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Price is the one element of the marketing mix that produce revenue ; the
other element produce cost, prices are the easiest marketing mix element to
adjust ; product features, channels and even promotion take more time .price
also communicating to the market the company’s intended value positioning
of its product or brand.
Many companies do not handle pricing well. They make these common
mistakes; price is to cost-oriented ; price is not revised often enough to
capitalize on market changes; price is set independent of the rest of the
marketing mix rather than as an intrinsic element of marketing positioning
strategy; and price is not varied enough for different product item ,market
segmentation , distribution channels, and purchase occasions.
Price is also the marketing variable that can be changed most quickly,
perhaps in response to a competitor price change.
Put simply, price is the amount of money or goods for which a thing
is bought or sold.
Perceived benefits are often largely dependent on personal taste (e.g. spicy
versus sweet, or green versus blue). In order to obtain the maximum possible
value from the available market, businesses try to ‘segment’ the market –
that is to divide up the market into groups of consumers whose preferences
are broadly similar – and to adapt their products to attract these customers.
(1) Increasing the benefits that the product will deliver, or,
For consumers, the PRICE of a product is the most obvious indicator of cost -
hence the need to get product pricing right.
IMPORTANCE OF PRICING:
When marketers talk about what they do as part of their responsibilities for
marketing products, the tasks associated with setting price are often not at
the top of the list. Marketers are much more likely to discuss their activities
related to promotion, product development, market research and other tasks
that are viewed as the more interesting and exciting parts of the job.
Yet pricing decisions can have important consequences for the marketing
organization and the attention given by the marketer to pricing is just as
important as the attention given to more recognizable marketing activities.
Some reasons pricing is important include:
• Most Flexible Marketing Mix Variable – For marketers price is the most
adjustable of all marketing decisions. Unlike product and distribution
decisions, which can take months or years to change, or some forms of
promotion which can be time consuming to alter, price can be changed
very rapidly. The flexibility of pricing decisions is particularly important
in times when the marketer seeks to quickly stimulate demand or
respond to competitor price actions. For instance, a marketer can agree
to a field salesperson’s request to lower price for a potential prospect
during a phone conversation. Likewise a marketer in charge of online
operations can raise prices on hot selling products with the click of a few
website buttons.
• Setting the Right Price – Pricing decisions made hastily without
sufficient research, analysis, and strategic evaluation can lead to the
marketing organization losing revenue. Prices set too low may mean the
company is missing out on additional profits that could be earned if the
target market is willing to spend more to acquire the product.
Additionally, attempts to raise an initially low priced product to a higher
price may be met by customer resistance as they may feel the marketer
is attempting to take advantage of their customers. Prices set too high
can also impact revenue as it prevents interested customers from
purchasing the product. Setting the right price level often takes
considerable market knowledge and, especially with new products,
testing of different pricing options.
• Trigger of First Impressions - Often times customers’ perception of a
product is formed as soon as they learn the price, such as when a
product is first seen when walking down the aisle of a store. While the
final decision to make a purchase may be based on the value offered by
the entire marketing offering (i.e., entire product), it is possible the
customer will not evaluate a marketer’s product at all based on price
alone. It is important for marketers to know if customers are more likely
to dismiss a product when all they know is its price. If so, pricing may
become the most important of all marketing decisions if it can be shown
that customers are avoiding learning more about the product because of
the price.
• Important Part of Sales Promotion – Many times price adjustments is
part of sales promotions that lower price for a short term to stimulate
interest in the product.
Many companies try to set prices that will maximize current profits. They
estimate the demand and costs associated with alternative prices and choose
the price that produces maximum current profit, cash flow, or Rate of return
on investment. This strategy assumes that the firm has knowledge of its
demand and cost functions; in reality, these are difficult to estimate. In
emphasizing current performance, a company may sacrifice long run
performance by ignoring the effects of other marketing mix variables,
competitors’ reactions, and legal restraints on price.
Some companies want to maximize their market share. They believe that a
higher sales volume will lead to lower cost and higher long run profit they set
the lowest price assuming the market is price sensitive.
MARK-UP PRICING:
TARGET-RETURN PRICING:
In target return pricing the firm determines the price that would yield its
target rate of return on investment (ROI). Target pricing is used to general
motors, which price its auto-mobiles to achieve a 15-20 percent ROI.
PERCIVED-VALUE PRICING:
VALUE-PRICING:
In recent years, several companies have adopted value pricing, in which they
win loyal customers by charging a fairly low price for a high quality offering.
Among the best practitioners of value pricing are WALL-MART, IKEA, and
SOUTH-WEST airlines.
GOING RATE-PRICING:
In going rate pricing, the firm basis its price largely on competitors prices.
The firm might charge the same, more, or less than major competitors. In
oligopolistic industries that sell a commodity such as steel, paper, or
fertilizers, firms normally charge the same price.
Is growing more popular, especially with the growth of the internet. There are
over 2000 electronic market places selling everything from pigs to use
vehicles to cargo to chemicals. One major use of actions is to dispose of
excess inventories or to use good. Company needs to be aware of the three
major types of actions and their separate pricing procedures
*ENGLISH ACTIONS (ascending bids)
*DUTCH ACTIONS (descending bids)
*SEALED BIDS ACTIONS
GROUP PRICING:
PHYSIOLOGICAL PRICING:
GAIN-RISK-SHARING PRICING:
Buyer may resist accepting a seller’s proposals because of the high perceive
level of a risk. The seller has the option of offering to absorb part or all of the
risk if he does not deliver the full promised value.
The final price must take into account the brand’s quality and advertising
relating to competition.
*Brands with average relative quality but high relative advertising budgets
were able to charge premium prices.
(1) Costs
In order to make a profit, a business should ensure that its products are
priced above their total average cost. In the short-term, it may be acceptable
to price below total cost if this price exceeds the marginal cost of production
– so that the sale still produces a positive contribution to fixed costs.
(2) Competitors
If the business is a monopolist, then it can set any price. At the other
extreme, if a firm operates under conditions of perfect competition, it has no
choice and must accept the market price. The reality is usually somewhere in
between. In such cases the chosen price needs to be very carefully
considered relative to those of close competitors.
(3) Customers
4. Product Lifecycle. How you price, and what value you provide for
that price, will change as you move through the product lifecycle.
1 ) Market-skimming pricing
The practice of ‘price skimming’ involves charging a relatively high price for a
short time where a new, innovative, or much-improved product is launched
onto a market.
The objective with skimming is to “skim” off customers who are willing to pay
more to have the product sooner; prices are lowered later when demand from
the “early adopters” falls.
2) Market-Penetration pricing
Penetration pricing involves the setting of lower, rather than higher prices in
order to achieve a large, if not dominant market share.
This strategy is most often used businesses wishing to enter a new market or
build on a relatively small market share.
This will only be possible where demand for the product is believed to be
highly elastic, i.e. demand is price-sensitive and either new buyer will be
attracted, or existing buyers will buy more of the product as a result of a low
price.
The strategy for setting the product’s price often has to be changed when
the product is part of a product mix. In this case the firm looks for a set of
prices that maximizes the profit on the total product mix. Pricing is
difficult because the various products have related demand and cost and
face different degrees of competition:
Product Line:
Optional Product:
Pricing optional or accessory products
Captive Product:
By-Product:
Product Bundle:
For the remainder of this tutorial we look at factors that affect how marketers
set price. The final price for a product may be influenced by many factors
which can be categorized into two main groups:
• Internal Factors :
There are a number of influencing factors which are not controlled by the
company but will impact pricing decisions. Understanding these factors
requires the marketer conduct research to monitor what is happening in
each market the company serves since the effect of these factors can
vary by market.
Pure Competition:
range of prices
Oligopolistic
Competition:
sensitive to each
other’s
pricing/marketing
strategies
Pure Monopoly:
Market consists of a
single seller
Cost-Plus Pricing:
Competition-Based Pricing:
• Going-Rate Pricing:
– Firm bases its price largely on competitors’ prices, with less
attention paid to its own costs or to demand.
• Sealed-Bid Pricing:
– Firm bases its price on how it thinks competitors will price rather
than on its own costs or on demand.