Pricing Products: Pricing Considerations, Approaches, and Strategy

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Pricing Products Pricing Considerations,
Approaches, and Strategy
Chapter 12

• There are two fools in every market one asks
  too little, one asks too much.
• Russian Proverb

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Price

• Definition The amount of money charged for a
  product or service.
• Most flexible element of marketing mix
• Attitudes hard to change
• Price is dynamic because of environmental
  influences
• Gets us into the most trouble
• Charging too much chases away potential customers
  
• Charging too little leave company in a poor
  position

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Factors to Consider when Setting Prices
Internal Factors
Pricing Decisions
External Factors
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Marketing Objectives
Internal Factors Affecting PricingDecisions
Marketing-Mix Strategy
Costs
Organizational Considerations
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Marketing Objectives that Affect Pricing
Decisions
Survival Low Prices to Cover Variable Costs
and Some Fixed Costs to Stay in Business.
Current Profit Maximization Choose the Price that
Produces the Maximum Current Profit, Cash Flow or
ROI.
Marketing Objectives
Market Share Leadership Low as Possible Prices
to Become the Market Share Leader.
Product Quality Leadership High Prices to Cover
Higher Quality and Guest Service Levels
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Marketing Mix Strategy
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Marketing Mix Variables Affecting Pricing
Decisions
Companies Will Consider Price Along With All the
Other Marketing-Mix Elements When Developing the
Marketing Program. Price Must be Coordinated
With
Product Design
Marketing-Mix Strategy
Distribution Channels
Non-Price Factors
Promotion Costs
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Costs, Effecting Pricing Decisions
Fixed Costs (Overhead) Costs that dont vary
with sales or production levels. Executive
Salaries Rent Insurance
Variable Costs Costs that do vary directly with
the level of production. Raw Materials

• Total Costs
• Sum of the Fixed and Variable Costs for a Given
• Level of Production

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Organizational Considerations Affecting Pricing

• Management must decide who within the
  organization will set prices
• Small companies Top management
• Large companies Corporate or Regional Managers

Managements Responsibility Yield (Revenue)
Management Applications
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External Factors
Market and Demand
Costs set lower limits of prices Market and
demand set upper limits
Marketers must understand the relationship
between price and demand for a product
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External Factors
Cross Selling and Upselling
Cross selling When the company promotes
sells other products to the guests Example Room
service, fax, or retail products
Upselling Occurs through training or sales
reservations employees to suggest a higher priced
product Examples Offering after dinner coffee
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External Factors
Consumer Perceptions of Price and Value

• In the end, it is the consumer who decides
  whether a products price is right.
• Pricing decisions must be buyer oriented
• Good pricing begins with analyzing consumer needs
• Value is what compels the customer to buy.
• Sopricing decisions require an
• Awareness of the target market.
• A customer-oriented approach.
• A recognition of the differences in buyers
  perceptions.

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External Factors
Analyzing the Price Demand Relationship

• Demand Price are inversely related.
• The demand curve for prestige goods is usually
  the opposite of a typical demand curve.
• What are some factors that affect demand along
  with price?
• How do these nonprice factors affect the demand
  curve?

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External Factors
Analyzing the Price Demand Relationship
Chapter 12 Figure 12-4 Inelastic and elastic
demand
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External Factors
Price Elasticity of Demand

• If demand hardly varies with a small change in
  price, we say that demand is inelastic.
• If demand changes greatly, we say that the demand
  is elastic.
• Buyers are less price sensitive when the product
  is unique or when it is high in quality, prestige
  or exclusiveness.

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External Factors
Factors That Affect Price Sensitivity

• The Unique Value Effect
• The Substitute Awareness Effect
• Business Expenditure Effect
• The End-Benefit Effect

• The Total Expenditure Effect
• The Shared Cost Effect
• The Sunk Investment Effect
• The Price Quality Effect

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External Factors
Competitors Prices Offers

• A hotels salesperson must learn the price,
  quality, and features of each competitors offer
• When competitors prices are known, this
  information can be used as a starting point for
  your own pricing position yourself accordingly.

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External Factors
Other External Elements

• Inflation
• Economic boom or recession,
• Interest rates the birth of new technology
• are examples of macroenvironmental factors
  that affect pricing strategies.

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Cost Based Pricing
General Pricing Approaches
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General Pricing Approaches

• Cost - Based Pricing
• Product costs set a floor for the price
• Cost Percentage
• Adding a standard markup to the cost
• 40 15 46
• Markup
• Cost as a percentage of selling price
• Cost 40 percent of sales price
• Break-Even or Target Profit
• Rule-of-Thumb (1 per 1000)

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General Pricing Approaches
Example Break Even Analysis

• BE Fixed Costs/Contribution (SP-VC)
• Example Meal SP 20, VC 8
• Contribution Margin (SP-VC) 12
• Fixed costs are 2400 a day
• BE2400/12 200
• Need to sell 200 meals _at_ 20 to break-even
• VC 40, contribution margin 60
• BE 2400/.6 4000

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Chapter 12 Figure 12-5 Break-even chart for
determining target price
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General Pricing Approaches

• Value-Based Pricing
• Uses the buyers perceptions of value
• Setting price to match the perceived value
• Consider the various prices different restaurants
  charge for the same items
• Competition-Based Pricing (Going-Rate Pricing)
• Same, more or less than the major competitors
• Charge what the traffic will bear

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Pricing Strategies New Products

• Prestige Pricing
• A hotel or restaurant wanting to position
  themselves as luxurious elegant enters the
  market with a high price.
• Marketing Skimming
• When the market is price-insensitive, a firm will
  set high prices, taking advantage of the market.

• Marketing Penetration
• Companies set a low initial price to penetrate
  the market quickly deeply.
• Works best when
• The market is highly price sensitive.
• The low price minimizes competition.

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Pricing Strategies Existing Products Pricing
Strategies
Product-Bundle Pricing

• Sellers use bundling to combine several of their
  products offer them at a reduced price.
• This is a common practice to induce buyers of
  products who otherwise might not buy the single
  product.
• Hotels, cruise lines, car rental companies or
  special attractions can be found packaged.

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Existing Products Pricing Strategies
Price-Adjustment Strategies

• Volume Discounts
• Special rates for customers who are likely to
  purchase a large quantity of hotel rooms
• Free room for every 20 room nights book for
  associations or corporate meeting planners.
• Discounts based on Time of Purchase
• Price reduction when the demand is lower
• Hotels, motels and airlines offer seasonal
  discounts
• Early bird specials
• Senior citizen discounts between (200 to 600 PM)

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Existing Products Pricing Strategies
Price-Adjustment Strategies

• Discriminatory Pricing
• Refers to segmentation and pricing differences
  based on price elasticity.
• Same product or service at two or more prices.
• Use different prices for price sensitive and not
  sensitive customers, such as coupon users,
  retired people, business travelers etc.
• Price discrimination is a useful tool for
  smoothing demand, bringing additional revenue and
  profits.

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Existing Products Pricing Strategies
Price-Adjustment Strategies

• Yield Management (Revenue Management)
• Managing capacity by maximizing the revenue based
  on elasticity of demand for selected customer
  segments.
• Yield Management System Software
• In some YM systems, customers staying a longer
  period can be charged more than those staying
  only a few nights.
• Last Minute Pricing
• Unsold inventory creates a market for last-minute
  inventory selling

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Existing Products Pricing Strategies
Pricing Adjustment Strategies

• Psychological Pricing
• Consider the psychology of prices, not economics
• Reference prices buyers carry in their minds
• Popular products often have reference prices,
  such as a cup of coffee, a strip steak, or a
  hamburger.
• Uses aspects such as prestige, reference prices
  and round figures.
• .99 1.99 9.99 cent pricing

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Existing Products Pricing Strategies
Pricing Adjustment Strategies

• Promotional Pricing
• (Below list price, or below cost price in special
  days, such as Valentines Day, Mothers Day)
• Fast food restaurants will price a few products
  as loss leader to attract customers, such as a
  coffee for 25 cents, or 3 hamburgers for a
  dollars
• Hotels may offer special promotional rates, such
  as Valentines weekend special.
• In casino hotels the main product is gaming, so
  they offer very low room prices to customers in
  low seasons.

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Existing Products Pricing Strategies
Pricing Adjustment Strategies

• Value Pricing Everyday Low Prices (EDLP)
• Offering a price below competitors on a permanent
  basis.
• Anytime a product/service is purchased, at any
  price, the buyer must have perceived value in
  that product.
• Value pricing is risky if a company does not have
  the ability to cut costs significantly.
• A marketing strategy Taco Bell, Southwest
  Airlines

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• Skip Pages 484 489
• Other Pricing Considerations
• Price changes