1. Pricing Policy 1

2.  Understand the relationship between pricing, customer value, competitiveness & profitability; particularly the need for a market-led approach to price setting.  Be able to differentiate between pricing policy and pricing tactics  Describe how factors outside the organisation (particularly market structures) affect pricing policy  Understand the critical importance of management accounting principles to pricing policy with special emphasis on the benefits of adopting a contribution-based costing system  Outline a practical market-led approach for price positioning  Comprehend certain commonly-encountered terms in the pricing field 2

3. 1. Price is the only element of the marketing mix that generates revenue (all others are costs) 2. Pricing policy must be tied to business and marketing plans (not delegated to sales force, accounting department etc) 3. Policy needs to be implemented in flexible & adaptive ways (the environment is always changing) 4. Pricing policy requires a sound management accounting system! Vitally important!!! 5. Pricing policy enormously helped by sound target market and positioning 3

4.  Pricing policy flows onto pricing tactics.  Pricing policy includes:  Decision making guidelines  Flows from strategic plans  Reflects target market (s)  Reflects market positioning  Reflects marketing mix design 4

5.  Day-to-day pricing decision making  Flexibility & adaptation  Situational contingent e.g.  negotiating a deal  Offering a discount & discount type  Loss-leader products & promotions  Price adjustments  Account reviews  Cost-Volume-Profit analysis  NOTE: Logically, making sound & intelligent tactical decisions is impossible without policy guidelines: Know your market, position well 5

6.  The freedom of a business to set prices autonomously varies according to the type of market the business operates in at the macro-level! 6

7. Many customers and many sellers Uniform, commodity product (e.g. potatoes, wool, cement, telecom shares) Established market price: cannot sell above and pointless to sell below (price taker) Freedom for buyers and sellers to enter and exit market Existence of ‘lead steers’ or ‘drovers’ – actions trigger price changes Very limited requirement/scope for marketing Emphasise low costs, productivity, continuity of demand 7

8.  Few sellers and many buyers  Sellers are very sensitive to each other’s prices  Market structure promotes pricing-parity, price signalling and leader-follower relationships (Cartel-collusion???)  Product is commoditised as it lacks meaningful differentiation between providers e.g. petrol, air travel, pizza  Marketing aims to foster brand preference on image and loyalty factors – avoiding price competition  Internal productivity is vitally important for profits 8

9. One seller – regardless of the number of buyers (supplier capture) Seller sets price according to range of policy guidelines Government departments: passports, licences Regulated: Lotto, electricity, ACC, ship survey, NZQA Private: Microsoft, Rolls Royce, orthodontics, Blackball Hilton Private monopolies almost always based upon UNIQUE competitive advantage e.g. location, patented technology Marketing tends to emphasise non-price factors Pricing policy for private monopolies tends to be “ What the market will bear: - DANGER = Marketing Myopia 9

10.  AKA “Domesticated market”, “Monopolistic competition”  Many buyers and sellers trading across number of market segments in a given category  Price structures reflect segment demand differences and differentiation efforts  Most common form of market structure  Marketing emphasises differentiation and price and non-price factors (ENTIRE Marketing Mix) 10

11. Basic Concepts: SALES REVENUE = UNIT SALES X UNIT PRICE VARIABLE COSTS = DIRECT COSTS OF UNITS (Direct labour, materials, selling) Change with production & sales rates FIXED COSTS = OVERHEAD EXPENSES. Do not change as production & sales change 11

12.  Overheads are allocated to products on basis of some arbitrary formula  Product Costs are therefore increased artificially  Prices are therefore increased and distorted  Profit picture for product is also distorted 12

13. CONTRIBUTION METHOD – RECOMMENDED  Overheads are kept separately – not allocated arbitrarily  Sales Revenue minus Variable (Direct) Cost = “Contribution”  Contribution is carried over to Overheads  Provided a product covers its Variable Costs and makes a Contribution to Overheads ….. 13

14.  Example: Home Business March 2009 Sales Revenue$1,000100% Less Variable Costs$350(35%) CONTRIBUTION$650(65%) Total Overheads $1280100% Less Contribution$650(51%) Overheads Remaining$630(49%) 14

15.  MAIN LEARNING POINTS  Overhead allocations are necessarily arbitrary  Overhead allocations = artificially distort product costs  Distorted product costs distort pricing processes  Arbitrary overhead allocations invite internal “political” behaviours – each product/department argues why its overhead charge should be reduced  Arbitrary overhead allocations reduce incentive to keep overhead expenses under control – passed on and charged out. 15

16. 1. PRICE OBJECTIVES (Marketing & Business)  Positioning (Marketing Strategy)  Business objectives and strategy (e.g. Profit & Market share)  Organisational Conditions (e.g. financial health) 16

17. 2. TARGET MARKET PRICE ELASTICITY  “Price Ceiling” factor  Price elasticity (Price in relation to Demand)  Engel’s Law  Price Perceptions (e.g. reference prices, price-value estimates, competitive price awareness)  Consumer behaviour (e.g. brand loyalty, habit, and involvement) 17

18. 3. COMPANY COST STRUCTURE  Firm’s cost structure  Reliability of management accounting systems  Anticipated cost changes (e.g. economies of scale, experience curve effects, forex exposure, productivity gains) 18

19. 4. COMPETITIVE CLIMATE Market structure (e.g. monopoly, perfect competition) Robustness of Sustainable Competitive Advantages Competitive intensity Prevalence of price-led competitive tactics (e.g. “Loud-shout” selling & discounting) 19

20.  Pricing is based on company costs: 1. COST-PLUS PRICING  Very simple and popular – add a standard mark-up onto costs  Widely used: retailing, construction, professional services, custom manufacturing  PROS: Easy to manage, costs are known, price stability, fair to buyers and sellers  CONS: Demand & competition down- played, assumes costs are known, inflexible 20

21. 2. TARGET RATE OF RETURN  Set prices at level that (hope!) will produce level of profit sought  Popular in B2B industries, SOE’s, community organisations, ‘user pays’ services – city councils  PROS: As per Cost-plus – esp. dominant supplier  CONS: Competitive environment, vulnerable to low cost competitors, demand conditions. 21

22.  GENERALLY MARKETERS DO NOT RECOMMEND COST- BASED PRICING POLICIES – TOO INWARD LOOKING – “MYOPIC” – COMPLACENT … … … 22

23.  Pricing is based on what target customers view as “good value for money”. (Market Orientated!!)  Great use of Non-Price variables in the Marketing Mix  Prices aligned with customers’ expectations, needs, experiences, and attitudes.  Prices embody competitive positioning … … … parallel value offerings 23

24.  Pricing involves customer and competitive research  Pricing involves close attention to “Mixing the Marketing Mix”… Integration!! “Price Bundling” – lots of features for one price “Price Unbundling” – standard + optional extras “Price Staircasing” – through product range “Traffic Builders” – loss leaders “Trading Up & Down” – as per staircasing 24

25. GENERALLY MARKETERS RECOMMEND VALUE-BASED PRICING POLICIES BUT … … … !!! COMPLEXITY, COSTING PROBLEMS, EXCESSIVE FLEXIBILITY 25

26. 1. ECONOMIC VALUE B2B equivalent of Value Pricing – business customers perceptions of value for money plus supplier choice e.g. Commercial Software, industrial equipment, packaging, transport services) 26

27. 2. COMPETITIVE PARITY (“GOING RATE”) Set prices generally/closely in line with rival players (e.g. oligopoly, close competition) Individual firm can charge slightly more of less from “sector norm” prices. Very popular – established markets, demand elasticity = ‘wild card’, promote stability – avoid price wars, not upset other players, collective wisdom, fair to buyers and sellers 27

28. 3. SEALED BID OR TENDERS Price quote is based on what competitors might or could offer for the job Not too high ---- not too low Works best for busy firm with good reputation, business networks and excellent costing & operations systems… … beat the odds with many tenders offers in play at any one time. 28

29. GENERALLY MARKETERS RECOMMEND FACTORING IN COMPETITION BUT … … !!! MUST ALSO TAKE ACCOUNT OF VALUE PROVIDED BY COMPETITIVE ADVANTAGE 29

30.  Major growth trend since late 1970’s  Take the adversarial factor out of pricing: “I win: You lose”, playing suppliers off against each other.  AIM: Work out a collaborative pricing policy that promotes long-term mutual value for both supplier and customer: co-destiny, partnership, value and risk sharing. 30

31. 1. “KEY ACCOUNT”  Key customers have ‘special relationship’ therefore work out price policy that is best to keep that relationship mutually appealing.  Move focus to innovation, cost-reduction, product design, enhanced competitiveness, etc. (We Both Win)  (Aggressive price dickering spoils the partnership and diverts energy) 31

32. 2. VALUE CHAIN COLLABORATION Suppliers-firms-retailers link up to work towards common business objectives. Time based opportunities, big league competitors, innovation, huge synergy potential. Prices reflect shared risks and rewards 32

33. GENERALLY MARKETERS RECOMMEND THIS APPROACH BUT … … !!! EVERYTHING DEPENDS ON INTEGRITY, TRUST ETHICS & SHARED VALUES 33