Lecture 8 Pricing

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BMA1/251 Principles of MarketingLecture 9: Price - Understanding Costs and Customer Value

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Learning Outcomes

By the end of this lecture you should be able to:Discuss how marketing objectives, marketing-mix strategy and costs and other company factors affect pricing decisions. List and discuss factors outside the company that affect pricing decisions. Explain how price setting depends on consumer perceptions of price and on the price-demand relationship. Compare the four general pricing approaches. Describe the major strategies for pricing new products. Comprehend the way in which companies establish a set of prices that maximises the profits from the total product mix. Explain how companies adjust their prices to take into account different types of customers and situations.

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What is Price?

“Price is what is charged for something of value”.

Quester et al (2004; 390)

“Price is what is given up in an exchange to acquire a good or service”.

“Price is the amount of money charged for a product or service, or the sum of values consumers exchange for the benefits of having or using the product or service”.

Dann & Dann (2003; 502)

Kotler et al (2006; 332)

Price is the medium of exchange. Price takes many forms – rates and tariffs, tolls, tuition fees, rent, interest, wages and salaries.

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What Do Prices Do?

Price is the only element of the marketing mix that produces revenue-all other elements represent costs Price captures the value that has been created by the other marketing mix elements. Price provides a reference point for product positioning, quality, and value.

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What Do Prices Do?

Provides the means of segmenting the market and and maximising profit. A company does not usually set a single price, but rather a pricing structure that covers different items in its product line. The company adjusts product prices to reflect changing costs and demand and to account for variations in buyers and situations.

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Factors Affecting Pricing Decisions

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Internal Influences

Marketing objectives:

Survival. Current profit maximisation. Market share leadership. Product quality leadership. Product positioning.

Marketing-mix strategy:

Price must be coordinated and consistent with other elements of the marketing mix. Who is responsible for setting price?

Organisational considerations:

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Internal Influences

Costs

Fixed costs - costs that do not vary with production or sales level. Variable costs - costs that vary directly with the level of production. Total costs - the sum of fixed and variable costs for any given level of production. Production levels costs - ability to achieve economies of scale from increased production. Experience curve costs - the drop in the average perunit production costs that comes with accumulated production experience.

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Costs at Different Production

Levels

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The Experience Curve

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External Influences

Types of market in which the firm competes:

Pure competition

The market consists of many buyers and sellers trading in a uniform commodity No single buyer or seller has much effect on the going market price. The market consists of many buyers and sellers. A range of prices occurs because sellers can differentiate their offers to the buyers.

Monopolistic competition

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External Influences

Types of market in which the firm competes:

Oligopolistic competition

The market consists of a few sellers who are highly sensitive to each other’s pricing and marketing strategies. The product can be uniform or non-uniform. The sellers are few because it is difficult for new sellers to enter the market.

Pure monopoly

Consists of one seller. The seller may be a government monopoly, a private, regulated monopoly or a private, nonregulated monopoly.

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External Influences

Consumer perceptions of price and value:

Must understand what customers are paying for. What do they see as value for money. Does each customer hold the same attitude towards price and value?

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External Influences

Price and demand relationship:Demand is wants and needs backed by purchasing power. Demand curve shows the number of units the market will buy in a given time period, at different prices that might be charged.

Price elasticity of demand:

Price elasticity is a measure of the sensitivity of demand to changes in price.

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Sample Demand Curves

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Elasticity of Demand

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External Influences

Competitor’s prices and offers:

What are their prices and how will they respond to our pricing strategy?

Other external factors:Economic conditions. Responses of resellers. Government legislation - for example The Trade Practices Act.

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Demand

Primary Demand – demand for a particular product type (eg cars, mobile phones, music). Selective Demand – demand for a specific brand/product within a product class (eg. VW Golf, VW Santana).

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General Pricing Approaches

Companies must give careful consideration to their pricing strategies. A number of approaches are available, and companies may use a mix of these approaches. Often costs set the floor price while consumer perceptions of the product’s value set the ceiling. Companies must then consider competitors’ prices and other external and internal factors to find the best price between these two extremes.