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 follows
1.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