MKTG101 Marketing Fundamentals
Week 9 Pricing “Quid Pro Quo” – something for something
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A firm‟s pricing decision model – its internal elements • The firm‟s:• • • • MKTG and Organisational objectives PRICING objectives COST structures Interdependence with other MKTG MIX variables
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A firm‟s pricing decision model – its external elements
• Expectations of the firm‟s CHANNEL MEMBERS – eg Distributors and “Intermediaries” • Consumer EXPECTATIONS and possible RESPONSES to the „MIX‟ • Level of COMPETITION • Any LEGAL & REGULATORY issues
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What, Price? – how is it done?
• Explain to a mktg manager how to Price one of the following:
– Mineral water in 250ml blue-tinted transparent plastic screw-top bottle – A solar-powered motor-cycle – A sub-orbital 1 hour space flight in a Virgin Blue spacecraft – A pin-hole-sized spy camera
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Some considerations
• The “type” of product • Potential buyer profiles – geo-psychodemographics • Market (competition) & economic conditions; elasticity • Raw materials costs - quality • Corporate profit objectives – leader, follower, challenger or nicher • Product perceptions – quality, status, benefits, features, value
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Price
Benefit/Product
Seller
Cost/Price
Customer
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What is price?
Simplistically: the amount of money charged for a product or service. More accurately: the sum of the values consumers exchange for the benefits of having or using the product or service. Note: not all of the price is paid to the supplier
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Corporate pricing objectives
• • • • • • Optimise long-run and short-run profits Expand market share/penetration Maintain price leadership situation Discourage potential competitors Avoid the attention of legislators Establish and maintain distribution chain loyalty
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General pricing approaches
• Cost-Plus Pricing • Breakeven Analysis and Target Profit Pricing • Economists’ market price model • Value Based Pricing • Competitor Based Pricing • Special situation pricing
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Factors affecting price
Internal Factors
Pricing Decisions
Market
Price
External Factors
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Internal factors
• • • • Organisation’s Marketing objectives Execution of Marketing Mix strategy Org’s Cost structure Org’s Financial policies and expectations
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Cost-plus pricing
Method:
calculate the full cost of producing, distributing and promoting the product to the customer then add a standard mark-up for profit.
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Benefits of cost-plus pricing
Minimise Price Competition
Increased Certainty
Key Reasons for Cost-Plus Popularity
Perceived Fairness
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Breakeven analysis & target profit pricing
Breakeven: the price at which revenue (Price x Quantity) exactly matches Total Costs (TC = FC + MC). Target profit: revenue exceeds costs by a target amount or percentage.
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Breakeven analysis
Revenue Revenue / Cost Total Cost
Variable Cost
Fixed Cost Break Even
MKTG101 2005 Week 9
Volume
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Features of breakeven analysis
• Assumes a price/demand model
• Arbitrarily allocates fixed costs and overhead • Can generate prices inappropriate to the marketing environment
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Average cost movements
Cost per unit Cost Unit at Different Levels of Production
1
2
3
4
SRAC
LRAC
1,000
2,000
3,000
Quantity Produced per Day
Changes in Long Run (LRAC) and Short Run (SRAC) Average Costs MKTG101 2005 Week 9 17
4,000
External factors
• • • • • Customer behaviours Competitors & their reactions Suppliers – their power Distribution channel Others
– Government – Community
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Economists’ model
Price
Supply Equilibrium price
Demand
Equilibrium quantity
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Quantity
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Assumptions necessary for the Economists’ model
• • • • Prices set to maximise short-term profit Consumers having Perfect Knowledge Perfect substitute products (commodities) Rational consumer behaviour (price is the only factor to consider) • Consumer the only party to consider in the pricing decision
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Factors To Consider When Setting Prices
• Nature of the Market and Demand
• • • • Price Elasticity Of Demand Pricing in different types of markets Consumer Perceptions of Price and Value Price and Demand Relationship
• Competitor’s Prices and Offers • Other External Factors
• Legal, Political, Economic, Social and Technological
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Prices in different types of markets
Pure competition: the market consists of many buyers and sellers trading in a uniform commodity No single buyer or seller has much effect on the going market price
Monopolistic competition: the market consists of many buyers and sellers. A range of prices occurs because sellers can differentiate their offers to the buyers See also DUOPOLY
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Prices in different types of markets cont.d
Oligopolistic competition: the market consists of a few sellers who are highly sensitive to each other’s pricing and marketing strategies. The product can be uniform or non-uniform. The sellers are few because it is difficult for new sellers to enter the market.
Pure monopoly: the market consists of only one seller. The seller may be a government monopoly, a private, regulated monopoly or a private, nonregulated monopoly. Pricing is handled differently in each case.
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Value-based pricing
Objective: to set the price equal to the value put on the product by the customer cf “POSITIONING”
• Recognises customer behaviour including perceived price/quality relationships
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Value-Based Pricing
Cost-Based Pricing Value-Based Pricing
Product Cost
Price
START
Customer Value
Price Cost Product
Value Customers
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Different demand curves
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Competition-based pricing
Objective: to set prices to reflect the competitive situation • Price to maintain a constant relationship with the leader’s price
– Premium: a higher price – Parity: set the same price as competitor – Discount: a lower price
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New product pricing strategies
Penetration: launch onto the market at the lowest long-term sustainable price Skimming: launch onto the market at the highest price, then slowly reduce price over time
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Penetration
Sales Volume
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Time
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Market skimming
Cumulative Sales
P3/Q3
Price
P2/Q2
P1/Q1 Time
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Market conditions
Penetration:
– Strong price elasticity of demand – No market price segments – Non-premium marketing mix – Potential competitors anticipated
Skimming:
– Demand inelastic – Significantly different segments – Competitive entry unlikely
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Product mix pricing strategies
Setting Price Steps Between Product Line Items
Product Line Pricing
Pricing Products That Must Be Used With The Main Product
Captive-Product Pricing
Pricing Bundles Of Products Sold Together
Product-Bundle Pricing
Pricing Optional Products Sold With The Main Product
Optional-Product Pricing
Pricing Low-Value By-Products To Get Rid of Them
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By-Product Pricing
Product line pricing
Objective: to determine the relative prices of different variants and sizes in a product line.
– Perceived difference in quality and cost – Competitive situation
– Consumer response to big and small steps
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Captive product pricing
Objective: to set the price for products that must be used in conjunction with the main product
– marketing objectives – relative profit structure – relative price elasticities – competitive situation – consumer perceptions
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Product bundle pricing
Strategy: Combine several products and require customers to purchase the 'bundle’
– Same products – Different products – Marketing objectives – Price elasticities – Competitive situation – Consumer perceptions
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Optional product pricing
Objective: to set prices for optional items available in addition to the base product
– Marketing objectives – Consumer perceptions
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By-product pricing
Strategy: to generate revenue from the sale of products generated in the process of making the main product
– Revenue opportunity – Keep separate from the main product marketing process
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Promotional pricing
Strategy: offer a short-term initiative to promote sales by augmenting the normal customer-perceived value.
Benefits
Costs Value
MKTG101 2005 Week 9
Same benefits Reduced costs = Greater value
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Promotional pricing initiatives
• • • • • • Loss leader Special events Cash Quantity Affiliation Periodic
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Ethical issues in pricing
• Exploitation
• Deception • Manipulation
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Sample MCQ
• We examined several different pricing strategies. Which one of the following price setting methods would a marketer choose to most closely reflect the fact that there is already a strong competitor in the market place? • A) cost plus • B) going-rate • C) target-return • D) price bundling • E) value-based
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Sample MCQ
• In the local supermarket, a dozen eggs cost $2.00; an “entertainment pack” consisting of a pack containing a selection of cheeses, biscuits and dips is available for $3.00 and a bottle of VO5 shampoo and a bottle of VO5 conditioner costs $4.00 when purchased together (they cost $2.50 each when purchased separately). Which of the following pricing strategies is the supermarket manager following? • A) two-part • B) product-bundling • C) by-product • D) captive product • E) product-line
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Sample MCQ
• You can buy an attractive new Gillette Mach III shaving razor for as little over $10 in a supermarket. The package includes 2 triple razor cartridges and the handle needed to use them. Further razor cartridges are sold in multiple packs for over $20. Which of the following pricing strategies best describes this situation? • A) product-line • B) optional-product • C) competitive parity • D) customer segment • E) captive product
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