintenance abolished

in UK in 1960s in most product areas.n Duty and tax requirements e.g

alcohol and tobaccon excise duties and VAT account for 80% of

the cost of a litre unleaded petrol and theactual cost of the fuel is around 8p per


17/48

Company Considerations

n Company and MarketingObjectives

n Set pricing objectives and policyn Assess target markets

n Assess costs/ cost structure

n Select specific pricen Select pricing method

n Assess customers demand


18/48

Other factors influencingpricing decisions

n Intermediaries objectivesn Competitors actions and reactionsn

Suppliersn Quality, customer satisfaction and valuen New product pricingn The economy

n Product rangen Social responsibilityn Government


19/48

PriceDiscrimination/Differential

Pricingn A firm may successfully charge higher prices

for the same product to people who are willingto pay more.

n This could be by:n Market segment services such as

cinemas/hairdressers are often available toOAPs at lower prices

n

Product Version software is written topdown and the full version sold at a premiumprice. For less advanced users all thesoftware co has to do is take features out

n Time travel cos are successful price

discriminators e.g. peak v off peak.


20/48

Pricing and competition

n A firm may respond to competitorprice cuts by:n Maintaining existing pricesn Maintaining prices but responding

with a non-price counter attackn

Reducing pricesn Raising prices and responding with a

non-price counter attack


21/48

Competitive Bidding

n Competitive bidding is a specialcase of competitor based pricing.

Many supply contracts especiallyconcerning local and nationalgovernment purchases involve

would be suppliers submitting asealed bid or tender.


22/48

Pricing Methods

n Cost based methodsn Cost plus pricing

n Easy, quick, no skill neededn neglects external forces, competition,

other mix variables

n Competitor based methodsn Going rate pricingn Premium pricingn Discount pricing


23/48

Cost Based PricingFrameworks

n Cost plus pricing use more easily measurable direct costcomponents such as labour and raw material inputs calculatedin the unit cost, then add a margin which incorporates anoverhead charge and a residual profit element. Often usedwhere overhead allocation to individual unit costs is too

complex or too time consuming.

n Full cost pricing full average cost of production of aproduct including an allocation of overheads. A profit marginis then added to determine selling price often used bysolicitors where the price is often determined after the workhas been performed.

n Mark-up pricing often used by retailers and involves afixed margin being added to the buying in price. In the UK,items such as cigarettes carry a low 5-8% margin; newspapersapprox. 25%; slow moving items such as furniture 33-50%

n What are the advantages and disadvantages of cost based

pricing?


24/48

Competitor Based PricingFrameworks

n Going Rate Pricing where prices areset on the basis of what competitors are

charging price stabilityn Premium pricing Where price is et

over and above the competition

n Discount pricing where price is et

below the competition


25/48

Building Market Share?

n It has been suggested that there are threeelements in the pricing decision for a newproduct:

n Getting the product accepted; maintaining amarket share in the face of competition;making a profit from the product

n When a firm launches a new product onto themarket, it must decide on a pricing policywhich lies between the two extremes ofmarket penetration and market skimming

P d t i


26/48

Product:priceinteraction(I)- product

life cycle

Price

Price Pric

e


27/48

Pricing Methods

n Demand/Market Based methodsn Market skimming

n marketer charges high price for a newproduct and then lowers it as the productmatures

n quick ROI, facilitates high image/quality

n Market penetrationn setting of low prices in order to gain rapid

market sharen should produce large volume, can

prevent new entrants


28/48

Market Skimming

n MS pricing is the setting of a high initial price to achievehigh unit profits with the knowledge that a certainnumber of customers will buy at a high price. This ispossible where rival firms are not expected to undercut

these high prices, where the fixed costs of output arefairly low so that EOS are relatively insignificant andwhere the customer believes that high prices signify aquality product.

n Ms involves:n

Charging high prices when first launchedn Spending heavily on advertising and sales promotion towin customers

n As the product moves into the latter stages of the PLClowering prices progressively.

n The objective of MS is to gain high unit profits early in

the PLC.


29/48

Market Penetration

n MP is a policy of low prices when the product isfirst launched in order to gain sufficientpenetration in the market. It is a policy of

sacrificing short term profits in the interests ofthe long term.n Circumstances which favour a penetration

policy are:n The firm wishes to discourage rivals from entering

the marketn Firms wishes to shorten the initial period of the

PLC in order to enter the growth and maturity stagesas quickly as possible

n There are significant EOS to be achieved from a

large output.


30/48

Product Mix PricingStrategies

n A product that is part of a product rangecannot be priced in isolation from therest of the range. E.g when Apple

launched the IPOD Nano it had tocarefully price-position the deviceagainst the original Ipod mobile.(product line pricing)

n The range has to be viewed as an entityn Within an individual product line, each

product offers additional features andtheir pricing needs to be spacedaccordingly.

n Encourages trading up

Product:price interaction(II)- NPD process


31/48

Product:price interaction(II)- NPD process

Brassington & Pettitt, 2003:358

Pric

e

Price


32/48

Product:price interaction(III)-Innovation Adoption

Source: Reprinted with the permission of The Free Press, a division of

Simon & Schuster, Inc., from Diffusion of Innovations,Third Edition byEverett M. Rogers. Copyright 1962, 1971, 1983 by The Free Press.

Price

Number

Time

Price

Pric

e

Pric

e


33/48

Managing pricing cuts &Increases

n Prices are rarely static for longn Competitive pressures, new market

opportunities, changing environmental

conditions etc can lead to price changes.n Any pricing cuts need to be considered

against margin and volume e.g. if the initialgross margin was 30% and a price cut of 10%was introduced, unit sales would need toincrease by 50% just to maintain original profitmargins.

n Pricing cuts may be seen as an aggressivemove by competition price ware Asda v

Tescon Respond carefully to competitor pricing cuts

plan it


34/48

Pricing internationally

n Firms can adopt three approaches to pricing goodsexported from the home market:

n Standardised ethnocentric pricing a singleprice is charged to recover costs and earn the return.As this is translated at local exchange rates this canlead to price volatility in local terms and a lowervolume of sales than would be possible.

n Adaptation or polycentric pricing each localsubsidiary sets its own prices. There is no co-

ordination. HQ has no control and grey markets candevelop.n Geocentric pricing aims for a global pricing

strategy but in the short term at least (e.g.introducing a new product) local subsidiaries havesome autonomy.


35/48

Factors affectingInternational Pricing

n The Companys objectivesn The marketing objectives

n A co may have differing objectives in various

countriesn Level of demandn Intensity of competitionn Costs additional costs such as transportation,

insurance and storage, taxes, agents feesetc.n Government restrictionsn Intermediariesn Foreign currency


36/48

Demand Based pricing

n Psychological Pricingn Relies on the customers emotive

responsen Odd pricingn Even pricing


37/48

Pricing Online

n Pricing structures morecomplex with manyorganisations seeking to

provide alternatives egsoftware (http://alternativeto.net/)

n Pricing is becoming more

transparent- sites exist toadvise users against incurringunnecessary costs

(http://www.saynoto0870.com/)


38/48

Traditional pricingmechanismsOptions for the price package include:

n Basic pricen Discountsn Add-ons and extra products and services

n Guarantees and warrantiesn Refund policiesn Order cancellation terms

(Smith and Chaffey, 2005, p.49)

Online Pricing


39/48

Pricing Policy

n A pricing policy should encompass:n Responsibilities and authority for

pricing decisionsn Discretion with regard to price

discounts, special dealsn Procedures for responding to

competitor price changesn Procedures for changing prices in

company

n Credit policy


40/48

Dynamic Pricing

Current models for dynamic pricinginclude:

n auctions,

n reverse auctions (where buyersset the price they are willing topay and then sellers bid for theirbusiness),

n trading exchanges,

n price matching,

n quantity pricing,

Examples of dynamic pricinginclude:

eBay and Priceline.com.


41/48

Web exclusive pricing discounted priceAdvent 7086 Laptop


42/48

Comparative Pricing

Aims to make pricing on the internet transparent byallowing you to compare prices for goods/services frommany retailers.

Examples include:

n Pricerunner.co.uk

n Moneysupermarket.com

n

Pricewatch.comn Kelkoo.co.uk

n Froogle.google.co.uk

n USwitch.com (for utilities)


43/48

New, Boxed & End of line

Scratch & dent

Refurbished

Ex-display

Used and returned

Opening Bid: 1.00Bid Increment: 25.00Next Bid: 475.00No. of Bids: 17 (Bid History)

Quantity: 1Open Date:

31/10/2005 7:20 AM GMTClose Date:

06/11/2005 9:00 PM GMTListing #: 64725370

Cashback website


44/48

Cashback website


45/48

E-couponsE-coupon

numbers


46/48

Voucher codes offering onlineprice discounts


47/48

Summary

n Pricing is the only p in the MarketingMix to generate revenue.

n

There are various different influences totake into consideration when setting aprice

n Price sensitivity is an issue.

n There are 3 key approaches to prices;cost based, competitor based, marketbased.

n Always consider the internationaldimension


48/48

References

n Linton & Donnelly (2009/10)Delivering customer value through

marketing, BHn Delivering Customer value

through Marketing, BPP Study Text

n Jobber (2007) Principles andPractice of Marketing, 5ed. McGrawHill

Documents

Lecture 6 MBA Pricing Vers 3