Pricing

What Is a Price?

Price is the only element in the marketing mix that produces revenue; all other elements represent costs

Customer Perceptions of Value

Understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value

Stages for Establishing Prices

1 Selecting the pricing objective.

Pricing objectives Describe what a firm wants to achieve through pricing

Form the basis of decisions about other stages in establishing prices

Must be explicitly stated and include a time frame.

1.Pricing Objectives and Typical Actions Taken to Achieve Pricing Objectives

Product Quality

Product Quality

This ad for Kellogg’s Corn Flakes focuses on high

product quality.

Product quality pricing objective: Set prices to recover research and development expenditures and establish a high-quality image

2. Determining Demand.

Each price will generate different demand and will have different impact on company’s marketing objectives. The relationship between price and demand can be expressed through demand curve. The price and demand is inversely related. The higher the price, the lower is the demand sometimes high price denotes better product. The demand can be determined on following bases-I.Price sensitivity

II.Estimating demand curves.

I.Price elasticity of demand.

The firm will charge a price that covers its cost of producing, ,and selling the product including a return for its risk. Even when companies price products to cover their full costs, it will not always result in net profitability.

Estimating costs

Analyzing competitors costs, prices and offers:In competitive situations, marketers must keep

prices the same as, or lower than, competitors’ prices.

In some instances, an organization’s prices are designed to be slightly above competitors’ prices to give its products an exclusive image, or below competitors to generate a low-cost image.

Wal-Mart has “Everyday low prices” Starbucks has premium-priced beverages

Selecting the price method Cost-based pricing: adding a some amount or percentage to the cost of the

product Cost-plus pricing: adding a specific amount or percentage to the seller’s

cost Markup pricing: adding to the cost of the product

a predetermined percentage of that costRetailer buys product at 45 Rs., adds 15 Rs Price = 60 Rs.

Markup as a percentage of cost = markup cost

= 15 45

= 33.3 percentMarkup as a percentage of selling price = markup

selling price= 15 60= 25 percent

Selection of a Basis: Demand and Competition-Based Pricing

Demand-based pricing Based on the level of demand for

the product Competition-based pricing

Influenced primarily by competitor’s prices

Demand-Based Pricing

Rental car rates are frequently based on demand. High demand

results in higher prices. Prices are lower when demand is low.

Common Pricing Strategies

Differential Pricing Charging different prices to different buyers for the same quality and quantity of productNegotiated pricing: Establishing a final

price through bargainingSecondary-market pricing: Setting one

price for the primary target market and a different price for another market

Periodic discounting: Temporary reduction of prices on a patterned or systematic basis

Random discounting: Temporary reduction of prices on an unsystematic basis

New-Product Pricing

Price skimmingCharging the highest possible price that

buyers who most desire the product will pay

Penetration pricingSetting prices below those of competing

brands to penetrate a market and gain a significant market share quickly

Product-Line PricingEstablishing and adjusting prices of

multiple products within a product line Captive pricing: Pricing the basic product in a

product line low while pricing related items at a higher level

Premium pricing: Pricing the highest-quality or most versatile products higher than other models in the product line

Bait pricing: Pricing an item in the product line low with the intention of selling a higher-priced item in the line

Price lining: Setting a limited number of prices for selected groups or lines of merchandise

Product-Line Pricing

Captive Pricing

The Gillette razor is inexpensive. To use this razor on a regular basis, customers must by the

replacement blade cartridges. The annual cost of the replacement blade cartridges is significant.

Gillette is using captive pricing.

Psychological Pricing Pricing that attempts to influence a customer’s

perception of price to make a product’s price more attractive Reference pricing: Pricing a product at a moderate level

and displaying it next to a more expensive model or brand Multiple-unit pricing: Packaging together two or more

identical products and selling them for a single price Odd-even pricing: Ending the price with certain

numbers to influence buyers’ perceptions of the price or product

Customary pricing: Pricing on the basis of tradition

Psychological Pricing

Bundle pricing Packaging together two

or more complementary products and selling them for a single price

Bundle Pricing

Price bundling is commonly used in the communications industry,

including phone, TV cable, and internet services.

Psychological Pricing Everyday low prices

(EDLP) Setting a low price for

products on a consistent basis

Everyday Low Price

Wal-Mart is well-known for using the Everyday

Low Prices strategy.

Psychological Pricing Prestige pricing

Setting prices at an artificially high level to convey prestige or a quality image

Prestige Pricing

Organizations employ prestige pricing to help support and

communicate a premium, high-quality product

Promotional PricingPrice leaders

Product priced below the usual markup, near cost or below cost

Special-event pricing Advertised sales or price cutting linked to a

holiday, season or eventComparison discounting

Setting a price at a specific level and comparing it with a higher price

Determination of a Specific Price• A flexible and convenient way to adjust

the marketing mix• To set the final price, it is important for

marketers to:1. Establish pricing objectives2. Have considerable knowledge about target-market

customers3. Determine demand, price elasticity, costs, and

competitive factors

After Reviewing This Chapter You Should:

1. Understand the six major stages of the process used to establish prices.

2. Know the issues that are related to developing pricing objectives.

3. Understand the importance of identifying the target market's evaluation of the price.

4. Be able to describe how marketers analyze. competitive prices.

5. Be familiar with the bases used for setting prices.

6. Be able to explain the different types of pricing strategies.

7. Understand how a final specific price is determined.