Pricing Strategies And Decisions - Strathmore University
Pricing Strategiesand DecisionsPaul Ouma, pouma@strathmore.edu
Session Questions1. How do consumers process and evaluate prices?2. How should a company set prices initially forproducts or services?3. How should a company adapt prices to meetvarying circumstances and opportunities?4. When should a company initiate a price change?5. How should a company respond to acompetitor’s price change?Paul Ouma, pouma@strathmore.eduCopyright 2012 Pearson Education, Inc. Publishing as Prentice HallSlide 2 of 33
PricingWhat is Pricing? Its the only one of the marketing mixcomponents that produces revenue all theother elements produce costs. Price is also the easiest element of themarketing mix to adjust, and communicatesthe intended value of the offering.Copyright 2012 Pearson Education, Inc. Publishing as Prentice HallSlide 3 of 33
Marketing MixCostProductPriceCostPlacePromotionPaul Ouma, pouma@strathmore.eduRevenueProducerCost
Pricing Pricing takes various forms including:rent, fees, commissions, rates, salaries, fares etc. Price has for a long time operated as the majordeterminant of the buyers choice. As a marketing mix element price can bechanged quickly unlike the other elements .5Paul Ouma, pouma@strathmore.edu
PRICINGHolistic marketers take into account thecompany, their customers, the competition,and the marketing environment in determineprices. Pricing decisions must be consistent with : the firm’s marketing strategy. its target market. brand positioning.6Paul Ouma, pouma@strathmore.edu
Bargaining
Pricing Environment ChangesAmong BuyersI’ll payKsh.2000Instant Price Comparisons e.gShopping Mall boards, FMCG retail storesGet Products Free e.g. Open sourcesoftwareName Your Own Price –“ more concious shoppers”
Changing Price EnvironmentKsh 15kAmongSellersKsh.20KKsh. 30KSelectivePricingNegotiatePricesMonitor Customers
How Companies PriceProduct-lineManagersSmall BusinessOwnerPricingDepartment
How Companies PriceEffectively designing and implementing pricingstrategies requires : In-depth understanding of consumer pricingpsychology. a systematic approach to setting, adapting,and changing prices.Purchase decisions are made based on customerpsychology on the perceived prices in relation tothe product/service quality.11
Perception And ValuePurchase decisions are made based on customerpsychology on the perceived prices in relation tothe product/service quality.Factors influencing customer pricing perceptioninclude: prior purchase experience Formal marketing communication : above-the-line informal mkting communication: below-the-line Point of sale communication– Ksh 499/ , 49,999/ 12Paul Ouma, pouma@strathmore.edu
Consumer Psychology & PricingPurchase decisions are based on how consumers perceive prices and what theyconsider the current actual price to be—not on the marketer’s stated price.Reference pricescompare an observed price to an internal reference price they remember or anexternal frame of reference such as a posted “regular retail price.”Price-quality inferencesuse price as an indicator of quality. Image pricing is especially effective with egosensitive products such as perfumes, expensive cars, and designer clothing.Price endingsMany sellers believe prices should end in an odd number. Customers see an itempriced at Ksh 49,999 as being in the Ksh.40,000 rather than the Ksh. 50,000 range;they tend to process prices “left-to-right” rather than by rounding. Anotherexplanation for the popularity of “9” endings is that they suggest a discount orbargain.13
Consumer Psychology and PricingPrice-Quality InferencesReferencePricesKsh. 49,999Price Endings
“Pair of Shoe” showsthe large part consumer psychologyplays in determining three different prices for essentially thesame item.GentClarks – 15,000Mark & Spencer – 10,000Bata – 4,900Paul Ouma, pouma@strathmore.edu
Pricing Approaches When a firm introduces a new product into the market itmust set the price for its distribution channels The firm will decide where it wants to position itsproduct on quality and pricePrice- pointsThese are pricing strategies followed by companies whilepositioning use price-segmentsNine (9) price quality strategies are identifiableaccording to Kotler16
Price- Quality StrategiesPriceHighQualityHighMediumLowMediumLow1. Premium PricingStrategy2. High Value PricingStrategy3. Super ValuePricingStrategy4. OverchargingPricing Strategy5. Medium ValuePricing Strategy6. Good ValuePricing Strategy7. Rip Off PricingStrategy8. False EconomyPricing Strategy9. Economy PricingStrategy17Paul Ouma, pouma@strathmore.edu
PriceQualityPrice- Quality StrategiesHMHM1. PS2. HVS3.SVS4.OS5.MVS6. GVS8. FES9.ESL 7.ROSLA Strategies – 1,5,9 can co-exist they serve 3 groups ofbuyers of a product/service.Companies positioning on high quality;(1) Premium pricingCompanies positioning on a balance – (5) Medium pricingCompanies positioning on low price –(9) Economy pricing18
PriceQualityPrice- Quality StrategiesHMHM1. PS2. HVS3.SVS4.OS5.MVS6. GVS8. FES9.ESL 7.ROSLB. Pricing Strategies – 2,3,6 compete with firms following pricingstrategies 1,5,9Strategy 2 – positioning - we give same high quality but we chargeStrategy 3 – positioning - we offer super value but charge less.Strategy 6 – positioning - we offer good value but charge less.19
PriceQualityPrice- Quality StrategiesHMHM1. PS2. HVS3.SVS4.OS5.MVS6. GVS8. FES9.ESL 7.ROSLc.Pricing Strategies – 4,7,8 Compete following the product inrelation to the qualityStrategy 4 – positioning – offer same medium quality , we charge high.Strategy 7 – positioning - we offer low quality but charge high.Strategy 8 – positioning - we offer medium quality and medium price.This pricing strategies sometimes overprice the products in relation tothe quality and can adversly affect satisfaction and repeat business20Paul Ouma, pouma@strathmore.edu
Pricing Policy - Setting the PriceA firm must consider these six factors in setting its pricing policy6 Select Final Price5Price Method43CompetitorsAnalysisEstimateCosts2 Determine Demand1Pricing ObjectivePaul Ouma, pouma@strathmore.edu
1. Selecting the Pricing Objective(s) Survival Maximum Current Profit Maximum Market Share Maximum MarketSkimming Product-Quality Leadership
Selecting the Pricing ObjectivesThe company decides where it wants to position its market offering. It can pursueany of the following objectives:Survival : a short-run objective for firms to deal with overcapacity, intensecompetition, or changing consumer wants. The key strategy is lowering prices andgiving away free goods and services e.g. Yu MobileMaximize current profits: emphasis current performance. firms may sacrificelong-run performance by ignoring the effects of other marketing variables,competitors’ reactions, and legal restraints on price.Maximum market share: (uses a market-penetration pricing strategy), in whicha higher sales volume will lead to lower unit costs and higher long-run profit.23
Selecting the Pricing ObjectivesMaximum market skimming : utilizes a market-skimming pricing strategy, inwhich prices start high and slowly dip over time. e.g Kencell -CeltelThis strategy can be fatal if competitors low prices.Product Quality Leadership : sets high prices to create high qualityperceptionsCharacterized by high levels of perceived high quality, good taste, status goods, invogue .Offers brands that are “affordable luxuries” –products or services characterized byhigh levels of perceived quality with a price just high enough not to be out ofconsumers’ reach.Products attract loyal customers e.g24
2. Determining Demand Price sensitivity Estimating demand curves Price Elasticity of Demand
Determining DemandDifferent prices lead to different demand levels. Demand curve captures thereactions of many individuals with different price sensitivities.Price Sensitivity – Price ElasticityHow responsive demand would be to changes in price.Customers are less price sensitive to low-cost items or items they buy infrequently.They are also less price sensitive when:a)b)c)d)e)there are few or no substitutes or competitors;they do not readily notice the higher price;they are slow to change their buying habits;they think the higher prices are justified; andprice is only a small part of the total cost of obtaining, operating, and servicingthe product over its lifetime.26Paul Ouma, pouma@strathmore.edu
Determining DemandThe normally inverse relationship betweenprice and demand is captured in a demandcurve in the next slide. The higher theprice, the lower the demand.27Paul Ouma, pouma@strathmore.edu
Inelastic and Elastic Demand Normally inverse relationship between price and demand The higher the price, the lower the demand. For prestige goods, the demand curve sometimes slopesupward.
3. Estimating CostsDemandPrice CeilingPriceProfitCostsPrice Floor
Estimating CostsDemand sets the price ceiling while costs set the floor.Costs include production, distribution, and selling expenses,plus a fair return (profit) to cover effort and risk. Thecompany wants to charge a price that covers its cost ofproducing, distributing, and selling the product, including afair return for its effort and risk.Yet when companies price products to cover their full costs,profitability isn’t always the net result.30
Estimating CostsTypes of costsFixed Costs(overhead)Variable CostsTotal Costs
Estimating CostsFixed costs, also known as overhead, are costs that do not varywith production level or sales revenue.Variable costs vary directly with the level of production.Total costs consist of the sum of the fixed and variable costs forany given level of production.Average cost is the cost per unit at that level of production; itequals total costs divided by production.Management needs to know how its costs vary per unit with differentlevels of production32
Costs at Varying Levels ofProduction
Estimating CostsAccumulatedProductionExperience Curve(Learning Curve)Experience curve/learning curverefers to the decline in theaverage cost with accumulatedproduction experience.
The Experience CurveThe curve shows average cost falls with accumulated production experience.
4. Analyzing Competitors’ OffersPriceCostsReactionWorth to Customer
Analyzing Competitor Costs, Prices and OffersWithin the range of possible prices determined by market demand and companycosts, the firm must take competitors’ costs, prices, and possible price reactionsinto considerationIf the firm’s offer contains features not offered by the nearest competitor, it shouldevaluate their worth to the customer and add that value to the competitor’s price.i.e superior products will be charged higherIf the competitor’s offer contains some features not offered by the firm, the firmshould subtract their value from its own price.i.e. inferior products will be priced lower than the competition.The firm can decide whether it can charge more, the same, or less than thecompetitor.i.e. similar products will be priced closely37
High Price(No possibledemand at this price)Three Cs Model for Price Setting:- the three major considerationsin price setting.Companies select a pricingmethod that includes one or moreof these three considerations.Ceiling priceCustomers’ assessment ofunique product featuresOrienting pointCompetitors’ prices andprices of substitutesCostsFloor PriceLow Price(No possibleprofit at this price)
5. Selecting a Pricing MethodHaving considered the 3Cs The customers demand schedule – set the ceiling pricebased on the customer assessment and perception ofquality. the costs – set a floor to the costs. competitor pricing – together with substitutes set aorientation pointPrices fall between the price floor (costs) and price ceiling(customer demand based on their assessment of uniquefeatures). The price of competitive offerings and substitutegoods serve as an orientation point.39Paul Ouma, pouma@strathmore.edu
Selecting a Pricing MethodVarious pricing methods can be applied.Pricing Methods Markup pricing Target-return Perceived-Value Value Going-rate Auction-typePaul Ouma, pouma@strathmore.edu
Selecting a Pricing MethodHaving considered the 3Cs Mark-up Pricing – add a standard mark-up to the productscost Target Return Pricing - determines the price that would yieldit targeted ROI Perceived Value Pricing – based on perceived customervalue. Build perceived value through promotions41
Markup PricingBasic method used to calculate price, used by construction companies, lawyers,and accountants. This method does not take into account current demand,perceived value, or competition.Variable cost per toaster 10Fixed costs 300,000Expected unit sales50,000
Target-Return PricingIn Target-return pricing, the firm determines the price that yieldsits target rate of return on investment.
Perceived-Value PricingCustomer’s perceived-value Performance KshWarranty KshCustomer support Ksh.Reputation Kshj,Ksh
Perceived-Value PricingCustomer’s perceived value is determined by : the buyer’s image of the product performance, the channel deliverables, the warranty quality, customer support, softer attributes such as the supplier’s reputation, trustworthiness, andesteem. Companies must deliver the value promised by their value proposition, andthe customer must perceive this value. Other firms use the other marketing program elements, such as advertising, salesforce, and the Internet, to communicate and enhance perceived value in buyers’minds.
Value PricingEDLPTHOUSANDS OFLOW PRICESEVERY DAYLevel ofQualitythroughout the storeP1C1P2C2HighPricingLow
Value PricingValue pricing is not just setting lower prices; it is a matter of reengineering thecompany’s operations to become a low-cost producer without sacrificing quality.As shown in the previous slide, the company reduces costs from C1 to C2, whilemaintaining the same level of quality. Prices are reduced giving buyers greatervalue.EDLP – Retailers that maintains an everyday low price policy charges a constantprice with little or no price promotions and special sales. Consistent priceseliminates week-to-week price uncertainty.Retailers adopt an EDLP as constant sales and promotions are costly and haveeroded consumer confidence in everyday shelf prices.High-low pricing is where the retailer charges higher prices on an everydayHighbasis but runs frequent promotions with prices temporarily lower than the EDLPlevel.47
Going-Rate Pricing Basing prices on competitor pricing Popular for commodies as maize ,steel,paper, and fertilizer as all firms normallycharge the same price. Small firms followthe leader, changing prices when themarket leader prices change.CommoditiesFollow theLeader
Auction PricingEnglishauction(ascending bids)Dutch auction(descending bids)Sealed-bidauction
Auction PricingAuction-type pricing is growing more popular in the electronic marketplaces.English auctions (ascending bids) have one seller and manybuyers. e.g., eBay, Amazon.com.Dutch auctions (descending bids) feature one seller and manybuyers (an auctioneer announces a high price for a product and then slowlydecreases the price until a bidder accepts) , or one buyer and many sellers (thebuyer announces something he or she wants to buy, and potential sellerscompete to offer the lowest price.Sealed-bid auctions let would-be suppliers submit only one bid; theycannot know the other bids. Common in most commonwealth countries and inthe U.S. government which often uses this method to procure supplies.50
7.Selecting the Final PriceIn selecting the final price the company will consider:Impact onother PartiesPsychological ringPaul Ouma, pouma@strathmore.edu
Selecting the Final PricePsychological pricing – many customers use price as an indicatorof qualityOther marketing Mix elements – brand equity and advertisingrelative to the competition. Are we positioned strongerCompany pricing policy – are we consistent with the companypricing policy?Impact on other parties – distribution channel, competitors,suppliers government reactions to price changesGain-and-risk-sharing pricing – loss/gain of business tocompetitor and market share etc52Paul Ouma, pouma@strathmore.edu
Adapting the PriceGeographicPricingPrice Discountsand AllowancesDifferentiatedPricingPromotionalPricing
Adapting the PriceSeveral price-adaptation strategies company usually use are: geographical pricing, price discounts and allowances, promotional pricing, differentiated pricing.These strategies are adapted by companies because they rarely realize thesame profit from each unit of a product that it sells due to variations ingeographical demand and costs, market-segment requirements,purchase timing, order levels, delivery frequency, guarantees, servicecontracts, etc54Paul Ouma, pouma@strathmore.edu
Product-Mix PricingProduct-mix pricing is necessitated if product demand andcosts are interrelated and face different types of competition.Examples of product-mix include:1. Product Line Pricing; many customers use price as an indicator ofquality. Use price points i.e different price levels for the product lines.2. Optional-Features Pricing; offer optional product features, add-onsand services together with the main product e.g cars,restaurants,hotels3. Captive Product Pricing ; products requiring ancillary or captiveproducts. Main product is low priced and ancillary product is highlypriced e.g. Gillete razors, Pen refills, ink cartridges4. Two-Part Pricing; consists of a fixed price and a usage price e.gmonthly minimum charges for leases. Fixed cost should be low andmain profits comes from usage billing.5. Product –Bundling Pricing; bundling of product, service and features ata set price e.g. supply,delivery,installation and service equipment55Paul Ouma, pouma@strathmore.edu
Promotional PricingPricing Techniques to stimulate new product1. Loss Leader Pricing ; drop price to encourage more purchasesespecially of top brands2. Seasonal/Special events pricing ; establishing special prices incertain seasons e.g. BATA back to school3. Cash Rebates ; special offers of certain products over a short period4. Warranties and service contracts ; companies offer free or low costwarranties to stimulate demand.5. Psychological discounting ; set an artificial high price and then lowerit e.g 499/ now 399/ These strategies are easily copied and can be money loser.56
Dealing with Price ChangesRaising PricesCutting PricesCompetitor Moves
Competitor Price ChangesHow should a company respond?When a competitor changes prices key questions to ask?i.ii.iii.iv.Why did the competitor change the price-market share, utilize excesscapacity, lead industry change?Does the competitor plan to make the price changes temporary orpermanent?How will this price change affect the company market share andprofitability if it does not respond? And are other industry players goingto respondWhat are the competitor and other firms going to respond?Possible responses by industry/brand leaders:i.Enhance augmented products e.g M-shwari.ii. Differentiate the offeringiii. Introduce low cost brands to compete with the low cost brand e.gEABL58Paul Ouma, pouma@strathmore.edu
Pricing Strategy Price High Medium Low High Quality Medium 17 7. Rip Off Pricing Strategy 8. False Economy Pricing Strategy 9. Economy Pricing Low Strategy Paul Ouma, pouma@strathmore.edu. Price-Quality Strategies 1. PS 2. HVS 3.SVS 4.OS 5.MVS 6. GVS 7.ROS 8. FES 9.ES Price L M H H M L Quality
Price is simple, but pricing is challenging Price is the amount of money charged for a product or service. Pricing is the determination of prices. Pricing can be monetary or non‐ monetary. Pricing decisions will lead to specific pricing strategies and tactics. Price seems to be simple, but pricing is
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Developing Pricing Strategies and Programs 383 Pricing decisions are clearly complex and difficult, and many marketers neglect their pricing strategies.2Holistic marketers must take into account many factors in making pricing decisions—the company,the customers,the competition,and the marketing environment.
5 Pricing Strategies Everyday Low Pricing High/Low Pricing Odd Pricing Leader Pricing Multiple Unit Pricing/Price Bundling Price Lining One-Price Policy Markdowns Reduction in the initial retail price Markdown as % of net sales amount of markdown net sales X 100 Ex. You bought 100 sweaters and 80% sell at 50 each while
The airline industry is developing new mechanisms for pricing and revenue management to improve an airline's capabilities for dynamic pricing. ATPCO has worked with the industry to identify and define three dynamic pricing mechanisms: Optimized Pricing, Adjusted Pricing, and Continuous Pricing. The agreed-
Pricing The categories for pricing air freight are ULD Pricing Tariff Pricing Contract Pricing Spot Bid Pricing Air freight pricing is very fluid and is quickly affected by capacity and market conditions. ULD pricing is based on the type of ULD. Each device w
Analysis in Pricing Decisions; Monopoly Pricing vs. Competitive Pricing; Bottom Line Pricing (d) Costing of Service Sector – methods, pricing, performance measurement (e) Transfer Pricing - Objectives, Methods ( Cost Based, Market Price Based, Negotiated Pricing),
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