Hogeschool van Amsterdam Interactieve Media An introduction to pricing Hoorcollege marketing blok 2...

Hogeschool van Amsterdam Interactieve Media

An introduction to pricing

Hoorcollege marketing blok 2 week 5


Learning goals

By the end of this week’s colleges and the reading you should: Understand the roles of pricing in the marketing mix Be aware of the factors that affect the price set Understand the strategies available to marketers when

setting prices Know some of the tactics available for changing prices


Agenda

The importance of price

What is price?

Factors that influence pricing decisions

Setting prices: pricing strategies

Tactics for changing price


The importance of price


Price is important

Price is one of the most important factors in the buying decision If it is perceived as too high by the target customer, demand will

be low

Price is the only income generator in the marketing mix If the price is too low, profits will not be optimal

Price suggests a positioning to the consumer If the price is out of step with the rest of the marketing mix it will

weaken the offer

Price is what the customer pays in the exchange process The customer must feel they are getting a fair deal


What is price?


What is a price?

All products and services have a price Gratis is also a price

A price the thing (usually money) that is charged in exchange for a product or service

More broadly a price is the sum of all values that consumers exchange for the benefits of having or using a product or service This might include things such as extra warranty and cost

of ownership


Perception (perceptie) is very important

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If the consumer feels the price is too high they will

try to find an alternative or may even go without

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I’m thirsty

I’ll get a drink of waterCool!

Oh bugger!


Perception of what is “too much” (or too little) varies by consumer

Waste of

money

Cool!

Knowing what your target customer understands as valuable is essential to setting a price

What’s in it for them?

US$ 23,000


Factors affecting price setting


Price setting can be complex


But in most cases there are two key factors

The highest price that can be charged is the maximum the target customer perceives as being “worth it”

The minimum is (usually) what is necessary not to lose money

The other factors affect where you can sit between these two


Setting prices: pricing strategies


Deciding strategy

In order to set a price you first need to understand What the target customer sees as the maximum price that

is “worth it”

And What your minimum price is based on the costs you have

Then you decide you pricing strategy


New product or new price?

A new price might be for a new product or for an existing one

Deciding the price of a new product tends to be different from changing the price of an existing product

With new products you often have less information to work with


New product pricing


New product pricing

Two types of “new” product Imitative products

Products that the consumer can compare easily with another offer meeting the same need

Innovative products Products that the consumer cannot compare with another

solution These are rarer than many think

Each requires a different approaches


Imitative products

The issue you here is how to position the product against existing offers

There are two variables involved Relative price compared to alternatives Relative quality compared to alternatives

These offer 4 possible strategies


Price positioning strategies for imitative products

Premiumstrategy

Good-valuestrategy

Overchargingstrategy

Economystrategy

High

Low

High Low

Relative Quality

Relative Price


Beware of being a “me too” offer

Premiumstrategy

Good-valuestrategy

Overchargingstrategy

Economystrategy

High

Low

High Low

Relative Quality

Relative Price

Metoo


Innovative products

These products have no reference Although they may be an innovative replacement for an

existing offer

Price is set based on an deep understanding of the target customer’s idea of value

There are two main strategies Market-skimming pricing Market-penetration pricing


Market-skimming

This involves setting the starting price high to skim layers of the market The price must be dynamic and adjusted over time to

maintain sales

Stage 1 Set a price that is just “worth it” for some segment (usually

innovators) of the market

Stage 2 As sales slow down because the market segment is

saturated or competitors enter the market the price is reduced for the next segment (early adopters)

And so on...


Market-skimming for & against

Advantages

Positions product in terms of Uniqueness Quality

Allows quicker recovery of development costs

Risks

Failure to react to product life cycle development

Setting the price too high Over-estimating the target

customer’s sense of what is valuable

Product not really unique

Fast competitor reaction


Market-penetration

This involves setting a price that is low enough to attract large numbers of buyers


Conditions favouring market-penetration

Price sensitive market

Production and distribution costs will fall as a result of high volumes

The low price helps keep competition out of the market


Advantages of penetration

Develop a market for a new offer quickly

Take advantages of economies of scale

Keep competition out of the market

Develop dominant market position


Market-skimming versus penetration

Market-skimming works best when: The product is genuinely

unique Competitors cannot copy

the product quickly E.g. it is protected by a

patent

The product offers real value to some market segments

The market is not price sensitive

Production and distribution costs will not fall quickly

Market penetration works best when: The market is price

sensitive Production and distribution

costs will fall based on increased volumes

The product is easily copied

The value of the product is less clear


“Normal” pricing


There is no such thing as “normal” pricing, but

Pricing existing or updated products is easier (a little like imitative new products)

There are 13 different strategies These can sometimes be used in combinations


“Normal” pricing strategies


“Gratis” pricing isn’t really gratis

Even when it’s gratis, someone has to pay

Gratis…Cool!

This had

better be

worth it!


Ways of keeping things “gratis”

Advertising

Selling database customer information

Selling-up


Some tactics for changing price

These really are used


Changing price is sometimes necessary…but risky

A price rise can mean Angry customers Potential reduction in market share if competitors do not

increase

A price decrease can mean A potential decrease in profit Image problems

Sometimes it is better not to change price, but find a more creative way to handle the price This may not be the case for economy brands


Some ways to avoid increasing price

Change the product (e.g. make it smaller)

Bundle the product

Separate extras and make the options

Change discount to intermediaries

Charge for deliver and extras

Move away from lower margin products in line-up

Offer “prompt payment” discounts

Late payment penalties

Change minimum order size

Leave the market


Some ways to avoid decreasing price

Short-term promotions

Bundle pricing

Value packs

Increase warranty

Increase intermediary discounts

Extend payment terms

Increase product quality

Offer better service

Leave the market


Summary

Price is the only element of the marketing mix that makes money

Poor pricing can ruin your marketing mix

Pricing of new products is more complex than existing products

Where possible avoid changing price Unless you are a economy brand

Hogeschool van Amsterdam Interactieve Media An introduction to pricing Hoorcollege marketing blok 2...

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