Pricing

Must Remember Pricing decision must be consistent with firm’s marketing strategy and its target market and brand positioning

Pricing decisions are clearly complex and difficult and many marketers neglect their pricing strategies.

For any organization, effectively designing and implementing pricing strategies require through understanding of consumer pricing psychology and systematic approach to setting, adapting and changing price.

Consumer Psychology and Pricing Reference prices - consumers compare an observed price to an internal reference price they remember or an external frame of reference such as a posted “regular retail price.” Possible Reference Pricing “Fair price” Typical price Last price paid Upper-bound price Lower-bound price Competitor prices Expected future price Usual discounted price

Consumer Psychology and Pricing Price-quality inferences - consumers use price as an indicator of quality. Image pricing is especially effective with ego-sensitive products such as perfumes, expensive cars, and designer clothing. Price Endings - Many sellers believe prices should end in an odd number. Customers see an item priced at Rs. 299 as being in the Rs. 200 rather than the Rs. 300 range; they tend to process prices “left-to-right” rather than by rounding. Another explanation for the popularity of “9” endings is that they suggest a discount or bargain. Prices that end with 0 and 5 are also popular and are thought to be easier for consumers to process and retrieve from memory.

Tiers in Pricing Most markets have three to five price points or tiers.

Steps in Setting Price Select the price objective Determine demand Estimate costs Analyze competitor price mix Select pricing method Select final price

Step 1: Selecting the Pricing Objective Survival is a short-run objective for firms to deal with overcapacity, intense competition, or changing consumer wants. Maximize current profits emphasis current performance. But firms may sacrifice long-run performance by ignoring the effects of other marketing variables, competitors’ reactions, and legal restraints on price.

Step 1: Selecting the Pricing Objective Maximum market share utilizes a market-penetration pricing strategy in which a higher sales volume will lead to lower unit costs and higher long-run profit. Eg: Texas Instruments (TI) famously practiced this market-penetration pricing for years. TI would build a large plant, set its price as low as possible, win a large market share, experience falling costs, and cut its price further as costs fell.

Step 1: Selecting the Pricing Objective Maximum market skimming utilizes a market- skimming pricing strategy, in which prices start high and slowly drip over time. This strategy can be fatal if competitors price low. Eg: When Sony introduced the world’s first high definition television (HDTV) to the Japanese market in 1990, it was priced at $43,000. So that Sony could “skim” the maximum amount of revenue from the various segments of the market, the price dropped steadily through the years—a 28-inch Sony HDTV cost just over $6,000 in 1993, but a 40-inch Sony HDTV cost only $600 in 2010.

Step 1: Selecting the Pricing Objective A firm striving to be a product-quality leader offers brands that are “affordable luxuries” –products or services characterized by high levels of perceived quality, taste, and status with a price just high enough not to be out of consumers’ reach. Eg: Brands such as Rolls Royce, BMW, Bosch, have positioned themselves as quality leaders, charging premium prices from their customers. Other objectives: Nonprofit (hospital) and public organizations (universities) may have other pricing objectives.

Step 2: Determining Demand Price sensitivity Estimate demand curves Price elasticity of demand

Price Sensitivity Customers are less price sensitive to low-cost items or items they buy infrequently. They are also less price sensitive when (1) there are few or no substitutes or competitors; (2) they do not readily notice the higher price; (3) they are slow to change their buying habits; (4) they think the higher prices are justified; and (5) price is only a small part of the total cost of obtaining, operating, and servicing the product over its lifetime. Lowest total cost of ownership (TCO)

Estimating Demand Curves Firms estimate demand curves using: surveys, price experiments, and statistical analysis. Marketers need to know how responsive, or elastic, demand is to a change in price.

Price Elasticity of Demand The demand curve shows the market’s probable purchase quantity at alternative prices. It sums the reactions of many individuals with different price sensitivities. The first step in estimating demand is to understand what affects price sensitivity.

Step 3: Estimating Costs Types of costs Accumulated production Target costing

Cost Terms and Production Fixed costs – rent, heat, interest, salaries Variable costs – cost of materials, packaging Total costs Average cost – cost per unit at level of production

Figure 13.2 Cost Per Unit at Different Levels of Production

Step 4: Analyzing Competitor’s Costs  Competitors’ costs  Competitors’ prices  Possible price reactions

Figure 13.4 The Three Cs Model for Price- Setting Costs set a floor to the price. Competitors’ prices and the price of substitutes provide an orienting point. Customers’ assessment of unique features establishes the price ceiling.

Step 5: Selecting a Pricing Method Markup pricing Target-return pricing Perceived-value pricing Value pricing EDLP High-Low Pricing Going-rate pricing Auction-type pricing

Target-Return Pricing In target-return pricing, the firm determines the price that yields its target rate of return on investment.

Perceived-Value Pricing Customer’s perceived-value  Performance  Warranty  Customer support  Reputation Customer’s perceived value is determined by the buyer’s image of the product performance, the channel deliverables, the warranty quality, customer support, and softer attributes such as the supplier’s reputation, trustworthiness, and esteem.

Value Pricing They win loyal customers by charging fairly low price for a high quality offerings It is not only matter of setting lower prices, t I smatter of re-engineering the company’s operation to be come a low-cost producers without sacrificing quality, to attract a large number of value-conscious customers E.g. IKEA, Target, Southwest

Step 6: Selecting the Final Price Impact of other marketing activities Company pricing policies – Banks (too many withdrawals), Hotels ( charge for no- show) Gain-and-risk sharing pricing Impact of price on other parties ( distributors and dealers)

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