Chapter 10 Pricing Strategies Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Slides prepared by Angela Tasevski Price Price is ‘what we pay for is what we get!’ It is the amount of money needed to acquire a product. Value is the quantitative measure of the worth of a product in an exchange for something else. So, price is value expressed in money terms. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Slides prepared by Angela Tasevski Price setting process Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Slides prepared by Angela Tasevski Pricing objectives Profit-oriented: To achieve a target return, or to maximise profits. Sales-oriented: To increase sales volume, or to maintain or increase market share. Status-quo oriented: To stabilise prices, or to meet competition (e.g. petrol). Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Factors influencing price setting the extent of demand determining the expected price from the: Expected price—the price at which customers consciously or unconsciously value a product. Inverse demand—the higher the price the greater the unit sales (demand). Estimated sales at various prices Conduct survey of buyer intentions. Conduct test-market experiments. Use computerised models. Get sales estimates from seller. Sales team to estimate sales for their areas/customers. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

The inverse demand curve Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Price elasticity of demand The effect that price change has on the number of units sold and the total revenue. Demand is elastic when: A reduction in price causes an increase in total revenue. An increase in price causes a decrease in total revenue. Demand is inelastic when: A price cut causes total revenue to decline. A prise rise causes an increase in total revenue. Refer to Figure 10.3, page 343. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Other parts of the marketing mix Product Stage of life cycle. Terms of sale. The product’s end use. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Other parts of the marketing mix Distribution channels Factory pricing for various customer types through intermediaries, e.g. direct to wholesale or direct to customer. Direct to customer without intermediaries. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Other parts of the marketing mix Promotion Type of channel used. Promotional responsibilities determine price for product from supplier. Local to tie in with national advertising. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Slides prepared by Angela Tasevski Product cost These are various: producer’s cost fixed cost variable cost total cost marginal cost Refer to Figure 10.4, page 346. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Price-setting methods Cost-plus—setting price of unit based on total cost plus desired profit (Table 10.2, p.349) or Marginal cost plus desired profit. Demand-based pricing (goods or services). Value-based pricing Includes tangible and intangible attributes. Objective is to determine the level of satisfaction a customer wants and what price they are prepared to pay for it. Also the price the firm believes a customer will pay. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Slides prepared by Angela Tasevski Break-even point The break-even point (zero profit): BEP (Units) = Total Fixed Costs ($) Selling price per unit – average variable cost per unit BEP (Dollars) = Fixed costs Contribution margin ratio = Fixed Costs (Price–variable costs)/ V. costs Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Break-even point (chart) Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Competition-based pricing Firm’s price is influenced by what the competition is charging. Pricing to meet competition Firm finds out what the market price is, and after allowing for mark-ups and intermediaries, it arrives at its own selling price. Pricing below the competition level Pricing below competition, commonly used by discount retailers. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Competition-based pricing (continued) Pricing above competition Pricing above competition, usually only when the product is distinctive or the seller has acquired prestige. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Slides prepared by Angela Tasevski Market entry strategies Market skimming pricing—involves setting a relatively high initial price. The price is set at the highest possible level that interested consumers will pay for the new product. It can help to establish a high-quality image for the new product. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Market entry strategies Market-penetration pricing—a relatively low initial price is set for a new product. Usually in order to reach mass markets. Also to discourage competition. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Slides prepared by Angela Tasevski Discounts and allowances Quantity discounts – Discounts based on the size of the purchase. Trade discounts – Reductions from list price offered to buyers as payment for the marketing functions that they will perform. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Slides prepared by Angela Tasevski Discounts and allowances Cash discounts – Deductions given to buyers for paying their bills within a specified time. Promotional discounts – Reductions granted by a seller in payment for promotional services performed by buyers. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Legal and ethical pricing Trade Practices Act 1974 (Cwlth) Price discrimination Section 49 of the Act prohibits discrimination in either price or non-price terms of trade (including advertising and marketing assistance, allowances, rebates and so on), if this discrimination could substantially injure competition. Price fixing Collusion between competitors to fix or control prices is illegal under the Act. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Legal and ethical pricing Re-sale price maintenance This occurs where the supplier stipulates or controls the resale price charged by the purchaser. Misleading or deceptive pricing Misleading or deceptive advertising of the price of a product is illegal under the general prohibition in section 52 of the Trade Practices Act. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Legal and ethical pricing Freight costs and geographic pricing Marketers need to take into account costs involved in shipping goods to buyers. Alternative strategies: Buyer pays freight costs. Seller bears cost of freight. Both parties share freight cost. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Legal and ethical pricing Point-of-production pricing Commonly known as FOB (free on board) and referring to export sales where the seller has paid to have goods loaded on board the ship and the buyer has paid for the cost of freight, ex-factory or factory gate pricing. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Legal and ethical pricing Uniform-delivered pricing The same delivered price is quoted to all buyers regardless of their locations. Usually where transport cost is minimal. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Legal and ethical pricing Zone-delivered pricing Divides a seller’s market into a limited number of broad geographic zones, and then a uniform delivered price is set within each zone. Freight-absorption pricing Seller might absorb part of the freight cost to offset competition. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Other pricing strategies Flexible price strategy Similar customers might pay a different price when buying similar quantities. Price lining Involves selecting a limited number of prices at which a business will set related products. Odd-pricing (psychological pricing) A strategy used by retailers for setting prices at uneven (or odd) amounts, e.g. $2.99 instead of $3.00. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski

Other pricing strategies Loss-leader pricing A promotional pricing strategy where the seller sets a very low price, at cost or below cost, to attract customers. RRP (recommended retail price) Manufacturer recommends a price to seller to assist in maintaining brand equity/image. Changing price Firm may choose to change price depending on varying circumstances. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing: A Practical Approach 6/e by Peter Rix Slides prepared by Angela Tasevski