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Pricing
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I. The importance of price
The role of pricing.
Costs and profit.
Elements of cost.
Benefits of a costing system formarketers.
Price setting.2
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The role of pricing.
Price can be defined as a measure of the
value exchanged by the buyer for the valueoffered by the seller.
Two broad categories of objectives may bespecified for pricing decisions: Maximizing profits.
Maintaining or increasing market share.
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Costs and profit.
Cost is the amount of resources which is
allocated to preparing a product for offer to amarket.
Profit is the excess over costs in revenue. Inother words, profit is the outcome of deliveringsatisfactions to customers.
Ex: Profits are what enable a company to go on
trading, developing new products, paying dividends andpension funds.
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Elements of cost.
Costs of products (or services):
The cost of materials.
The cost of wages and salaries.
The cost of other ex enses.
Material, labor costs and other expenses can beclassified as direct costs or as indirect costs.
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Elements of cost (cont.)
Functional costs:
Production or manufacturing costs.
Administration costs.
Fixed costs and variable costs.
Controllable and uncontrollable costs.
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Benefits of a costing system for
marketers
The identification of profitable and unprofitable
products, services, centers and so on. The identification of wages and inefficiency.
A i n in in ri .
The provision of accurate stock valuations.
The analysis of changes in costs, volume andhence profit.
Assistance in planning, control and decisionmaking.
Evaluation of the effectiveness of decisions. 7
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Price setting in theory.
Economic theory can determine the price
structure under two market conditions:Perfect competition.
Mono ol .
Price elasticity
Price is greater than 1 (elastic).
Price is less than 1 (inelastic).
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II. Pricing Policy
&Marketin Mix
What is a pricing policy?
Pricing issuesPricing as a strategic tool
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In marketing mix, Price is the second component,behind Product and before Place.
The 7Ps of the marketing mix:
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Definition:
Price is the unit ofrevenue combiningcosts and profit at
exchange takes placein a transaction.When multiplied by
volume it equals salesturnover.
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For example:
The airline, railway, taxi, and bus
companies charge you a fare.
The local utilities call their price a rate.
e oca an c arges you nterest or t emoney you borrow.
So on.
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2.1 What is a pricing policy?
Policy
Some principles are presented formally in writtenprocedures
Some are informal and unpublished
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Pricing policy is the outcome ofmanagement decisions about pricewhich derive from internal
opera ona cons era ons a oucosts and external, customer-focused considerations about value
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2.2 Pricing issues (contd)
=> The firm must decide a suitable price to
satisfy both consumers and suppliers
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2.3 Pricing as a strategic tool
Price is also a signal of quality to the
product competes with alternatives in themarket.
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III. PRICEIII. PRICEIII. PRICEIII. PRICE
EXPECTATIONSEXPECTATIONSEXPECTATIONSEXPECTATIONS
WHERE ISPRICE HIGH
OR LOW ?
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Price positioning
New Samsung
S8003 Jet
Second-hand Samsung
S8003 Jet
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The price of information
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IV. Pricing strategy
Pricing strategy and the marketing mix
Pricing and the competitive edge
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4.1. Price and promotion Information is embedded in the marketing mix under
marketing communications or promotion
Strategy: is the way in which organization meet theirmedium to long-term objectives by using their resources
in certain ways.
Marketing strategy: is the way which organizations meettheir marketing objectives by manipulating (fine-tuning)
the interactions of the components of the marketing mixto achieve optimum customer response.
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Information / price model
Rapid Slow
High Low
skimming
skimming
Rapid penetration Slow
penetration
High
Low
Price
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The high price/ high promotion category
produces a rapid skimming strategy withhigh-powered promotional campaigns.
Market penetration is enhanced by thecombination of low price and high levels of
promotion.
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4.2. Pricing strategy and the
marketing mix The components of the marketing mix never
operate alone The mix components are those of the product mix(4Ps) or the services mix (the 7Ps).
Some segments may be very price sensitive, thus the
price is the predominant component.
The outlet may be the most critical factor
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4.3. Pricing and the competitive
edge
Pricing is a very powerful weapon in the
marketers armoury Price is unarguable when considered alone.
than its competitors: is not matter of opinionor preference
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Price war: is the outcome of head-to-head
conflict of the major players in achievingmarket supremacy.
players. Quality may be reduced to supportthe price reductions. So, the outcome is oftena reduction of competition.
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V. Approaches to pricing
Target pricing
Perceived value pricing
Competitor related pricing
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5.1 Cost plus pricing:
Definition: Cost plus pricing includes thevariable cost associated with the oods,
as well as a portion of the fixed cost.
The best pricing = cost + profit margin
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5.2 Target pricing
Target pricing is where an organizationpitches a price which will deliver a target
period.
Pricing based on breakeven analysis
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5.3 Perceived value pricing Price build up a perception of valuein
the mind of the purchaser.
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5.4 Competitor related pricing
Price of competitors influence onapproaches to pricing.
Price followers are those entrants to amarket who simply follow the existing
players, very often pricing just below themarket leader
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Price leaders are those entrants who
establish the going rate in a market thusproviding a basis for others to follow.
Price leader provide a benchmark in termof the economies of scale, they have
entered the beneficial sector of thelearning curve.
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VI. COMPETITIVE
ADVANTAGE
Competitive focusCost leadership and differentiation
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According toAccording to Competitive AdvantageCompetitive Advantageofof
Michael Porter in 1996, he has laid down theMichael Porter in 1996, he has laid down theprinciple that firms should compete at one ofprinciple that firms should compete at one oftwo level either as cost leaders or astwo level either as cost leaders or as
Chapter 10: Pricing
differentiators.differentiators.
Firms should do this in a broad or narrowFirms should do this in a broad or narrow
focus.focus.
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The two elements of competitive focusrefer to the scope of operation of the
.
The scope of operation can either besmall part of the available market ofindustry, or the more widely with a broadapproach to the opportunities which areappropriate.
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Cost leadership is the outcome of anumber of competencies which enable
in the market.
Differentiation depends on the crafting of
a distinctive offering which responds withcompetitive advantage to the specializedwants of a market segment
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