Slide 16.1 Price Pricing Chapter 16 Kotler, Wong, Saunders and Amtrong Pinciples of Marketing, PwerPoits, Fouth European Econ © Pearson Education Lite 2005Introduction * Companies face dynamic pricing challenges from local and international markets and are impacted from a variety of sources including macro and micro economic issues and competitors. + Price is equated to the sum of the values that consumers exchange for the benefits of having or using the product or service + Price is one of the most important and far-reaching of the variables that marketing managers control. Price is the only elementof the marketing mix that produces revenues. Kotler, Wong, Saunders and Armstrong Principles of Marketing, PowerPoints, Fourth European Edition © Pearson Education Limited 2005Slide 16.3 Price defined Price is the amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service. Ker, Wong, Saunders and Amstrong Principles of Markating, PowerPoints, Fourth European Edition © Pearson Eiucation Limited 2008Slide 16.4 Internal factors affecting price Company’s marketing objectives Marketing mix strategy Costs Organisation structure Kotler, Wong, Saunders and Armstrong Prinples of Marketing, PowerPoints, Fourth European Edition © Pearson Education Limited 2005Slide 16.5 Marketing objectives * Pricing should augment the marketing mix strategy * Marketing objectives are reflected in the pricing decisions and include — Survival — Current profit maximisation — Market share maximisation — Product-quality leadership — Full cost recovery * Non profit hospitals — Partial cost recovery + Utilised by non profit organisations Kotor, Wong, Saunders and Armstrong Principles of Marking, PowoePoints, Fourth European Ection © Pearson Education Limitad 2008Slide 16.6 Marketing mix strategy * Price decisions are coordinated with product design, distribution and promotional decisions to form an effective integrated marketing programme + Various strategies can be used depending upon the type of product and the environmentin which it is involved. + Frequently pricing decisions are made first and the marketing mix evolves around that. + De-emphasis of price by using the other marketing mix tools to create non-price positions based upon differentiation and value. Koter, Wong, Saunders and Armstrong Prinses of Marketing, PowerPoins, Fourth Eurcpean Edticn © Pearson Education Limited 2008Slide 16.7 Figure 16.1 Factors affecting price decisions Kot, Wong, Saunders ad Amstong Pintle of Marktng Powe, Fouth European Editen © Pearson Education Lid 2066Slide 16.8 Gucci's very strong image and reputation as a prestigious brand mean that customers are willing to pay for the fashion house's expensive fragrances. Source: Advertising Archives. Reproduced with permission Kotler, Wong, Saunders and Ammsttong Principles of Marking, PowerPoints, Fourth European Eiition © Pearson Eduction Limited 2005‘Slide 16.9 Costs * Types of cost — Fixed costs that do not vary with production or sales level. — Variable costs vary with level of production. — Total costs, sum of variable and fixed costs. Koller, Wong, Saundors and Armtrong Principles of Markoting, PowerPoint, Fourth European Eisiton © Pearson Education Limited 2008Slide 16.12 External factors affecting pricing decisions External factors include the nature of the market and demand, competition and other environmental elements. + The market and demand * Costs set the lower limit and demand sets the upper limit of price. This price-demand relationship is of fundamental importance to marketers. Kot, Wong, Saunders and Armstrong Principles of Marketing, PowerPohrs, Fourth Eurcpean Edition © Pearson Education Linted 2008Slide 16.13 Pricing in different types of market — Pure competition markets * Uniform commodity + No single buyer or seller has much effect on the market price + Marketing mix has little impact Kote, Wong, Saunders and Armstong Princinls of Marketing, PonerPoints, Fourth European Econ © Pearson Education Linited 2008Slide 16.13 Pricing in different types of market — Pure competition markets * Uniform commodity + No single buyer or seller has much effect on the market price + Marketing mix has little impact Koter, Wong, Saunders and Aumtrong Principlos of Marketing, PowerPons, Fourth European Exiton © Pearson Education Limited 2008Slide 16.14 Pricing in different types of market — Monopolistic competition + Buyers and sellers trade over a range of prices + Emphasis upon differentiation through the marketing mix Koll, Wong, Saunders and Amstiong Principles of Marketing, PowerPonrs, Fourth European Eaton © Pearson Educaton Limited 2008Slide 16.15 Pricing in different types of market — Oligopolistic competition + Few sellers highly sensitive to each other's price and marketing strategies over, Wong, Saunders and Armstrong Principles of Marketing, PowerPons, Fourth European Edition © Pezrson Education Limited 2005Slide 16.16 Pricing in different types of market — Pure monopoly + Single seller controlling the market Koller, Wong, Saunders and Armsiong Principles of Marketing, PowerPoints, Fourth European Eston © Pearson Education Limited 2008Slide 16.18 Price elasticity of demand — A measure of the sensitivity of demand to changes in price. + Price elasticity of demand = % change in quantit demanded % change in price — Buyers are less price sensitive if product is unique and high in quality or image. — If demand is elastic, producers will lower price and generate more total revenue through greater demand at the lower price. Koller, Wong, Saunders and Amstrong Principles of Marketing, PowerPokts, Fourth European Eilon © Pearson Education Limited 2008Slide 16.19 Price influence on profits — Profit is the balance of income generated minus the costs incurred to sell the product — Many financial management ratios + Return on investment (ROI) + Return on sales + (EVA) Economic Value Added Koter, Wong, Saunders and Armsttong Principles of Marketing, PowerPoints, Fourth European Editon © Pearson Educaton Limited 2008Slide 16.20 Competitors and other external factors impacting price * Competitors’ costs, prices and offers — Competitor price benchmarking gives a good indication of market price acceptance levels. « Economic conditions such as recession. * Resellers and intermediaries. * Governmental influences such as tariffs on imports. * Social concerns Ker, Wong, Saunders and Armstrong Principles of Marketing, PowerPohis, Fourth European Eaton © Pearson Education Limted 2005Slide 16.20) Competitors and other external factors impacting price * Competitors’ costs, prices and offers — Competitor price benchmarking gives a good indication of market price acceptance levels. * Economic conditions such as recession. * Resellers and intermediaries. * Governmental influences such as tariffs on imports. * Social concerns Kotler, Wong, Saunders and Armstrong Princples of Marketing, PowerPoinis, Fourth European Edtion © Pearson Education Linitod 2008Slide Pricing objectives + Income related — how much money can we make? + Volume related — how many units can we sell? - Competition related — what share of the available business do we want? + Societal - what are our responsibilities to our customers and society as a whole? Kotler, Wong, Saunders and Armstrong Principles of Marketing, PewerPoints, Fourth European Edtion © Pearson Education Limited 2008Slide 16.23 Pricing objectives Figure 16.5 Primary considerations in price settings Kotler, Wong, Saunders and Armstrong Principles of Marketing, PowerPoints, Fourth European Edltion © Pearson Educaton Limited 2005Slide 16.24 1. Cost based pricing * Cost-plus pricing — Adding a standard mark-up to the cost of the product. * Mark-up/down — The difference between selling price and cost as a percentage of selling price or cost + Break-even analysis and target profit pricing — Setting price to break even on the costs of making and marketing a product. Kotler, Wong, Seunders and Armstrong Principles of Marketing, PowerPoint, Fourth European Edition © Pearson Education Liited 2005Slide 16.27 2. Value based pricing * Setting price based on the buyers’ perceptions of product values rather than on the cost. + Underlying principle is to offer the right combination of quality and good service at a fair price. * Everyday low pricing is an important aspect of value pricing at the retail level. Kotlor, Wong, Saunders and Armstrong Prncipos of Markoting, PowerPoint, Fourth European Edition ® Parson Education Limitod 2008Slide 16.28 Cost-based vs. value-based pricing Cost-based pricing Ee eee Value-based pricing [eatonac —~| vate |—~| poco | —~ I —- Figure 16.7 Cost-based versus value-based pricing Source: The Strategy and Tactics ofPricing, 3rd ednby Thomas. Nagle and Reed K. Holden (2002),p. 4. Reprintedby permissionof Pearson Education, inc., Upper Saddle River, NJ 07458. Kotler, Wong, Saunders and Armstrong Principles of Marketing, PowerPoints, Fourth European Edion © Pearson Education Limited 2008Slide 16.29 3. Competition based pricing + Going-rate pricing — Setting price based largely on following competitors’ prices rather than on company costs or demand. + Sealed-bid pricing — Potential buyers submit sealed bids, and the item is awarded to the buyer who offers the best price. English auction is where the price is raised until only one bidder remains. Dutch auction is where prices start high and are lowered successively until someone buys. Collective buying is where an increasing number of customers agree to buy as prices are lowered to the final bargain price. Reverse auction is where the customers name the price that they are willing to pay for an item and seek a company willing to sell Kotor, Wong, Saunders and Armstrong Princes of Marketing, PowerPolnts, Fourth European Eaton © Pearson Education Limited 2008Slide 16.30 New product price setting * Setting the price for new products is complex and challenging. * Different strategies will be used if the product is an imitator of an existing product versus an innovative product that is patent protected. Kotor, Wong, Saundors and Armstrong Princip of Marketing, PoworPonts, Fourth European Edtion © Pearson Education Linitod 2008)Slide 16.33 Pricing for new products with innovative features and benefits: + Market skimming pricing + Pricing strategy used for new products that have unique features and benefits over the competition + Ahigh price is set for the new product to skim the maximum price and generate the most profit. + Market penetration pricing + Initial low price to penetrate the market and convert as many buyers onto the new product and grab a large market share. + This is a short-term strategy that is dangerous and needs to be supported by a robust range of products to leverage against. Koter, Weng, Saunders and Armstrong Priciles of arketing, PowerPoirts, Fourth European Editon © Pearson Education Limited 2008Slide 16.36 Product-mix pricing strategies (3) OO Terer ge ics Eye es CCU) PoC) DCE aes rene ntact Pees ter as a oa PoC Racial Pea nu aera Table 16.4 Product-mix pricing strategies Kole, Wong, Saunders and Armstrong Principles of Marketing, PonesPonis, Fourth European Edition © Pearson Education Linited 2005Slide 16.40 | Psychological pricing « Apricing approach that considers the psychology of prices and not simply the economics; the price is used to say something about the product. — Includes reference pricing, which are prices that are set in buyers’ minds and refer to when they look at a given product. Kotler, Wong, Saunders arc Armstrong Principles of Marketing, PowerPoin's, Fourth European Ediion © Pearson Eiducaton Limited 2005Slide 16.41 Promotional pricing * Temporarily pricing products below the list price and sometimes even below cost, to increase short-run sales. + Dangers include creating ‘deal prone’ customers and the risk of precipitating price wars. Koller, Wong, Saunders and Armstrong Principles of Marketing, PowerPoint, Fourth European Editon © Pearson Education Limited 2008Slide 16.44 International pricing * Globalisation and the development of international pricing strategies offer many challenges and complexities to companies. + Prices will be influenced by: — economic conditions — competitive situations — laws — regulations — sophistication of the retailing and wholesaler environments. Koller, Wong, Saunders and Armstrong Principles of Marketing, PowerPoints, Fourth Eurcpean Editon © Pearson Education Limited 2008Slide 16.50 Four typical responses to a competitor’s change in price: Reduce price + Raise perceived quality Improve quality and increase price Launch low-price ‘fighting brand’ . . Kotler, Wing, Saunders and Azmstong Priniples of Marketing, PowerPolns, Fourth European Edn © Pearson Education Linitad 2008