w8 pb&p mgt lecture 8(13)

8/12/2019 w8 PB&P Mgt Lecture 8(13)

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Price in the Marketing Mix

The only marketing mix element of the 4Ps that directly affectsrevenues

Links to other marketing mix strategies:

Brand strategy

Distribution Strategy

Marketing Communications StrategiesService Level and Quality

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Product

Strategy

Pricing

Strategy

Distribution

Strategy

Promotion

Strategy

Business Goals and Strategies

Profitability, Return on Investment, Shareholder Value etc

Marketing Goals and StrategiesPositioning the Brand, Market Share, Sales, Profitability etc

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Designing a Revenue and Pricing Model

Some key considerations:

How does the business or product make its money?

Who are its customers?

What are its sources of revenues and cashflow?

What are its pricing objectives?

Is its revenue model sustainable? Revenue and p r ic ing modelswi l l probably ch ange over t ime

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Digital jukebox Spotify on track to report modest

first profit, August 2011

The digital jukebox reported a profit for the first time in 2011 in the

biggest indication yet that a business model is emerging that

could stem the millions lost to music piracy.

Already ahead of iTunes as the biggest digital music retailer inSweden and Norway, Spotifynow has 1.9 million paying

subscribers in the US and Europe, although most of its 6 million

active users still use its song library for nothing.

Spotify makes three-quarters of its money from subscriptions anda quarter from advertising. In 2010 an average of 450,000

customers paid8 a month, generating45m, to which can be

added just over13m in advertising revenues.

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http://www.spotify.com/uk/http://www.spotify.com/uk/


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Pricing objectives can be long term or short term and

can include

Create and support the brands positioning and image

Long term market share maximization

Short term sales growth

Maintain the status quo

Long term profit maximization


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What is Profit?

Profit = Total Revenues Total Costs

= (Price x Quantity Sold) Total Costs

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Selling Price per Unit

- Variable Cost per Unit

= Gross Profit per Unit x no of units sold = Total Gross Profit

or Contribution

- Fixed Cost per Unit

= Net Profit per Unit x no of units sold = Total Net Profit

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Example

You run a small business. The production cost of one item is 65p.

You find that selling at the prices below results in the following sales volumes.

Price Quantity Sold Total Sales Revenue GP/Item Total GP

70p 120

80p 110

90p 90

100p 60

What is the best price to charge?

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Example




70p 120 84 5p 6.00

80p 110 88 15p 16.50

90p 90 81 25p 22.50

100p 60 60 35p 21.00


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Example




70p 120 84 5p 6.00

80p 110 88 88 15p 16.50

90p 90 81 25p 22.50

100p 60 60 35p 21.00


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Designing a Pricing Model

Setting the pricing objective(s)

Estimating costs

Determining demand

Analyzing competitor offers

Selecting a pricing method

Selecting the final price

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Main Strategic Approaches to Pricing

1.Positioning the brand

2. Cost -based pricing

3. Demand - based pricing

4. Competitor and substitute - based pricing

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1. Positioning the Brand: Price / Quality Strategies

Price

Low Medium High

Superb value High value Premiumstrategy strategy strategy

Good value Medium value Overcharging

strategy strategy strategy

Economy False economy Rip-off

strategy strategy strategy

High

Medium

Low

Quality

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2. Cost-Based Pricing

Cost Plus or Markup Pricing

Aims to cover costs

Based on a calculation of fixed and variable costs plus a

margin for profit

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Variable cost per unit 10

Fixed costs 300,000 a year

Expected unit sales 50,000 a year

Unit cost = variable cost per unit + fixed costs

unit sales

= 10 + 300,000 = 16

50,000

If 25%profit mark up is required:

Selling price is 16 + (16 x 25%)

= 16 + 4 = 20

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Cost-Based Pricing

Simple approach

Sometimes used for pricing professional services, industrialproducts and capital goods

Does not take into account customers perceived value or

competitor offers

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3. Demand-Based Pricing

Usually aims to maximize total gross profit (contribution) bycharging what the market will bear.

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Some Key Considerations

How the brand is positioned in the

market

Buyers perceptions of value

Buyers sensitivity to price

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A Simple Demand Curve

Price

Quantity demanded

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Inelastic Demand

Price

Quantity demanded

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Demand Curve for a Luxury Product

Price

Quantity demanded

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Demand elasticity is affected by various factors

including

Awareness and sensitivity of buyers to price and price changes

Readiness of buyers to seek a lower price

Availability of competitors or substitutes

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Key considerations in competitor / substitutes pricing

What is the competitive structure of the industryhow manyrival sellers?

Which brand is the market or price leader?

Competitive power - what is the power of sellers relative tobuyers in the market?

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Other Strategic and Tactical Pricing Considerations

1. Differential pricing

2. New product pricing strategies

3. Tactical pricing

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1. Differential Pricing

Different prices for different market segments with different

needs and demand elasticities

Market must be segmentable

Cost of segmentation should

not exceed extra revenues

generated

Should not cause customerdiscontent

Should be legal

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2. Two Possible New Product Pricing Strategies

1. Market Skimming Strategy

Price initially high and then gradually lowers

Usually only applicable for a new, unique high tech product

Needs a segment of innovators and early adopters who areprepared to pay a high price

Initial high price can generate cashflow and contribute towardsearly payback

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2. Two Possible New Product Pricing Strategies

2. Penetration Pricing Strategy

Aims to gain rapid market share at low price so that long run

economies of scale will lead to long term profits and marketleadership

Suitable when demand is highly elastic

Main product may be priced lowextras, consumables etc may be

priced highBait and Hook strategy

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3. Tactical Pricing

Distinguish from the strategic, long termpricing strategy

for a brand

Aims to manage and maintain sales volumes and margins

with short term fluctuations in demand

Short term promotional pricing can take many forms

sales, special offers, discounts, free gifts, BOGOFFs etc

New Mercedes-

Benz Special Offers

w8 pb&p mgt lecture 8(13)

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