product or service • Price is the sum of values that consumers exchange for the benefits of using the products or service • In the recent decades price has become more important in buyer choice behaviour • Fixed pricing was the trend of the past century • dynamic pricing is charging prices depending on individual customers and situations • The internet has supplemented dynamic pricing instead of the fixed sticker pricing • Dynamic pricing gives a lot of advantages to marketers • 1,Internet sellers like Amazon.com can mine their databases to gauge a specific shoppers desires • 2,Many B2B marketers monitor inventories cost and demand at any given moment • 3,Buyers also benefit from web and dynamic pricing • 4,Buyers also can negotiate prices at online auction sites and exchanges Pricing objectives • Internal factors • 1.Marketing objectives- before setting price, the company must decide on its strategy for the product • If the company has selected its target market and positioned carefully,then its marketing mix strategy including price will be fairly straight forward • For eg;the toyotas lexus competes with the luxury cars in the higher income segment • Caterpillar charges 20 to 30% more than the competitors for its construction equipment based on superior product and service quality • A company may seek general or specific objectives • General objectives include survival,current profit maximization,market share leadership and quality leadership • Not for profit and public organisations may adopt a number of other pricing objectives like partial cost recovery • This is knowing that it must rely on private gifts and public grants to cover remaining costs • 2.Marketing mix strategy- Price is only one of the marketing mix tools that a company uses to achieve its marketing objectives • Price decisions must be coordinated with product design,distribution and promotion decisions • These form a consistent and effective marketing program • Decisions made for other marketing mix variables may affect pricing decisions • For eg:a decision to position the product on high- performance &quality , the seller must charge a higher price to cover higher costs • The producers need to allocate large reseller margins for ensuring their support and promote products • Companies often position their products on price and then tailor other marketing mix decisions to the prices they want to charge • Price is a crucial product-positioning factor that defines the products market,competition and design • Target costing reverses the usual process of first designing a product and ultimately determining its cost • Instead it starts with an ideal selling price based on customer considerations • It then targets costs that will ensure that the price is met • P&G used target costing extensively • 3,Costs- Any company wants to charge a price that both covers all its costs and gives a rate of return • The company has to consider fixed,variable and total costs while making price decisions • 4.Organisational considerations- pricing decisions are differently handled by different companies • In small companies the top management takes the decision • In larger companies the line managers decide pricing and in business markets sales people negotiate with customers • External factors- • 1.Market and demand- the upper limit of prices depends on market and demand • Consumers and business buyers compare prices against benefits and utility • The price-demand relationship will vary according to the nature of markets • Consumers perception of price also influence pricing decisions • 2.Competition- the activities of competitors,their costs and prices,competitors reactions to the companys pricing will influence pricing decisions • The companys pricing strategy will vary according to the nature of competition and the nature of its strategy to face competition • Some companies go for price leadership,others go for low price,low margin strategy to wipe out competitors • 3.Other environmental factors- Economic conditions affect pricing due to its effect on cost of production • The company should consider the pricing impact on external parties who expect more margins and better terms of trade • Govt.policies also affect pricing decisions and also the co.should consider the societal and social issues while considering prices Pricing approaches • The price the company charges will be somewhere between one that is too low to produce a profit or too high to produce a demand • Product costs set a floor to the price,consumer peceptions of the products value set the ceiling • Between these two extremes the company must consider competitors prices and other external and internal factors to find the best price • 1.Cost-based pricing- • a,cost plus pricing is the most simplest pricing method,which adds a standard mark up to the cost of the product • Construction companies for eg submit job bids by estimating the total project cost and by adding a standard mark up profit • Lawyers,accountants and other professionals typically price by adding a standard mark up to their costs • b,Break even analysis and target profit pricing- • Another cost oriented pricing approach is break even pricing or target profit pricing • The firm tries to determine the price at which it will break even or make the target profit it is seeking • Such pricing is used by general motors which prices its automobiles to achieve a 15-20 % profit on its investment • 2.Value based pricing- an increasing number of companies are basing their products on the products perceived value • This pricing uses buyers perception of value,not the sellers cost • While cost based pricing is product driven whereas here target price is based on customer perception of product value • a,value pricing- is offering just the right combination of quality and good service at a fair price • This has led to the introduction of less expensive versions of established brand name products • Eg:holiday inns strategy of low budget hotels,Revlons range of affordable cosmetics • b,value added pricing-companies rather than cutting prices to match competitors attach value added services to differentiate their offers • This extra value will support higher margins • Its not about price but keeping customers loyal • 3.Competition based pricing- One form of competition pricing is going rate pricing • Here a firm bases its prices on competitors prices with less attention to own costs or demand New product pricing strategies • Pricing strategies change as the product passes through its life cycle • The introductory stage is specially challenging as they fix prices for the first time • The choice is between two broad strategies; market skimming pricing and market penetration pricing • 1.Market skimming pricing- Many companies that invent new products set high initial prices to skim revenues layer by layer from the market • Sony frequently uses this strategy,it was notable at the introduction of high definition television • Firstly the products quality and image must support its higher price • Competitors should not be able to enter the market and undercut price • 2.Market penetration pricing- The companies set a low price in order to penetrate the market quickly and deeply • This is to attract a large number of customers quickly and win a large market share • The high sales volume results in falling costs allowing the company to cut prices further • Walmart &Dell for its PC products Product mix pricing strategies • 1.Product line pricing-the management should decide on the price steps to be set between the products in a line • In many industries sellers use very established price points for their products in their line • The price steps should take in to account cost differences between the products in the line • It also considers customer evaluations of their features and competitors prices • 2.Optional product pricing- is to offer to sell optional or accessory products along with their main product • For eg; a car buyer may choose to order power windows and a CD changer • Most advertised prices today represent a well equipped car • The recent economic downturn forced auto major to move back features back to option • 3.Captive-product pricing- Companies that make products that must be used along with the main product are using this pricing • Examples of captive products are razor blades,video games and printer cartridges • Producers of main products(razors,video game consoles and printers) often price them low and set high prices for the supplies • 4.By-product pricing- if the bye products are having no value and getting rid of them is costly,this will affect the pricing of the main product • Using by-product pricing,the manufacturer will seek a market for these by products • it should accept any price that covers more than the cost of storing and delivering them • 5.Product bundle pricing- Sellers often combine several of their products and offer the bundle at a reduced price • For Eg a fast food restaurant bundle a burger,fries and a soft drink at a combo price • Price bundling can promote the sales of products consumers might not otherwise buy Promotional pricing • In promotional pricing companies will temporarily price the products below list price or even below cost to create an urgency & excitement • Supermarkets &departmental stores will price a few products at loss to attract customers to the shop in the hope that they buy others on normal prices • Eg; super markets sell diapers at a less cost in order to attract a family crowd and their chunk of busines • Manufacturers sometimes offer cash rebates to consumers if they buy in a stipulated period of time • Rebates are popular with auto makers and producers of durable goods and appliances • Some other promotional activities include low interest financing,longer warranties,free maintenance to offer price relief • Promotional pricing has adverse effects like, used too frequently and copied by competitors,creates “deal- prone customers” • Constantly reduced prices can erode a brands value in the eyes of customers • Price promotions are considered as quick fix instead of getting through the difficult process of strategising and brand building • The frequent use of promotional pricing can also lead to price wars • Such price wars usually play in to the hands of one or few competitors efficient in operations • The hardware industry untill recently was not in to price wars with IBM,HP&gateway showed good profits utilizing new technologies • When market started declining, the low cost brand leader,Dell started a price war in mid 2000s. • Promotional pricing can be effective means of generating sales • The effectiveness depends on the nature of the company and circumstances • It can be damaging if it is taken as a steady diet Psychological pricing • Price is an indication of the product and many consumers use price to judge the quality • A$100 bottle of perfume may contain only $3 worth of scent but people are willing to pay $100 because this price indicates something special • In psychological pricing sellers consider the psychology of prices and not simply the economics • For eg: consumers usually perceive a higher priced product as having better quality • When they can judge the quality of a product by examining it or calling up past experience with it they use price less to judge quality • When they cannot judge quality because of lack of imformation or skill price becomes a important symbol of quality • Eg:Smirnoff and wolfschmidt • Reference prices are the prices that the buyers carry in their minds and refer to when looking at a given product • The reference price might be formed by noting current prices,remembering past prices or assessing the buying situation • Sellers can influence or use these consumers reference prices when setting price • For most purchases customers don’t have the skill or information they need to figure out whether they are paying a good price • They don’t have the time,ability and inclination to research different brands and stores • Instead they rely on certain cues that signal whether the price is high or low • For eg the fact that its sold in a prestigious departmental store might signal its worth a higher price • A retailer might show a high manufacturers suggested price next to the marked price indicating the product was orginally priced higher • The retailer also might sell a selection of familiar products for which the consumers have accurate price knowledge at very low prices • This will suggest the customer that the stores prices for the familiar products are low as well Discriminatory pricing • Companies often adjust their basic price to accommodate differences in customers , products,locations and so on • Price discrimination occurs when a company sells a product or service at two or more prices not related to the proportional costs • In the first degree price dicrimination,the seller charges a separate price to each customer depending on the intensity of demand • In the second degree price discrimination,the seller charges less to the buyers who buy a larger volume • In the third-degree price discrimination,the seller charges different amounts to different class of buyers as in the following cases • 1.customer-segment pricing-different customer groups are charged different prices for the same product or service • Eg a museum charging less from students and senior citizens • 2.Product form pricing- different versions of the product are priced differently but not propotionately to their respective costs • Eg: a mineral water company sells a bottle around 50 ounce at $2 • The same water,1.7 ounces is packed in a moisturizer for $6 • It manages to charge $3 in an ounce in one form and about $.04 an ounce in another • 3.Image pricing-some companies price the same products at two different levels based on image differences • A perfume co. can put the perfume in one bottle,give it an image and name and price it at $10 an ounce • It can put the same perfume in another bottle with a different name and image and price it at $30 an ounce • 4.Channel pricing-coke carries a different price depending on whether its purchased in a fine restaurant,fast food restaurant or a vending machine • 5.Location pricing-the same product is priced differently at different locations though the cost of offfering at each location is the same • A theatre varies its seat prices according to the audience preferences for different locations • 6.time pricing- prices are varied by season,day or hour • Public utilities could vary energy rates to commercial users by time of day and weekend vs week day • Restaurants charge less to early bird customers, charge less on weekends • Hotels and airlines use yield pricing by which they offer lower prices on unsold inventory before it expires Advertising • Advertising is any paid form of nonpersonal presentation and promotion of ideas,goods or services by an identified sponsor • Advertisers not only include business firms, but also musuems,charitable organisations and government agencies that direct messages to general public • In small companies it is handled by somebody in the sales and marketing dept.,a large organisation will have its own dept.handling it Setting the advertising objectives • The advertising decisions must flow from prior decisions on target market,market positioning and marketing mix • An advertising goal is a specific communication task and achievement level to be accomplished with a specific audience in a specific period of time • Advertising objectives can be classified according to whether the aim is to inform,persuade,remind or reinforce • 1.Informative advertising aims to create awareness and knowledge of new products or new features of existing products • 2.Persuasive advertising aims to create liking, preference,conviction and purchase of a product or service • Eg:Chivas regal attempts to persuade consumers that it gives more taste and status than other scotch • 3.Reminder advertising aims to stimulate repeat purchase of products and services • Expensive coco cola ads in magazines are intended to remind people to purchase it • 4.Reinforcement advertising aims to convince current purchasers that they made the right choice • Automobile ads often depict satisfied customers enjoying special features in their new car Deciding on the advertising budget • Advertising is a current expense building up an intangible asset- brand equity • 5 factors are to be considered when setting the advertisement budget 1.Stage in the product life cycle- new products have more ad budgets and established brands have lower budgets as a ratio to sales 2.Market share and consumer base- high market share brands less advertising to maintain market share, increase market share more expense 3.Competition- higher the competition more the advertising budget,and a brand needs to heavily advertised to be heard 4.Advertising frequency- the no of repetitions needed to put across the brands message to the consumers decides the budget 5.Product substitutability- brands in commodity class require heavy advertising to establish a differential image Choosing the advertising message • Advertising campaigns vary in creativity, and just the facts are not enough • A great execution must be updated before it gets outdated • Advertisers go through 4 steps to develop a creative strategy 1.Message generation- whatever method is used the creative people should talk to consumers,dealers and experts 2.Message evaluation- a good ad focusses on one core selling proposition and the messages are rated on desirability,exclusiveness and credibility 3.Message execution- the messages impact depends not only on what is said,but how it is said whether rational or emotional positioning 4.Social responsibility review- advertisers and their agencies must be sure their creative advertising does not overstep social and legal norms Deciding on the media • Once the budget is decided and the message is chosen the next is choosing the media • The steps are as follows 1.Deciding on the reach,frequency and impact – Media selection is the problem of finding the most cost –effective media to deliverer exposures to the target audience a.Reach – is the number of different persons or households exposed to a particular media schedule b.frequency- the no. of times within the specified time period an average person or house hold is exposed to the message c.Impact- the qualitative value of an exposure through a given medium For eg: a food product ad in a housing complex has more impact than in a police gazette 2.Choosing among major media types- the media planner has to know the capacity of the major media types to deliver reach,frequency and impact a.Target audience media habits- for eg:radio, internet and television are most effective for teenagers b. Product- Womens dresses are best shown in the most subscribed magazines and polaroid cameras can be effectively advertised on TV c. Message- a message announcing a major sale tommorow will require radio or newspapers A message containing great deal of technical data may require specialized magazines or mailings d.cost- televison and other visual ads are expensive but newspaper is comparitively inexpensive what counts is the exposure per cost incurred than the total cost 3.Selecting specific media vehicles- now the media planner searches for the most cost – effective media vehicles • In the magazine field there are thousands of special interest magazines • Which means its easy to reach special interest groups but hard to reach general audience • In the television and radio there are thousands of commercial program vehicles to consider 4.Deciding on media timing- the advertiser faces a macro scheduling problem and a microscheduling problem a.Macrosheduling problem- the advertiser has to decide how to schedule the advertising in relational to seasonal and business cycle trends • Eg: a firm has 70% of sales occuring between june and september,the firm has three options • The firm can vary its ad expenses to follow the seasonal pattern,oppose the seasonal pattern or go constant throught the year • 2.Micro sheduling problem- calls for allocating advertising expenditures within a short period to obtain maximum impact • The most effective pattern depends upon the communication objectives • This is in relation to the nature of the product,target customers,distribution channels etc • The timing pattern should consider buyer turnover,purchase frequency and forgetting rate 5.Deciding on geographical media allocation- the company has to decide how to allocate its ad budget over space as well as over time • The company makes national buys when it places ads on national TV networks or nationally circulated magazines • It makes spot buys when it buys TV time in just a few TV markets or regional editions of magazines 6.Communication effect research- seeks to determine whether an ad is communicating effectively • This is called as copy testing and can be done before an ad is put in to media either broadcasted or printed • Advertisers are also interested in posttesting the overall communication impact of a completed advertising campaign 7.Sales effect research- Communication- effect advertising research helps advertisers assess ad’s communication effects,not about its sales impact • Advertisings sales effect is harder to measure than its communication effect • Sales are influenced by many factors besides advertising such as the products features, price, availability and competition