pricing
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PRICING Understanding and capturing customer value
Chapter Questions• How do consumers process and evaluate prices?
• How should a company set prices initially for products or services?
• How should a company adapt prices to meet varying circumstances and opportunities?
• When should a company initiate a price change?
• How should a company respond to a competitor’s price challenge?
WHAT IS A PRICE?
• In the narrowest sense, price is the amount of money charged for a product or service.
• More broadly, price is the sum of all the values that customers give up in order to gain the benefits of having or using a product or service.
• Price is the only element in the marketing mix that produces revenue.
• Price is one of the most flexible marketing mix elements.• Pricing Rests on Value; Capturing Value is Its
Purpose
FACTORS TO CONSIDER WHEN SETTING PRICES
• Customer Perceptions of Value the customer will decide whether a product’s price is right.
• Value-based pricing uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing.
• Price is considered along with the other marketing mix variables before the marketing program is set.
• Cost-based pricing is product driven. • “Good value” is not the same as “low price.”
Changed pricing environment • pricing strategies are changing due to the change in
technology and trend in market• differentiated products also changed the mindset of the
consumers now a days• Internet revolution and its impact over the fixed pricing
decisions – thousands of vendors offering prices to one product one platform to compare the price of a product from various sellers Free products- McDonalds, Mad Over Donuts are few examples
offered free breakfast ranges and donuts
Two types of value-based pricing are good-value pricing and value-added pricing.
1. Good-Value Pricing:- Good-value pricing is offering just the right combination of quality and good service at a fair price.
• Everyday low pricing (EDLP)- EDLP involves charging a constant, everyday low price with few or no temporary price discounts.
• High-low pricing- involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items.
• Value-Added Pricing- Value-added pricing is the strategy
of attaching value-added features and services to differentiate their offers and thus support higher prices.
Types of Costs
• Fixed costs (also known as overhead) are costs that do not vary with production or sales level.
• Variable costs vary directly with the level of production. They are called variable because their total varies with the number of units produced.
• Total costs are the sum of the fixed and variable costs for any given level of production.
Common Pricing Mistakes
• Determine costs and take traditional industry margins
• Failure to revise price to capitalize on market changes
• Setting price independently of the rest of the marketing mix
• Failure to vary price by product item, market segment, distribution channels, and purchase occasion
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When to Use Price Cues
• Customers purchase item infrequently
• Customers are new• Product designs vary over time
• Prices vary seasonally
• Quality or sizes vary across stores
Steps in Setting PriceSelect the price objective
Determine demand
Estimate costs
Analyze competitor price mix
Select pricing method
Select final price
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Step 1: Selecting the Pricing Objective
• Survival• Maximum current profit
• Maximum market share
• Maximum market skimming
• Product-quality leadership
Step 3: Estimating Costs
Types of Costs
Target Costing
Accumulated
Production
Activity-Based
Cost Accounting
Tata motors developed ‘Nano’its small car with a target price
Price-Adaptation Strategies
Geographical Pricing
Discounts/Allowances
Differentiated Pricing
Promotional Pricing
Price-Adaptation Strategies
Countertrade• Barter• Compensation deal• Buyback arrangement• Offset
Discounts/ Allowances• Cash discount• Quantity discount• Functional discount• Seasonal discount• Allowance
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Promotional Pricing Tactics
• Loss-leader pricing• Special-event pricing• Cash rebates• Low-interest financing• Longer payment terms• Warranties and service
contracts• Psychological
discounting
Special festival pricing by Coca-Cola on the occasion of Ramzan in Pakistan.
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Differentiated Pricing
• Customer-segment pricing
• Product-form pricing• Image pricing• Channel pricing• Location pricing• Time pricing• Yield pricing
Pricing for rural markets • A large proportion have a low and seasonal income• Several approaches adopted by retailers and companies to address this
• Rural retailers often extend credit• Retailers also “break the bulk” and sell in loose form, in small quantities
• Companies use a similar strategy by introducing “low-unit packing” or LUP
• Companies also develop low-priced products with a target price for rural markets
• Companies might offer refill packs or recyclable and reusable packs
Increasing Prices
Delayed quotation pricing
Escalator clauses
Unbundling
Reduction of discounts