Pricing Policy Notes

Pricing:
Understanding and
capturing customer
value
MARKETING PRINCIPLES 11
HPRM103
Defining Price
Narrowly defined price is the amount of money charged for a
product or a service.
Broadly defined, its the sum of all the values that customers
give up to gain the benefits of having or using a product or
service.
◦ It measures sacrifice and also serves as an information cue.
Sacrifice - that which is given up to get a good or service.

this is usually in form of money, but can also be time lost while waiting
to acquire the good or service.
For a college student, paying tuition might mean skipping a vacation,
or buying less costly clothing brands.
Defining Price cont’d..
Information effect – inference of product quality.
i.e, higher price equals higher quality.
It also convey the prominence and status of the purchaser to other people.
Price is the only marketing mix element that produces revenue – all
the others are costs.
Therefore, it stands out in determination of a firm’s market share and

profitability.
It plays a key role in creating customer value and building customer
relationships, as a key part of the value proposition.
Major Pricing Strategies
When setting prices:
Customer perceptions of the product’s value serve as the
ceiling (upper limit) for prices.
Product costs serve as the floor (lower limit) for prices.
Prices set by companies fall somewhere between the two
extremes.
Pricing products higher than customers’ perceived product
value will result in loss of sales (loss of customers).
Pricing products lower than product costs will result in losses
for the company.
Major Pricing Strategies cont’d..
Three major pricing strategies or approaches: customer value-based
pricing, cost-based pricing, and competition-based pricing.
Value-based and cost-based pricing: A comparison.
Cost-based pricing is often product driven:
The company designs what it considers to be a good product, ascertains
the per unit costs of production, selling and distribution, and sets a price
that covers costs plus a target profit.
Marketing’s role will be convincing buyers to buy the product at the set
price.
If the price turns out to be too high, the company must settle for lower
mark-ups or lower sales, both resulting in disappointing profits.
Value-based pricing reverses this process.
Customer value-based pricing - consider buyers’ perceptions of value, not
the seller’s cost.
Price is set to match consumers’ perceived value.
Marketers assess customer needs and value perceptions, target price is
set based on customer perceptions of value and the targeted value and
price drive decisions about what costs can be incurred and the resulting
product design.
Ultimately, the behavior of customers will tell marketers whether a
product’s price is right or not.
A product purchase is an of exchange value - the customer gives up
something of value (the price) to get something of value (the benefits of
having or using the product).
Value-based pricing challenges
Accurate measurement of the value customers will attach to products is
difficult.
Calculating the cost of ingredients in a meal at a restaurant is relatively
easy. However, assigning a value to other subjective benefits such as
taste, environment, relaxation, conversation, and status is intricate.
These values vary for different consumers and different situations.
Consumers use these perceived values to evaluate a product’s price, so
the company must find a way to measure them.
They can ask consumers how much they would pay for a basic product
(stripped-down model) and for each benefit added (augmentation) to the
offer.
Alternatively, experiments can be used to test the perceived value of
different product offers.
Two types of value-based pricing:
Good-value and value-added pricing
Good-value pricing - offering just the right combination of
quality and good service at a fair price.
This has, by and large, involved introducing less expensive
versions of established, brand-name products.
E.g., fast-food restaurants such as Chicken Slice and Nandos
offer value meals priced lower than their regular meals.
Value is a relative term – for some, its being able to get brand-
name or high-quality products at lower prices than “normal”
Good-value pricing also involves redesigning existing brands to offer
more quality for a given price or the same quality for less.
It can also be offering less value at rock-bottom or very low prices.
It can manifest as high-low pricing, charging higher prices on an everyday

basis but running frequent promotions to lower prices temporarily on
selected items is another type of good-value pricing.
Another type at the retail level is everyday low pricing (EDLP), which
involves charging a constant, everyday low price with few or no
temporary price discounts.
Value-added pricing - attaching value-added features and
services to differentiate a company’s offers and charging
higher prices.
Rather than cutting prices to match competitors, they attach
value-added features and services to differentiate their offers
and justify higher prices.
Similarly, some movie theatre chains are adding amenities
and charging more rather than cutting services to maintain
lower admission prices.
Cost-based pricing
Prices are set based on the costs of producing, distributing, and selling
the product plus a fair rate of return for effort and risk.
Costs are important in a company’s pricing strategy.
Lower costs can result in lower prices and smaller margins but greater
sales and profits.
Types of Costs
A company’s costs take two forms, fixed and variable.
Fixed costs (also known as overhead) - costs that do not vary with
production or sales level.
E.g., a company must pay each month’s bills for rent, interest, and
executive salaries, regardless of the company’s output.
Variable costs vary directly with the level of production (units produced)
E.g., each tablet produced by Apple involves the cost of computer
chips, wires, plastic, packaging, and other inputs.
Total costs - Fixed + variable costs for any given level of production.
Marketers must set prices that will at least cover the total production
costs at a given level of production.
Cost-Plus Pricing or mark-up pricing
Involves adding a standard mark-up to the cost of the product.
E.g., an electronics retailer might pay a manufacturer $20 for an HDMI
cable and mark it up to sell at $30, a 50 percent mark-up on cost ($30-
$20 = $10; then $10/$20 = 0.5; 0.5*100= 50%).
The retailer’s gross margin is $10 ($30-$20).
If the store’s operating costs amount to $8 per HDMI cable sold, the
retailer’s profit margin will be $2 (gross profit margin – operating
costs; $10-$8 = $2).
The manufacturer that made the HDMI cable probably used cost-plus
pricing, too.
If the manufacturer’s standard cost of producing the HDMI cable was
$16, it might have added a 25 percent mark-up, setting the price to
retailers at $20 ($16*1.25 = $20).
The cost-plus pricing strategy ignores consumer demand and competitor
prices – it is not likely to lead to the best price.
Arguments for cost-plus pricing strategy:
First, sellers are more certain about costs than about demand.
Tying pricing to cost simplify pricing.
Second, when all firms in the industry use this pricing method, prices
tend to be similar, minimizing price competition.
Break-even pricing, or target return pricing.
Here, a firm tries to determine the price at which it will break even or
make the target return it is seeking.
Target return pricing uses the concept of a break-even chart, which
shows the total cost and total revenue expected at different sales
volumes.
For instance, if fixed costs are $6 million and variable costs are $5 per
unit.
The slope of the total revenue curve reflects the price.
Assuming the price is $15 (the company’s revenue is $12 million on 800
000 units).
At the $15 price, the manufacturer must sell at least 600 000 units to
break even (breakeven volume = fixed costs ÷ (price – variable costs) = $6
000 000 ÷ ($15 – $5) = 600 000).
That is, at this level, total revenues will equal total costs of $9 million,
producing no profit.
If the manufacturer wants a target return of $2 million, it must sell at
least 800 000 units to obtain the $12 million of total revenue needed to
cover the costs of $10 million plus the $2 million of target profits.
In contrast, if the company charges a higher price, say $20, it will not
need to sell as many units to break even or to achieve its target profit.
In fact, the higher the price, the lower the manufacturer’s break-even
point will be.
This analysis, however, doesn’t to consider customer value and the
relationship between price and demand.
As the price increases, demand decreases, and the market may not buy
even the lower volume needed to break even at the higher price.
E.g., suppose the HDMI cable manufacturer calculates that, given its
current fixed and variable costs, it must charge a price of $30 for the
product in order to earn its desired target profit.
Marketing research, however, shows that few consumers will pay more
than $25.
The company must trim its costs to lower the break-even point so that it
can charge the lower price consumers expect.
Although break-even analysis and target return pricing can help the
company determine minimum prices needed to cover expected costs
and profits, they do not take the price–demand relationship into account
When using this method, the company must also consider the impact of
price on sales volume needed to realize target profits and the likelihood
that the needed volume will be achieved at each possible price.
Competition-Based Pricing
Prices are set based on competitors’ strategies, costs, prices, and market
offerings.
Consumer judgments of a product’s value will be based on the prices
that competitors charge for similar products.
Questions the company should ask when assessing competitors’ pricing
strategies:
How does the company’s market offering compare with competitors’
offerings in terms of customer value?
If consumers perceive that the company’s product or service provides
greater value, the company can charge a higher price.
If consumers perceive less value relative to competing products, the
company must either charge a lower price or change customer
perceptions to justify a higher price.
How strong are current competitors and what are their current pricing
strategies?
If the company faces a host of smaller competitors charging high prices
relative to the value they deliver, it might charge lower prices to drive
weaker competitors out of the market.
If the market is dominated by larger, low-price competitors, the company
may decide to target unserved market niches with value-added products
at higher prices.
Other Internal and External
Considerations Affecting Pricing Decisions
Beyond customer value perceptions, costs, and competitor strategies,
the company must consider several additional internal and external
factors.
Internal factors affecting pricing include the company’s overall marketing
strategy, objectives, and marketing mix, as well as other organizational
considerations.
External factors include the nature of the market and the demand and
other environmental factors.
Overall Marketing Strategy, Objectives, and Mix
Price is only one element of the company’s broader marketing strategy.
A company’s target markets, positioning, its marketing mix strategy,
including price, will make shape pricing decisions.
Brand positioning is key in making pricing decisions.
Pricing may be important to accomplish company objectives at many
levels: to attract new customers or to profitably retain existing ones; to
prevent competition from entering the market, or set prices at
competitors’ levels to stabilize the market; to keep the loyalty and
support of resellers or to avoid government intervention.
Prices can be reduced temporarily to create excitement for a brand.
Or one product may be priced to help the sales of other products in the
company’s line.
Price is a crucial product-positioning factor that defines the product’s
market, competition, and design.
Target costing technique can be used to support product-positioning
strategies.
It reverses the usual process of first designing a new product,
determining its cost, and then asking, “Can we sell it for that?”
It starts with an ideal selling price based on customer-value
considerations, and then targets costs that will ensure that the price is
met.
E.g., when Honda set out to design the Fit, it began with a US$13 950
starting price point and 33-miles-per-gallon operating efficiency firmly in
mind.
It then designed a stylish, peppy little car with costs that allowed it to
give target customers those values.
Organizational Considerations
Management must decide who within the organization should set prices.
Companies handle pricing in a variety of ways.
In small companies, prices are often set by top management rather than
by the marketing or sales departments.
In large companies, pricing is typically handled by divisional or product
line managers.
In industrial markets, salespeople may be allowed to negotiate with
customers within certain price ranges.
Even so, top management sets the pricing objectives and policies, and it
often approves the prices proposed by lower-level management or
salespeople.
In industries in which pricing is a key factor (airlines, aerospace, steel,
railroads, oil companies), companies often have pricing departments to
set the best prices or help others in setting them and these report to the
marketing department or top management.
Others who have an influence on pricing include sales managers,
production managers, finance managers, and accountants.
Accountants will favour the cost-based strategies and marketers will
probably adopt value-based strategies.
The Market and Demand
Before setting prices, marketers must understand the relationship
between price and market demand for the company’s product.
Pricing in Different Types of Markets
Control on pricing by sellers varies with different types of markets.
Under pure competition, the market consists of many buyers and sellers
trading in a uniform commodity such as tomatoes, onions, etc.
No single buyer or seller has much effect on the going market price.
Marketing research, product development, pricing, advertising, and sales
promotion play little or no role.
Under monopolistic competition, the market consists of many buyers
and sellers who trade over a range of prices rather than a single market
price.
A range of prices occurs because sellers can differentiate their offers to
buyers.
Other Internal and External Considerations
Affecting Pricing Decisions
Sellers try to develop differentiated offers for different customer
segments and, in addition to price, freely use branding, advertising, and
personal selling to set their offers apart.
Boutiques and clothing companies in Zimbabwe
Because there are many competitors in such markets, each firm is less
affected by competitors’ pricing strategies than in oligopolistic markets
Under oligopolistic competition, the market consists of a few sellers who
are highly sensitive to each other’s pricing and marketing strategies.
In a pure monopoly, the market consists of one seller.
The seller may be a government monopoly (ZESA), a private regulated
monopoly, or a private non-regulated monopoly (DuPont when it
introduced nylon).
Pricing is handled differently in each case.
Analyzing the Price–Demand Relationship
Each price the company might charge will lead to a different level of
demand.
In the normal case, demand and price are inversely related; that is, the
higher the price, the lower the demand.
In short, consumers with limited budgets will probably buy less of
something if its price is too high.
The type of market makes a difference
Price Elasticity of Demand
Marketers also need to know price elasticity—how responsive demand
will be to a change in price.
If demand hardly changes with a small change in price, we say demand is
inelastic.
If demand changes greatly, we say the demand is elastic
If demand is elastic rather than inelastic, sellers will consider lowering
their prices.
A lower price will produce more total revenue.
This practice makes sense as long as the extra costs of producing and
selling more do not exceed the extra revenue.
Most firms would also want to avoid pricing that turns their products
into commodities.
Price comparison sites on the Internet has increased consumer price
sensitivity, turning products ranging from cellphones and televisions to
new automobiles into commodities in some consumers’ eyes.
Other Internal and External Considerations
Affecting Pricing Decisions
The Economy
Economic factors such as a boom or a recession, inflation, and interest
rates affect pricing decisions.
In the face of economic downturns, rather than cut prices, marketers can
instead shift their focus to more affordable items in their product mixes.
Another approach is to hold steady on price but redefine the “value” in
value propositions.
Regardless of the state the economy, people continue to make
purchases, and their purchase decisions are not based on prices alone.
They balance the price they pay against the value they receive.
Other External Factors
What impact will prices have on other parties in the marketing
environment.
Resellers: the company should set prices that give resellers a fair profit,
encourage their support, and help them sell the product effectively.
The government.
Social concerns: in setting prices, a company’s short-term sales, market
share, and profit goals may need to be tempered by broader societal
considerations.
New-Product Pricing strategies
When setting prices for the first time or for new products, managers
have two broad pricing strategies to choose from: market-skimming
pricing and market-penetration pricing.
Market-Skimming Pricing
Involves setting high initial prices for new inventions and subsequently
lowering the prices layer by layer to “skim” revenues from the market.
This strategy is commonly used by electronics manufacturers such as
Samsung, Apple, etc
E.g., every time Apple introduces a new iPhone or iPad model, the initial
price is very high, because for the type of customer who anxiously awaits
the newest gadget, price is no object.
Six month after the product launch prices come down slightly; after a
year they are lowered even more; and after two years, and when
rumours of the next version appear, the prices drop again.
New-Product Pricing cont’d..
Conditions suitable for using market skimming:
The product’s quality and image must support its higher price and
enough buyers must want the product at that price.
The costs of producing a smaller volume cannot be so high that they
cancel the advantage of charging more.
Competitors should not be able to enter the market easily and undercut
the high price.
Market-Penetration Pricing
Involves setting a low initial price in order to penetrate the market
quickly and deeply—to attract a large number of buyers quickly and win
a large market share.
The high sales volume results in falling costs, allowing the company to
reduce prices even further.
New-Product Pricing cont’d..
Conditions under which a market penetration strategy is
most suitable:
The market must be highly price sensitive so that a low price produces
more market growth.
Production and distribution costs must fall as sales volume increases –
for long-term sustainability.
The low price positioning must be sustainable, to keep out competition.
Product Mix Pricing
Marketers must look for a set of prices that ensure maximization of
profits on the total product mix.
Product mix pricing is difficult because the various products have related
demand and costs, and face different degrees of competition.
Five product mix pricing situations:
◦ product line pricing, optional-product pricing, captive-product
pricing, by-product pricing, and product bundle pricing
Product line pricing
Setting price steps between various (different) products in a product line
based on cost differences between the products, customer evaluations
of different features, and competitors’ prices.
For example, Varun Beverages (Pepsi Zimbabwe) has the soft drinks
product line (various brands – pepsi, mirinda, 7up, mountain dew, etc –
cans and pets), energy drink (sting), pure water (aqua clear), etc.
Product Mix Pricing cont’d..
Marketers must decide on the price steps to set between the various
products in a line (how much should a pepsi can be?).
Optional-Product Pricing
Pricing of optional or accessory products along with a main product.
Is a pricing strategy in which the main product is sold at a low margin or
near cost price, and marketers focus on promoting the extras and
upgrades—the optional products.
E.g., new cars offer sound systems, Bluetooth, GPS systems, and many
other options; new computers and phones can come with hardware and
software extras, and service plans.
Captive-Product Pricing
Setting a price for products that must be used along with a main product,
such as blades for a razor (shaving machine), games for a video-game
console and ink cartridges for printers.
Producers of the main products (razors, video-game consoles, and
printers) often price them low and set high mark-ups on the supplies.
In services, this captive-product pricing is called two-part pricing.
The price of the service is broken into a fixed fee plus a variable usage
rate.
E.g., at amusement parks you pay a daily-ticket or season-pass charge
just to get in, but once inside there are many other fees that must be
paid, depending on your usage.
By-Product Pricing
Setting a price for by-products to make the main product’s price more
competitive.
Producing products and services often generates by-products.
If the by-products have no value and if getting rid of them is costly, this
will affect the pricing of the main product.
Marketers seek a market for these by-products to help offset the costs of
disposing of them and to help make the price of the main product more
competitive.
The by-products themselves can even turn out to be profitable— turning
trash into cash – soya mince in Zimbabwe.
Product bundle pricing
Combining several products and offering the bundle at a reduced price
For example, fast-food restaurants bundle a burger, fries, and a soft drink
at a “combo” price.
Price bundling can promote the sale of products that consumers might
not otherwise buy - they are lured by low bundle price.
Price Adjustment Strategies
Companies usually adjust their basic prices to account for various
customer differences and changing situations.
Seven price adjustment strategies :
◦ discount and allowance pricing, segmented pricing, psychological
pricing, promotional pricing, geographical pricing, dynamic pricing,
and international pricing.
Discount and Allowance Pricing
Adjustments of the basic price to reward customers for certain
responses, such as early payment of bills, high volume purchases, and
off-season buying.
Discounts and allowances—can take many forms.
◦ discount - a straight reduction in price on purchases during a stated
period of time or on larger quantities
cont’d..
◦ Cash discount - a price reduction to buyers who pay their bills
promptly.
E.g., “2/10, net 30,” which means that although payment is due within 30
days, the buyer can deduct 2 percent if the bill is paid within 10 days.
Quantity discount - price reduction to buyers who buy large volumes.
◦ Seasonal discount - price reduction to buyers who buy merchandise or
services out of season.
◦ Allowance - promotional money paid by manufacturers to retailers in
return for an agreement to feature the manufacturer’s products in
some way.
They are another type of reduction from the list price.
E.g., trade-in allowances - price reductions given for turning in an old
item when buying a new one.
Trade-in allowances are most common in the automobile industry but
are also given for other durable goods.
cont’d..
Promotional allowances - payments or price reductions to reward dealers for
participating in advertising and sales support programs.
Segmented Pricing
Adjustments to basic prices to allow for differences in customers, products, and
locations.
The company sells a product or service at two or more prices, even though the
difference in prices is not based on differences in costs.
Forms of segmented pricing:
Customer-segment pricing - different customers pay different prices for the
same product or service.
Museums and public transport, for example, may charge a lower admission and
transport fare for students and senior citizens.
Product-form pricing - different versions of the product are priced differently
but not according to differences in their costs.
cont’d..
For example, business-class customers in an airplane pay more than
economy-class
Although business-class customers receive roomier, more comfortable
seats and higher quality food and service, the differences in costs to the
airlines are much less than the additional prices to passengers.
However, to passengers who can afford it, the additional comfort and
services are worth the extra charge.
Location-based pricing - a company charges different prices for different
locations, even though the cost of offering each location is the same.
For instance, sports arenas and theatres vary their seat prices because of
audience preferences for certain locations.
Time-based pricing - a firm varies its price by the season, the month, the
day, and even the hour.
Price Adjustment Strategies cont’d..
Resorts give weekend and seasonal discounts.
For segmented pricing to be an effective strategy, certain conditions
must exist:
The market must be segmentable, and the segments must show different
degrees of demand.
The costs of segmenting and serving the market cannot exceed the extra
revenue obtained from the price difference.
It must also be legal.
Segmented prices should reflect real differences in customers’ perceived
value - consumers in higher price tiers must feel that they’re getting their
extra money’s worth for the higher prices paid.
In the same vein, companies must be careful not to treat customers in
lower price tiers as second-class citizens.
Otherwise, in the long run, the practice will lead to customer resentment
and ill will.
Psychological Pricing
Price says something about the product.
Many consumers, for instance, use price to judge quality.
A $100 bottle of perfume may contain only $3 worth of materials, but
consumers are willing to pay the $100 because this price indicates
something special.
In using psychological pricing, sellers consider the psychology of prices
and not simply the economics.
For example, consumers usually perceive higher-priced products as
having higher quality.
When they can judge the quality of a product by examining it or calling
on past experience with it, they use price less to judge quality.
But when they cannot judge quality because they lack the information or
skill, price becomes an important quality signal
cont’d..
E.g., who’s the better lawyer, one who charges $50 per hour or one who
charges $500 per hour?
Most of us would simply assume that the higher-priced lawyer is better
Reference prices as part of psychological pricing—prices that buyers
carry in their minds and refer to when looking at a given product.
These 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.
consumers don’t have all the skill or information they need to figure out
whether they are paying a good price.
They don’t have the time, ability, or inclination to research different
brands or stores, compare prices, and get the best deals.
Instead, they may rely on certain cues that signal whether a price is high
or low.
Interestingly, such pricing cues are often provided by sellers, in the form
of sales signs, price matching guarantees, loss-leader pricing, etc.
Even small differences in price can signal product differences.
Consider a flat screen TV priced at $500 compared with one priced at
$499.99.
The actual price difference is only one cent, but the psychological
difference can be much greater. For example, some consumers will see
the $499.99 as a price in the $400 range rather than in the $500 range.
The $499.99 will more likely be seen as a bargain price, whereas the
$500 price suggests more quality.
Some psychologists argue that each digit has symbolic and visual
qualities that should be considered in pricing.
Thus, eight is round and even and creates a soothing effect, whereas
cont’d..
Promotional Pricing
Companies will temporarily price their products below list price and
sometimes even below cost to create buying excitement and urgency.
It takes several forms.
Discounts from normal prices to increase sales and reduce inventories.
Special-event pricing in certain seasons to draw more customers. E.g.
Festive seasons, Black Fridays, etc.
Cash rebates by manufacturers to consumers who buy the product from
dealers within a specified time - the manufacturer sends the rebate
directly to the customer.
These are popularly used by automakers and producers of cellphones
and small appliances, but they are also used with consumer packaged
goods.
cont’d..
Low-interest financing by manufacturers, longer warranties, or free
maintenance to reduce the consumer’s “price.”
Promotional pricing negative effects.
Used too frequently and copied by competitors, price promotions can
create “deal-prone” customers who wait until brands go on sale before
buying them.
Constantly reduced prices can erode a brand’s value in the eyes of
customers.
cont’d..
Geographical Pricing
Marketers must also make decisions about how to price their products
for customers located in different parts of the country or the world.
Should the company risk losing the business of more-distant customers
by charging them higher prices to cover the higher shipping costs?
Or should the company charge all customers the same prices regardless
of location?
Geographical pricing options:
FOB-origin pricing - under this practice goods are placed free on board
(hence, FOB) a carrier.
Title and responsibility of the goods pass to the customer, who pays the
freight from the factory to the destination.
cont’d..
Since each customer picks up its own cost, supporters of FOB pricing feel
that this is the fairest way to assess freight charges.
The disadvantage, however, is that the firm will be a high-cost firm to
distant customers
Uniform-delivered pricing – the company charges the same price plus
freight to all customers, regardless of their location.
The freight charge is set at the average freight cost.
Uniform-delivered pricing therefore results in a higher charge to the
nearest customer and a lower charge to the furthest customer
Zone pricing - all customers within a given zone pay a single total price,
and the more distant the zone, the higher the price.
Customers within a given price zone receive no price advantage from the
company.
cont’d..
Basing-point pricing - a geographical pricing strategy in which the seller
designates some city as a basing point and charges all customers the
freight cost from that city to the customer.
If all sellers use the same basing-point city, delivered prices would be the
same for all customers, eliminating price competition.
Freight-absorption pricing – the seller absorbs all or part of the actual
freight charges to get the desired business.
Usually used by a seller who is anxious to do business with a certain
customer.
The seller might reason that if it can get more business, its average costs
will decrease and more than compensate for its extra freight cost.
Freight-absorption pricing is used for market penetration and to hold on
to increasingly competitive markets.
cont’d..
Dynamic Pricing
Adjusting prices continually to meet the characteristics and needs of
individual customers and situations.
For instance, the flexibility of the Internet allows online sellers to
instantly and constantly adjust prices on a wide range of goods based on
demand dynamics (sometimes called real-time pricing).
In other cases, customers control pricing by bidding on auction sites such
as eBay, or negotiating on sites such as Priceline.
Still other companies customize their offers based on the characteristics
and behaviours of specific customers.
cont’d..
International Pricing
Companies participating in international markets must decide what
prices to charge in the different countries they operate in.
A company can set a uniform worldwide price.
Most companies, however, adjust their prices to reflect local market
conditions and cost considerations.
The price that a company should charge in a specific country depends on
many factors, including economic conditions, competitive situations,
laws and regulations, and development of the wholesaling and retailing
system.
Different consumer perceptions and preferences from one country to the
other may also call for different prices.
Different marketing objectives in various world markets, may demand
changes in pricing strategy.
cont’d..
For example, Samsung might introduce a new product into mature
markets in highly developed countries with the goal of quickly gaining
mass-market share—this would call for a penetration-pricing strategy.
In contrast, it might enter a less-developed market by targeting smaller,
less price-sensitive segments; in this case, market skimming pricing
makes sense.
Costs play an important role in setting international prices.
Goods that are relatively inexpensive in the domestic market may carry
outrageously higher price tags in other countries.
Price escalation may result from differences in selling strategies or
market conditions - higher costs of selling in another country—the
additional costs of product modifications, shipping and insurance, import
tariffs and taxes, exchange-rate fluctuations, and physical distribution.
Price Changes
Companies often face situations in which they must initiate price
changes or respond to price changes by competitors.
Initiating Price Changes
Companies may find it desirable to initiate either a price cut or a price
increase.
It must, however, anticipate possible buyer and competitor reactions.
Initiating Price Cuts
A company may consider cutting its price because of:
◦ excess capacity.
◦ falling demand.
In both cases, marketers may slash prices to boost sales and share, but
cutting prices in an industry loaded with excess capacity may lead to
price wars.
Price cuts may be used to dominate the market through lower costs.
Price Changes cont’d…
Initiating Price Increases
This can be triggered by:
◦ cost inflation.
Rising costs squeeze profit margins and lead companies to pass cost
increases along to customers.
If possible, the company should try to find ways to cut costs instead of
raising prices.
The company must avoid being perceived as a price gouger (exploiting
customers).
Customers will eventually turn away from companies or even whole
industries that they perceive as charging excessive prices.
In the extreme, claims of price gouging may even bring about increased
government regulation
Buyer Reactions to Price Changes
Customers interpretations of price changes are not always predictable.
A price increase, which would normally lower sales, may have some
positive meanings for buyers.
Price increase may be positively interpreted as:
◦ better quality and more unique features
And negatively interpreted as:
◦ swindling customers
Price cut may be negatively interpreted as:
◦ poor quality, product, brand or service having challenges, new model
about to be introduced.
Competitor Reactions to Price Changes
Competitors are most likely to react when the number of firms involved is
small, when the product is uniform, and when the buyers are well
informed about products and prices.
How can marketers anticipate the likely reactions of competitors?
Likely interpretations of a price cut by competitors:
◦ The company is trying to grab a larger market share, or it’s trying to
avert poor performance by boosting sales.
◦ Or the company wants the whole industry to cut prices in order to
increase total demand.
The company try to predict the likely reactions of competitors.
If all competitors behave alike, this amounts to analyzing only a typical
competitor.
In contrast, if the competitors do not behave alike—perhaps because of
differences in size, market shares, or policies— then separate analyses
are necessary.
However, if some competitors will match the price change, there is good
reason to expect that the rest will also match it
Responding to Price Changes
How a company should respond to a price change by a competitor.
First, the company must answer the following questions:
Why did the competitor change the price?
Is it temporary or permanent?
What will happen to the company’s market share and profits if it does
not respond?
Are other competitors going to respond?
Moreover, the company must also consider its own situation and
strategy and possible customer reactions to price changes.
In the event that that a competitor has cut its price and the price cut is
likely harm company sales and profits.
The company can simply decide to hold its current price and profit
margin.
It might believe that it will not lose too much market share, or that it
would lose too much profit if it reduced its own price.
Or it might decide that it should wait and respond when it has more
information on the effects of the competitor’s price change.
However, waiting too long to act might let the competitor get stronger
and more confident as its sales increase.
Four responses may be considered if effective action if deemed
necessary:
Reduce the price to match the competitor’s price.
If the market is price sensitive and that it would lose too much market
share to the lower-priced competitor.
This will reduce the company’s profits in the short run.
Reduce product quality, services, and marketing communications to
retain profit margins, but this will ultimately hurt long-run market share.
The company should try to maintain its quality as it cuts prices.
Alternatively, the company might maintain its price but raise the
perceived value of its offer.
It could improve its communications, stressing the relative value of its
product over that of the lower-price competitor.
The firm may find it cheaper to maintain price and spend money to
improve its perceived value than to cut price and operate at a lower
margin.
The company might improve quality and increase price, moving its brand
into a higher price–value position.
The higher quality creates greater customer value, which justifies the
higher price.
In turn, the higher price preserves the company’s higher margins.
Finally, the company might launch a low price “fighter brand”—adding a
lower-price item to the line or creating a separate lower price brand.
This is necessary if the particular market segment being lost is price
sensitive and will not respond to arguments of higher quality.
Fighter brands are created explicitly to win back customers who have
switched to a lower-priced rival; however, they sometimes result in
customers switching from the company’s own premium offering to its
fighter brand.
Positioning a fighter brand presents a manager with a dual challenge.
Managers must ensure that it appeals to the price-conscious segment
they want to attract while guaranteeing that it falls short for current
customers of your premium brand.
Public Policy and Pricing
In setting prices, companies are usually free to charge whatever prices
they wish.
However, several laws restrict pricing practices.
Companies, as well, must consider broader societal pricing concerns.
Deceptive Marketing Practices.
Price fixing - sellers must set prices without talking to (consulting)
competitors.
Otherwise, price collusion is suspected.
Bid rigging - where one party agrees not to submit a bid or tender in
response to a call, or agrees to withdraw a bid or tender submitted at the
request of another party - is another indictable (unlawful, illegal,
criminal) offence pertaining to price fixing.
Predatory pricing - selling below cost with the intention of punishing a
competitor, or gaining higher long-run profits by putting competitors out
of business.
This protects small sellers from larger ones who might sell items below
cost temporarily or in a specific locale (location) to drive them out of
business.
The biggest problem is determining what constitutes predatory pricing
behaviour.
Selling below cost to unload (offload) excess inventory is not considered
predatory; selling below cost to drive out competitors is.
Unfair price discrimination – sellers charging different prices to
customers at a given level of trade.
Price discrimination is allowed if the seller can prove that its costs are
different when selling to different retailers—for example, that it costs
less per unit to sell a large volume of products to one retailer than to sell
to others.
Quantity or volume discounts are not prohibited.
However, discriminatory promotional allowances (those not offered on
proportional terms to all other competing customers) are illegal.
Thus, large competitors cannot negotiate special discounts, rebates, and
price concessions that are not made proportionally available to smaller
competitors.
Retail (or resale) price maintenance - a manufacturer cannot require
dealers to charge a specified retail price for its product.
Although the seller can propose a manufacturer’s suggested retail price
to dealers, it cannot refuse to sell to a dealer who takes independent
pricing action, nor can it punish the dealer by shipping late or denying
advertising allowances.
Deceptive pricing occurs when a seller states prices or price savings that
are not actually available to consumers.
For example, firms cannot advertise a product at a low price, carry very
limited stock, and then tell consumers that they’re out of the product
(stock of the product) so that they can entice them to switch to a higher-
priced item.
This “bait (lure, attraction) and switch (change)” advertising is illegal.
However, some deceptions are difficult for consumers to discern, such as
when an airline advertises a low one-way fare that is available only with
the purchase of a round-trip ticket, or when a retailer sets artificially high
“regular” prices, and then announces “sale” prices close to its previous
everyday prices.
Scanner fraud and price confusion.
The widespread use of scanner-based computer checkouts has led to
increasing complaints of retailers overcharging their customers.
Most of these overcharges result from poor management - from a failure
to enter current or sale prices into the system.
Other cases, however, involve intentional overcharges.
Price confusion results when firms employ pricing methods that make it
difficult for consumers to understand just what price they are really
paying.
THE END

Pricing Policy Notes

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Pricing Policy Notes

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Sacrifice - that which is given up to get a good or service.

i.e, higher price equals higher quality.

Therefore, it stands out in determination of a firm’s market share and

It can also be offering less value at rock-bottom or very low prices.

It can manifest as high-low pricing, charging higher prices on an everyday

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