Pricing Strategies

General pricing approaches

• Cost-based pricing
• Value-based pricing
• Competition-based pricing

 

Cost-based pricing

• Adding a standard markup to cost
• Ignores demand and competition
• Popular pricing technique because:
• Sellers more certain about cost than demand
• Simplifies pricing
• When all sellers use, prices are similar and competition is minimized
• Some feel it is more fair to both buyers and sellers

 

Value-based pricing

• Uses buyers’ perceptions of value rather than seller’s costs to set price.
• Measuring perceived value can be difficult.
• Consumer attitudes toward price and quality have shifted during the last decade.
• Introduction of less expensive versions of established brands has become common.

 

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.
• May price at the same level, above, or below the competition

Factors to Consider When Setting Prices

Customer Perception of Value

• Value-based pricing uses the buyers’ perception of value, not the seller’s cost, as the key to pricing. Price is considered before the marketing program is set.
• Value-based pricing
• is customer-driven.
• Represents the price ceiling
• Cost-based pricing
• is product-driven.
• Represents the price floor

Customer Perception of Value

• Good-value pricing offers the right combination of quality and good service to fair price.
• Existing brands are being redesigned to offer more quality for a given price or the same quality for less price.

Customer Perception of Value

• Everyday low pricing (EDLP)
• a constant everyday low price with few discounts.
• High-low pricing
• higher prices everyday but frequent promotions to lower prices temporarily on selected items.

Other Internal and External Considerations Affecting Price Decisions

• External factors
• The market and demand
• Types of markets
• Analyzing the price-demand relationship
• Competitors’ strategies and prices
• Other environmental factors

The Market and Demand
Types of markets

• Pure competition
• Monopolistic competition
• Oligopolistic competition
• Pure monopoly

Pure competition is a market with many buyers and sellers trading uniform commodities where no single buyer or seller has much effect on market price.

 

Monopolistic competition is a market with many buyers and sellers who trade over a range of prices rather than a single market price with differentiated offers.

 

Oligopolistic competition is a market with few sellers because it is difficult for sellers to enter who are highly sensitive to each other’s pricing and marketing strategies.

 

Pure monopoly is a market with only one seller. In a regulated monopoly, the government permits a price that will yield a fair return. In a non-regulated monopoly, companies are free to set a market price.

 

Analyzing the Price-Demand Relationship

• Before setting prices, the marketer must understand the relationship between price and demand for its products.
• The demand curve shows the number of units the market will buy in a given period at different prices.
• Normally, demand and price are inversely related.
• Higher price = lower demand
• For prestige (luxury) goods, higher price can equal higher demand when consumers perceive higher prices as higher quality.

Price Elasticity of Demand

• Price elasticity of demand illustrates the response of demand to a change in price.
• Inelastic demand occurs when demand hardly changes when there is a small change in price.
• Elastic demand occurs when demand changes greatly for a small change in price.

 

Factors affecting price elasticity of demand

• Unique product
• Quality
• Prestige
• Substitute products
• Cost relative to income

Factors to consider:

• Comparison of offering in terms of customer value
• Strength of competitors
• Competition pricing strategies
• Customer price sensitivity

Market-skimming pricing
Set a high price for a new product to “skim” revenues layer by layer from the market.
Company makes fewer, but more profitable sales.
When to use:
Product’s quality and image must support its higher price.
Costs of smaller volume cannot be so high they cancel the advantage of charging more.
Competitors should not be able to enter market easily and undercut the high price.

Market-penetration pricing
Set a low initial price in order to “penetrate” the market quickly and deeply.
Can attract a large number of buyers quickly and win a large market share.
When to use:
Market must be highly price sensitive so a low price produces more market growth.
Production and distribution costs must fall as sales volume increases.
Must keep out competition and maintain low price or effects are only temporary.

Market-skimming VS Market-penetration

Product-line pricing
Involves setting price steps between various products in a product line based on:
Cost differences between products
Customer evaluations of different features
Competitors’ prices

 

Optional-product pricing
Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator).

 

Captive-product pricing
Pricing products that must be used with the main product (e.g., replacement cartridges for Gillette razors).

 

By-product pricing
Pricing low-value by-products to get rid of them and make the main product’s price more competitive.

 

Product bundle pricing
Combining several products and offering the bundle at a reduced price.

 

Product-adjustment pricing strategies

• Discount and Allowance pricing
• Segmented pricing
• Psychological pricing
• Promotional pricing
• Geographic pricing
• International pricing

 

 

 

 

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Distribution Strategies

Conventional Distribution Systems

• Consist of one or more independent producers, wholesalers, and retailers.
• Each seeks to maximize its own profits and there is little control over the other members.
• No formal means for assigning roles and resolving conflict.

 

Vertical Marketing Systems

 

Vertical marketing systems (VMS) provide channel leadership and consist of producers, wholesalers, and retailers acting as a unified system and consist of:

• Corporate marketing systems
• Contractual marketing systems
• Administered marketing systems

Corporate vertical marketing system integrates successive stages of production and distribution under single ownership.

Contractual vertical marketing system consists of independent firms at different levels of production and distribution who join together through contracts to obtain more economies or sales impact than each could achieve alone.
Most common form is the franchise organization

Administered vertical marketing system has a few dominant channel members without common ownership. Leadership comes from size and power.
Franchise organizations link several stages in the production distribution process.

 

Conventional VS Vertical system

 

Horizontal Marketing Systems

• Horizontal marketing systems include two or more companies at one level that join together to follow a new marketing opportunity
• Companies combine financial, production, or marketing resources to accomplish more than any one company could alone.

 

Multichannel Distribution Systems

• Hybrid marketing channels exist when a single firm sets up two or more marketing channels to reach one or more customer segments.

Disintermediation

• Disintermediation occurs when product or service producers cut out intermediaries and go directly to final buyers, or when radically new types of channel intermediaries displace traditional ones.

 

Number of marketing intermediaries

 

 

Intensive distribution is a strategy used by producers of convenience products and common raw materials in which they stock their products in as many outlets as possible.

 

Exclusive distribution is a strategy in which the producer gives only a limited number of dealers the exclusive right to distribute products in territories

 

Selective distribution is a strategy when a producer uses more than one but fewer than all of the intermediaries willing to carry the producer’s products.

 

 

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Product Life-Cycle Strategies

Product life-cycle (PLC) is the course that a product’s sales and profits take over its lifetime.

• Product development
• Introduction
• Growth
• Maturity
• Decline

 

 

Introduction stage is when the new product is first launched.

Takes time

Slow sales growth

Little or no profit
High distribution and promotion expense

 

 

Growth stage is when the new product satisfies the market. Sales increase

New competitors enter the market
Price stability or decline to increase volume
Consumer education
Profits increase
Promotion and manufacturing costs gain economies of scale
Product quality increases
New features
New market segments and distribution channels are entered

 

 

Maturity stage is a long-lasting stage of a product that has gained consumer acceptance.
Slowdown in sales
Many suppliers
Substitute products
Overcapacity leads to competition
Increased promotion and R&D to support sales and profits.

 

 

Decline stage is when sales decline or level off for an extended time, creating a weak product.
Maintain the product
Harvest the product
Drop the product

 

 

Modifying Strategies

Market modifying strategy is when a company tries to increase consumption of the current product.

• New users
• Increase usage of existing users
• New market segments

Marketing mix modifying strategy is when a company changes one or more of the marketing mix elements.

• Price
• Promotion
• Distribution channels

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