There are two fools in every market. One charges too little; the other charges too much Russian proverb

Transcription

1 There are two fools in every market. One charges too little; the other charges too much Russian proverb WHAT IS PRICE? Price is the amount of money charged for product or service, or the sum of all the values that consumers exchange for the benefit of having or using the product or service. (Philip Kotler - 12 th edition) Price is all around us Price is expressed in different terms for different exchanges as shown below: Rent Tuition Fee Fare Interest Premium Salary Taxes Commission For your apartment For your education Bus /Railway /Airline Bank loans Insurance Executive /Staff Government services Salesman THE ROLE AND IMPORTANCE OF PRICING Price is the only element of the marketing mix which generates revenue (all other elements represent cost). Price brings together the other elements of the marketing mix, and affects each one of them. For example, price is often used by consumers to judge the likely quality of the product (a product function) and price can be also used as a short term incentive to buy (promotion function). Price can also be used to encourage people to buy on-line (a process function). Can be used as a communicator, a bargaining tool and a competitive weapon. Is the most flexible element of the marketing mix (Prices can be changed and negotiated quickly) Price should not be set in isolation; it should be well blended with other marketing mix variables. Price connects customers & sellers at the point of exchange Price contributes to the firm s income and profits for each product and each market. Customers often use price to compare competing products. For certain products price can be the primary customer criterion for choice.

2 FACTORS INFLUENCING PRICING DECISIONS: The Five Cs of Pricing To ensure that pricing decisions are effective and consistent with the organisation s objectives, marketers should consider the five Cs of pricing shown in Figure below: costs, customers, channels of distribution, competition, and compatibility. These five elements represent the critical factors influencing pricing decisions. Factors influencing Pricing Decisions PRICING DECISIONS COSTS CUSTOMER CHANNELS COMPETITION COMPATIBILITY Costs Costs associated with producing, distributing, and promoting a product or service is instrumental in establishing the minimum price or floor for pricing decisions. Prices must cover, at least over the long term, the investment and support behind the product, as well as provide enough income and profit to the organisation. A company's costs may be an important element in its pricing strategy. Customers Customer perceptions of price and willingness to pay are important influences on pricing decisions. Buyer reactions are primary determinants of demand. Demand sets the upper limit to the prices the marketer can set. The organisation cannot set a price higher than the customer is willing to pay. Channels of Distribution When making price decisions, a producer must consider what distribution channel members (such as wholesalers, retailers and dealers) expect. A channel member certainly expects to receive a profit margin and requirement to cover costs associated with handling, reselling and the functions performed. At times, resellers expect producers to provide several support activities, such as sales training, service training, advertising, sales promotions etc. These support activities clearly incur associated costs and are expressly required by some resellers, so a producer must consider these costs when determining prices.

3 Competition Prices charged by competing firms and the reaction of competitors to price changes also influence pricing decisions. Pricing decisions have to be made in a competitive context. The level and intensity of competition and the pricing decisions that other organisations make in the market will influence any producer s own pricing. A marketer needs to know competitors prices so that a company can adjust its own prices accordingly. This does not mean that a company will necessarily match competitor s prices; it may set its price above or below theirs. Compatibility Marketers should be set prices that are compatible with the organisation s goals & mission and its target market and positioning. Decision makers should also make pricing decisions that are compatible with the organizations marketing objectives. Say, for instance, if the marketing objective of the company to increase market share then in the short run the organisation will charge lesser prices. CONCEPTS OF COSTING FOR PRICING Variable costs, Fixed Costs, Total Costs Variable costs: vary directly with changes in the number of units produced. These costs are are incurred through raw materials, components, direct labour used for manufacturing or assembly. Fixed Costs: these costs also known as overheads do not vary with changes in the number of units produced. This includes executive salaries, insurance, rent, etc. Total Costs: consists of the sum of the fixed costs van variable costs for any given level of production. Contribution Contribution is calculated in the following way: Selling price - Variable cost = Contribution As the term implies, contribution is the amount, if any, which is left after deducting variable costs from a selling price and which therefore 'contributes' to covering fixed costs. By calculating contribution, the marketer can assess if it would be worthwhile, at least in the short run, to sell a product at less than total cost. As fixed costs by definition would be incurred irrespective of how much is produced or sold, then we might decide that if we can cover variable costs, we should continue to produce the product. In the long run of course all costs must be covered.

4 Break-Even Analysis The breakeven point represents the level of output at any given price where total revenue is exactly equal to the total costs of production and marketing. The breakeven point is the point at which total revenue and total cost are equal (i.e. no profit is made, nor are any losses incurred). Producing beyond this point generates increasing levels of profit. The breakeven quantity (BEQ) can be calculated in the following way. BEQ = Fixed costs/contribution PRICING METHODS Cost-based Pricing A pricing method, whereby a monetary amount or a percentage is added to the cost of a product. The organisation determines or identifies the costs that will incur in producing and marketing the product, determines the profit margin desired and sets the final price. This strategy does not necessarily take into account market considerations. They are however, simple and easy to implement. Two common cost based pricing methods are: Cost Plus pricing In cost plus pricing, the seller s costs are determined and the price is then set by adding a specified amount or percentage of the cost to the sellers cost. Cost plus pricing is appropriate when production costs are difficult to predict or production takes a long time. Custom made equipment and commercial construction projects are often priced by this method. Mark-up pricing A common pricing method among retailers is mark-up pricing. In mark-up pricing, a product s price is derived by adding a pre-determined percentage of the cost, called mark-up, to the cost of the product. Value Based Pricing Value-based pricing uses buyers perceptions of value, not the seller s cost, as the key to pricing. Price is considered along with the other marketing mix variables before the marketing program is set and value based pricing is perhaps one of the most marketing-oriented ways of setting prices.

5 Market Skimming Pricing Setting a high price for new or innovative product to skim maximum revenues layer by layer from the segments willing to pay the high price. This is charging the highest possible price the customer would pay for a product. The cost of the product could be far less than the set price leading to a very high level of overall profit per product. This strategy is commonly used in consumer electronics market. Price-skimming strategy is favoured under following conditions: The new product is protected from competitors through one or more entry barriers. (Example: patent rights) When a truly innovative product is introduced to the market which does not have any substitutes. The new product has distinctive features strongly desired by consumers. When the price elasticity of demand for the product is less. That is when the price is increased customers reducing their demand only by small quantities. Product quality and image must support its high price, and sufficient buyers must want to buy the product at that price. Market Penetration Pricing Penetration pricing is setting a low price in order to penetrate the market quickly and produce a larger unit sales volume. When introducing a product, marketer sometimes uses penetration pricing strategy to gain a large market share quickly. Penetration strategy is favoured under following conditions: When a high level of competition is expected When the target market is very price sensitive. The low price will discourage any new competitors When the price elasticity of demand for the product is high Substantial reduction in unit costs can be achieved through large-scale operations. (Economies of scale) Psychological Pricing Prices set to induce customers to purchases goods based on their emotional reactions rather than on rational. (The price is used to say something about the product). There are several pricing strategies used under this. Image/Prestige Pricing: setting a high price to convey an image of high quality. E.g. Mercedes Benz, Rolex, Designer labels Odd pricing: selling a product at Rs as customers would feel that they are getting a bargained price. Rs. 100 would be a psychological barrier for customers in terms of value. (Example Bata pricing)

6 Promotional Pricing Strategy Promotional pricing is closely linked with sales promotion and it can be used too stimulate a market or reinforce perceptions of value in the short term. Examples include: Cash rebates: Manufacturers will sometimes offer cash rebates to consumers who buy the product from dealers within a specified time period. Special event pricing: Sellers will use special event pricing in certain seasons to attract more customers. For example during Christmas season most products such as garments and consumer durables are promotionally priced with special offers and sale prices to attract Christmas shoppers. Loss leader pricing: Used extensively in supermarkets, departmental stores and retail marketing settings. This approach to pricing involves setting very low prices on certain selected essential fast moving products or brands as an attraction to draw customers into the store in the hope that they will buy other items at normal price. Low interest deals: Obviously, this type of pricing weapon is particularly useful where a customer is likely to want extended credit on a product. So, for example, it is used extensively in marketing cars or other high value consumer products where payments are spread over a period of time. For example 0% interest payment schemes offered by various local and international banks for their credit card holders. Geographical Pricing A company also must decide how to price its products for customers located in different parts of the country or world. Competitor-based Pricing Sometimes companies base their pricing decisions largely on competitors' prices. You should note that this does not mean charging the same prices as competitors; they may be more or less than major competitors. The advantages of competitor-based pricing include the fact that it is relatively simple, and of course, takes into account competitor considerations. However, one of the disadvantages of this pricing method is that it is essentially passive in approach, especially when following rather than leading competitors on price. The major disadvantage of this approach to pricing, however, is that it does not reflect differences in company cost structures, objectives, resources, and marketing strategies.

7 List of References Kotler, Philip and Gray, Armstrong, (2008) Principles of Marketing Prentice Hall Kotler, Philip and Gray, Armstrong, and Y, Agnihotri, Prafulla and ul Haque, Eshan (2013) Principles of Marketing A south Asian Perspective Prentice Hall Sylvester, GS, (2014) Preliminary Certificate in Marketing Study text by Sri Lanka Institute of Marketing