1. An introduction to pricing
Hoorcollege marketing blok 2 week 5

2. Learning goals
By the end of this week’s colleges and the reading you should:
Understand the roles of pricing in the marketing mix
Be aware of the factors that affect the price set
Understand the strategies available to marketers when setting prices
Know some of the tactics available for changing prices

3. Agenda The importance of price What is price?
Factors that influence pricing decisions
Setting prices: pricing strategies
Tactics for changing price

4. The importance of price

5. Price is important
Price is one of the most important factors in the buying decision
If it is perceived as too high by the target customer, demand will be low
Price is the only income generator in the marketing mix
If the price is too low, profits will not be optimal
Price suggests a positioning to the consumer
If the price is out of step with the rest of the marketing mix it will weaken the offer
Price is what the customer pays in the exchange process
The customer must feel they are getting a fair deal

6. What is price?

7. What is a price? All products and services have a price
Gratis is also a price
A price the thing (usually money) that is charged in exchange for a product or service
More broadly a price is the sum of all values that consumers exchange for the benefits of having or using a product or service
This might include things such as extra warranty and cost of ownership

8. Perception (perceptie) is very important
I’ll get a drink of water
Oh bugger!
I’m thirsty
Cool!
If the consumer feels the price is too high they will try to find an alternative or may even go without

9. Perception of what is “too much” (or too little) varies by consumer
Cool!
Waste of money
US$ 23,000
Knowing what your target customer understands as valuable is essential to setting a price What’s in it for them?

10. Factors affecting price setting

11. Price setting can be complex

12. But in most cases there are two key factors
The highest price that can be charged is the maximum the target customer perceives as being “worth it”
The minimum is (usually) what is necessary not to lose money
The other factors affect where you can sit between these two

13. Setting prices: pricing strategies

14. Deciding strategy In order to set a price you first need to understand
What the target customer sees as the maximum price that is “worth it”
And
What your minimum price is based on the costs you have
Then you decide you pricing strategy

15. New product or new price?
A new price might be for a new product or for an existing one
Deciding the price of a new product tends to be different from changing the price of an existing product
With new products you often have less information to work with

16. New product pricing

17. New product pricing Two types of “new” product
Imitative products
Products that the consumer can compare easily with another offer meeting the same need
Innovative products
Products that the consumer cannot compare with another solution
These are rarer than many think
Each requires a different approaches

18. Imitative products
The issue you here is how to position the product against existing offers
There are two variables involved
Relative price compared to alternatives
Relative quality compared to alternatives
These offer 4 possible strategies

19. Price positioning strategies for imitative products
Relative Price
High
Low
Relative Quality
High
Premium
strategy
Good-value
strategy
Low
Overcharging
strategy
Economy
strategy

20. Beware of being a “me too” offer
Relative Price
High
Low
Relative Quality
High
Premium
strategy
Good-value
strategy Me
too
Low
Overcharging
strategy
Economy
strategy

21. Innovative products These products have no reference
Although they may be an innovative replacement for an existing offer
Price is set based on an deep understanding of the target customer’s idea of value
There are two main strategies
Market-skimming pricing
Market-penetration pricing

22. Market-skimming
This involves setting the starting price high to skim layers of the market
The price must be dynamic and adjusted over time to maintain sales
Stage 1
Set a price that is just “worth it” for some segment (usually innovators) of the market
Stage 2
As sales slow down because the market segment is saturated or competitors enter the market the price is reduced for the next segment (early adopters)
And so on...

23. Market-skimming for & against
Advantages
Positions product in terms of
Uniqueness
Quality
Allows quicker recovery of development costs
Risks
Failure to react to product life cycle development
Setting the price too high
Over-estimating the target customer’s sense of what is valuable
Product not really unique
Fast competitor reaction

24. Market-penetration
This involves setting a price that is low enough to attract large numbers of buyers

25. Conditions favouring market-penetration
Price sensitive market
Production and distribution costs will fall as a result of high volumes
The low price helps keep competition out of the market

26. Advantages of penetration
Develop a market for a new offer quickly
Take advantages of economies of scale
Keep competition out of the market
Develop dominant market position

27. Market-skimming versus penetration
Market-skimming works best when:
The product is genuinely unique
Competitors cannot copy the product quickly
E.g. it is protected by a patent
The product offers real value to some market segments
The market is not price sensitive
Production and distribution costs will not fall quickly
Market penetration works best when:
The market is price sensitive
Production and distribution costs will fall based on increased volumes
The product is easily copied
The value of the product is less clear

28. “Normal” pricing

29. There is no such thing as “normal” pricing, but
Pricing existing or updated products is easier (a little like imitative new products)
There are 13 different strategies
These can sometimes be used in combinations

30. “Normal” pricing strategies

31. “Gratis” pricing isn’t really gratis
Even when it’s gratis, someone has to pay
This had better be worth it!
Gratis…Cool!

32. Ways of keeping things “gratis”
Advertising
Selling database customer information
Selling-up

33. Some tactics for changing price
These really are used

34. Changing price is sometimes necessary…but risky
A price rise can mean
Angry customers
Potential reduction in market share if competitors do not increase
A price decrease can mean
A potential decrease in profit
Image problems
Sometimes it is better not to change price, but find a more creative way to handle the price
This may not be the case for economy brands

35. Some ways to avoid increasing price
Change the product (e.g. make it smaller)
Bundle the product
Separate extras and make the options
Change discount to intermediaries
Charge for deliver and extras
Move away from lower margin products in line-up
Offer “prompt payment” discounts
Late payment penalties
Change minimum order size
Leave the market

36. Some ways to avoid decreasing price
Short-term promotions
Bundle pricing
Value packs
Increase warranty
Increase intermediary discounts
Extend payment terms
Increase product quality
Offer better service
Leave the market

37. Summary
Price is the only element of the marketing mix that makes money
Poor pricing can ruin your marketing mix
Pricing of new products is more complex than existing products
Where possible avoid changing price
Unless you are a economy brand