2. Factors Affecting Price Decisions
Internal Factors External Factors
Nature of the market
Marketing Objectives Pricing and demand
Marketing Mix Strategy
Costs
Decisions Competition
Other environmental
Organizational
factors (economy,
considerations
resellers, government)
3. Internal Factors Affecting Pricing
Decisions: Marketing Objectives
Survival
Low Prices to Cover Variable Costs and
Some Fixed Costs to Stay in Business.
Current Profit Maximization
Choose the Price that Produces the
Marketing Maximum Current Profit, Etc.
Objectives Market Share Leadership
Low as Possible Prices to Become
the Market Share Leader.
Product Quality Leadership
High Prices to Cover Higher
Performance Quality and R & D.
4. Internal Factors Affecting Pricing
Decisions: Marketing Mix
Product Design
Non price Price Distribution
Positions
Promotion
5. External Factors
Affecting Pricing Decisions
Market and
Demand
Competitors’ Costs,
Prices, and Offers
Other External Factors
Economic Conditions
Reseller Needs
Government Actions
Social Concerns
6. Market and Demand Factors
Affecting Pricing Decisions
Pricing in Different Types of Markets
Pure Competition
Many Buyers and Sellers Pure Monopoly
Who Have Little Single Seller
Effect on the Price
Monopolistic Oligopolistic
Competition Competition
Many Buyers and Sellers Few Sellers Who Are
Who Trade Over a Sensitive to Each Other’s
Range of Prices Pricing/ Marketing
Strategies
9. Cost-Based Pricing
Certainty About
Costs
Simplest
Ethical
Cost-Plus
Factors Pricing
Pricing is Pricing is an
Situational Method
Simplified
Approach That
Unexpected
Adds a
Price Competition Standard
Is Minimized Attitudes
Markup to the Ignores
Costof the
of Current
Others Demand &
Product.
Much Fairer to Competition
Buyers & Sellers
10. Cost-Based Versus Value-Based Pricing
Cost-Based Pricing Value-Based Pricing
Product Customer
Cost Value
Price Price
Value Cost
Customers Product
11. Competition-Based Pricing
Setting Prices
Going-Rate
Company Sets Prices Based on What
Competitors Are Charging.
? Sealed-Bid
?
Company Sets Prices Based on
What They Think Competitors
Will Charge.
12. New Product Pricing Strategies
Market Skimming • Use Under These
Conditions:
Setting a High Price for a – Product’s Quality and
New Product to “Skim” Image Must Support Its
Maximum Revenues from Higher Price.
the Target Market. – Costs Can’t be so High that
They Cancel the
Results in Fewer, But Advantage of Charging
More Profitable Sales. More.
– Competitors Shouldn’t be
Able to Enter Market Easily
and Undercut the High
Price.
13. New Product Pricing Strategies
• Use Under These Market Penetration
Conditions:
– Market Must be Highly Setting a Low Price for a
Price-Sensitive so a Low New Product in Order to
Price Produces More “Penetrate” the Market
Market Growth. Quickly and Deeply.
– Production/ Distribution
Costs Must Fall as Sales Attract a Large Number of
Volume Increases. Buyers and Win a Larger
– Must Keep Out Market Share.
Competition & Maintain Its
Low Price Position or
Benefits May Only be
Temporary.
14. Product Mix-Pricing Strategies:
Product Line Pricing
• Involves setting price
steps between various
products in a product
line based on:
– Cost differences between
products,
– Customer evaluations of
different features, and
– competitors’ prices.
15. Product Mix- Pricing Strategies
• Optional-Product
– Pricing optional or
accessory products sold
with the main product.
i.e camera bag.
• Captive-Product
– Pricing products that
must be used with the
main product. i.e. film.
16. Product Mix- Pricing Strategies
• By-Product • Product-Bundling
– Pricing low-value – Combining several
by-products to get products and
rid of them & make offering the bundle
the main product’s at a reduced price.
price more – i.e. theater season
competitive. tickets.
– i.e. sawdust,
17. Discount and Allowance Pricing
A d ju s tin g B a s ic P r ic e to R e w a r d C u s to m e r s
F o r C e rta in R e s p o n s e s
C a s h D is c o u n t S e a s o n a l D is c o u n t
Q u a n tity D is c o u n t T r a d e -In A llo w a n c e
F u n c tio n a l D is c o u n t P r o m o t io n a l A ll o w a n c e
18. Psychological Pricing
• Considers the psychology of
prices and not simply the
economics.
• Customers use price less
when they can judge quality
of a product.
• Price becomes an important
Valu
e $2 quality signal when
2. 00
Sale customers can’t judge
$14
. 99 quality; price is used to say
something about a product.
19. Promotional Pricing
Loss Leaders Temporarily Pricing
Products Below List
Special-Event Pricing Price to Increase
Short-Term Sales
Cash Rebates Through:
Low-Interest Financing
Longer Warranties
Free Merchandise
Discounts
Hinweis der Redaktion
Internal Factors - When setting price, marketers must take into consideration several factors which are the result of company decisions and actions. To a large extent these factors are controllable by the company and, if necessary, can be altered. However, while the organization may have control over these factors making a quick change is not always realistic. For instance, product pricing may depend heavily on the productivity of a manufacturing facility (e.g., how much can be produced within a certain period of time). The marketer knows that increasing productivity can reduce the cost of producing each product and thus allow the marketer to potentially lower the product’s price. But increasing productivity may require major changes at the manufacturing facility that will take time (not to mention be costly) and will not translate into lower price products for a considerable period of time. External Factors - There are a number of influencing factors which are not controlled by the company but will impact pricing decisions. Understanding these factors requires the marketer conduct research to monitor what is happening in each market the company serves since the effect of these factors can vary by market
Return on Investment (ROI) – A firm may set as a marketing objective the requirement that all products attain a certain percentage return on the organization’s spending on marketing the product. This level of return along with an estimate of sales will help determine appropriate pricing levels needed to meet the ROI objective. Cash Flow – Firms may seek to set prices at a level that will insure that sales revenue will at least cover product production and marketing costs. This is most likely to occur with new products where the organizational objectives allow a new product to simply meet its expenses while efforts are made to establish the product in the market. This objective allows the marketer to worry less about product profitability and instead directs energies to building a market for the product. Market Share – The pricing decision may be important when the firm has an objective of gaining a hold in a new market or retaining a certain percent of an existing market. For new products under this objective the price is set artificially low in order to capture a sizeable portion of the market and will be increased as the product becomes more accepted by the target market (we will discuss this marketing strategy in further detail in our next tutorial). For existing products, firms may use price decisions to insure they retain market share in instances where there is a high level of market competition and competitors who are willing to compete on price. Maximize Profits – Older products that appeal to a market that is no longer growing may have a company objective requiring the price be set at a level that optimizes profits. This is often the case when the marketer has little incentive to introduce improvements to the product (e.g., demand for product is declining) and will continue to sell the same product at a price premium for as long as some in the market is willing to buy.
It should be noted that not all companies view price as a key selling feature. Some firms, for example those seeking to be viewed as market leaders in product quality, will deemphasize price and concentrate on a strategy that highlights non-price benefits (e.g., quality, durability, service, etc.). Such non-price competition can help the company avoid potential price wars that often break out between competitive firms that follow a market share objective and use price as a key selling feature.
Marketers must be aware of regulations that impact how price is set in the markets in which their products are sold. These regulations are primarily government enacted meaning that there may be legal ramifications if the rules are not followed. Price regulations can come from any level of government and vary widely in their requirements. For instance, in some industries, government regulation may set price ceilings (how high price may be set) while in other industries there may be price floors (how low price may be set). Additional areas of potential regulation include: deceptive pricing, price discrimination, predatory pricing and price fixing. Finally, when selling beyond their home market, marketers must recognize that local regulations may make pricing decisions different for each market. This is particularly a concern when selling to international markets where failure to consider regulations can lead to severe penalties. Consequently marketers must have a clear understanding of regulations in each market they serve.
Marketers should never rest on their marketing decisions. They must continually use market research and their own judgment to determine whether marketing decisions need to be adjusted. When it comes to adjusting price, the marketer must understand what effect a change in price is likely to have on target market demand for a product. Understanding how price changes impact the market requires the marketer have a firm understanding of the concept economists call elasticity of demand, which relates to how purchase quantity changes as prices change. Elasticity is evaluated under the assumption that no other changes are being made (i.e., “all things being equal”) and only price is adjusted. The logic is to see how price by itself will affect overall demand. Obviously, the chance of nothing else changing in the market but the price of one product is often unrealistic. For example, competitors may react to the marketer’s price change by changing the price on their product. Despite this, elasticity analysis does serve as a useful tool for estimating market reaction. Elasticity deals with three types of demand scenarios: Elastic Demand – Products are considered to exist in a market that exhibits elastic demand when a certain percentage change in price results in a larger and opposite percentage change in demand. For example, if the price of a product increases (decreases) by 10%, the demand for the product is likely to decline (rise) by greater than 10%. Inelastic Demand – Products are considered to exist in an inelastic market when a certain percentage change in price results in a smaller and opposite percentage change in demand. For example, if the price of a product increases (decreases) by 10%, the demand for the product is likely to decline (rise) by less than 10%. Unitary Demand – This demand occurs when a percentage change in price results in an equal and opposite percentage change in demand. For example, if the price of a product increases (decreases) by 10%, the demand for the product is likely to decline (rise) by 10%. For marketers the important issue with elasticity of demand is to understand how it impacts company revenue. In general the following scenarios apply to making price changes for a given type of market demand: For elastic markets – increasing price lowers total revenue while decreasing price increases total revenue. For inelastic markets – increasing price raises total revenue while decreasing price lowers total revenue. For unitary markets – there is no change in revenue when price is changed.
External Factors: Customer Expectations Possibly the most obvious external factors that influence price setting are the expectations of customers and channel partners. As we discussed, when it comes to making a purchase decision customers assess the overall “value” of a product much more than they assess the price. When deciding on a price marketers need to conduct customer research to determine what “price points” are acceptable. Pricing beyond these price points could discourage customers from purchasing. Firms within the marketer’s channels of distribution also must be considered when determining price. Distribution partners expect to receive financial compensation for their efforts, which usually means they will receive a percentage of the final selling price. This percentage or margin between what they pay the marketer to acquire the product and the price they charge their customers must be sufficient for the distributor to cover their costs and also earn a desired profit.