Chapter 13 Pricing

Topics:– Determinants of Pricing Strategy– Cost Issues– Competition Issues– Customer Value and Pricing– The Pricing Plan using Marketing-

orientated pricing.– Hansen (A) case

'Positive direction'

"Dr Martens will remain a brand true to its heritage and deliver footwear of the highest quality. "The offshore strategy is the first step in moving the company and the brand forward in a positive direction." Paul Gates, general secretary of KFAT, said: "It may be cheaper in China, but this is an issue of added value and quality. "It does not matter if the boots are cheap if nobody is going to buy them (because of their poorer quality)."

Dr Martens moves to China

The makers of Dr Martens boots have announced the company is moving production to China with the loss of more than 1,000 jobs. A spokesman for the company said the decision was made because it was far cheaper to produce footwear in China. It plans to cease all production in the UK, but will continue to employ a number of office and design staff.

Pricing methods

Cost

Competition Marketing

Pricingmethods

Ceiling and Floor of Price – Pricing’s ‘Black Box’

Low Price

No Possible Profit at thisPrice

High Price

No PossibleDemand at this Price

COMPETITORPRICES

COSTS USP’sDIFFERENTIATION

Q2

Q1

P2

P1

Pri

ce

Quantity

The demand curve

Does the Demand Curve Always look like this??

What of Luxury Goods – so called ‘Giffen’ goods

What may cause an ‘inelastic’ market/demand curve?

Losses

Break even point

Fixed costs

Total revenue

Total variable costs

Total cost

Profits

Units of Production

Mo

ney

(£)

Determining the break even point

4

Cost-oriented Pricing

Direct Costs (per unit) £2

Fixed Costs £200,000

Expected Sales 100,000

Costs per Unit

Direct Costs £2

Fixed Costs (200K/100K) £2

Full Costs £4

Mark-up (10%) £0.4

Price (costs + mark-up) £4.4

Costs are taken into account only when they are directly attributable to the production of a particular product. Fixed costs or overheads are not included in the marginal cost.

Marginal cost for the example given:

Fixed Costs £200,000

Expected Sales 100,000

Marginal Cost £2

Mark-up (10%) £0.2

Marginal Price £2.2

Full Cost Pricing Direct (Marginal) Cost Pricing

Evaluating Cost-Plus Pricing

Benefits– Cost-plus is easy and quick to evaluate. It

is perceived by firms to be inexpensive.– It might be required or desired by

customers.

Evaluating Cost-Plus Pricing

Disadvantages– Often delegated to inappropriate management levels.– In the initial calculations, there are obvious difficulties

in allocating appropriate figures for contribution to fixed costs.

– Such calculations are meaningless if estimated volume levels are greatly above/below actual levels achieved.

– No consideration of competitive prices or response.– Does not systematically evaluate demand.– Logically corrupt. Uses estimate of volume to calculate

price. In competitive markets price determines volume.– Opportunities to charge a higher price may be missed.

Competitor-oriented Pricing

Going-rate Pricing:With no product differentiation producers are forced

to accept the going rate. In reality there is almost no situation in which no differentiation occurs.

Competitive bidding: The supplier will price according to a specification

drawn up by the purchaser. Usually the supplier will choose the lowest (most competitive) price tendered.

Statistical modelling has resulted in the following basis for calculating expected profits.Expected profit = Profit X Probability of winning

Pricing Plans

Premise:

Experience of pricing decisions in a range of companies suggests that the biggest gains are likely to result not from additional knowledge or insights concerning specific aspects of pricing, but from a more consistent and rational application of what is already known. More specifically, there is a need to ensure that the decisions that are taken concerning the many different aspects of a company’s price structure form part of a coherent plan.

Marketing-orientated pricing

Effect on distributors/

retailers

Negotiating margins

Costs Political factors

Product line pricingCompetition

Price-quality relationshipsExplicability

Marketing strategy

Value to customer

Marketing-orientedpricing PLAN

EVC Analysis

120000 120000

30000

50000

30000

EVC =90000

100000

20000

EVC =80000

40000 Added Value

Life Cycle Cost

Purchase Price

Start-up Costs

Post-Purchase Costs

Reference Product

New Product X

New Product Y

Nine Marketing-Mix Strategies on Price/Quality

1. Premium strategy 2. High-value strategy 3. Superb-value strategyHigh

Medium

Low

Product Quality

4. Overcharging strategy

7. Rip-off strategy

5. Average strategy

8. False economy strategy

6. Good value strategy

9. Economic strategy

High Medium Low

Price

Re v

e nu

e

Time

0

Introduction stage

Growth stage

Maturity stage

Decline stage

The Product Life Cycle

New product launch strategy

Rapidskimming

HighSlow

skimming

Rapidpenetration

Slowpenetration

Price

Low

Promotion

High Low

When To Use a Penetration or a Skimming Strategy for Pricing New Products

Level of Desirein Market

Distinctiveness from Competitive Products

Importance of Price to Market

Ease of Duplicating Product

Return on Investment Objective

Dimension

SkimmingStrategy

PenetrationStrategy

HighLow

Similar

Important

Easy

Gradual Fast

Not Easy

Not Important

Distinctive

Source: Hise, R, Gillett, P and Ryans, J, (1979), Basic Marketing Concepts and Decisions, Winthrop Publishers, Cambridge, Massachusetts, p 450.

Initiating Price Changes

Increases

Cuts

Circumstances Value greater Value less than price than price Rising costs Excess supply Excess demand Build objective Harvest objective Price war unlikely Pre-empt

competitive entry

Initiating Price Changes

Increases Cuts

Tactics Price jump Price fall Staged price increases Staged price

reductions Escalator clauses Fighter brands Price unbundling Price bundling Lower discounts Higher discounts

Initiating Price Changes

Increases Cuts

Estimating Strategic objectives Competitor Self-interest

Reaction Competitive situation Past experience

Reacting to Competitors’ Price Changes

Increases Cuts

When To Rising costs Falling costs Follow

Excess demand Excess supply Price insensitive

customers Price sensitive

customers Price rise compatible

with brand image Price fall compatible

with brand image Harvest or hold

objective Build or hold

objective

Reacting to Competitors’ Price Changes Increases Cuts

When To Stable or falling costs Rising costs

Ignore Excess supply Excess demand Price sensitive

customers Price insensitive

customers Price rise compatible

with brand image Price fall

incompatible with brand image

Build objective Harvest objective

Reacting to Competitors’ Price Changes

Increases Cuts

Tactics

Quick response

Margin improvement

urgent

Offset competitive

threat

Slow response

Gains to be made by being

customer’s friend

High customer

loyalty

Hansen Bathrooms (A) case

What other factors should be taken into account with regards Rob Vincent’s proposal?

Suggest alternative pricing strategies and the likely sort of price to the customer this would lead to

What impact would this have on the rest of the mix?