1 Pricing Strategies for the Asia Pacific Asia-Pacific Marketing Federation Certified Professional Marketer Copyright Marketing Institute of Singapore

2 Outline Introduction Introduction Pricing strategies and process Pricing strategies and process Reactions to price changes Reactions to price changes Impact on discounting Impact on discounting Price wars Price wars Yield management Yield management

3 Introduction We need to set price when we have a new product, or when we enter a new market with an existing product We need to set price when we have a new product, or when we enter a new market with an existing product How? How? Need to decide what position you want your product to be in (see quality-price relationshipnext slide) Need to decide what position you want your product to be in (see quality-price relationshipnext slide)

4 Price-Quality Strategies Philip Kotler identified 9 price-quality strategies Philip Kotler identified 9 price-quality strategies Premium High Value Super Value Over Charging Mid Value Good Value Rip-off False Economy High Quality Low Quality High Price Low Price

5 Pricing Process 1. Set Pricing Objectives (see next slide) 2. Analyze demand 3. Draw conclusions from competitive intelligence 4. Select pricing strategy appropriate to the political, social, legal and economical environment 5. Determine specific prices

6 Possible Pricing Objectives Profit objectives e.g. Profit objectives e.g. Targeted profit return Targeted profit return Volume objectives e.g. Volume objectives e.g. Dollar or unit sales growth Dollar or unit sales growth Market share growth Market share growth Other objectives e.g. Other objectives e.g. Match competitors price Match competitors price Non-price competition Non-price competition

7 Demand Analysis Measure the impact of price change on total revenue Measure the impact of price change on total revenue Predicts unit sales volume and total revenue for various price levels Predicts unit sales volume and total revenue for various price levels Different customers have different price sensitivities and needs Different customers have different price sensitivities and needs

8 Impact of Cost on Pricing Strategy Fixed and variable costs Fixed and variable costs Full-Cost Pricing Full-Cost Pricing Markup pricing, break-even pricing and rate-of-return pricing Markup pricing, break-even pricing and rate-of-return pricing Variable-cost pricing Variable-cost pricing 3 types of relationships 3 types of relationships Ratio of fixed costs to variable costs Ratio of fixed costs to variable costs Economies of scales Economies of scales Cost structure Cost structure

9 Discussion: Impact of Ethics on Pricing How should you price if your product is a life-saving drug? How should you price if your product is a life-saving drug? What are the ethical considerations? What are the ethical considerations? Customers have no choice Customers have no choice Need to pay for the research Need to pay for the research When cheaper options doesnt work When cheaper options doesnt work Competition decides Competition decides

10 Information Needed for Price Change Customers ability & willingness to buy; customer lifestyle; benefits sought; characteristics of the product e.g. Customers ability & willingness to buy; customer lifestyle; benefits sought; characteristics of the product e.g. When the kopi tiams, local coffee shops in Singapore tried to raise the price of a cup of coffee by 10 cents in March 1994, the grass- root reaction was stormy When the kopi tiams, local coffee shops in Singapore tried to raise the price of a cup of coffee by 10 cents in March 1994, the grass- root reaction was stormy When Starbucks Coffee and Spinellis raised their prices in the beginning of 1998 by a hefty 20%, nobody raised an eyelit When Starbucks Coffee and Spinellis raised their prices in the beginning of 1998 by a hefty 20%, nobody raised an eyelit

11 Information Needed for Price Change (contd) Need to know everything about the competitors Need to know everything about the competitors How would competitors react to our price change? (see following slide) How would competitors react to our price change? (see following slide) In obtaining competitors information, remember the value of the information In obtaining competitors information, remember the value of the information

12 New-Product Pricing Strategies 1. Skimming pricing Charging a high price initially and reducing the price over time Charging a high price initially and reducing the price over time Commonly used when introducing new & innovative products in the ASPAC region Commonly used when introducing new & innovative products in the ASPAC region 2. Penetration pricing Charging a low price when entering the market to capture market share Charging a low price when entering the market to capture market share Used when competitors are closing in with similar or better products Used when competitors are closing in with similar or better products

13 New-Product Pricing Strategies (contd) 3. Intermediate pricing Pricing somewhere in between the skimming strategy and the penetration strategy Pricing somewhere in between the skimming strategy and the penetration strategy

14 Pricing Strategies for Established Products Three strategic alternatives: Maintain the price if you are the leader e.g. Maintain the price if you are the leader e.g. In 1999, Shell in Singapore maintained its price when other petrol companies engaged in a price war until towards the end of the engagement In 1999, Shell in Singapore maintained its price when other petrol companies engaged in a price war until towards the end of the engagement Reduce the price e.g. Reduce the price e.g. SIA regularly reduce its airfare in anticipation of the developing market situations SIA regularly reduce its airfare in anticipation of the developing market situations Increase the price Increase the price during inflation, or if demand is expected to increase or if you wish to harvest e.g. in Indonesia during inflation, or if demand is expected to increase or if you wish to harvest e.g. in Indonesia

15 Price-Flexibility Strategy One-price policysetting one fixed price for all markets One-price policysetting one fixed price for all markets Flexible-price policysetting different prices in different markets based on: Flexible-price policysetting different prices in different markets based on: Geographic Location, Geographic Location, Time of delivery, or Time of delivery, or The complexity of the product The complexity of the product

16 How much flexibility in price? Depends on the Demand-Cost gap and the influence of competition, social, legal and ethical considerations Depends on the Demand-Cost gap and the influence of competition, social, legal and ethical considerations Example: Life-saving drugs Example: Life-saving drugs

17 Product-Line Pricing When pricing products in different lines, must take cross-elasticities of demand across the set of products into consideration When pricing products in different lines, must take cross-elasticities of demand across the set of products into consideration The idea is to maximize the profits of the entire organization rather than that of a single product or a single line The idea is to maximize the profits of the entire organization rather than that of a single product or a single line

18 Leasing Strategy Leasing is more common for industrial goods e.g. Leasing is more common for industrial goods e.g. Singapore Airlines sold many of their aircraft and lease them back for their operations Singapore Airlines sold many of their aircraft and lease them back for their operations There is a growing trend toward leasing consumer goods as well There is a growing trend toward leasing consumer goods as well e.g. Leasing of office equipment e.g. Leasing of office equipment

19 Reactions to Price Change Customers are more sensitive to price changes if the products cost a lot and/or are bought frequently Customers are more sensitive to price changes if the products cost a lot and/or are bought frequently Competitors may see each of your price change as a fresh challenge and react according to its self-interest at the time. Need to estimate each close competitors likely reaction Competitors may see each of your price change as a fresh challenge and react according to its self-interest at the time. Need to estimate each close competitors likely reaction

20 Responding to Competitors Price Change If competitors lower price for homogenous products If competitors lower price for homogenous products Try augmenting the product Try augmenting the product If it doesn t work or if it is not likely to work, then meet the price cut head-on If it doesn t work or if it is not likely to work, then meet the price cut head-on

21 Responding to Competitors Price Change (contd) If competitors raise price If competitors raise price In a homogeneous market, follow if you think the whole market is likely to follow In a homogeneous market, follow if you think the whole market is likely to follow In a non-homogeneous market, evaluate In a non-homogeneous market, evaluate The reason for the competitor price change The reason for the competitor price change If the price increase is temporary If the price increase is temporary The effect on your market share & profit The effect on your market share & profit The likely response(s) from the other competitors The likely response(s) from the other competitors

22 When a Market Leader is Being Attacked on Price Options available: Maintain price Maintain price Raise perceived quality Raise perceived quality Match competitors price Match competitors price Increase price and improve quality Increase price and improve quality

23 Impact of Discounting on Brand Equity Why discount? Why discount? Problems emerging with discounts Problems emerging with discounts The value equation (V=Q/P) The value equation (V=Q/P)

24 Price War Price wars are frequent in industries where Cost differentiation opportunities exists Cost differentiation opportunities exists Capital is intensive and products are homogeneous Capital is intensive and products are homogeneous Examples: Airfares, ISP, Petrol, & Loans e.g. The Home Loan price war in Singapore in Sept 2000 involving OUB, UOB, DBS among others The Home Loan price war in Singapore in Sept 2000 involving OUB, UOB, DBS among others

25 Yield Management What is it? What is it? Yield management goals Yield management goals Industries that benefited from yield management Industries that benefited from yield management Common variables Common variables