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LECTURE 8b

Pricing Strategy

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GBUS 207: PRINCIPLES OF MARKETING
Presentation Outline

• What Is a Price?
• New Product Pricing Strategies
• Product Mix Pricing Strategies
• Price Adjustment Strategies
• Price Changes

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GBUS 207: PRINCIPLES OF MARKETING
What Is a Price?
Price:- the amount of money charged for a product or service,
or the sum of the values that customers exchange for the
benefits of having or using the product or service. (Kotler &
Armstrong)
***
- one of the most important determinants of a firm’s market
share and profitability.
- only marketing mix element that produces revenue and not
costs.
- also one of the most flexible elements
- customer perceptions of the product’s value determine the
ceiling for prices whilst product costs set the floor for prices.
Price charged should fall between these two parameters.
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GBUS 207: PRINCIPLES OF MARKETING
What Is a Price?
Factors to consider when setting prices include: customer
perceptions of value, company and product costs as well as
other internal & external factors.

Customer Perceptions of Value


- advocates for setting prices based on buyer’s perceptions of value rather
than on the seller’s cost = Value-Based Pricing
Fig. 1

Set target Design product


Assess customer price to match Determine
to deliver
needs and value customer costs that can
desired value
perceptions perceived be incurred
at target price
value

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GBUS 207: PRINCIPLES OF MARKETING
What Is a Price?
Two types of Value-based pricing:
a) good-value pricing – offering just the right combination of quality and
good service at a fair price eg. Everyday low prices (EDLP)
b) value-added pricing – attaching value-added features and services to
differentiate a company’s offers and charging higher

Company and Product Costs


- setting prices based on costs for producing, distributing, and selling the
product plus a fair rate of return for effort and risk = Cost-Based Pricing
Fig 2.

Convince
Design a Determine Set price Buyers of
good product product costs based on cost product’s
value

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GBUS 207: PRINCIPLES OF MARKETING
What Is a Price?
Types of Costs:
a) Fixed costs (overheads) – costs that do not vary with production or
sales level eg. Rent,
b) Variable costs – costs that vary directly with the level of production.eg.
Raw materials,
Total costs = sum of fixed costs and variable costs for any given level of
production.

*Note that if it costs a company more than competitors to produce and


sell its product, the company will need to charge a higher price or make
less profit which could potentially put it at a competitive disadvantage all
things being equal.

Costs vary with different levels of production and production experience


(experience curve or learning curve).
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GBUS 207: PRINCIPLES OF MARKETING
What Is a Price?
Cost-Based Pricing
a) Cost-Plus Pricing- adding a standard markup to the cost of the product
b) Break-Even Pricing or Target Profit Pricing – setting price to break
even on the costs of making and marketing a product, or setting price to make
a target profit.

Other Internal & External Considerations Affecting Pricing Decisions


Internal factors include: the firm’s overall marketing strategy, objectives &
marketing mix and other organizational considerations i.e.
who makes the pricing decision.

External factors include: the nature of the market & demand, competitors’
strategies &prices, and other environmental factors.

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GBUS 207: PRINCIPLES OF MARKETING
What Is a Price?
Internal factors
• Overall marketing strategy
- firm’s pricing strategy is largely determined by its decisions on market
positioning

• Objectives
- does the company want to attract new customers, profitably retain existing
ones
- does it want to increase barriers to entry or match competition

• Marketing Mix
- decisions on price must be coordinated with product design, distribution and
promotional decisions.

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GBUS 207: PRINCIPLES OF MARKETING
What Is a Price?
External factors
• The Market and Demand
- Pricing in Different Types of Markets i.e. pure competition, monopolistic
competition, oligopolistic competition and pure monopoly.
- Analyzing the Price-Demand Relationship i.e. demand curve
- Price Elasticity of Demand i.e. responsiveness of demand to price changes

• Competitors’ Strategies and Prices


- how does the company’s product compare with competitors’ offerings in
terms of customer value?
- how strong are current competitors and what are their current pricing
strategies?
- how does the competitive landscape influence customer price sensitivity?

• Other External Factors


- economic conditions, resellers reactions, government and social concerns
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GBUS 207: PRINCIPLES OF MARKETING
New-Product Pricing Strategies
1. Market-Skimming Pricing
- setting a high price for a new product to skim maximum revenues layer
by layer from the segments willing to pay the high price; the company
makes fewer but more profitable sales e.g. Sony HDTV intro
Conditions for success:
• Product’s quality and image must support its higher price and demand
must be adequate at that price.
• The costs of producing a smaller volume must not cancel the benefit of
charging more.
• Sufficient barriers to entry must be in place.
2. Market-Penetration Pricing
- setting a low price for a new product in order to attract a large no. of
buyers and a large market share.
Conditions for success:
• Market must be highly price sensitive (low price = more market growth)
• Production and distribution costs must fall as sales volume increases.
• Sufficient barriers to entry and ability to maintain low-price position.
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GBUS 207: PRINCIPLES OF MARKETING
Product Mix Pricing Strategies
The firm looks for a set of prices that maximizes profits on the total product mix.
Product Mix Pricing Strategies
1. Product line pricing:
Setting prices across an entire product line based on cost differences between the
products, customer evaluations of diff. features and competitors’ prices.
2. Optional-product pricing:
Pricing optional or accessory products sold with the main product eg. cell phone
cases
3. Captive-product pricing or two-part pricing (services):
Pricing products that must be used with the main product eg. blades for razor,
printer cartridges, etc
4. By-product pricing:
Pricing low-value by-products to get rid of or make money on them so that the
main product can be more competitive. eg. Blue skies fruit drink
5. Product bundle pricing:
Pricing bundles of products sold together eg. Tour packages
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GBUS 207: PRINCIPLES OF MARKETING
Price-Adjustment Strategies
At some point firms usually adjust their basic prices to account for various
customer differences and changing situations.

Price-Adjustment Strategies
1. Discount & allowance pricing:
Reducing prices to reward customers responses such as paying early or
promoting the product eg. Cash or quantity
2. Segmented pricing or yield / revenue management:
Adjusting prices to allow for differences in customers, products or locations
and not costs. Forms – Customer-segment: Product form pricing: location
based
3. Psychological pricing:
Adjusting prices for psychological effect and not just economics eg. Reference
pricing in department stores, prices ending in 9, SALE signs, price-matching
guarantees….
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GBUS 207: PRINCIPLES OF MARKETING
Price-Adjustment Strategies
Price-Adjustment Strategies
4. Promotional pricing:
Temporarily reducing prices to increase short-run sales
5. Geographical pricing:
Adjusting prices to account for the geographical location of customers
eg. FOB origin, uniform-delivered, zone, basing-point, freight-absorption,
6. Dynamic pricing:
Adjusting prices continually to meet the characteristics and needs of
individual customers and situations
7. International pricing:
Adjusting prices for international markets

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GBUS 207: PRINCIPLES OF MARKETING
Price Changes
Companies are faced with situations in which they must either initiate price
changes or respond to price changes by competitors. Note that in both cases,
the organization must anticipate possible buyer and competitor reactions.

Initiating Price Changes


• Initiating Price Cuts
• Initiating Price Increases
• Buyer Reactions to Price Changes
• Competitor Reactions to Price Changes
Responding to Price Changes
Why did the competitor change their price? Is the price change temporary or
permanent? What will happen to the company’s market share and profits if it
does not react? Are other competitors going to respond? What is the firm’s
own situation & strategy? What will be the possible customer reactions to price
changes?
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GBUS 207: PRINCIPLES OF MARKETING
Price Changes

Fig. 3 Assessing and Responding to Competitor Price Changes


Hold current price;
Has competitor
No cut continue to monitor
price? competitor’s price

Yes

Will lower price negatively


No
affect our market share
and profits? Reduce price

Yes
No Raise perceived value

Can/should effective
action be taken?j Improve quality and
increase price
Yes
Launch low-price
“fighting brand”
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GBUS 207: PRINCIPLES OF MARKETING
TRIALS
1. Companies bringing out a new product can choose between
two broad strategies: market-skimming pricing and market-
penetration pricing. Distinguish between the two.

2. Discuss the importance of consumer perceptions of value


and costs to setting prices.

3. Identify four (4) of the product mix pricing strategies.


Describe each of them using appropriate examples.

4. Manufacturers can use by-product pricing to achieve


competitive advantage for their main products. Explain
briefly,0 with relevant example, how this can be done?
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GBUS 207: PRINCIPLES OF MARKETING