Sunday, 30 June 2013


Nature of Pricing

Price is the value placed on what is exchanged. Something of value is exchanged for satisfaction and utility, includes tangible (functional) and intangible (prestige) factors. Can be a barter. Buyers must determine if the utility gained from the exchange is worth the buying power that must be sacrificed. Price represents the value of a good/service among potential purchases and for ensuring competition among sellers in an open market economy.
Marketers need to understand the value consumers derive from a product and use this as a basis for pricing a product--must do this if we are customer oriented.

Importance of Price to the Marketer

  • Often the only element the marketer can change quickly in response to demand shifts.
  • Relates directly to total revenue TR = Price * Qtty
    Profits = TR - TC
    -effects profit directly through price, and indirectly by effecting the qtty sold, and effects total costs through its impact on the qtty sold, (ie economies of scale)
  • Can use price symbolically, emphasize quality or bargain.
  • Deflationary pressures, consumers very price conscious.

Price and Non Price Competition

Price Competition

Match, beat the price of the competition. To compete effectively, need to be the lowest cost producer.
Must be willing and able to change the price frequently. Need to respond quickly and aggressively.
Competitors can also respond quickly to your initiatives.
Customers adopt brand switching to use the lowest priced brand.
Sellers move along the demand curve by raising and lowering prices.
Demand Curve
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Non-Price Competition

Emphasize product features, service, quality etc. Can build customer loyalty towards the brand. Must be able to distinguish brand through unique product features.
Customer must be able to perceive the differences in brands and view them as desirable.
Should be difficult (impossible) for competitors to emulate the differences (PATENTS)
Must promote the distinguishing features to create customer awareness.
Price differences must be offset by the perceived benefits.
Sellers shift the demand curve out to the right by stressing distinctive attributes (consumers must perceive and desire particular attributes).

Handout...Bristish Airways

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Handout...Mobil Bets Drivers Pick Cappucino...

Mobil is trying to distinguish its offering from other gas marketers, in order that it doesn't have to compete on price alone, which is the traditional way gas has been marketed. It identified 4 types of consumers that purchase gas in different ways etc.
  • Road Warriors 16%
  • True Blues 16%
  • Generation F3 27%
  • Homebodies 21%
  • Price Shoppers 20%

Factors Affecting Pricing Decisions

There is considerable uncertainty regarding the reaction to price on the part of buyers, channel members, competitors etc.
It is also important in market planning, analysis and sales forecasting.
  • Organizational and Marketing Objectives,

    Need to be consistent with companies goals. IE exclusive retailer sets high prices. Also consistent with the marketing objectives for the year.
  • Types of Pricing Objectives

    • Profit, Satisfactory profit levels vs. profit maximization. Expressed in dollar amount or percent change from the previous period.
    • Market share, Pricing objectives used to increase or maintain market share.
    • Cash flow, recover cash as fast as possible, especially with products with short life cycles.
    • Status Quo, maintain market share, meeting competitors prices, achieving price stability or maintaining public image. Primarily for non price competition.
    • Survival, accept short term losses necessary for survival.
  • Buyers Perceptions,

    How important is price to the target market?
    Price sensitivity varies among market segments and across different products (ie necessary products vs. luxury)
    Need to know buyers acceptable range of prices and sensitivity towards price changes.
    Need to gauge Price Elasticity, a measure of the sensitivity of the demand to changes in prices.
    Percent change in quantity demanded relative to the percent change in price. % change in Qtty demanded
    % change in price
    We are now looking at the actual impact on demand as price varies. Elastic demand is more sensitive to price than inelastic demand.
    Elastic demand, greater than1 (-1)
    Inelastic demand, less than 1 (-1)
    Unitary demand, equal to 1
    Always take the absolute values

    Inelastic Demand

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    Elastic Demand

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    Type of demand that exists is based on:
    • Available substitutes
    • urgency of need
    • brand loyalty
    TR = Price * Qtty
    If demand is elastic then change in price causes an opposite change in the total revenue.
    If demand is inelastic then change in price causes the same change in the total revenue.
    The less elastic the demand, the more beneficial it is for the seller to increase price.

    Handout...Companies Finding Consumers resisting Price Boosts

    Different examples of products that have elastic demand and inelastic demand.
  • Costs,

    In the long run, cannot survive by selling at or below cost. Need to take into account all costs, costs associated with product, with total product line etc.

    Analysis of Demand, Cost and Profit Relationships

    Need to set a price that covers all costs. Two methods:
    Breakeven Analysis:
    Break even point is where the cost of producing the product is equal to the revenue derived from selling the product. Types of Cost: not change with change in # units produced
    Variable..vary directly with the change in the # units produced
    BEP       =     FC            =             FC              
            -------------          -----------------------
         per unit cont. to FC     price - variable cost/unit 
    Need to determine the BE point for each of several prices. Focuses on what is needed to break even.
    Marginal Analysis:
    What happens to the costs and revenues as production increases by one unit. This will determine at which point profit will be maximized. Need to distinguish between:
    Fixed Costs
    Average Fixed Costs, FC/units produced
    Variable Costs (materials labor etc.)
    Average Variable Cost, VC/Unit produced Total Cost = (AFC+AVC)*QTTY
    Marginal cost = the extra cost to the firm for producing one more unit.
    Marginal revenue = the extra revenue with the sale of one additional unit.
    MR - MC tells us if it is profitable to produce one more unit.
    Profit maximization at MR = MC
    To produce/sell more units than the point MR = MC the additional cost of producing one more unit is greater than the additional revenue from selling one more unit. At any point prior to MR = MC, MR will be greater than MC, therefore the additional revenue from selling one more unit will be greater than the additional cost of producing one more unit, therefore forgoing the opportunity to generate additional profits. Therefore MR = MC = Profit Maximization; assuming all products are sold.
    Due to the environment it is difficult to predict costs and revenues etc.
  • Other marketing Mix variables,

    All marketing mix variables are interrelated.
    IE price determines the quality status.
    Determines the type of distribution (selective/intensive).
    Effects the margin for wholesalers and retailers.
    Type of promotion, use price (bargain).
  • Channel Member Expectations,

    Expect to receive a profit for services performed.
    Need to keep distributors/retailers happy, avoid conflicts, use exclusive dealing, avoid discounters.
    May use price guarantees to assure wholesalers/retailers that the price they pay is the lowest available.
    Cooperation depends on the equitable distribution of costs and profits within the channel.

Select an approximate price level

Demand Oriented Pricing:

Determined by the demand for the product.
Determine the demand first,
calculate the mark up needed for each channel member,
then determine how much is available (cost ceiling) to produce the product.
Need to estimate the amount of products demanded at each price level. Demand - Minus pricing--determine final selling price and work backwards to compute costs. Used by firms that sell directly to consumers. Price decisions revolve around what people will pay.
Determine the final selling price, mark-up required, then maximum acceptable/unit cost for production or buying a product.
Range of acceptable prices, used when firm believes that price is key factor in consumer decision making process. Price ceiling is the maximum the consumers will pay for a product. Need to understand the elasticity of demand.
Use Yield Management Pricing-right mix price-quantity to generate highest revenue--airlines. Price manages demand!
Types of policies:
  • Price Skimming Charge highest price possible that buyers who most desire the product will pay. Generate much needed initial cash flow, cover high R&D costs. Esp. good for limited capacity introductions.
    Attract market segment more interested in quality, status, uniqueness etc.
    Good if competition can be minimized by other means, IE, brand loyalty, patent, high barriers to entry etc.
    Consumers demand must be inelastic.
  • Penetration Pricing Price reduced compared to competitors to penetrate into markets to increase sales.
    Less flexible, more difficult to raise prices than it is to lower them.
    May use it to follow price skimming.
    Good as a barrier to entry.
    Appropriate when the demand is elastic.
    Use if there is an increase in economies of scale through increased demand.
  • Odd-even pricing, end prices with a certain number, $99.95 sounds cheaper than $100., may tell friends that it is $99.
    Customers like to receive change, since change is given, then the transaction must be recorded.
    Consumers may perceive that a lot of time taken considering the price, and it is set as low as possible.
    Even prices are more unusual than odd prices. Even prices for upscale goods.
  • Price bundling, Offer a product, options, and customer service for one total price. Prevalent in the BB market, include installation etc.
    May unbundle price, ie, breakdown prices and allow customers to decide what they want to purchase.
    Fast food industry.
  • Prestige Pricing, when price is used as a measure of quality.

Cost oriented pricing:

$ amount or % added to cost. Need to know the desired margins etc. Easy to administer.
  • Cost-plus pricing Cost calculated then a % added. Costs, overhead may be difficult to determine. Establish the # of units to produce, calculate the fixed and variable costs and add a predetermined cost-popular with rapid inflation.
    Profit is stated as a % of costs, not sales, price not established through consumer demand, little incentive to hold down costs.
    Adjustments for rising costs are poorly conceived.
    Good when consumers are price inelastic and the firm has control over prices.
    Good for establishing a floor price, for which you can't charge less.
  • Mark-up pricing, Common among retailers. May vary from one product category to another depending on turnover rates.
    Reduces prices to a routine.
    Stated as a % of costs or selling price.

Competitive Oriented Pricing:

Considers competitors prices primarily. Especially with products that are homogeneous.
Can chose to be below, at or above competitors prices.
Better position for estimating pricing if marketers know what competitors are charging.
IE employ competitive shopping, purchase pricing, call up.
Sometimes very difficult to determine, esp. in the resellers market.
How will competitors respond to an adjustment in price.
What is the market structure?
Oligopoly--Marlboro's Black Monday
Perfect competition--buyers will only pay the market determined price.
Is the competitive environment Market controlled, Company controlled or Government controlled price environment?
Policies consistent w/ competition oriented:
  • Customary prices, priced on the basis of tradition, ie, candy bar was 5c for a longtime, mf. change the size before they change the price, alter other MM variables before pricing. Wrigley's Gum only varied price 5 times, 10-15, 15-20, 20-25, 25-30, and 30-35

Selecting a Price level in today's marketplace:

Price resistance from consumers.
Age of disinflation due to:
  • Overcapacity
  • Global competition...US most competitive in the world
  • slow growth
  • Increased unemployment
Therefore need to rethink all aspects of business.
Price has been restored as the economic arbiter:
How the marketplace truly values goods and services
No cloak of inflation to disguise mgt. decision errors
"When you have inflation, it covers alot of sins." Strategies:
  • Redesign products for ease and speed of manufacture
  • Strip away costly features customers don't want
  • Reduce rebates/discounts for everyday low prices
  • Forge closer links with customers (relationship marketing)
  • Accelerate new product development
  • Invest in information technology
  • Reduce bureaucratic layers
"Management challenge of the '90s is to reduce costs and increase perceived value of the product"

Cannot let the internal processes determine price, price MUST determine process.

Traditional view of pricing = add up costs, overruns and acceptable profit margin.
Now...set target price (what the customer is willing to pay), determine acceptable level of profit, intermediary costs, then determine allowable costs of production.
"Back into price from the customers perspective" Must accelerate product development, since costs and demand patterns will shift over time.
Cars' development cycle was 5-6 yrs, now less than 3 = Neon.
Compaq "Design to price", built computers costing 60% less. Price target from marketing, profit margin goal from management, team then determines what the costs must be. Prolinea and Contura Notebook were developed in less than 8 months.
  • Value added strategy...Non Price competition.
    Feature that is truly valued by the consumer, no one else has, you have a monopoly of feature...but customers are less willing to over pay for feature...perceived quality of all products has risen, making this strategy very difficult.
  • Strip down product to bear minimum...Southwest Airlines

Determine A Specific Price

A pricing method will yield a certain price, that price will likely need refining. One-Price vs. Flexible Pricing Policy

Price Discounting (off list prices)

  • Trade, given by a producer to an intermediary for performing certain functions (in terms of % off list prices)
  • Quantity, due to economies of purchasing large qttys. Pass cost savings on to the buyer. There are five areas of cost savings, reduced per selling costs, fixed costs decline or remain the same, lower costs from the suppliers of raw materials, longer production runs means no increase in holding costs, shift storage, financing, risk taking functions to the buyer. Can cumulative/non cumulative.
  • Cash, for prompt payment, 2/10 net 30, means 2% discount allowed if payment is made within 10 days, entire balance is due within 30 days, no discount, after that interest will be charged.
  • Seasonal, purchase out of season
  • Allowances, trade in allowances, price reductions granted for turning in a used item when purchasing a new one-to achieve desired goal. Popular in the aircraft industry. Also promotional allowances, price reduction in return for dealers promotional efforts.

Term  nonprice competition Definition

 A method of competition undertaken by firms in the same market (typically oligopoly firms) that involves advertising, brand-name promotion, support services, illegal activities, and everything but the price. Oligopoly firms are quite prone to nonprice competition due to the interdependence, especially such as that illustrated by the kinked-demand curve. Because oligopoly firms find difficulty competing through prices, they seek out alternative methods of competition, such as advertising or sabotage.

in other words,
 Non-price competition refers to a situation where one of the following two things happens:
  • Buyers compete with each other to acquire a good on a basis other than price. Such competition occurs in a situation of excess demand: at the given price, the demand for the good exceeds the supply. The typical cause for excess demand is a price ceiling, though it may also be caused by sticky prices or unforeseen dramatic changes in supply or demand.
  • Sellers compete with each other to sell a good on a basis other than price. Such competition occurs in a situation of excess supply: at the given price, the supply for the good exceeds the demand. The typical cause for excess supply is a price floor.
Non-price competition is closely related to rent seeking.
A typical form of non-price competition is queueing -- long waiting lines to buy the commodity.


Public services: non-price competition among buyers

Public services, many of which are offered for free, or at the same low cost, may suffer from non-price competition. There may be long queues (waiting lines) for access to public services. Here, people are paying for the free service by spending their time in line. However, the economic value of this payment is not captured by anybody.

Limited quantity, low price: non-price competition among buyers

For commodities for which there is a market shortage, people may compete with each other to get to the few places selling the commodity. Thus, people may start waiting outside the shop selling the commodity hours before it opens (see queueing), or pay others to purchase the good for them, or travel long distances looking for shops that still have the commodity.

Frills to compete under price floors

For commodities where a price floor is set as a minimum price, and this is greater than the market price, sellers might try to compete by offering more and more frills with the commodity to attract people to compensate for the above-market price they are paying. For instance, when the government sets high minimum prices for airlines, airlines may try to compete by offering frills such as fancy food or other frills. In this case, the additional frills provide some benefit to buyers at some cost to the sellers. However, it may still be a loss in the sense that for some buyers, these frills may not have much value, but they cannot buy the basic commodity without frills at a cheaper price.

Competing based on "quality" in situations where price is zero

For many Internet-based knowledge goods, such as weblog entries and search engines, the price is by default zero. The important point here is not that the market price is nearly zero, but rather, that because transactions at such small amounts of money are not economical, the price must be set at exactly zero. This forces practically all competition between such services (when attracting buyers) to be non-price competition.


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