12. pricing Flashcards
What is Price?
Price is the sum of the values that consumers exchange for the
benefits of having or using the product or service (usually
amount of money)
▪ Income
▪ Flexible and quick to alter
▪ Easy to imitate
▪ “Right” price is determined by customers
final price
List Price – (Incentives + Allowances) + Extra Fees
importance of pricing
No matter how good the product, how creative the promotion
or how efficient the distribution, unless price cover costs, the
company will make a loss.
▪ Undercharging → lost margin
▪ Overcharging → lost sales
▪ Both elements can affect firm’s profitability
pricing importance (2)
Pricing should be used as a strategic tool.
▪ It can help to achieve corporate and brand objectives without
necessarily cutting prices.
▪ Price is always set in relation to the other elements of the
marketing mix.
▪ Price is key to positioning → often, it sends quality cues to
customers
pricing methods
- cost
- competition
- marketing
cost oriented pricing
Price based on costs of production and other costs, plus a
reasonable return for the efforts and risks of the company
▪ Assumption
▪ Low cost → lower prices → more sales → more profits
▪ Two methods are normally used
▪ Full-cost pricing
▪ Direct- (or marginal-) cost pricing
Full-cost pricing advantages
Gives an indication of minimum
price needed to make a profit.
▪ Can be used with other methods –
acts as a constraint.
Full-cost pricing critique
▪ Takes no account of customers’ willingness to pay.
▪ If followed strictly, leads to an
increase in price when demand falls.
▪ Is illogical because a sales estimate is made before a price is set.
▪ There may be problems in allocating overheads
Direct-cost pricing Advantages
Avoids problem of allocating
overheads.
▪ Avoids ‘price up as demand down’ problem.
▪ Indicates lowest price at which it is sensible to take business.
direct-cost pricing Criticisms
When business is buoyant, gives no indication of optimum price.
▪ Cannot be used in the long-term because fixed costs need to
covered too
competitor oriented pricing
Price based on focusing on competitors rather than costs when setting prices
Two often used forms:
▪ Going-rate pricing
▪ Competitive bidding
going rate pricing
With no product differentiation, producers are forced to accept the going rate.
▪ In reality there is almost no situation in which no differentiation occurs.
competitive bidding
The supplier will price according to a specification drawn up by the purchaser. Usually the supplier will choose the lowest (most competitive) price tendered.
▪ Statistical modelling has resulted in the following basis for calculating expected profits: Expected profit = Profit x Probability of winning
competitor oriented pricing is difficult in practive, why?
Restricted in practice
▪ Difficult to express precise statistical probability
▪ Only in situations with medium to long term range
▪ Relies heavily on competitor information systems
market oriented pricing
The price of a product should be set in line with marketing strategy.
▪ The danger is to view price in isolation.
▪ Price should refer to other marketing decisions, such as positioning,
strategic objectives, promotion, distribution, and product benefits.
▪ The idea is to diminish customer confusion.
▪ Setting prices will depend whether is a new or an existing product.
