MARK1012 LECTURE 9 SLIDES

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MARK1012 LECTURE 8: PRICING: MOHAMMED 1 MARK 1012 MOHAMMED A RAZZAQUE Lecture Objectives 1. Define pricing and understand factors influencing pricing decisions and three main pricing strategies. 2. Discuss the importance of understanding customerͲvalue perceptions, costs, and competitor strategies when setting prices. 3. Identify and define the other important internal and external factors affecting a firm’s pricing decisions. 4. Describe the main strategies for pricing new and imitative products. 5. Explain how companies find a set of prices that maximise the profits from the total product mix. 6. Discuss how companies adjust their prices to take into account different types of customers and situations. 7. Discuss the key issues related to initiating and responding to price changes. Mohammed A Razzaque . School of Marketing . University of New South Wales L8-2

Transcript of MARK1012 LECTURE 9 SLIDES

Page 1: MARK1012 LECTURE 9 SLIDES

MARK1012 LECTURE 8: PRICING: MOHAMMED

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MARK 1012

MOHAMMED A RAZZAQUE

Lecture�Objectives

1. Define�pricing�and�understand�factors�influencing�pricing�decisions�and�three�main�pricing�strategies.

2. Discuss�the�importance�of�understanding�customerͲvalue�perceptions,�costs,�and�competitor�strategies�when�setting�prices.

3. Identify�and�define�the�other�important�internal�and�external�factors�affecting�a�firm’s�pricing�decisions.�

4. Describe�the�main�strategies�for�pricing�new�and�imitative�products.

5. Explain�how�companies�find�a�set�of�prices�that�maximise�the�profits�from�the�total�product�mix.

6. Discuss�how�companies�adjust�their�prices�to�take�into�account�different�types�of�customers�and�situations.

7. Discuss�the�key�issues�related�to�initiating�and�responding�to�price�changes.

Mohammed A Razzaque . School of Marketing . University of New South Wales L8-2

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What�is�Price?�

Price�is�the�…�amount�of�money�charged�for�a�product�or�service;

�sum�of�the�values�consumers�exchange�for�the�benefits�of�having�or�using�the�product�or�service;�and�

�only�element�of�the�marketing�mix�that�produces�revenue;�

�all�other�elements��������represent�costs.

Companies�…�do�not�usually�set�a�single�price,�they�adopt�a�pricing�structure that�covers�different�items�in�its�product�line.

�adjust�product�prices�to�reflect�changing�costs�and�demand�and�to�account�for�variations�in�buyers�and�situations.

Mohammed A Razzaque . School of Marketing University of New South Wales L8-3

Predetermined Receivable In Commercial Exchanges

Revenue�[or�turnover]�is�income�that�a�company�receives�from�the�sale of�its�offerings�to�customers.

Factors�influencing�Pricing�Decisions�and�Pricing�Strategies

Factors

� Internal�¾ Company’s�marketing�

objectives,�¾ Company’s��marketingͲmix�

strategy,�costs�and�organisation.

� External¾ the�nature�of�the�market�and�

demand,�¾ competition�and�other�

environmental�factors�that�influence�pricing�decision).�

Strategies

� Three�main�pricing�strategies:�¾ Customer�valueͲbased�

pricing,�¾ CostͲbased�pricing�and�¾ CompetitionͲbased�pricing.��

Mohammed A Razzaque . School of Marketing . University of New South Wales

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FACTORS�AFFECTING�PRICE

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CUSTOMER�PERCEPTIONS�OF�VALUE

PRODUCT�COST

MARKETING STRATEGYMARKETING OBJECTIVES

MARKETING MIXNATURE OF THE MARKET

NATURE OF DEMAND

Competitors’�actionsGovernment

Mohammed A Razzaque . School of Marketing . University of New South Wales

Factors�Affecting�Price

Mohammed A Razzaque . School of Marketing . University of New South Wales L8-6

Internal Factors

PricingDecisions

External Factors

Marketing�Objectives. The�overall�objectives�influence�price:� Survival:¾ primary�factor�in�marginal�businesses;�¾ staying�in�business�in�hopes�of�making�profits�

when�conditions�improve.� Current�Profit�Maximisation:¾ emphasising�short�term�results�over�longͲrun�

performance.� MarketͲShare�Leadership:¾ company�seeks�the�dominant�market�share;¾ Low�prices�increase�demand�so�that�later�

volume�creates�profit.� ProductͲQuality�Leadership:¾ tends�to�push�prices�high;¾ may�be�linked�to�niching strategy.��

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Internal�Factors�Affecting�Price

�Marketing�Mix�Strategy.¾ Price�must�support the�overall�marketing�mix�and�the�positioning�strategy.��

¾ Price�conveys�to�consumer�one�kind�of�information about�the�product.�

�Costs.¾ Set�the�pricing�floor�that�the�company�can�charge for�its�product.�

�Organisation�for�Pricing.¾How�the�Organisation�delegates�the�pricing�function�affects�price.��

¾ Pricing�is�also�linked�to�overall�company�goals.

y The�market�and�demand�sets�the�upper�limit

y Competitor’s�price�and�other�offers

y Other�external�factorsy Economic�conditionsy Governmenty Trade�practices

Mohammed A Razzaque . School of Marketing . University of New South Wales L8-7

External�Factors

From Previous page

L8-8

Major�pricing�strategies

Customer�Value�Based�Pricing

GoodͲvalue�Pricing

Value�Added�Pricing

CostͲbased�Pricing

CostͲplus�pricing

Breakeven�pricing

Target�return�Pricing

CompetitionͲbased�Pricing

Different organisations may use different pricing strategies

Mohammed A Razzaque . School of Marketing . University of New South Wales

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GoodͲvalue�pricing

� ‘Offering�just�the�right�combination�of�quality�and�good�service�that�customers�want�at�a�fair�price’.

� Involves:– introducing�less�expensive�versions�

of�established�name,�or�– redesigning�existing�brands�to�offer�

more�quality�for�a�given�price,�or�the�same�quality�for�less,�and�

– EDLP�or�everyday�low�pricing�(EDLP)�in�the�retail�sector�is�an�example.

ValueͲadded�pricing

• Companies�adopt�valueͲadded�pricing�strategies�to�increase�pricing�power.

• NOT�cutting�prices�to�match�competitors;�rather�adding�valueͲadded�features�and�services�to�differentiate�their�offerings�and�this�supports�higher�prices’.

L8-9

CustomerͲvalue�based�pricing�and�its�two�types� Price�is�based�on�buyers’�perceptions�of�value�NOT�the�seller’s�cost.� Analyse�consumer�needs�and�value�perceptions�and�then�determine�

the�price��to�match�consumers’�perceived�value.��

Mohammed A Razzaque . School of Marketing . University of New South Wales

CostͲbased�pricing

� Costs set�the�floor for�the�company’s�price.��

� The�price�must;¾ cover�all�costs�for�

producing,�distributing,�delivering�and�selling�the�product;�and

¾ deliver�a�fair�rate�of�return�for�its�effort�and�risk.��

� Low�cost�and�low�price�can�generate�great�sales�and�profit�and�revenue.�

� It�is�argued�that�many�companies�pursue�the�following�cycle:�

Mohammed A Razzaque . School of Marketing . University of New South Wales L8-10

Low�Price�

Increase�in�sales

Increase�in�level�of�

production

Decreases�the�cost

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Types�of�CostͲbased�pricing

CostͲplus�pricing

� The�simplest�method,�involves�‘adding�a�standard�markͲup�to�the�cost�of�the�product’.

� Price�is�based�on�costs�and�the�desired�profit�margin but�ignores�market�demand�factors.¾ No�standard�markͲups�to�set�prices.¾ Highest�markͲup has�the�highest�risk.��¾ MarkͲups�are�smallest�on�some�

commodities�such�as�milk�and�bread;�higher�on�seasonal�items�and�perishable�goods.��

¾ MarkͲups�vary�widely�across�different�industries.�

Breakeven�pricing�and�targetͲreturn�pricing

� Involves�‘setting�the�price�to�break�even�on�the�costs�of�making�and�marketing�a�product,�or�to�make�the�desired�profit’.��¾ Based�on�the�concept�of�a�breakeven�chart,�which�shows�the�total�cost�and�total�revenue�expected�at�different�sales�volume�levels.�

L8-11Mohammed A Razzaque . School of Marketing . University of New South Wales

Cost-Plus Pricing [Cost + Mark-Up]

Mohammed A Razzaque . School of Marketing . University of New South Wales L8-12

IncreasedCertainty

MinimisePrice

CompetitionKeyReasons forCost-PlusPopularity

As�all�firms�in�the�industry�use�this�method,�prices�tend�to�be�similar�and�price�competition�is�minimised.

Reasons�for�costͲplus�pricing�popularity�are:

Sellers�are�more�certain�of�their�costs�than�they�are�about�demand.

Ensures�a�profit�for�sellers�for�their�valueͲadded�activities�and�does�not�take�advantage�of�consumers�when�demand�is�greater.

PerceivedFairness

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Breakeven�pricing�and�targetǦreturn�pricing

� Breakeven Analysis.¾ An analysis of the company's costs in relation to

units of the product produced and sold.

¾ Identifies the minimum pricing level the company's activities can support.

� Target Profit Pricing.¾ A variation on break-even analysis that links price

to profit objectives above total costs. ¾ Computationally appealing; however, its use in planning

should accommodate the fact that increased prices decrease demand.

Mohammed A Razzaque . School of Marketing . University of New South Wales

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Types�of�Costs

� Costs set�the�pricing�floor�that�the�company�can�charge�for�its�product.��There�are�two�types�of�costs:¾ Fixed�Costs (or�overhead)�are�costs�that�do�not�vary�with�

production�or�sales�levels.��¾ Variable�Costs vary�directly�with�the�level�of�production.��

� Total�Costs Ͳ the�sum�of�the�fixed�and�variable�costs�for�any�given�level�of�production�Ͳ vary�with�level�of�production.¾ Price�must�cover�the�total�cost.��Higher�cost�will�lead�to�a�higher�

price�and�less�profit,�which�results�in�a�competitive�disadvantage.�¾ Management�must�consider�how�costs�will�change�at�different�

levels�of�production�as�part�of�their�overall�demand�management�strategy.��

Mohammed A Razzaque . School of Marketing . University of New South Wales L8-14

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COSTͲPLUS�PRICING:�COMPUTATION

� For�Product�X,�per�unit�variable�cost�is�$47,�fixed�costs�is�$500,000�and�expected�unit�sales�volume�is�20,000�units.�If�the�manufacturer�intends�to�earn�a�20%�markͲup�on�sales,�what�will�be�the�manufacturer’s�markͲup�price?

� Manufacturer’s�costs�per�unit�of�X�=�unit�cost�+�fixed�costs/unit�sales=��$47�+�500,000/20,000��=��$72

� Let�the�markͲup�price�be��SThen�S (1�Ͳ desired�return�on�sales)�=��$72S =�$72/�(1�Ͳ .2)�=��$90.00

ÄWhat�is�the�Marginal�Revenue�[MR]�here?����$�90.00Ä MR�is�the�additional�revenue�that�a�producer�receives�from�selling�one�more�unit�

of�the�good.

L8-15Mohammed A Razzaque . School of Marketing . University of New South Wales

Unless otherwise stated, mark-up is always calculated on sales; NOT on costs. In�the�above�example,�calculating�the�markǦup�price�as�$72�x�(1�+.2)�=�$86.4�would�be�incorrect.

Breakeven�Analysis�I

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200400600800

1,0001,200

10 20 30 40 50

Total Revenue

Total Cost

Fixed Cost

Target Profit ($200,000)

Sales Volume in Units (thousands)

Cos

t in

Dol

lars

(th

ousa

nds)

Break-even analysis identifies the so-called break-even point, i.e., the volume at which total costs (fixed and variable) and total revenue are

equal. At Break-even volume [unit terms or dollar terms]total profit is zero: the organization neither makes a profit nor incurs a loss.

Mohammed A Razzaque . School of Marketing . University of New South Wales

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Breakeven�Analysis�II

L8-17

In�equation�form�a�firm's�profit�(or�loss)�may�be�expressed�as:�

Profit�=�Total�revenue�– [�total�variable�costs�+�total�fixed�costs]

Since�profit�(or�loss)�is�zero�at�the�break�even�point,�the�above�equation�may�be�reͲwritten�as:Total�revenue =�Total�variable�costs�+�Total�fixed�costs

The�formula�for�determining�the�number�of�units�required�to�breakͲeven�is�as�follows:

1. BreakͲeven�point�[BEP]�in�units =��Total�Fixed�CostContribution�margin

2. BreakͲeven�point��[BEP]�in�dollars =������Total�fixed�cost�

Variable�cost�per�unit��selling�price�per�unit

=� BreakͲeven�point�in�units��x�Selling�price�per�unit

1--

Mohammed A Razzaque . School of Marketing . University of New South Wales

Illustrative�Example�I

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� Consider�the�following�data�for�Positron�Inc:�(1)�direct�labor�is�$8.50�per�unit,�(2)�raw�materials�are�$3�per�unit,�(3)�selling�price�is�$24�per�units,�(4)�advertising�and�sales�force�costs�are�$380,000,�and�(5)�other�relevant�fixed�costs�are�$120,000.

� Contribution�per�unit� =�Selling�price�– Variable�costs=�$24.00�– ($8.50�+�$3.00)����=�$12.50

� BreakͲeven�point�in�units =����������__Total�fixed�costs__Contribution�per�unit=�[$380,000�+�$120,000]�/�$12.50=��40,000�units

� BreakͲeven�point�in�dollars =��_�����$500,000__1�– $11.50/24.00

=��_$500,000_ =��$960,000��1�– 0.479167�

� Alternatively�BreakͲeven�point�in�dollars�=�40,000�X�$24.00�per�unit�=�$960,000

Mohammed A Razzaque . School of Marketing . University of New South Wales

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Illustrative�Example�IIBEP�With�profit�Target

� Suppose�Singtron�wants�to��achieve�a�profit�goal�of�$100,000.�How�many�units�should�they�sell?

� BreakͲeven�point�in�units������=�__Total�fixed�costs_+�Target�profit_Contribution�per�unit

=�[$380,000�+�$120,000�+�$100,000�]/�$12.50=��48,000�units

� BreakͲeven�point�in�dollars���=��_�����$600,000__1�– $11.50/24.00

=��_$600,000_ =��$1152,000��1�– 0.479167�

� Alternatively�BreakͲeven�point�in�dollars�=�40,000�X�$24.00�per�unit�=�$1152,000

L8-19Mohammed A Razzaque . School of Marketing . University of New South Wales

Value�based�pricing�vs Cost�Based�Pricing

L8-20Mohammed A Razzaque . School of Marketing . University of New South Wales

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L8-21

ValueͲBased�Pricing

L8-21

Product

Cost

Price

Value

Customers

Customer

Value

Price

Cost

Product

START� Reverse�of�cost�based�approach,�

¾ uses�the�buyer's�perception�of�value�as�the�key�to�pricing,�and�

¾ utilises�non�price�mix�variables�to�help�set�perceived�value�in�buyer's�mind.�

� The�marketer�must�have�an�accurate�view�of�what�benefits�and�features�consumer�want�and�are�willing�to�pay�for�in�setting�a�specific�valueͲpricing�goal.

Toyota used this approach on its lower end cars like the Tercel and the Corolla in the early 1980s. Once the value price was determined and profit per car objectives set, engineers and designers were challenged with the task of making the cost of production support those goals.

Cost Based Value Based

Mohammed A Razzaque . School of Marketing . University of New South Wales

CompetitionͲbased�pricing�I

�Involves�‘setting�prices�based�on�competitors’�strategies,�costs,�prices�and�market�offerings’.�

�What�principle�should�guide�decisions�about�what�price�to�charge�relative�to�those�of�competitors?��The�answer�is�simple�in�concept�but�difficult�in�practice.��Be�certain�to�give�customers�superior�value�for�the�price.�

L8-22Mohammed A Razzaque . School of Marketing . University of New South Wales

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L8-23

CompetitionͲBased�Pricing�II

Mohammed A Razzaque . School of Marketing . University of New South Wales L8-23

Costs

Bid / Tender

Contract

??????

� Economic value pricing¾ more applicable to industrial markets; ¾ sort of a package pricing that may include purchase

price, installation costs, maintenance, disposal costs etc.

� Going-Rate Pricing approach¾ bases price largely on what competitors charge for

their products. ¾ Popular in markets where demand elasticity is

difficult to measure.� Sealed-Bid Pricing approach ¾ involves competition between sellers attempting to

under price each other while still covering costs.¾ Common in bidding for government contracts.

The�market�and�demand�Ͳ I

�Market�and�demand�set�the�upper�limit�of�prices. Pricing�varies�in�different�types�of�markets¾ Monopolistic�competition:�

� many�buyers and�sellers�trading�over�a�range�of�prices.��� Products�can�be�differentiated�in�quality,�features,�or�styles.

¾ Oligopolistic�competition:�� few�sellers�each�sensitive�to�the�other's�pricing�and�strategies.� Barriers�to�entry�prohibit�new�sellers�from�entering�the�market.�

¾ Pure�monopoly:�� a�single�seller,�e.g.,�government,�or�regulated�/unregulated�monopoly� Pricing�may�be�linked�to�other�than�cost�or�profit�factors,�including�fear�of�

competition�entering�or�regulation.¾ Pure�competition:�

�Many�buyers�and�sellers�trading�in�a�uniform�commodity�so�that�no�one�agent�affects�pricing.��

� Going�rate�pricing�is�the�rule.�

Mohammed A Razzaque . School of Marketing . University of New South Wales L8-24

Carol Yuan
*
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The�market�and�demand�Ͳ II

�Consumer�Perceptions�of�Price�and�Value.¾ Buyers�ultimately�decide�prices.��Marketers�must�combine�technical�expertise�with�

creative�judgement�and�an�awareness�of�buyers’�motivations.

�Price�demand�relationship�varies�from�product�to�product¾ A�demand�curve shows�the�number�of�units�the�market�will�buy�in�a�given�time�

period�at�various�prices.��¾ The�price�elasticity�of�demand illustrates�how�responsive�demand�will�be�to�a�

change�in�price.��Two�concepts�are�important�here:

� Inelastic�Demand. demand�hardly�changes�with�a�small�change�in�price,�� Elastic�Demand. small�change�in�prices�changes�demand�greatly,�

�Ethical�issues�involved�in�pricing�products�characterised�by�inelastic�demand�are�often�complicated�and�controversial.

L8-25Mohammed A Razzaque . School of Marketing . University of New South Wales

Elasticity�of�Demand

L8-26

Price�elasticity�of�demand�=�Per�cent�change�in�quantity�demandedPer�cent�change�in�price

Mohammed A Razzaque . School of Marketing . University of New South Wales

Do�not�confuse�this�concept�with�Marginal�Revenue�or�MRMarginal�Revenue�=������Change�in�Revenue

Change�in�Quantity

Carol Yuan
*
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More�on�elasticity

�Other�things�equal,�if�a�firm�finds�the�demand�for�one�of�its�products�is�inelastic,�it�can�INCREASE�its�total�revenues�by�raising�its�price.�¾With�inelastic�demand,�price�reduction�causes�the�quantity�sold�to�increase�but�total�revenue�actually�decreases.��So�with�inelastic�demand�while�a�price�increase�causes�the�quantity�sold�to�decrease,�the�total�revenue�increases.

�The�more�substitutes�a�product�has,�the�more�likely�it�is�to�be�price�elastic.��¾ In�many�snack�machines�today,�the�buyer�has�more�than�two�dozen�choices—making�the�demand�more�elastic.��

L8-27Mohammed A Razzaque . School of Marketing . University of New South Wales

Pricing�a�New�(and�inovative)�product

�Market�skimming�prices:¾setting�a�high�initial�price�for�a�new�product�to�‘skim’�maximum�revenue�from�the�segments�willing�to�pay�the�high�price;�¾the�company�makes�fewer�but�more�profitable�sales.

�Market�penetration�prices:¾setting�a�low�initial�price�for�a�new�product�to�attract�a�large�number�of�buyers;�and�¾obtain�a�large�market�share.

�Pricing�an�imitative�new�product:¾positioning�problems�encountered

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L8-29

Four�New�Product�Pricing�Strategies

Mohammed A Razzaque . School of Marketing . University of New South Wales L8-29

Promotion

Rapid-skimmingstrategy

Slow-penetration

strategy

Rapid-penetration

strategy

Slow-skimmingstrategy

High

Price

Low

High

Low

ProductͲmix�pricing�strategies�I

� The�strategy�for�setting�a�price�on�an�offer�often�has�to�be�

� changed�when�the�product�or�service�is�part�of�a�mix.��

� This�section�introduces�five�productǦmix�and�serviceǦmix�pricing�situations

Mohammed A Razzaque . School of Marketing . University of New South Wales L

Product Line PricingSetting Price Steps Between Product Line Items

Optional-Product PricingPricing Optional Products Sold With The Main Product

Captive-Product PricingPricing Products That Must Be Used With The Main Product

By-Product PricingPricing Low-Value By-Products To Get Rid of Them

Product-Bundle PricingPricing Bundles Of Products Sold Together

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ProductͲMix�Pricing�Strategies�II

�Product�Line�Pricing.¾Companies�usually�develop�product�lines�rather�than�single�products.�(e.g.�dress�shirts,�airconditioners,�refrigerators).¾Refers�to�setting�price�steps�between�each�product�in�the�line�establishing�a�single�price�for�all�products�in�a�product�line,�such�as�having�a�price�of�$75�for�the�highͲpriced�line,�$55�for�the�mediumͲpriced�line,�and�$35�for�the�lower�priced�line.

�OptionalͲProduct�Pricing.�¾Allows�companies�to�present�a�low�base�price�capable�of�attracting�customers�while�maintaining�the�possibility�of�generating�high�revenues�by�selling�costly�addͲons�later.�¾Cars�are�good�examples.

Mohammed A Razzaque . School of Marketing . University of New South Wales L8-31

Product-Mix Pricing Strategies III

�CaptiveͲProduct�Pricing.¾Pricing�products�that�must�be�used�with�a�main�product.�9 For�example,�the�razor�is�priced�low�while�high�markͲups�are�attached�to�the�price�of�the�blades.

�ByͲProduct�Pricing.¾Waste�from�production�and�distribution�may�be�sold�as�byͲproducts�allowing�producers�to�lower�prices�and�costs�on�their�main�products.�9Meat�products,�petroleum�/chemical�products�are�examples.

�ProductͲBundle�Pricing.¾combines�several�products�and�offers�them�at�a�reduced�price�from�the�cost�of�each�product�purchased�separately.��9 Season�tickets�and�group�rates�are�examples.

Mohammed A Razzaque . School of Marketing . University of New South Wales L8-32

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Price�Adjustment�Strategies�Ͳ I

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Companies typically adjust their prices to account for various customer differences and changing situations:

Mohammed A Razzaque . School of Marketing . University of New South Wales

Price�Adjustment�Strategies�– IIDiscounts�and�Allowances:�Reduction�from�the�usual�price

Discounts• Cash�discount,�a�price�reduction�to�

buyers�who�pay�their�bills�promptly.�• Quantity discount is�a�price�reduction�

to�buyers�who�buy�large�volumes.�• Functional�discount (or�trade�

discount)�is�offered�by�the�seller�to�tradeͲchannel�members�who�perform�certain�functions.�

• Seasonal�discount is�a�price�reduction�to�buyers�who�buy�merchandise�or�services�out�of�season.�

Allowances• TradeͲin�allowances are�price�

reductions�given�for�turning�in�an�old�item�when�buying�a�new�one.�

• Promotional�allowances are�payments�or�price�reductions�to�reward�dealers�for�participating�in�advertising�and�sales�support�programs

L8-34Mohammed A Razzaque . School of Marketing . University of New South Wales

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Price�Adjustment�Strategies�Ͳ III

�Segmented�Pricing refers�to�pricing�differences�not�based�on�costs�and�takes�several�forms:��¾ CustomerͲsegment�pricing target�a�specific�segment,�as�in�senior�citizen�discounts.��

¾ ProductͲform�pricing�varies�costs�on�versions�of�a�product�by�features�but�not�production�costs.���

¾ Location�pricing��stems�from�preferences�where�different�locations�have�different�perceived�values,�e.g.,seating in�a�theatre.��

¾ Time�pricing�refers�to�price�breaks�given�at�times�of�lower�demand;�e.g.,�peak/offͲpeak�season�pricing

�Psychological�Pricing Ͳ based�on�the�reference�price�consumers�carry�in�their�mind�when�considering�sellers�prices.

L8-35Mohammed A Razzaque . School of Marketing . University of New South Wales

Price�Adjustment�Strategies�Ͳ IV

L8-36

MorePrice

AdjustmentStrategies

Promotional

Geographical

Inte

rnat

iona

l

Value

Promotional�adjustments�refer�to�temporary�reductions�below�list�and�sometimes�below�costs,�used�to�attract�customers:

� Special�event.�Pricing�used�during�slow�seasons.

� Cash�rebates or�low�financing.��Offering�“extras”�to�bring�in�customers�“on�the�brink”�and�help�them�decide�to�finally�purchase.

� Loss�leaders.��Products�offered�below�costs�to�attract�attention�to�an�entire�line.

�Value�Pricing.�Offering�the�right�combination�of�quality�and�good�service�at�a�fair�price.

Mohammed A Razzaque . School of Marketing . University of New South Wales

Carol Yuan
*
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Price�Adjustment�Strategies�– VGeographical�pricing

� Involves�deciding�how�to�price�products�for�customers�located�in�different�parts�of�the�country�or�world.

� FOBǦorigin�pricing: ���������������������free�on�board ȋ�����ǡ�FOBȌ����������Ǥ��������������������������������������������������ǡ���������������������������������������������������������Ǥ�

� UniformǦdelivered�pricing ��������������������������Ǥ�����ǡ�����������������������������������������������������������������ǡ�����������������������������Ǥ�

� Zone�pricing ǣ�������������������������������������������������������Ǣ��������������������������ǡ���������������������Ǥ�

� BasingǦpoint�pricing: �������������������������������������Dz������������dz�����������������������������������������������������������������������������������ǡ�����������������������������������������������������������������Ǥ�

� FreightǦabsorption�pricing: �������������������������������������������������������������������������������������������������

L8-37Mohammed A Razzaque . School of Marketing . University of New South Wales

Other�Types�of�Price�Adjustments

�Dynamic�Pricing���¾Adjusting�prices�continually�to�meet�the�characteristics�and�needs�of�individual�customers�and�situations.�

�International�Pricing¾The�price�that�a�company�should�charge�in�a�specific�country�depends�on�many�factors,�including�economic�conditions,�competitive�situations,�laws�and�regulations.

L8-38

Mohammed A Razzaque . School of Marketing . University of New South Wales

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Loss�Leader�Strategy

�Offering�a�product/service�at�a�price�that�is not�profitable�for�the�sake�of�offering�another�product/service�at�a�greater�profit�or�to�attract�new�customers.�¾ A�common�practice�when�a�business�first�enters�a�market;�¾ A�loss�leader�introduces�new�customers�to�a�product/service�in�

the hope�of�building�a�customer�base�and securing�recurring�revenue.¾ More�than�just�a�nifty�business�trick�Ͳ it�is�a�successful�strategy�if�

executed�properly.9 Example:�Razor�blades. Companies�like�Gillette�essentially�give�their�razor�

units�away�for�free,�knowing�that�customers�will�have�to�buy�their�replacement�blades,�which�is�where�the�company�makes�all�of�its�profit.

9 Example: Microsoft's�Xbox�video�game�system,�which�was�sold�at�a�loss�of more�than $100�per�unit�to�create�more�potential�to profit from�the�sale�of higherͲmargin�video�games.

Mohammed A Razzaque . School of Marketing . University of New South Wales L8-39

Price�changes�may�be�initiated�for�several�reasons

L8-40

InitiatingPrice Cuts

InitiatingPrice Increases

Buyer Reactions

Competitor Reactions

Issues in Price Change Strategies

Price�Cuts:�Stem�from�overǦcapacity,�falling�market�share,�or�attempts�to�dominate�the�market�through�lower�costs.

Price Increases: Inflation, tendency to speculate on inflationary trends, and over demand may cause prices to rise. Higher prices can also increase profit margins.

Buyer�Reactions�to�Price�Changes:�May�be�direct,�though�not�always.Sometimes�higher�prices�support�quality�improvements�and�lower�prices�mean�company�or�product�problems.�Whether the buyer perceptions are correct or wrong will not immediately change their inclination to act on them.

Competitor Reactions to Price Changes: Most often react in industries with a small number of firms, uniform products in the market, and buyers are well informed. May be similar price changes or increased non price competition.

Mohammed A Razzaque . School of Marketing . University of New South Wales

Carol Yuan
*
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L8-41

Copyright ©2012 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442531109/Kotler/POM/5e

Responding�to�price�changes

Mohammed A Razzaque . School of Marketing . University of New South Wales

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Copyright ©2012 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442531109/Kotler/POM/5e

Public�policy�and�pricing[Practices�that�are�prohibited�by�law]

Mohammed A Razzaque . School of Marketing . University of New South Wales

PriceͲfixing:�setting�prices�by�a seller�after�talking�to�its�competitors

Predatory�pricing:�selling�below�cost�with�the�intention�of�punishing�a�competitor�or�driving�competitors�out�of�business.

Offering different price terms to customers at a given level of trade.

Requiring dealers to charge a specified retail price.

Stating prices or price savings that mislead consumers or are not actually available to consumers

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Setting�Pricing�Policy

Mohammed A Razzaque . School of Marketing . University of New South Wales L8-43

1. Selecting the pricing objective

2. Determining demand

3. Estimating costs

4. Analyzing competitors’costs, prices, and offers

6. Selecting final price

5. Selecting a pricing method