9-1 Chapter 9 PRICING THE PRODUCT. 9-2 Meaning of pricing from the perspective of the buyer, seller...
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Transcript of 9-1 Chapter 9 PRICING THE PRODUCT. 9-2 Meaning of pricing from the perspective of the buyer, seller...
9- 1
Chapter 9
PRICING THE PRODUCT
9- 2
• Meaning of pricing from the perspective of the buyer, seller and society
• Seller’s objectives in making pricing decisions
• Alternative pricing approaches available to the manager
33 9-9-
PRICE: PERSPECTIVES
CUSTOMER SOCIETY MARKETER
RATIONAL/ECONOMIC IRRATIONAL/FREEDOM
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Value sole justification for price Value = perceived (benefits - costs) Perceived benefits directly related to
price: status, convenience, the deal, brand, quality, choice
Providing value-added elements to the product is a popular strategic alternative
Perceived costs: actual dollar amount paid, inconvenience, limited choice, poor service, risk of making a mistake, related costs, lost opportunity, unexpected consequences
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• Bartering system / exchange of goods of equal value to monetary system – a more convenient way to purchase goods and accumulate wealth
• Society can employ price to control its economic health
• Price can be inclusive / exclusive
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• Results of price manipulation are predictable
• Consumer is a rational decision-maker, has perfect information; demand is inversely proportional to price
• Primary demand: total market demand by all buyers for a product type
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• Man’s response to price is sometimes unpredictable and pre-testing price manipulation is a necessary task
• Example: prices go down, people become suspicious and buy less
• Conspicuous consumption
• Non-profit organizations
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• Foreign competition: lower price, high quality
• Competitors: try to gain market share by reducing their prices
• New products: more prevalent today than in the past; difficult to price due to lack of historical base
• Technology: reduced ‘shelf life’ of existing products; pressure to recover costs more quickly
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• Survival: long-term through generation of sufficient revenues
• Profit: satisfies stockholders• Sales: demand managed to
regulate sales that generate profit• Market share: attracting
appropriate market segments in significant numbers ensures sales volume sufficient for survival and prosperity
• Image: fairness in dealings, reliability, accountability ensure position of respect, esteem in the community
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• Competitive pricing strategy
• Non-price competition
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• Pricing to meet competition: price is an indicator/baseline; marketing mix elements targeted at customers interested in products in a particular price category
• Pricing above competitors: requires clear advantage on some non-price element of the marketing mix; high price-quality association cannot be presumed
• Pricing below competitors: market niche; control costs, reduce services; generate large sales volume through lower profit margins; price wars; inability to raise price or image
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• Non-price competitive strategy: use strategies other than price to attract customers e.g., advertising, credit, delivery, displays, convenience
• Difficult to match non-price characteristics; may not create competitive advantage
• Deleterious effect on company profitability
• Main target: price smarter, focus not on matching the price of a competitor
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• Tracks demands over several years
• Balance through ‘yield management’ that keeps supply and demand in check
• Aspects of pricing: the rate charged and the length of the rental
• Price as a legitimate rationing device
• Smart pricing: base on the value to the customer; profit through customizing prices to different customers
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• Penetration: introductory stage of lifecycle, accept relatively low price, lower profit margin for more sales and quicker establishment; best in case of price sensitive customers, anticipation of quick entry by competitors, likelihood of rapid acceptance, adequate resource base e.g, Texas Instruments calculators
• Price skimming: high prices, target buyers willing to pay premium to get the new product; best under opposite conditions e.g., Motorola cell phones
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Each price must be far enough apart so that buyers can see definite quality differences e.g., ties at $15, $17, $20.50
Consumer shopping goods e.g., apparel rather than product lines e.g., groceries
Customers want wide assortment of goods Simpler and more efficient to use relatively fewer
prices, product/service mix can be tailored Price points: different prices that make up the line Smaller inventory As costs change, prices can be kept constant and
quality changed
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Price is bid or negotiated separately for each exchange
Discounts and allowances Quantity Seasonal Cash Trade Personal allowances Trade-in allowances
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• Reductions in base price given for purchasing some pre-determined quantity of merchandise
• Non-cumulative: applies to each purchase and encourages larger purchases; buyer cannot switch to a competitor till his stock is used
• Cumulative: applies to total bought over a period of time; helps build repeat purchase e.g., building materials dealers
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• Reductions on out-of-season merchandise e.g., discount on snowmobiles in summer
• Spread demand over the year
• Fuller use of production facilities
• Improved cash flow during the year
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• Cash: reductions on base price for paying in cash, or within a short period of time e.g., a 2% discount on bills paid within ten days
• Trade: price reductions given to middlemen e.g., wholesalers, industrial distributors, retailers; encourage them to stock and give preferred treatment to an organization’s products; discounts may also be used to gain shelf space or preferred position in the store
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• Personal: aimed at middlemen e.g., wholesalers giving prize money called spiffs for retailers to pass on to retailer’s sales clerks for aggressively selling certain items
• Trade-in: allow the seller to negotiate best price with the buyer; the trade-in can be of value if it can be resold e.g., a construction company trading in a used grader worth $70,000 for a new model from an equipment company
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• Group similar or complementary products and charge a total price that is lower than if they were sold separately e.g., Gateway Computers
• Increased sales will compensate for lower profit margins e.g., annual newspaper subscription
• Sell a less popular product by combining it with popular ones e.g., season ticket for college hockey games
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• Prestige pricing: inferring quality from price e.g., fur coat
• Customary prices: those that consumers identify with particular items e.g., candy bars typically cost 60 cents
• Odd prices: prices that end in such digits as 5, 7, 8, 9 e.g., a price of $2.95 is perceived by consumers as a bargain or saving than a price of $3.00
• Combination pricing: e.g., two-for-one
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ALTERNATIVES
COST-ORIENTED DEMAND-ORIENTED VALUE-BASED
COST-PLUS MARK-UPS
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• Goal: a particular gross margin (how much the goods cost and the actual price for which it sells) that will produce a desirable profit level
• Do not need forecasts of general business conditions or customer demand
• Consumer perception: fair as price is related to the cost of producing the item
• Inherent inflexibility; ignoring consumer’s perception of product’s value creates disadvantage
• Company’s costs may fluctuate, so constant price changing is not a viable strategy
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• Difference between average cost and price of all merchandise in stock, for particular department or individual item
• May be designated as a percent of selling price or as a percent of cost of the merchandise
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TYPES
• Cumulative: difference between total dollar delivered cost of all merchandise and the total dollar price of the goods put into stock for a specified period of time
• Initial: original mark-up at which individual items are put into stock
• Maintained: difference between actual price for which all of the merchandise is sold and the total dollar delivered cost of the goods exclusive of deductions; typically less than initial due to mark-downs, stock-shrinkages from theft, breakage; essential in estimating operating profits; provides indication of efficiency
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• Price that will produce enough revenues to cover all costs at a given level of production
• Total costs: fixed and variable
• Effective when a target return objective is sought
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• Nature of the demand curve for the product or service being priced
• Demand curve influenced by the structure of the industry; competitive – price may be used to gain market share; few dominant players: variation in prices minimal
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• Focuses entirely on the customer as a determinant of the total price/value package
Acknowledge that:• To the customer the price is the only unpleasant
part of buying• Price is the easiest marketing tool to copy• Price represents everything about the product• Asks and answers:• What is the highest price that can be charged
and still make the sale? (customers, competitors)
• Is the firm willing to sell at that price? (costs, constraints)
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• Customer buying process: price knowledge, price expectations
• Competitors: define indirect competitors• Incremental costs: cost of producing each additional
unit• Avoidable costs: unnecessary, those that can be
passed onto some other institution in the marketing channel
• Opportunity costs• Constraints: formal e.g., government restrictions in
respect to strategies like price-fixing; informal e.g., matching the price of competitors
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• Employ a segmented approach towards price, based on criteria like customer type, location, order size
• Establish highest possible price level and justify it with comparable value
• Use price as a basis for establishing strong customer relationships
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• More strategic element of marketing
• Smarter pricing