12/10/20143 Possible Pricing Objectives Pricing objectives Status quo oriented Sales oriented Profit oriented Non-price competition Meeting competition Growth in market share EURO or unit sales growth Maximize profits Target return
12/10/20144 Price as seen by Consumers List Price - Less: Discounts ( Quantity, Seasonal, Cash, Temporary sales) Less: Allowances (Trade-inns) Less: Rebate and coupon value Plus: Taxes Product: Physical Service Assurance of quality Repair facilities Packaging Credit Trading stamps Place of delivery or when available equals
12/10/20147 Costs Fixed costs are those costs that remain unchanged no matter how much is produced (rent, depreciation, managers’ salaries, insurance, employees’ salaries) Variable costs – changing expenses, closely related to the output
12/10/20148 Cost-oriented pricing Markup The Markup is a money amount (EUR, $, BGN), or percent, added to the cost of products to get the selling price Example: Cost 1 Euro Euro markup = 1.50 Euro
12/10/20149 Average-cost pricing Average-cost pricing means adding a reasonable markup to the average cost of a product
12/10/ Full cost pricing ( Cost-oriented pricing) Year 1 Direct costs (per unit)= 2 Fixed costs= 200,000 Expected sales= 100,000 Cost per unit Direct costs= 2 Fixed costs (200,000:100,000)= 2 Full costs= 4 Mark-up (10%)= 0.40 Price (cost+mark-up)= 4.40
12/10/ Full cost pricing ( Cost-oriented pricing) Year 2 Expected sales= 50,000 Cost per unit Direct costs= 2 Fixed costs (200,000:50,000)= 4 Full costs= 6 Mark-up (10%)= 0.60 Price (cost+mark-up)= 6.60
12/10/ Cost-oriented pricing Full cost pricing It leads to an increase in price as sales fall Sales estimates are made before the price is set – illogical procedure It focuses at the internal costs, rather than to the customers willingness to pay Overheads are difficult to estimate in a multi-products company
12/10/ Average and marginal cost Average cost : the average cost for all products Marginal cost : the cost to produce one more unit. Example: 275 Euro is the cost to produce 9 units and 280 Euro – to produce 10 units. Then the marginal cost is the additional cost (5 Euro) to produce 1 more unit.
12/10/ Direct cost pricing Use of direct cost (or marginal cost). This involves calculating only the costs for materials and labor + mark-up. This price does not cover the full costs. It is applied in some service businesses, such as hotels, airlines, where the product can not be stored (the unused capacity means lost revenue).
12/10/ BEP pricing Break-even point represents the quantity where the firm’s total cost will just equal its total revenue Total fixed costs BEP (units) = Fixed cost contribution per unit
12/10/ BEP pricing Total revenue and cost (USD000) Units of production (000) Profit area Loss area Total cost curve Total revenue curve
12/10/ BEP pricing Let us take an example: Let the price of product A = 1.2 Euro Let the total fixed cost is 30,000 Euro. Let the variable cost is 0.80 Euro. Then the fixed cost of that product is (1.2 – 0.8) = 0.4 Euro per unit. 30,000 Euro BEP = 0.40 Euro = 75,000 units
12/10/ Competitors based methods
12/10/ Immediate Competitors Technically Similar product Secondary competitors Different products solving the same problem in similar way Tertiary competitors Different products solving or eliminating the problem in a different way
12/10/ Competitor-oriented pricing Going-rate pricing: the prices used by the competitors. No price differentiation (away from the marketing principles) Below the competition Above the competition
12/10/ Competitor-oriented pricing Bid pricing Bid pricing means offering a specific price for each possible job rather than setting a price that applies to all customers, i.e. building contractors.
12/10/ Competitor-oriented pricing Bid pricing Expected profit = Profit x Probability of winning Profit = Bidding price - Costs Based on past experience about the pricing (bidding) policy of the competitors
12/10/ Competitor-oriented pricing Bid pricing Bid price Profit Probability Expected Which bid price do you recommend ?
12/10/ Competitor-oriented pricing Bid pricing Bid price Profit Probability Expected The recommended bid price is EUR 2200 – based on the Expected Profit criterion
12/10/ Marketing methods
12/10/ Marketing Orientated Pricing Market factors Value to customers Competition Effect on distributors/ retailers Political Factors Price-quality relationship Marketing Strategy Costs Explicability Negotiating margins
12/10/ Reference pricing Price lining The customers have a “feeling” about the price levels and compare the tag- price with those levels. Setting a few price levels for a product line and then marking all items at these prices. For example, most watches are priced between 30 and 200 BGN. And the prices are 30, 70, 110, 150, 200.
12/10/ Value pricing Value pricing means setting a fair price level for a marketing mix that really gives customers what they need. Toyota is an example of a company which has different marketing mixes for different markets, each one offering more compared to the competing offerings.
12/10/ Perception pricing A tractor with a relatively very high price USD 90,000 Competitors’ price + 7,000 for superior durability + 6,000 for superior reliability + 5,000 for superior after sale service + 2,000 for additional guarantee on parts USD 110,000 a deserved price - 10,000 discount USD 100,000 our deserved list price
12/10/ Perception pricing WeightCharacteristics Products % A B C 25Durability Reliability33 30Delivery terms Quality of service %
12/10/ Psychological pricing Psychological pricing means setting prices that have special appeals to target customers. Some scholars believe that there are whole ranges of prices that potential customers see as the same. Price cuts within the range do not increase the demand.
12/10/ Psychological pricing Demand curve when Psychological pricing is appropriate Price (EUR) Quantity
12/10/ Prestige pricing Prestige pricing is setting a rather high price to suggest high quality or high status
12/10/ Prestige pricing Lowering the prices will reposition the business/product, resulting in a failure to attract the target market
12/10/ Skimming price A skimming price policy (skim the cream) is based on selling to the top of the market products at the highest possible price. It is applied by the market leaders only (image, high quality products, new products)
12/10/ Conditions for charging high prices Lack of competition Product provides high value Customers have high ability to pay Consumer and bill payer are different High pressure to buy
12/10/ Complementary product pricing Complementary product pricing is setting prices on several products as a group. One of them can be priced very low so that the demand for the whole group will increase and maximize the profit.
12/10/ Bait pricing Bait pricing is setting some very low prices to attract customers, and trying to sell some more expensive models or brands once the customer is in the store
12/10/ Odd-even pricing Odd-even pricing is setting prices that end in certain numbers, i.e. number 5, number 9 or 99.
12/10/ New product launch strategies Slow penetration Slow skimming Rapid penetration Rapid skimming Low High LowHigh Price Promotion
12/10/ Introductory price Used to speed new products into a market The plan is to raise the prices as soon as the introductory offer is over
12/10/ Penetration pricing Penetration pricing policy is based upon selling to the market at one low price. This is the case when the whole demand curve is fairly elastic. It is very efficient when the economy of scale in production leads to a substantial reduction of the cost. Some scholars call the penetration price ‘stay-out-price’.
12/10/ Conditions for charging low prices Only feasible alternative Dominating competitors Make money later Make money elsewhere Experience effect (computers) Barrier to entry Predation – an attempt to put other companies out of business
12/10/ Price discrimination Price discrimination is selling the same products to different buyers at different prices if it injures competition -> Robinson-Patman Act (of 1936)
12/10/ Price discrimination It refers to segmentation of the market and pricing differences, based on price elasticity characteristics of these segments Example: Dinner menu for 15 BGN is offered for 10 BGN from 6 to 7 p.m. Time flexible and money sensitive customers will add sales. The variable cost has to be < 7
12/10/ Discounts Discounts are reductions from the list price given by a seller to buyers who either give up some marketing function or provide the function themselves
12/10/ Discounts Discounts Quantity discounts Offered to encourage customers to buy in larger amounts. 1-3 PCs at 350 EUR 4-6 PCs at 330 EUR 7+ PCs at 300 EUR Cumulative quantity discounts Seasonal discounts Apply to purchases over a given period of time Encourage buyers to order in low seasons
12/10/ Discounts Discounts Net 10 or Net 30 It means that the customer is given 10 days or 30 days to pay Cash discounts Encourage the buyers to pay their bills quickly. Usually the cash discount modifies the net terms. 2/10 net 30 Means that the buyer can take a 2% discount off the face value of the invoice if the invoice is paid within 10 days.
12/10/ Discounts Discounts Trade (functional) discount A list price reduction given to the channel members for the job they are doing in the sales process Sale price A temporary discount from the list price to encourage the customers for immediate buying
12/10/ Allowances Allowances – like discounts – are given to channel members, customers or final users for doing something or accepting less of something
12/10/ Allowances Allowances Advertising allowances Price reductions given to firms in the channel to advertise or otherwise promote supplier’ products locally Stocking allowances To get shelf space for a product Push money (prize money) Called also PMs or spiffs – given to retailers to pass on the salesclerks for aggressively selling certain items Trade-in allowance A price reduction given for used products when similar new products are bought
12/10/ Rebates The rebates are refunds paid to consumers after a purchase. Some car dealers offer rebates of USD 500 to 2500 to push the sales of slow-moving models.
12/10/ Types of prices F.O.B. price – Free On Board some vehicle at some place. At the point of loading the title to the products passes to the Buyer. Then the Buyer pays the freight and takes responsibility for damage in transit.
12/10/ Types of prices C.I.F. (Cost Insurance and Freight): The title to the product remains with the Seller until the unloading of the product in the place of destination is done
12/10/ Types of prices Free custom office in Bourgas. The product must be delivered to the specified place.
12/10/ Types of prices Zone pricing means making an average freight charge to all buyers within specific geographic areas. The Seller pays the actual freight charges and bills each customer for an average charge.
12/10/ Dumping Dumping is pricing a product sold in a foreign market below the cost of producing it or at a price lower than in its domestic market
12/10/ Initiating price changes Increase the priceCut the price Value greater than priceValue less than price Rising costsExcess supply Excess demandBuild objective Harvest objectivePrice war unlikely Stop competitors’ entry Price jumpPrice fall Staged price increasesStaged price reduction Escalator clauses (aver. Salary) Fighter brands (2 nd brand) Price unbundling (training)Price bundling Lower discountsHigher discounts Circumstances Tactics