Marketing plan memo + power points main points

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COM5111Week6SemB2019-20-C.pdf

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1Sources: Getty Images

COM5111

Pricing

strategy

COM5111 Semester B 2019-20

Week 6

27th February 2020

Critical questions

1. How do consumers process and evaluate prices?

2. How should a company initially set prices for products and/or

services?

3. How should a company adapt prices to meet varying circumstances

and opportunities?

4. When should a company initiate a price change?

5. How should a company respond to a competitor’s price change?

• Rent

• Tuition

• Fee

• Fare

• Rate

• Toll

• Premium

• Honorarium

• Special assessment

• Bribe

• Dues

• Salary

• Commission

• Wage

• Tax

Not just a number on a tag … Many forms; performs many functions; and made up of many components

A major determinant

of buyer choice

Synonyms for price

Understanding Pricing

• Pricing in a digital world

✓ Get instant vendor price comparisons

✓ Name your price and have it met

✓ Get products free

✓ Monitor customer behavior & tailor offers

✓ Give customers access to special prices

✓ Let customers decide the price

✓ Negotiate prices in online auctions and exchanges

B__

S_____

Understanding Pricing

• A changing pricing environment

– Sharing economy

– Bartering • Florida Barter

• www.swap.com

– Renting

A severe recession in 2008–2009

New millennial generation (new attitudes and values to consumption)

It is about a brand’s luxury connotation

Understanding Pricing

• How companies price

– Small companies: (boss)

– Large companies: (division/product line managers)

• How companies should price

– Understanding of consumer pricing psychology

– a systematic approach to setting, adapting, and changing prices

Common mistakes • Calculate and add

• Not revising often enough - make change

• Set independently

• Not varying: e.g. purchase occasions

Consumer psychology and pricing ( how consumers perceive prices )

How they consider the actual but not the state price

Interpret price in different ways

Reference prices

Price-quality inferences

Price endings

Comparing an observed price to an internal reference price they remember or an external frame of reference

Many consumers use price as an indicator of quality

Many sellers believe prices should end in an odd number

Imaging pricing Ego-sensitive

products

“Left to right” 9 - discount

Possible consumer reference prices sellers often attempt to manipulate them

e.g. products among expensive competitors

Source: Adapted Winer, R. S. (1988). Behavioral perspectives on pricing: buyers’ subjective perceptions of price revisited. In T. Devinney, T. M. (Eds.), Issues in Pricing: Theory

and Research, (pp. 35-57). Lexington, MA: Lexington Books.

Price cues

• ‘Left-to-right’ pricing (€299 versus €300) €34 to €39; €34 to €44

• Odd number discount perceptions

• Even number value perceptions

• Ending prices with 0 or 5 (easy to process and retrieve)

• ‘Sale’ written next to price (spur demands)

Sales signs and prices that end in 9 become less effective the more they employed. They are more influential when consumers’ price knowledge is poor when …

When to use price cues

• Customers purchase item infrequently

• Customers are new

• Product designs vary over time

• Prices vary seasonally

• Quality or sizes vary across stores

• How about Limited availability? (e.g. three days only)

Watch this video for tips on pricing from a marketing executive: www.youtube.com/watch?v=4phxRH6vk-I

Pricing a new product must take into account the conditions of the market and competitors’ prices

Setting the right price

http://www.youtube.com/watch?v=4phxRH6vk-I

Select the price objective

Determine demand

Estimate costs

Analyze competitor price mix

Select pricing method

Select final price

Where to position its market offering (e.g. product) on quality and price

Steps in setting price (slide #14 - #36)

Step 1: selecting the price objective

1. Survival

2. Maximum current profit

3. Maximum market share (e.g. TI. Slide #14)

4. Maximum market skimming (e.g. Sony, Apple. Slide #15)

5. Product-quality leadership “affordable luxuries”

• Other objectives (e.g. university, nonprofit hospital, social service agency)

Conditions favouring a market- penetration pricing strategy

Market-penetration pricing involves setting a low price for a new product in order to attract a large number of buyers and a large market share. So lead to lower unit costs and higher long-run profit

• Market is highly price sensitive and low prices stimulate market growth

• Production and distribution costs fall with accumulated production

experience

• Low price discourages actual and potential competition

Conditions favouring a market-skimming pricing strategy

Market-skimming pricing (or price skimming) strategy sets high initial prices to “skim” revenue layers from the market.

Certain conditions:

• A sufficient number of buyers have high demand

• Unit costs of producing a small volume are not so high as to cancel

advantage of charging what traffic will bear

• High initial price does not attract more competitors to the market

• High price communicates superior product image

Price sensitivity

Estimating

demand curves

Price elasticity

of demand

What affects price sensitivity?

attempt to measure

their demand curves

using several

different methods

Step 2: determining demand

normally a inverse relationship between price and demand

So when the demand curse slopes upward?

Inelastic and elastic demand Each price will lead to a different level of demand and have a different impact on a company’s marketing objectives

Reprinted by permission of Pearson Education, Inc., Upper Saddle River, NJ.

Æ +Y PHONE

Companies prefer customers who are less price-sensitive!! Agree, or not?

Factors leading to less price sensitivity No Google, no GPS, no camera... so why such a huge price tag for the Æ sir Æ +Y

£37,000

a phone to be seen with

Surveys

Price experiments

Statistical analysis

How can companies estimate demand curves?

Price elasticity of demand

• If demand hardly changes with a small change in price, the demand is

inelastic; if demand changes considerably, it is elastic

• The higher the elasticity, the greater the volume growth resulting from a 1%

price reduction

• If demand is elastic, sellers consider lowering price

• There may be a price indifference band within which there is little or no

effect

Types of costs

Target costing

Accumulated

production

Step 3: estimating costs

Cost per unit at different levels of production per period

Cost terms and production

• Fixed costs

• Variable costs

• Total costs

• Average cost

• Cost at different levels of production

• Activity-based cost accounting (the key is to define and judge activities properly)

23 Cost per unit as a function of accumulated production: the experience curve

Experience curve - also known as the learning curve, is the decline in the average cost with accumulated production experience.

Accumulated production

Target costing

• Price less desired profit margin

Step 4: analyse competitor’s costs, prices and offers

• Firm must take competitors’ costs, prices, & reactions into

account

• Evaluate worth to customer for differentiated features

• Anticipate response from competition

The three Cs model for price setting

• Three major considerations in price – Customers’ assessment of unique features =

price ceiling

– Competitors’ prices = orienting point

– Costs = price floor

Step 5: selecting a pricing method

Six pricing setting methods

1. Markup pricing

2. Target-return pricing

3. Perceived-value pricing

4. Value pricing

5. Going-rate pricing

6. Auction-type pricing

1. Markup pricing

• Add a standard markup to the product’s cost

2. Target-return pricing

• Price that yields its target rate of return on investment

Break-even chart for determining

target-return price and break-even volume (what would happen at other sales levels)

Variable costs, not shown in the figure, rise with volume

Companies must deliver the value promised

key to perceived-value pricing is to deliver more unique value than competitors and to demonstrate this to

prospective buyers

managerial judgments, value of similar products, focus groups, surveys

• Buyer’s image of

product performance

• Ability to deliver on time

• Warranty quality

• Customer support

• Supplier reputation

• Trustworthiness

• Esteem

3. The components of perceived-value pricing?

Value pricing (not just low price) refers to re-engineering the company’s operations to

become a low-cost producer without sacrificing quality, to attract a large number of

value-conscious customers.

For a video on how to negotiate value go to:

www.youtube.com/watch?v=Y-iH1dDp6-8&feature=related

Everyday

low pricing (EDLP)

High-low

pricing

4. What is value pricing?

http://www.youtube.com/watch?v=Y-iH1dDp6-8&feature=related

5. What is going-rate pricing?

In going-rate pricing, firms base prices

on competitors’ prices,

charging the same, more or less than

major competitors

Smaller firms ‘follow the leader’

English auctions

Dutch auctions

Sealed-bid auctions

one seller and many buyers

one seller and many buyers orone buyer and many sellers

would-be suppliers submit only one bid; they cannot know the other bids

6. Auction type pricing

Step 6: selecting the final price Pricing methods narrow the range from which the company must select its final price

• Additional factors to select final price:

• Impact of other marketing activities

• Company pricing policies

• Gain-and-risk sharing pricing – Buyer resist … The seller then has the option of offering to absorb part or all the risk

• Impact of price on other parties – distributors and dealers; sales force; government?

Geographical pricing

Discounts/allowances

Differentiated pricing

Promotional pricing

Price adaption strategies

Geographical pricing

Countertrade

• Barter

• Compensation deal

• Seller receive some percentage of payment in cash and the rest in products

• Buyback arrangement

• The seller sells a plant, or technology to another country and

• agrees to accept partial payment using products manufactured with the supplied equipment

• Offset

• The seller receive full amount in cash but

• agrees to spend a substantial amount of money in that country within a stated time period

Price discounts and allowances

• Cash discount

• Quantity discount

• Functional discount

• Seasonal discount

• Allowance

Promotional pricing tactics

• Loss-leader pricing (supermarket drops prices)

• Special-event pricing

• Cash rebates

• Low-interest financing

• Longer payment terms

• Warranties and service contracts (adding low cost or free contracts)

• Psychological discounting (was $459, now $359)

Differentiated pricing

• Customer-segment pricing (diff groups pay differently)

• Product-form pricing (diff version priced diff)

• Image pricing (same product in two diff levels. Price differently)

• Channel pricing (fast-food, where you get it?)

• Location pricing (theatre)

• Time pricing (tickets, restaurants)

Critical question for debate

Initiating and Responding to Price Changes

• Initiating price cuts – Excess plant capacity

– Domination of market

• Price-cutting traps – Price concessions

– Low-quality

– Fragile market share (A low price buys market share but not market loyalty)

– Shallow pockets

– Price war

Initiating price increases

Delayed quotation pricing

Escalator clauses

Unbundling

Reduction of discounts

does not set a final price until the product is finished or delivered

pay today’s price plus all or part of any inflation increase that takes place before delivery

maintains its price but removes or prices separately one or more elements

not to offer its normal cash and quantity discounts

if sales volume is unaffected

Profits before and after a price increase

If the company’s profit margin is

3 percent of sales

Ways to avoid price increases

• Shrink the product

• Substitute cheaper materials

• Reduce or remove product features

• Remove or reduce product services

• Use less expensive packaging

• Reduce the sizes and models offered

• Create new economy brands

Responding to competitors’ price changes

• Anticipating competitive responses

• Responding to competitors’ price changes

47Source: Kumar, N. (2006). Strategies to fight low-cost rivals. December 2006, Harvard Business Review.

• Design ‘cool’ product • Continually innovate • Offer unique product mix • Sell experience

Critical question for discussion

Is the right price a fair price?

Take a position:

• Prices should reflect the value that consumers are willing to pay.

Prices should primarily just reflect the cost involved in making a

product.

Recap: can you explain

1. How do consumers process and evaluate prices?

2. How should a company initially set prices?

3. How should a company adapt prices to meet varying

circumstances and opportunities?

4. When should a company initiate a price change?

5. How should a company respond to a competitor’s price change?

Your main goal is to pull people into the funnel in hopes of turning a fraction of them into paying customers

Estée Lauder Gillette & HP Ryanair (seat, pay)

Marketing insight: giving it all away

• Stick to the free offer (Freemium Strategy)

• Have a product that truly stands out

• Make sure the product works

• Keep improving the product

• Make access to product within one click (easy access)

• Know your up-selling plan from the beginning

• Identify a range of revenue sources