Pricing

• Price is the amount of money charged for a product or service

• Price is the sum of values that consumers exchange for the benefits of using the products or service

• In the recent decades price has become more important in buyer choice behaviour

• Fixed pricing was the trend of the past century• dynamic pricing is charging prices depending

on individual customers and situations• The internet has supplemented dynamic

pricing instead of the fixed sticker pricing• Dynamic pricing gives a lot of advantages to

marketers

• 1,Internet sellers like Amazon.com can mine their databases to gauge a specific shoppers desires

• 2,Many B2B marketers monitor inventories cost and demand at any given moment

• 3,Buyers also benefit from web and dynamic pricing

• 4,Buyers also can negotiate prices at online auction sites and exchanges

Pricing objectives• Internal factors• 1.Marketing objectives- before setting price, the

company must decide on its strategy for the product• If the company has selected its target market and

positioned carefully,then its marketing mix strategy including price will be fairly straight forward

• For eg;the toyotas lexus competes with the luxury cars in the higher income segment

• Caterpillar charges 20 to 30% more than the competitors for its construction equipment based on superior product and service quality

• A company may seek general or specific objectives• General objectives include survival,current profit

maximization,market share leadership and quality leadership

• Not for profit and public organisations may adopt a number of other pricing objectives like partial cost recovery

• This is knowing that it must rely on private gifts and public grants to cover remaining costs

• 2.Marketing mix strategy- Price is only one of the marketing mix tools that a company uses to achieve its marketing objectives

• Price decisions must be coordinated with product design,distribution and promotion decisions

• These form a consistent and effective marketing program• Decisions made for other marketing mix variables may

affect pricing decisions• For eg:a decision to position the product on high-

performance &quality , the seller must charge a higher price to cover higher costs

• The producers need to allocate large reseller margins for ensuring their support and promote products

• Companies often position their products on price and then tailor other marketing mix decisions to the prices they want to charge

• Price is a crucial product-positioning factor that defines the products market,competition and design

• Target costing reverses the usual process of first designing a product and ultimately determining its cost

• Instead it starts with an ideal selling price based on customer considerations

• It then targets costs that will ensure that the price is met

• P&G used target costing extensively

• 3,Costs- Any company wants to charge a price that both covers all its costs and gives a rate of return

• The company has to consider fixed,variable and total costs while making price decisions

• 4.Organisational considerations- pricing decisions are differently handled by different companies

• In small companies the top management takes the decision

• In larger companies the line managers decide pricing and in business markets sales people negotiate with customers

• External factors-• 1.Market and demand- the upper limit of prices

depends on market and demand• Consumers and business buyers compare prices

against benefits and utility• The price-demand relationship will vary

according to the nature of markets• Consumers perception of price also influence

pricing decisions

• 2.Competition- the activities of competitors,their costs and prices,competitors reactions to the companys pricing will influence pricing decisions

• The companys pricing strategy will vary according to the nature of competition and the nature of its strategy to face competition

• Some companies go for price leadership,others go for low price,low margin strategy to wipe out competitors

• 3.Other environmental factors- Economic conditions affect pricing due to its effect on cost of production

• The company should consider the pricing impact on external parties who expect more margins and better terms of trade

• Govt.policies also affect pricing decisions and also the co.should consider the societal and social issues while considering prices

Pricing approaches

• The price the company charges will be somewhere between one that is too low to produce a profit or too high to produce a demand

• Product costs set a floor to the price,consumer peceptions of the products value set the ceiling

• Between these two extremes the company must consider competitors prices and other external and internal factors to find the best price

• 1.Cost-based pricing- • a,cost plus pricing is the most simplest pricing

method,which adds a standard mark up to the cost of the product

• Construction companies for eg submit job bids by estimating the total project cost and by adding a standard mark up profit

• Lawyers,accountants and other professionals typically price by adding a standard mark up to their costs

• b,Break even analysis and target profit pricing-• Another cost oriented pricing approach is break

even pricing or target profit pricing• The firm tries to determine the price at which it

will break even or make the target profit it is seeking

• Such pricing is used by general motors which prices its automobiles to achieve a 15-20 % profit on its investment

• 2.Value based pricing- an increasing number of companies are basing their products on the products perceived value

• This pricing uses buyers perception of value,not the sellers cost

• While cost based pricing is product driven whereas here target price is based on customer perception of product value

• a,value pricing- is offering just the right combination of quality and good service at a fair price

• This has led to the introduction of less expensive versions of established brand name products

• Eg:holiday inns strategy of low budget hotels,Revlons range of affordable cosmetics

• b,value added pricing-companies rather than cutting prices to match competitors attach value added services to differentiate their offers

• This extra value will support higher margins• Its not about price but keeping customers loyal• 3.Competition based pricing- One form of

competition pricing is going rate pricing• Here a firm bases its prices on competitors prices

with less attention to own costs or demand

New product pricing strategies

• Pricing strategies change as the product passes through its life cycle

• The introductory stage is specially challenging as they fix prices for the first time

• The choice is between two broad strategies; market skimming pricing and market penetration pricing

• 1.Market skimming pricing- Many companies that invent new products set high initial prices to skim revenues layer by layer from the market

• Sony frequently uses this strategy,it was notable at the introduction of high definition television

• Firstly the products quality and image must support its higher price

• Competitors should not be able to enter the market and undercut price

• 2.Market penetration pricing- The companies set a low price in order to penetrate the market quickly and deeply

• This is to attract a large number of customers quickly and win a large market share

• The high sales volume results in falling costs allowing the company to cut prices further

• Walmart &Dell for its PC products

Product mix pricing strategies

• 1.Product line pricing-the management should decide on the price steps to be set between the products in a line

• In many industries sellers use very established price points for their products in their line

• The price steps should take in to account cost differences between the products in the line

• It also considers customer evaluations of their features and competitors prices

• 2.Optional product pricing- is to offer to sell optional or accessory products along with their main product

• For eg; a car buyer may choose to order power windows and a CD changer

• Most advertised prices today represent a well equipped car

• The recent economic downturn forced auto major to move back features back to option

• 3.Captive-product pricing- Companies that make products that must be used along with the main product are using this pricing

• Examples of captive products are razor blades,video games and printer cartridges

• Producers of main products(razors,video game consoles and printers) often price them low and set high prices for the supplies

• 4.By-product pricing- if the bye products are having no value and getting rid of them is costly,this will affect the pricing of the main product

• Using by-product pricing,the manufacturer will seek a market for these by products

• it should accept any price that covers more than the cost of storing and delivering them

• 5.Product bundle pricing- Sellers often combine several of their products and offer the bundle at a reduced price

• For Eg a fast food restaurant bundle a burger,fries and a soft drink at a combo price

• Price bundling can promote the sales of products consumers might not otherwise buy

Promotional pricing

• In promotional pricing companies will temporarily price the products below list price or even below cost to create an urgency & excitement

• Supermarkets &departmental stores will price a few products at loss to attract customers to the shop in the hope that they buy others on normal prices

• Eg; super markets sell diapers at a less cost in order to attract a family crowd and their chunk of busines

• Manufacturers sometimes offer cash rebates to consumers if they buy in a stipulated period of time

• Rebates are popular with auto makers and producers of durable goods and appliances

• Some other promotional activities include low interest financing,longer warranties,free maintenance to offer price relief

• Promotional pricing has adverse effects like, used too frequently and copied by competitors,creates “deal- prone customers”

• Constantly reduced prices can erode a brands value in the eyes of customers

• Price promotions are considered as quick fix instead of getting through the difficult process of strategising and brand building

• The frequent use of promotional pricing can also lead to price wars

• Such price wars usually play in to the hands of one or few competitors efficient in operations

• The hardware industry untill recently was not in to price wars with IBM,HP&gateway showed good profits utilizing new technologies

• When market started declining, the low cost brand leader,Dell started a price war in mid 2000s.

• Promotional pricing can be effective means of generating sales

• The effectiveness depends on the nature of the company and circumstances

• It can be damaging if it is taken as a steady diet

Psychological pricing

• Price is an indication of the product and many consumers use price to judge the quality

• A$100 bottle of perfume may contain only $3 worth of scent but people are willing to pay $100 because this price indicates something special

• In psychological pricing sellers consider the psychology of prices and not simply the economics

• For eg: consumers usually perceive a higher priced product as having better quality

• When they can judge the quality of a product by examining it or calling up past experience with it they use price less to judge quality

• When they cannot judge quality because of lack of imformation or skill price becomes a important symbol of quality

• Eg:Smirnoff and wolfschmidt

• Reference prices are the prices that the buyers carry in their minds and refer to when looking at a given product

• The reference price might be formed by noting current prices,remembering past prices or assessing the buying situation

• Sellers can influence or use these consumers reference prices when setting price

• For most purchases customers don’t have the skill or information they need to figure out whether they are paying a good price

• They don’t have the time,ability and inclination to research different brands and stores

• Instead they rely on certain cues that signal whether the price is high or low

• For eg the fact that its sold in a prestigious departmental store might signal its worth a higher price

• A retailer might show a high manufacturers suggested price next to the marked price indicating the product was orginally priced higher

• The retailer also might sell a selection of familiar products for which the consumers have accurate price knowledge at very low prices

• This will suggest the customer that the stores prices for the familiar products are low as well

Discriminatory pricing

• Companies often adjust their basic price to accommodate differences in customers , products,locations and so on

• Price discrimination occurs when a company sells a product or service at two or more prices not related to the proportional costs

• In the first degree price dicrimination,the seller charges a separate price to each customer depending on the intensity of demand

• In the second degree price discrimination,the seller charges less to the buyers who buy a larger volume

• In the third-degree price discrimination,the seller charges different amounts to different class of buyers as in the following cases

• 1.customer-segment pricing-different customer groups are charged different prices for the same product or service

• Eg a museum charging less from students and senior citizens

• 2.Product form pricing- different versions of the product are priced differently but not propotionately to their respective costs

• Eg: a mineral water company sells a bottle around 50 ounce at $2

• The same water,1.7 ounces is packed in a moisturizer for $6

• It manages to charge $3 in an ounce in one form and about $.04 an ounce in another

• 3.Image pricing-some companies price the same products at two different levels based on image differences

• A perfume co. can put the perfume in one bottle,give it an image and name and price it at $10 an ounce

• It can put the same perfume in another bottle with a different name and image and price it at $30 an ounce

• 4.Channel pricing-coke carries a different price depending on whether its purchased in a fine restaurant,fast food restaurant or a vending machine

• 5.Location pricing-the same product is priced differently at different locations though the cost of offfering at each location is the same

• A theatre varies its seat prices according to the audience preferences for different locations

• 6.time pricing- prices are varied by season,day or

hour• Public utilities could vary energy rates to

commercial users by time of day and weekend vs week day

• Restaurants charge less to early bird customers, charge less on weekends

• Hotels and airlines use yield pricing by which they offer lower prices on unsold inventory before it expires

Advertising

• Advertising is any paid form of nonpersonal presentation and promotion of ideas,goods or services by an identified sponsor

• Advertisers not only include business firms, but also musuems,charitable organisations and government agencies that direct messages to general public

• In small companies it is handled by somebody in the sales and marketing dept.,a large organisation will have its own dept.handling it

Setting the advertising objectives

• The advertising decisions must flow from prior decisions on target market,market positioning and marketing mix

• An advertising goal is a specific communication task and achievement level to be accomplished with a specific audience in a specific period of time

• Advertising objectives can be classified according to whether the aim is to inform,persuade,remind or reinforce

• 1.Informative advertising aims to create awareness and knowledge of new products or new features of existing products

• 2.Persuasive advertising aims to create liking, preference,conviction and purchase of a product or service

• Eg:Chivas regal attempts to persuade consumers that it gives more taste and status than other scotch

• 3.Reminder advertising aims to stimulate repeat purchase of products and services

• Expensive coco cola ads in magazines are intended to remind people to purchase it

• 4.Reinforcement advertising aims to convince current purchasers that they made the right choice

• Automobile ads often depict satisfied customers enjoying special features in their new car

Deciding on the advertising budget

• Advertising is a current expense building up an intangible asset- brand equity

• 5 factors are to be considered when setting the advertisement budget

1.Stage in the product life cycle- new products have more ad budgets and established brands have lower budgets as a ratio to sales

2.Market share and consumer base- high market share brands less advertising to maintain market share, increase market share more expense

3.Competition- higher the competition more the advertising budget,and a brand needs to heavily advertised to be heard

4.Advertising frequency- the no of repetitions needed to put across the brands message to the consumers decides the budget

5.Product substitutability- brands in commodity class require heavy advertising to establish a differential image

Choosing the advertising message

• Advertising campaigns vary in creativity, and just the facts are not enough

• A great execution must be updated before it gets outdated

• Advertisers go through 4 steps to develop a creative strategy

1.Message generation- whatever method is used the creative people should talk to consumers,dealers and experts

2.Message evaluation- a good ad focusses on one core selling proposition and the messages are rated on desirability,exclusiveness and credibility

3.Message execution- the messages impact depends not only on what is said,but how it is said whether rational or emotional positioning

4.Social responsibility review- advertisers and their agencies must be sure their creative advertising does not overstep social and legal norms

Deciding on the media

• Once the budget is decided and the message is chosen the next is choosing the media

• The steps are as follows1.Deciding on the reach,frequency and impact –

Media selection is the problem of finding the most cost –effective media to deliverer exposures to the target audience

a.Reach – is the number of different persons or households exposed to a particular media schedule

b.frequency- the no. of times within the specified time period an average person or house hold is exposed to the message

c.Impact- the qualitative value of an exposure through a given medium

For eg: a food product ad in a housing complex has more impact than in a police gazette

2.Choosing among major media types- the media planner has to know the capacity of the major media types to deliver reach,frequency and impact

a.Target audience media habits- for eg:radio, internet and television are most effective for teenagers

b. Product- Womens dresses are best shown in the most subscribed magazines and polaroid cameras can be effectively advertised on TV

c. Message- a message announcing a major sale tommorow will require radio or newspapers

A message containing great deal of technical data may require specialized magazines or mailings

d.cost- televison and other visual ads are expensive but newspaper is comparitively inexpensive

what counts is the exposure per cost incurred than the total cost

3.Selecting specific media vehicles- now the media planner searches for the most cost – effective media vehicles

• In the magazine field there are thousands of special interest magazines

• Which means its easy to reach special interest groups but hard to reach general audience

• In the television and radio there are thousands of commercial program vehicles to consider

4.Deciding on media timing- the advertiser faces a macro scheduling problem and a microscheduling problem

a.Macrosheduling problem- the advertiser has to decide how to schedule the advertising in relational to seasonal and business cycle trends

• Eg: a firm has 70% of sales occuring between june and september,the firm has three options

• The firm can vary its ad expenses to follow the seasonal pattern,oppose the seasonal pattern or go constant throught the year

• 2.Micro sheduling problem- calls for allocating advertising expenditures within a short period to obtain maximum impact

• The most effective pattern depends upon the communication objectives

• This is in relation to the nature of the product,target customers,distribution channels etc

• The timing pattern should consider buyer turnover,purchase frequency and forgetting rate

5.Deciding on geographical media allocation- the company has to decide how to allocate its ad budget over space as well as over time

• The company makes national buys when it places ads on national TV networks or nationally circulated magazines

• It makes spot buys when it buys TV time in just a few TV markets or regional editions of magazines

6.Communication effect research- seeks to determine whether an ad is communicating effectively

• This is called as copy testing and can be done before an ad is put in to media either broadcasted or printed

• Advertisers are also interested in posttesting the overall communication impact of a completed advertising campaign

7.Sales effect research- Communication- effect advertising research helps advertisers assess ad’s communication effects,not about its sales impact

• Advertisings sales effect is harder to measure than its communication effect

• Sales are influenced by many factors besides advertising such as the products features, price, availability and competition