Chapter 7: Developing Pricing Strategy The Marketing Plan Handbook Fourth Edition Marian Burk Wood 7-1

Chapter 7: Developing Pricing Strategy

The Marketing Plan HandbookFourth Edition

Marian Burk Wood

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Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Unique Aspects of Pricing

Pricing directly produces revenues.

Most pricing decisions can be implemented relatively quickly.

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Value Need to research and analyze value.

Consider how the product’s value will be communicated.

Customers’ perceptions of value and price sensitivity can be used to deal with imbalances in supply and demand.

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Weighing Benefits vs. Total Price

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Different Types of Pricing

Fixed Pricing: customers in the targeted segment pay the price set (fixed) by the marketer.

Dynamic Pricing: Prices vary from customer to customer or situation to situation.

Negotiated Pricing (B2B): Buyer and seller negotiate the price.

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Price Elasticity Price elasticity is the level of demand for a product

at different price points.

Calculation: Dividing the percentage change in unit sales demanded by the percentage change in price.

“Elastic”: When a small price change significantly increases or decreases demand.

“Inelastic”: When a price change does not significantly change the number of units demanded.

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Price Elasticity (cont’d)

Change in Price Inelastic Demand Elastic Demand

Small Increase Demand drops slightly

Demand drops significantly

Small Reduction Demand rises slightly Demand rises Significantly

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Factors Impacting Elasticity

Customers are less sensitive to price when: It is a relatively small amount of product. Comparisons to possible substitutes are not easy. Switching costs are involved. The product’s quality, status, or another benefit

justifies the price. The cost is shared with others. Perceive the price as fair. Products are bundled.

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Cost-Based Pricing/Value-Based Pricing Cost-based pricing:

Start with the product and its cost. Set a price that covers the cost. Communicate value to customers.

Value-based pricing: Research customers’ perceptions of value and the

price they are willing to pay. Find a way to make the product at a reasonable

cost (target costing) to return a reasonable profit or achieve other objectives.

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Cost-Based Pricing/Value-Based Pricing

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Planning Pricing Decisions

Pricing decisions must be: Value-based. Objectives-driven . Proactive.

When planning pricing, marketers must examine: Objectives. External influences. Internal influences.

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Pricing to Meet the Firm’s Objectives The pricing strategy must be consistent

with the firm’s overall goals and objectives.

Due to market realities, organizations may have to trade off market share growth with profitability.

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Samples of Pricing Objectives

Type of Objective Sample Pricing Objective

Financial For profitability:

Set prices to achieve gross margin of 40%.

Marketing For higher market share:

Set prices to achieve a market share increase of 5% within 6 months.

Societal For philanthropy:

Set prices to raise $10,000 for charity during the second quarter of the year.

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External Pricing Influences

Customers. Competitors. Channel Members. Legal, Regulatory and Ethical Concerns.

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Customers Consumers

Perceptions of value, behavior, and attitudes all affect consumers’ reaction to pricing.

Business Customers Globalization has increased range of choices.

Customers frequently search for the lowest price.

Emphasis on building relationships, thereby increasing switching costs.

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Competitors

By analyzing the pricing strategies of competing products, a company can get a better sense of: The alternatives available to customers, and Competitors’ pricing objectives and strategies.

Pricing is often highly visible Often exerting downward pressure on profits and

limiting pricing options.

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Channel Members Companies must consider the pricing

expectations of their distribution partners.

Impact of the Internet = downward price pressure due to: More efficient transaction capabilities,

Convenient price comparisons, and

More intense competition – sometimes from unexpected sources.

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Sample of Consumer Pricing in the Retail Channel

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Legal and Regulatory Concerns

Companies need to comply with a variety of pricing laws and regulations. Some of these include:

No price collusion.

No price discrimination.

No predatory pricing.

Price limits.

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Ethical Concerns

Some examples of ethical decisions in pricing:

Is it ethical to raise prices during an emergency, when products may be scarce or particularly valuable?

Should a company set a high price for an indispensable product, knowing that some customers will be unable to pay?

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External Pricing Influences

Key external influences on pricing strategy include:

Costs and break-even objectives.

Targeting and positioning strategy.

Product strategy.

Other marketing decisions.

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Costs and Break-Even Objectives

Costs typically establish the theoretical “floor” of the pricing range.

Break-even point: the sales level at which revenues cover costs.

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Total, Fixed and Variable Costs

The total cost consists of both fixed and variable cost.

Fixed costs: Overhead expenses such as rent and payroll, which do not vary with volume.

Variable costs: Expenses such as raw materials, which do vary with volume.

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Average Cost/Unit Equals total costs divided by total

number of units.

Computed at various output levels.

Insight into how the price could be set at each level of demand to recover total costs, or earn a targeted level of profit.

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Break-Even Example Break-even volume = fixed cost/price-

variable cost.

Example: Given:

Fixed cost = $40,550 Variable cost = $45 per unit Price = $995 per unit

Therefore: Breakeven = $40,550/$995 - $45 Breakeven = $40,550/$950 Breakeven = 42.6 units (roundup to 43 units)

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Targeting and Positioning Strategy Target Market

Price–sensitive customers would likely require lower price points.

Affluent customers would likely tolerate higher price points.

Positioning A product positioned as being a “good value” will

likely require a lower price point, A product positioned as a luxury good, or as a

status symbol would best be supported by a higher price point.

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Product Strategy Introduction: Decision between skim and penetration

pricing.

Growth: Pricing used to stimulate demand, drive toward break-even point.

Maturity: Pricing used to defend market share, retain customers, pursue profitability and expand into additional channels.

Decline: Pricing can be used to stimulate demand and “clear out” old products, or to “milk” existing products for profitability at end of life.

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Skim Pricing

Favorable conditions: Considerable differentiation.

Quality-sensitive customers.

Sustainable advantage.

Few competitors.

Few substitutes.

Difficult competitor entry.

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Penetration PricingMore appropriate when business is focused on

building unit volume.

Most likely to occur at the early stages of the Product Life Cycle.

Favorable conditions: No/Limited differentiation.

Price-sensitive customers.

No sustainable advantage.

Many competitors.

Many substitutes.

Easy competitor entry.

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Skim and Penetration Pricing

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Pricing for Special Situations

For survival: Price to cover costs at very least.

For bankruptcy: Price to liquidate stock and raise money quickly.

For aggressive growth: Set prices to return slim or no profit margins in the short run.

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Impact of Other Marketing Mix Variables Channel members, suppliers and logistics

Each independent business partner has its own business objectives.

Promotion strategy Higher-priced products often promoted differently.

Personal selling: Customers expect to negotiate prices with salespeople.

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Adapting Prices Modifying and fine-tuning prices within an

acceptable range.

Sometimes prompted by changes in customer behavior.

The chosen adaptation depends on the company’s: Resources and capabilities Goals and strategic direction Marketing plan objectives.

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Pricing Adaptations

Some typical pricing adaptations include:

Discounts.

Allowances.

Bundling or Unbundling.

Product Enhancement.

Segment Pricing.

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Copyright © 2011 Pearson Education, Inc. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice HallPublishing as Prentice Hall

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Chapter 7: Developing Pricing Strategy The Marketing Plan Handbook Fourth Edition Marian Burk Wood 7-1