PRICING STRATEGIES
What do the following words have in common? Fare, dues, tuition, interest, rent, and
fee. The answer ...
2
What is Price?
In general terms price is a component of an exchange or transaction that takes place
between two parti...
when a purchase situation arises price is one of several variables customers evaluate
when they mentally assess a product...
losing revenue. Prices set too low may mean the company is missing out on
additional profits that could be earned if the ...
take time (not to mention be costly) and will not translate into lower price
products for a considerable period of time. ...
Market Share – The pricing decision may be important when the firm has an
objective of gaining a hold in a new market or ...
administration (e.g., office expense). These costs can be divided into two main
categories:
Fixed Costs - Also referred ...
what effect a change in price is likely to have on target market demand for a product.
Understanding how price changes im...
Firms within the marketer’s channels of distribution also must be considered when
determining price. Distribution partner...
the Apple iPod may do so at a cost that is only 10% of the purchase price of the
iPod. However, if Apple were to dramatic...
11
Setting Price
The central point of this tutorial is a five-step process for setting price. We want to
emphasize that...
resellers decide to raise the price 25% higher than that price the marketer’s sales may
be much lower then forecasted.
W...
Sometimes called list price or published price, marketers will often use this as a promotional
or negotiating tool as the...
14
Markup Pricing
This pricing method, often utilized by resellers who acquire products from suppliers, uses
a percenta...
15
$15 = 23%
$65
The calculation for setting initial price using Markup-on-Selling-Price is:
Item Cost = Price
(1.00 ...
16
Breakeven Pricing
Breakeven pricing is associated with breakeven analysis, which is a forecasting tool used by
marke...
market pricing approach requires a strong market research effort to measure customer
reaction. For many marketers it is n...
price when pricing is slightly below a whole number value. For example, a
product priced at (US) $299.95 may be perceived...
19
Competitive Pricing
how competitors price their products can influence the marketer’s pricing
decision. Clearly when...
consistently part of the marketer’s pricing program and not adjustments that appear only
occasionally as part of special ...
transportation cost per item drops as more are ordered thus allowing the
supplier to offer lower prices for higher quanti...
22
Geographic Pricing
Products requiring marketers to pay higher costs that are affected by geographic area
in which a ...
23
Markdowns
The most common method for stimulating customer interest using price is the
promotional markdown method, w...
24
Sales Promotions
marketers may offer several types of pricing promotions to simulate demand. While we
have already d...
customers’ use of loyalty cards triggers the store’s computer to access customer
information. If customers’ characteristi...
Future Payment – Provides the buyer with the opportunity to acquire use of the product with payment
occurring some time i...
27
Other Considerations
marketers must consider many factors when making a pricing decision. We conclude our discussion ...
Pricing strategies in the Product Life Cycle (PLC)
As we have already seen the competitive situation for a product change...
29
1. Price skimming
The setting of a high initial price can be interpreted as an assumption by management that eventual...
International pricing
Geographic pricing becomes an issue when the company serves geographically distant markets,
and tr...
The cost of modifying the product for foreign markets.
Operational costs of the export operation (e.g. subsidiary costs):...
32
Transfer pricing
Transfer (intra-corporate) pricing is the pricing of sales to members of the multinational corporate...
CASE STUDY
33
Braun as part of Gillette
Today the marketer of the Oral-B brand is Braun AG of Germany, which was acquir...
New low-priced Braun Power toothbrush product
Gillette’s main threat in the US power toothbrushes is Procter & Gamble, wh...
35
Global Sales
The global market for power toothbrushes (power tooth brushes) amounted to just 47 million units in
200...
occasions. Others have a different attitude: They use price as a key strategic tool. These "power
pricers" have discovere...
CONCLUSION
Gillette has a long, distinguished history. It remains innovative. Its scientists, technicians and product
en...
BIBLOGRAPHY
38
Book reference
“Marketing Strategy and plan”
Michael vag,
Website
www.business.gov.in
www.wikianswar...
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Pricing modify final for print STARTEGY Pricing modi Pricing modi

Pricing modify final for print 2 3-2014Pricing modi
Published on: Mar 4, 2016
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Transcripts - Pricing modify final for print STARTEGY Pricing modi Pricing modi

  • 1. PRICING STRATEGIES What do the following words have in common? Fare, dues, tuition, interest, rent, and fee. The answer is that each of these is a term used to describe what one must pay to acquire benefits from another party. More commonly, most people simply use the word price to indicate what it costs to acquire a product. The pricing decision is a critical one for most marketers, yet the amount of attention given to this key area is often much less than is given to other marketing decisions. One reason for the lack of attention is that many believe price setting is a mechanical process requiring the marketer to utilize financial tools, such as spreadsheets, to build their case for setting price levels. While financial tools are widely used to assist in setting price, marketers must consider many other factors when arriving at the price for which their product will sell. . For some marketers more time is spent agonizing over price than any other marketing decision. In this tutorial we look at why price is important and what factors influence the pricing decision. 1
  • 2. 2 What is Price? In general terms price is a component of an exchange or transaction that takes place between two parties and refers to what must be given up by one party (i.e., buyer) in order to obtain something offered by another party (i.e., seller). Yet this view of price provides a somewhat limited explanation of what price means to participants in the transaction. In fact, price means different things to different participants in an exchange: Buyers’ View – For those making a purchase, such as final customers, price refers to what must be given up to obtain benefits. In most cases what is given up is financial consideration (e.g., money) in exchange for acquiring access to a good or service. But financial consideration is not always what the buyer gives up. Sometimes in a barter situation a buyer may acquire a product by giving up their own product. For instance, two farmers may exchange cattle for crops. Also, as we will discuss below, buyers may also give up other things to acquire the benefits of a product that are not direct financial payments (e.g., time to learn to use the product). Sellers’ View - To sellers in a transaction, price reflects the revenue generated for each product sold and, thus, is an important factor in determining profit. For marketing organizations price also serves as a marketing tool and is a key element in marketing promotions. For example, most retailers highlight product pricing in their advertising campaigns. Price is commonly confused with the notion of cost as in “I paid a high cost for buying my new plasma television”. Technically, though, these are different concepts. Price is what a buyer pays to acquire products from a seller. Cost concerns the seller’s investment (e.g., manufacturing expense) in the product being exchanged with a buyer. For marketing organizations seeking to make a profit the hope is that price will exceed cost so the organization can see financial gain from the transaction. Finally, while product pricing is a main topic for discussion when a company is examining its overall profitability, pricing decisions are not limited to for-profit companies. Not-for-profit organizations, such as charities, educational institutions and industry trade groups, also set prices, though it is often not as apparent . For instance, charities seeking to raise money may set different “target” levels for donations that reward donors with increases in status (e.g., name in newsletter), gifts or other benefits. While a charitable organization may not call it a price in their promotional material, in reality these donations are equivalent to price setting since donors are required to give a contribution in order to obtain something of value. Price vs. Value For most customers price by itself is not the key factor when a purchase is being considered. This is because most customers compare the entire marketing offering and do not simply make their purchase decision based solely on a product’s price. In essence
  • 3. when a purchase situation arises price is one of several variables customers evaluate when they mentally assess a product’s overall value. value refers to the perception of benefits received for what someone must give up. Since price often reflects an important part of what someone gives up, a customer’s perceived value of a product will be affected by a marketer’s pricing decision. Any easy way to see this is to view value as a calculation: Value = perceived benefits received perceived price paid For the buyer value of a product will change as perceived price paid and/or perceived benefits received change. But the price paid in a transaction is not only financial it can also involve other things that a buyer may be giving up. For example, in addition to paying money a customer may have to spend time learning to use a product, pay to have an old product removed, close down current operations while a product is installed or incur other expenses. However, for the purpose of this tutorial we will limit our discussion to how the marketer sets the financial price of a transaction. 3 Importance of Pricing When marketers talk about what they do as part of their responsibilities for marketing products, the tasks associated with setting price are often not at the top of the list. Marketers are much more likely to discuss their activities related to promotion, product development, market research and other tasks that are viewed as the more interesting and exciting parts of the job. Yet pricing decisions can have important consequences for the marketing organization and the attention given by the marketer to pricing is just as important as the attention given to more recognizable marketing activities. Some reasons pricing is important include: Most Flexible Marketing Mix Variable – For marketers price is the most adjustable of all marketing decisions. Unlike product and distribution decisions, which can take months or years to change, or some forms of promotion which can be time consuming to alter (e.g., television advertisement), price can be changed very rapidly. The flexibility of pricing decisions is particularly important in times when the marketer seeks to quickly stimulate demand or respond to competitor price actions. For instance, a marketer can agree to a field salesperson’s request to lower price for a potential prospect during a phone conversation. Likewise a marketer in charge of online operations can raise prices on hot selling products with the click of a few website buttons. Setting the Right Price – Pricing decisions made hastily without sufficient research, analysis, and strategic evaluation can lead to the marketing organization
  • 4. losing revenue. Prices set too low may mean the company is missing out on additional profits that could be earned if the target market is willing to spend more to acquire the product. Additionally, attempts to raise an initially low priced product to a higher price may be met by customer resistance as they may feel the marketer is attempting to take advantage of their customers. Prices set too high can also impact revenue as it prevents interested customers from purchasing the product. Setting the right price level often takes considerable market knowledge and, especially with new products, testing of different pricing options. Trigger of First Impressions - Often times customers’ perception of a product is formed as soon as they learn the price, such as when a product is first seen when walking down the aisle of a store. While the final decision to make a purchase may be based on the value offered by the entire marketing offering (i.e., entire product), it is possible the customer will not evaluate a marketer’s product at all based on price alone. It is important for marketers to know if customers are more likely to dismiss a product when all they know is its price. If so, pricing may become the most important of all marketing decisions if it can be shown that customers are avoiding learning more about the product because of the price. Important Part of Sales Promotion – Many times price adjustments are part of sales promotions that lower price for a short term to stimulate interest in the product marketers must guard against the temptation to adjust prices too frequently since continually increasing and decreasing price can lead customers to be conditioned to anticipate price reductions and, consequently, withhold purchase until the price reduction occurs again. Factors Affecting Pricing Decision For the remainder of this tutorial we look at factors that affect how marketers set price. The final price for a product may be influenced by many factors which can be categorized into two main groups: Internal Factors - When setting price, marketers must take into consideration several factors which are the result of company decisions and actions. To a large extent these factors are controllable by the company and, if necessary, can be altered. However, while the organization may have control over these factors making a quick change is not always realistic. For instance, product pricing may depend heavily on the productivity of a manufacturing facility (e.g., how much can be produced within a certain period of time). The marketer knows that increasing productivity can reduce the cost of producing each product and thus allow the marketer to potentially lower the product’s price. But increasing productivity may require major changes at the manufacturing facility that will 4
  • 5. take time (not to mention be costly) and will not translate into lower price products for a considerable period of time. External Factors - There are a number of influencing factors which are not controlled by the company but will impact pricing decisions. Understanding these factors requires the marketer conduct research to monitor what is happening in each market the company serves since the effect of these factors can vary by market. Below we provide a detailed discussion of both internal and external factors. 5 Internal Factors The pricing decision can be affected by factors that are controlled by the marketing organization. These factors include: Company and Marketing Objectives Marketing decisions are guided by the overall objectives of the company. While we will discuss this in more detail when we cover marketing strategy in a later tutorial, for now it is important to understand that all marketing decisions, including price, work to help achieve company objectives. Corporate objectives can be wide-ranging and include different objectives for different functional areas (e.g., objectives for production, human resources, etc). While pricing decisions are influenced by many types of objectives set up for the marketing functional area, there are four key objectives in which price plays a central role. In most situations only one of these objectives will be followed, though the marketer may have different objectives for different products. The four main marketing objectives affecting price include: Return on Investment (ROI) – A firm may set as a marketing objective the requirement that all products attain a certain percentage return on the organization’s spending on marketing the product. This level of return along with an estimate of sales will help determine appropriate pricing levels needed to meet the ROI objective. Cash Flow – Firms may seek to set prices at a level that will insure that sales revenue will at least cover product production and marketing costs. This is most likely to occur with new products where the organizational objectives allow a new product to simply meet its expenses while efforts are made to establish the product in the market. This objective allows the marketer to worry less about product profitability and instead directs energies to building a market for the product.
  • 6. Market Share – The pricing decision may be important when the firm has an objective of gaining a hold in a new market or retaining a certain percent of an existing market. For new products under this objective the price is set artificially low in order to capture a sizeable portion of the market and will be increased as the product becomes more accepted by the target market (we will discuss this marketing strategy in further detail in our next tutorial). For existing products, firms may use price decisions to insure they retain market share in instances where there is a high level of market competition and competitors who are willing to compete on price. Maximize Profits – Older products that appeal to a market that is no longer growing may have a company objective requiring the price be set at a level that optimizes profits. This is often the case when the marketer has little incentive to introduce improvements to the product (e.g., demand for product is declining) and will continue to sell the same product at a price premium for as long as some in the market is willing to buy. 6 Marketing Strategy Marketing strategy concerns the decisions marketers make to help the company satisfy its target market and attain its business and marketing objectives. Price, of course, is one of the key marketing mix decisions and since all marketing mix decisions must work together, the final price will be impacted by how other marketing decisions are made. For instance, marketers selling high quality products would be expected to price their products in a range that will add to the perception of the product being at a high-level. It should be noted that not all companies view price as a key selling feature. Some firms, for example those seeking to be viewed as market leaders in product quality, will deemphasize price and concentrate on a strategy that highlights non-price benefits (e.g., quality, durability, service, etc.). Such non-price competition can help the company avoid potential price wars that often break out between competitive firms that follow a market share objective and use price as a key selling feature. Costs For many for-profit companies, the starting point for setting a product’s price is to first determine how much it will cost to get the product to their customers. Obviously, whatever price customers pay must exceed the cost of producing a good or delivering a service otherwise the company will lose money. When analyzing cost, the marketer will consider all costs needed to get the product to market including those associated with production, marketing, distribution and company
  • 7. administration (e.g., office expense). These costs can be divided into two main categories: Fixed Costs - Also referred to as overhead costs, these represent costs the marketing organization incurs that are not affected by level of production or sales. For example, for a manufacturer of writing instruments that has just built a new production facility, whether they produce one pen or one million they will still need to pay the monthly mortgage for the building. From the marketing side, fixed costs may also exist in the form of expenditure for fielding a sales force, carrying out an advertising campaign and paying a service to host the company’s website. These costs are fixed because there is a level of commitment to spending that is largely not affected by production or sales levels. Variable Costs – These costs are directly associated with the production and sales of products and, consequently, may change as the level of production or sales changes. Typically variable costs are evaluated on a per-unit basis since the cost is directly associated with individual items. Most variable costs involve costs of items that are either components of the product (e.g., parts, packaging) or are directly associated with creating the product (e.g., electricity to run an assembly line). However, there are also marketing variable costs such as coupons, which are likely to cost the company more as sales increase (i.e., customers using the coupon). Variable costs, especially for tangible products, tend to decline as more units are produced. This is due to the producing company’s ability to purchase product components for lower prices since component suppliers often provide discounted pricing for large quantity purchases. Determining individual unit cost can be a complicated process. While variable costs are often determined on a per-unit basis, applying fixed costs to individual products is less straightforward. For example, if a company manufactures five different products in one manufacturing plant how would it distribute the plant’s fixed costs (e.g., mortgage, production workers’ cost) over the five products? In general, a company will assign fixed cost to individual products if the company can clearly associate the cost with the product, such as assigning the cost of operating production machines based on how much time it takes to produce each item. Alternatively, if it is too difficult to associate to specific products the company may simply divide the total fixed cost by production of each item and assign it on percentage basis. 7 External Market Factors The pricing decision can be affected by factors that are not directly controlled by the marketing organization. These factors include: Elasticity of Demand Marketers should never rest on their marketing decisions. They must continually use market research and their own judgment to determine whether marketing decisions need to be adjusted. When it comes to adjusting price, the marketer must understand
  • 8. what effect a change in price is likely to have on target market demand for a product. Understanding how price changes impact the market requires the marketer have a firm understanding of the concept economists call elasticity of demand, which relates to how purchase quantity changes as prices change. Elasticity is evaluated under the assumption that no other changes are being made (i.e., “all things being equal”) and only price is adjusted. The logic is to see how price by itself will effect overall demand. Obviously, the chance of nothing else changing in the market but the price of one product is often unrealistic. For example, competitors may react to the marketer’s price change by changing the price on their product. Despite this, elasticity analysis does serve as a useful tool for estimating market reaction. Elasticity deals with three types of demand scenarios: Elastic Demand – Products are considered to exist in a market that exhibits elastic demand when a certain percentage change in price results in a larger and opposite percentage change in demand. For example, if the price of a product increases (decreases) by 10%, the demand for the product is likely to decline (rise) by greater than 10%. Inelastic Demand – Products are considered to exists in an inelastic market when a certain percentage change in price results in a smaller and opposite percentage change in demand. For example, if the price of a product increases (decreases) by 10%, the demand for the product is likely to decline (rise) by less than 10%. Unitary Demand – This demand occurs when a percentage change in price results in an equal and opposite percentage change in demand. For example, if the price of a product increases (decreases) by 10%, the demand for the product is likely to decline (rise) by 10%. For marketers the important issue with elasticity of demand is to understand how it impacts company revenue. In general the following scenarios apply to making price changes for a given type of market demand: For elastic markets – increasing price lowers total revenue while decreasing price increases total revenue. For inelastic markets – increasing price raises total revenue while decreasing price lowers total revenue. For unitary markets – there is no change in revenue when price is changed. Customer and Channel Partner Expectations Possibly the most obvious external factor that influences price setting are the expectations of customers and channel partners. As we discussed, when it comes to making a purchase decision customers assess the overall “value” of a product much more than they assess the price. When deciding on a price marketers need to conduct customer research to determine what “price points” are acceptable. Pricing beyond these price points could discourage customers from purchasing. 8
  • 9. Firms within the marketer’s channels of distribution also must be considered when determining price. Distribution partners expect to receive financial compensation for their efforts, which usually means they will receive a percentage of the final selling price. This percentage or margin between what they pay the marketer to acquire the product and the price they charge their customers must be sufficient for the distributor to cover their costs and also earn a desired profit. 9 Competitive and Related Products Marketers will undoubtedly look to market competitors for indications of how price should be set. For many marketers of consumer products researching competitive pricing is relatively easy, particularly when Internet search tools are used. Price analysis can be somewhat more complicated for products sold to the business market since final price may be affected by a number of factors including if competitors allow customers to negotiate their final price. Analysis of competition will include pricing by direct competitors, related products and primary products. Direct Competitor Pricing – Almost all marketing decisions, including pricing, will include an evaluation of competitors’ offerings. The impact of this information on the actual setting of price will depend on the competitive nature of the market. For instance, products that dominate markets and are viewed as market leaders may not be heavily influenced by competitor pricing since they are in a commanding position to set prices as they see fit. On the other hand in markets where a clear leader does not exist, the pricing of competitive products will be carefully considered. Marketers must not only research competitive prices but must also pay close attention to how these companies will respond to the marketer’s pricing decisions. For instance, in highly competitive industries, such as gasoline or airline travel, competitors may respond quickly to competitors’ price adjustments thus reducing the effect of such changes. Related Product Pricing - Products that offer new ways for solving customer needs may look to pricing of products that customers are currently using even though these other products may not appear to be direct competitors. For example, a marketer of a new online golf instruction service that allows customers to access golf instruction via their computer may look at prices charged by local golf professionals for in-person instruction to gauge where to set their price. While on the surface online golf instruction may not be a direct competitor to a golf instructor, marketers for the online service can use the cost of in-person instruction as a reference point for setting price. Primary Product Pricing - marketers may sell products viewed as complementary to a primary product. For example, Bluetooth headsets are considered complementary to the primary product cellphones. The pricing of complementary products may be affected by pricing changes made to the primary product since customers may compare the price for complementary products based on the primary product price. For example, companies that sell accessory products for
  • 10. the Apple iPod may do so at a cost that is only 10% of the purchase price of the iPod. However, if Apple were to dramatically drop the price, for instance by 50%, the accessory at its present price would now be 20% of the of iPod price. This may be perceived by the market as a doubling of the accessory’s price. To maintain its perceived value the accessory marketer may need to respond to the iPod price drop by also lowering the price of the accessory. Marketers must be aware of regulations that impact how price is set in the markets in which their products are sold. These regulations are primarily government enacted meaning that there may be legal ramifications if the rules are not followed. Price regulations can come from any level of government and vary widely in their requirements. For instance, in some industries, government regulation may set price ceilings (how high price may be set) while in other industries there may be price floors (how low price may be set). Additional areas of potential regulation include: deceptive pricing, price discrimination, predatory pricing and price fixing. Finally, when selling beyond their home market, marketers must recognize that local regulations may make pricing decisions different for each market. This is particularly a concern when selling to international markets where failure to consider regulations can lead to severe penalties. Consequently marketers must have a clear understanding of regulations in each market they serve. There are also additional legal concerns when it comes to price which we will discuss in a future tutorial. 10 Government Regulation Marketers must be aware of regulations that impact how price is set in the markets in which their products are sold. These regulations are primarily government enacted meaning that there may be legal ramifications if the rules are not followed. Price regulations can come from any level of government and vary widely in their requirements. For instance, in some industries, government regulation may set price ceilings (how high price may be set) while in other industries there may be price floors (how low price may be set). Additional areas of potential regulation include: deceptive pricing, price discrimination, predatory pricing and price fixing. Finally, when selling beyond their home market, marketers must recognize that local regulations may make pricing decisions different for each market. This is particularly a concern when selling to international markets where failure to consider regulations can lead to severe penalties. Consequently marketers must have a clear understanding of regulations in each market they serve.
  • 11. 11 Setting Price The central point of this tutorial is a five-step process for setting price. We want to emphasize that while the process serves as a useful guide for making price decisions, not all marketers follow this step-by-step approach. As we will see many marketers may choose to bypass Steps 3 and 4 altogether. Additionally it is important to understand that finding the right price is often a trial-and-error exercise where continual testing is needed. Like all other marketing decisions, market research is critical to determining the optimal selling price. Consequently, the process laid out here is intended to open the marketer’s eyes to the options to consider when setting price and is in no way presented as a guide for setting the “perfect” price. Steps in the Price Setting Process We view price setting as a series of decisions the marketer makes in order to determine the price direct and indirect customers pay to acquire the product. Direct customers are those who purchase products directly from the marketer. For example, consider the direct pricing decisions that take place when a new novel is sold: Publisher of the book must decide at what price they will charge their immediate customers in the channel of distribution such as online booksellers (e.g., Amazon.com). Booksellers must decide at what price they will sell the book to their immediate customers which are typically final consumers (e.g., website shopper). As we see with the bookseller example, many companies also sell indirectly to the final customer through a network of resellers such as retailers. For marketers selling through resellers the pricing decision is complicated by resellers’ need to earn a profit and the marketer’s need to have some control over the product’s price to the final customer. In these cases setting price involves more than only worrying about what the direct customer is willing pay since the marketer must also evaluate pricing to indirect customers (e.g., resellers’ customers). Clearly sales can be dramatically different than what the marketer forecasts if the selling price to the final customer differs significantly from what the marketer expects. For instance, if the marketing organization has forecasted to sell 1,000,000 novels if the price to the final customer is one price and
  • 12. resellers decide to raise the price 25% higher than that price the marketer’s sales may be much lower then forecasted. With an understanding that marketers must consider many factors) when setting price, we now turn to the process by which price is set. We present this as a five-step approach. As we noted earlier, while not all marketers follow these steps, what is presented does cover the methods used by many marketers. The steps we cover include: 1. Examine Company and Marketing Objectives 2. Determine an Initial Price 3. Set Standard Price Adjustments 4. Determine Promotional Pricing 5. State Ownership and Payment Options Step 1: Examine Company and Marketing Objectives As we discussed, marketing decisions including price are driven by the objectives set by the management of the organization. These objectives come at two levels. First, the overall objectives of the company guide all decisions for all functional areas (e.g., marketing, production, human resources, finance, etc.). Guided by these objectives the marketing department will set its own objectives which may include return on investment, cash flow, market share and maximize profits to name a few. Pricing decisions like all other marketing decisions will be used to help the department meet its objectives. For instance, if the marketing objective is to build market share it is likely the marketer will set the product price at a level that is at or below the price of similar products offered by competitors. Also, the price setting process looks to whether the decisions made are in line with the decisions made for the other marketing decisions (i.e., target market, product, distribution, promotion). Thus, if a company with a strong brand name targets high-end consumers with a high quality, full-featured product, the pricing decision would follow the marketer’s desire to have the product be considered a high-end product. In this case the price would be set high relative to competitors’ products that do not offer as many features or do not have an equally strong brand name. Step 2: Determine an Initial Price With the objectives in Step 1 providing guidance for setting price, the marketer next begins the task of determining an initial price level. We say initial because in many industries this step involves setting a starting point from which further changes may be made before the customer pays the final price. 12
  • 13. Sometimes called list price or published price, marketers will often use this as a promotional or negotiating tool as they move through the other price setting steps. For companies selling to consumers, this price also leads to a projection of the recommended selling price at the retail level often called the manufacturer’s suggested retail price (MSRP). The MSRP may or may not be the final price for which products are sold. For strong brands that are highly sought by consumers the MSRP may in fact be the price at which the product will be sold. But in many other cases, as we will see, the price setting process results in the price being different based on adjustments made by the marketer and others in the channel of distributions. Speaking of distribution channels, some marketers will utilize multiple channel partners to handle product distribution. When resellers are involved marketers must recognize that all members of the channel will seek to profit when a sale is made. If a marketer seeks to sell the product at a certain retail price (e.g., MSRP) then the price charged to the first channel member to handle the product can potentially influence the final selling price. To see how this can cause problems, assume a marketer sets an MSRP of (US) $1.99 for a product that sells through a distribution channel. This channel consists of wholesalers, who must pay the marketer $1.89 to purchase the product, and retailers who in turn buy the product from wholesalers. In this example it is unlikely the retailer will sell the product at the MSRP since the wholesaler will add to the $1.89 purchase price and most likely raise the price charged to the retailer to a point that is higher than the MSRP. The retailer in turn will add to their purchase price when selling to consumers. In this scenario it is possible the final price to the consumer will be closer to $2.99 than the $1.99 MSRP. As this example shows marketers must take care in setting the initial price so that all channel partners feel it is worth their effort to handle the product. Marketers have at their disposal several approaches for setting the initial price which include: 13 Cost Pricing Market Pricing Competitive Pricing Bid Pricing Cost Pricing Under cost pricing the marketer primarily looks at production costs as the key factor in determining the initial price. This method offers the advantage of being easy to implement as long as costs are known. But one major disadvantage is that it does not take into consideration the target market’s demand for the product. This could present major problems if the product is operating in a highly competitive market where competitors frequently alter their prices. There are several types of cost pricing including:
  • 14. 14 Markup Pricing This pricing method, often utilized by resellers who acquire products from suppliers, uses a percentage increase on top of product cost to arrive at an initial price. A major general retailer, such as Walmart, may apply a set percentage for each product category (e.g., women’s clothing, automotive, garden supplies, etc.) making the pricing consistent for all like-products. Alternatively, the predetermined percentage may be a number that is identified with the marketing objectives (e.g., required 20% ROI). For resellers that purchase thousands of products (e.g., retailers) the simplicity inherent in markup pricing makes it a more attractive pricing option than more time-consuming methods. However, the advantage of ease of use is sometimes offset by the disadvantage that products may not always be optimally priced resulting in products that are priced too high or too low given the demand for the product. Resellers differ in how they use markup pricing with some using the Markup-on-Cost method and others using the Markup-on-Selling-Price method. We will demonstrate each using an item that costs a reseller (US) $50 to purchase from a supplier and sells to customers for (US) $65. Markup-on-Cost – Using this method, markup is reflected as a percentage by which initial price is set above product cost as reflected in this formula: Markup Amount = Markup Percentage Item Cost $15 = 30% $50 The calculation for setting initial price is determined by simply multiplying the cost of each item by a predetermined percentage then adding the result to the cost: Item Cost + (Item Cost x Markup Percentage) = Price $50 + (50 x .30 = $15) = $65 Markup-on-Selling-Price – Many resellers, and in particular retailers, discuss their markup not in terms of Markup-on-Cost but as a reflection of price. That is, the markup is viewed as a percentage of the selling price and not as a percentage of cost as it is with the Markup-on-Cost method. For example, using the same information as was used in the markup on cost, the markup on selling price reflected in this formula: Markup Amount = Markup Percentage Selling Price
  • 15. 15 $15 = 23% $65 The calculation for setting initial price using Markup-on-Selling-Price is: Item Cost = Price (1.00 – Markup Percentage) $50 = $65 (1.00 – .23) So why do some use Markup-on-Cost while others use Markup-on-Selling-Price? One answer is that it is a traditional way for resellers in certain industries to discuss how they arrive at price (e.g., “We only make 5% of the price of the product.”). But many feel the reason is that Markup-on-Selling-Price serves as an aid to company promotion because the amount of money a reseller makes is in percentage terms always lower when calculated using Markup-on-Selling-Price than it is with Markup-on-Cost. For example, in the Markup-on- Cost example where the markup is 30% the gross profit is $15 ($65-$50). If the reseller using Markup-on-Selling-Price received a gross profit of $15 their markup would only be 23% ($50/[1.00-.23] = $65). Consequently, a retailer’s advertisement may say: “We Make Little, But Our Customers Save A Lot” and back this up by saying they only make a small percentage on each sale. When in reality how much they really make in monetary terms may be equal to another retailer who uses Markup-on-Cost and reports a higher markup percentage. Cost-Plus Pricing In the same way markup pricing arrives at price by adding a certain percentage to the product’s cost, cost-plus pricing also adds to the cost by using a fixed monetary amount rather than percentage. For instance, a contractor hired to renovate a homeowner’s bathroom will estimate the cost of doing the job by adding their total labor cost to the cost of the materials used in the renovation. The homeowner’s selection of ceramic tile to be used in the bathroom is likely to have little effect on the labor needed to install it whether it is a low-end, low priced tile or a high-end, premium priced tile. Assuming most material in the bathroom project are standard sizes and configuration, any change in the total price for the renovation is a result of changes in material costs while labor costs are constant.
  • 16. 16 Breakeven Pricing Breakeven pricing is associated with breakeven analysis, which is a forecasting tool used by marketers to determine how many products must be sold before the company starts realizing a profit. Like the markup method, breakeven pricing does not directly consider market demand when determining price, however it does indicate the minimum level of demand that is needed before a product will show a profit. From this the marketer can then assess whether the product can realistically achieve these levels. The formula for determining breakeven takes into consideration both variable and fixed costs as well as price, and is calculated as follows: Fixed Cost = # of Units to Breakeven Price – Variable Cost Per Unit For example, assume a company operates a single-product manufacturing plant that has a total fixed cost (e.g., purchase of equipment, mortgage, etc.) per year of (US) $3,000,000 and the variable cost (e.g., raw materials, labor, electricity, etc.) is $45.00 per unit. If the company sells the product directly to customers for $120, it will require the company to sell 40,000 units to breakeven. $3,000,000 = 40,000 units $120 - $45 Again we must emphasize that marketers must determine whether the demand (i.e., number of units needed to breakeven) is realistically attainable. Simply plugging in a number for price without knowing how the market will respond to that figure means that this method has little value. (Note: A common mistake when performing this analysis is to report the breakeven in a monetary value such a breakeven in dollars (e.g., $40,000). The calculation presented above is a measure of units that need to be sold. Clearly it is easy to turn this into a revenue breakeven analysis by multiplying the units needed by the selling price. In our example, 40,000 units x $120 = $4,800,000.) Market Pricing Under the market pricing method cost is not the main factor driving price decisions; rather initial price is based on analysis of market research in which customer expectations are measured. The main goal is to learn what customers in an organization’s target market are likely to perceive as an acceptable price. Of course this price should also help the organization meet its marketing objectives. Market pricing is one of the most common methods for setting price, and the one that seems most logical given marketing’s focus on satisfying customers. So if this is the most logical approach why don’t all companies follow it? The main reason is that using the
  • 17. market pricing approach requires a strong market research effort to measure customer reaction. For many marketers it is not feasible to spend the time and money it takes to do this right. Additionally for some products, especially new high-tech products, customers are not always knowledgeable about the product to know what an acceptable price level should be. Consequently, some marketers may forego market pricing in favor of other approaches. For those marketers who use market pricing, options include: 17 1. Backward Pricing 2. Psychological Pricing 3. Price Lining Backward Pricing In some marketing organizations the price the market is willing to pay for a product is an important determinant of many other marketing decisions. This is likely to occur when the market has a clear perception of what it believes is an acceptable level of pricing. For example, customers may question a product that carries a price tag that is double that of a competitor’s offerings but is perceived to offer only minor improvements compared to other products. In these markets it is important to undertake research to learn whether customers have mentally established a price range or reference price for products in a certain product category. The marketer can learn this by surveying customers with such questions as: “How much do you think these types of products should cost you?” In situations where a price range is ingrained in the market, the marketer may need to use this price as the starting point for many decisions and work backwards to develop product, promotion and distribution plans. For instance, assume a company sells products through retailers. If the market is willing to pay (US)$199 for a product but is resistant to pricing that is higher, the marketer will work backwards factoring out the profit margin retailers are likely to want (e.g., $40) and as well as removing the marketer’s profit (e.g., $70). From this, the product cost will remain ($199 -$40-$70= $89). The marketer must then decide whether they can create a product with sufficient features and benefits to satisfy customers’ needs at this cost level. Psychological Pricing For many years researchers have investigated customers’ response to product pricing. Some of the results point to several interesting psychological effects price may have on customers’ buying behavior and on their perception of individual products. We stress that certain pricing tactics “may” have a psychological effect since the results of some studies have suggested otherwise. But enough studies have shown an effect that this topic is worthy of discussion. • Odd-Even Pricing - One effect dubbed “odd-even” pricing relates to whole number pricing where customers may perceive a significant difference in product
  • 18. price when pricing is slightly below a whole number value. For example, a product priced at (US) $299.95 may be perceived as offering more value than a product priced at $300.00. This effect can also be used to influence potential customers who receive product information from others. Many times a buyer will pass along the price as being lower than it is either because they recall it being lower than the even number or they want to impress others with their success in obtaining a good value. For instance, in our example a buyer who pays $299.95 may tell a friend they paid “a little more than $200” for the product when in fact it was much closer to $300. • Prestige Pricing - Another psychological effect, called prestige pricing, points to a strong correlation between perceived product quality and price. The higher the price the more likely customers are to perceive it has being higher quality compared to a lower priced product. (Although there is point at which customers will begin to question the value of the product if the price is too high.) In fact, the less a customer knows about a product the more likely they are to judge the product as being of higher quality based on only knowing the price. Prestige pricing can also work with odd-even pricing as marketers, looking to present an image of high quality, may choose to price products at even levels (e.g., $10 rather than $9.99). 18 Price Lining The difference in the “needs-set” between customers often leads marketers to realization that the overall market is really made up of a collection smaller market segments. These segments may seek similar products but with different sets of product features, which are presented in the form of different models (e.g., different quality of basketball sneakers) or service options (e.g., different hotel room options). Price lining or product line pricing is a method that primarily uses price to create the separation between the different models. With this approach, even if customers possess little knowledge about a set of products, customers may perceive they are different based on price alone. The key is whether the prices for all products in the group are perceived as representing distinct price points (i.e., enough separation between each). For instance, a marketer may sell a base model, an upgraded model and a deluxe model each at a different price. If the differences in features for each model is not readily apparent to a customer, such as differences that are inside the product and not easily viewed (e.g., difference between laptop computers), then price lining will help the customer recognize that differences do exist as long as the prices are noticeably different. Price lining can also be effective as a method for increasing profitability. In many cases the cost to the marketer for adding different features to create different models or service options does not alone justify a big price difference. For instance, an upgraded model may cost 10% more to produce than a base model but using the price lining method the upgraded product price may be 20% higher and thus more profitable than the base model. The increase in profitability offered by price lining is one reason marketers introduce multiple models, since it allows the company to not only satisfy the needs of different segments but also presents an option for a customer to “buy up” to a
  • 19. 19 Competitive Pricing how competitors price their products can influence the marketer’s pricing decision. Clearly when setting price it makes sense to look at the price of competitive offerings. For some, competitor’s price serves as an important reference point from which they set their price. In some industries, particularly those in which there are a few dominant competitors and many small companies, the top companies are in the position of holding price leadership roles where they are often the first in the industry to change price. Smaller companies must then assume a price follower role and react once the big companies adjust their price. When basing pricing decisions on how competitors are setting their price, firms may follow one of the following approaches: 1. Below Competition Pricing - A marketer attempting to reach objectives that require high sales levels (e.g., market share objective) may monitor the market to insure their price remains below competitors. 2. Above Competition Pricing - Marketers using this approach are likely to be perceived as market leaders in terms of product features, brand image or other characteristics that support a price that is higher than what competitors offer. 3. Parity Pricing - A simple method for setting the initial price is to price the product at the same level competitors price their product. Bid Pricing Not all selling situations allow the marketer to have advanced knowledge of the prices offered by competitors. While the Internet has made researching competitor pricing a relatively routine exercise, this is not the case in markets where bid pricing occurs. Bid pricing typically requires a marketer to submit a price to a potential buyer that is sealed or unseen by competitors. It is not until all bids are obtained and unsealed that the marketer is informed of the price listed by competitors. Bid pricing occurs in several industries though it is a standard requirement when selling to local, national and international governments. In these situations the marketer’s pricing strategy depends on the projected winning bid price, which is generally the lowest price. However, price alone is only the deciding factor if the bidder meets certain qualifications. The fact that marketers often operate in the dark in terms of available competitor research, makes this type pricing one of the most challenging of all pricing setting methods. Step 3: Set Standard Price Adjustments With the first round of pricing decisions now complete, the marketer’s next step is to consider whether there are benefits to making adjustments to the list or published price. For our purposes we will consider two levels of price adjustments – standard and promotional. The first level adjustments are those we label as “standard” since these are
  • 20. consistently part of the marketer’s pricing program and not adjustments that appear only occasionally as part of special promotions (see Step 4: Determine Promotional Pricing). In most cases standard adjustments are made to reduce the list price in an effort to either stimulate interest in the product or to indirectly pay channel partners for the services they offer when handling the product. In some circumstances the adjustment goes the other way and leads to price increases in order cover additional costs incurred when selling to different markets. It should be noted that many companies do not make adjustments to their list price, particularly those selling directly to final customers. There are two key reasons for this. First, the product is in high demand and therefore the marketer sees little reason to lower the price. Second, the marketer believes the product holds sufficient value for customers at its current list price and the marketer feels reducing the price may actually lead buyers to question the quality of the product (e.g., “How can they offer all those features for such a low price? Something must be wrong with it.”). In such cases holding fast to the list price allows the marketer to maintain some control over the product’s perceived image. For firms that do make standard price adjustments, options include: 20 Quantity Discounts Trade Allowances Special Segment Pricing Geographic Pricing Quantity Discounts This adjustment offers buyers an incentive of lower per-unit pricing as more products are purchased. Most quantity or volume discounts are triggered when a buyer reaches certain purchase levels. For instance, a buyer may pay the list price when they purchase between 1-99 units but receive a 5% discount off the list price when the purchase exceeds 100 units. Options for offering price adjustments based on quantity ordered include: Discounts at Time of Purchase – The most common quantity discounts exist when a buyer places an order that exceeds a certain minimum level. While quantity discounts are used by marketers to stimulate higher purchase levels, the rational for using these often rests in the cost of product shipment. Shipping costs tend to decrease per item shipped. Why? Think about a large truck carrying product. In most cases the expenses (e.g., truck driver expense, fuel, road tolls, etc.) required to move a truck from one point to another does not radically change as more product is shipped in the truck trailer (i.e., container). In other words, the total shipping cost is only a little higher if 1,000 items (assuming all can fit in a trailer) are carried in the truck compared to hauling just 10 items. Consequently, the
  • 21. transportation cost per item drops as more are ordered thus allowing the supplier to offer lower prices for higher quantity. Discounts on Cumulative Purchases – This method allows the buyer to receive a discount as more products are purchased over time. For instance, if a buyer regularly purchases from a supplier they may see a discount once the buyer has reached predetermined monetary or quantity levels. The key reason to use this adjustment is to create an incentive for buyers to remain loyal and purchase again. 21 Trade Allowances Manufacturers who rely on channel partners to distribute their products (e.g., retailers, wholesalers) offer discounts off of list price called trade allowances. These discounts function as an indirect form of payment for a channel member’s work in helping to market the product (e.g., keep product stocked, talk to customers about the product, provide feedback to the manufacturer, etc.). Essentially the difference between the trade discounted price paid by the reseller and the price the reseller charges its customer will be the reseller’s profit. For example, let’s assume the maker of snack products sells a product to retailers that carries a stated MSRP of (US) $2.95 but offers resellers a trade allowance price of $1.95. If the retailer indeed sells the product for the MSRP, the retailer will realize a 33% markup on selling price ($1.95/(1-.33) = $2.95). Obviously this percentage will be different if the retailer sells the product at a price that is different than the MSRP, but the important point to understand is that marketers must factor in what reseller’s expect to earn when they are setting trade discounts. This Special Segment Pricing In some industries special classes of customers within a target market are offered pricing that differs from the rest of the market. The main reasons for doing this include: building future demand by appealing to new or younger customers; improving the brand’s image as being sensitive to customer’s needs; and rewarding long time customers with price breaks. For instance, many companies including movie theaters, fitness facilities and pharmaceutical firms offer lower prices to senior citizens. Some marketers offer non-profit customers lower prices compared to that charged to for-profit firms. Other industries may offer lower prices to students or children. Another example used by service firms is to offer pricing differences based on convenience and comfort enjoyed by customers when experiencing the service such as seat location at a sporting or entertainment event.
  • 22. 22 Geographic Pricing Products requiring marketers to pay higher costs that are affected by geographic area in which a product is sold may result in adjustments to compensate for the higher expense. The most likely cause for charging a different price rests with the cost of transporting a product from the supplier’s distribution location to the buyer’s place of business. If the supplier is incurring all costs for shipping then they may charge a higher price for products in order to cover the extra transportation costs. For instance, shipping products by air to Hawaii may cost a Los Angeles, California manufacturer a much higher transportation cost than a shipment made to San Diego. Transportation expense is not the only cost that may raise a product’s price. Special taxes or tariffs may be imposed on certain products by local, regional or international governments which a seller passes along in the form of higher prices. amount needs to be sufficient to entice the reseller to agree to handle and possibly promote the product. Step 4: Determine Promotional Pricing The final price may be further adjusted through promotional pricing. Unlike standard adjustments, which are often permanently part of a marketer’s pricing strategy and may include either a decrease or increase in price, promotional pricing is a temporary adjustment that only involves price reductions. In most cases this means the marketer is selling the product at levels that significantly reduce the profit they make per unit sold. As one would expect, the main objective of promotional pricing is to stimulate product demand. But, marketers should be careful not to overuse promotional programs that temporarily reduce selling price. If promotional pricing is used too frequently customers may become conditioned to anticipate the reduction. This results in buyers withholding purchases until the product is again offered at a lower price. Since promotional pricing often means the marketing organization is making very little profit off of each item sold, consistently selling at a low price could jeopardize the company’s ability to meet their financial objectives. The options for promotional pricing include: Markdowns Loss Leaders Sales Promotions Bundle Pricing Dynamic Pricing
  • 23. 23 Markdowns The most common method for stimulating customer interest using price is the promotional markdown method, which offers the product at a price that is lower than the product’s normal selling price. There are several types of markdowns including: Temporary Markdown – Possibly the most familiar pricing method marketers use to generate sales is to offer a temporary markdown or “sale’ pricing. These markdowns are normally for a specified period of time the conclusion of which will result in the product being raised back to the normal selling price. Permanent Markdown – Unlike the temporary markdown where the price will eventually be raised back to a higher price, the permanent markdown is intended to move the product out of inventory. This type of markdown is used to remove old products that: are perishable and close to being out of date (e.g., donuts); are an older model and must be sold to make room for new models; or are products that the marketer no longer wishes to sell. Seasonal – Products that are primarily sold during a particular time of the year, such as clothing, gardening products, sporting goods and holiday-specific items, may see price reductions at the conclusion of its prime selling season. Loss Leaders An important type of pricing program used primarily by retailers is the loss leader. Under this method a product is intentionally sold at or below the cost the retailer pays to acquire the product from suppliers. The idea is that offering such a low price will entice a high level of customer traffic to visit a retailer’s store or website. The expectation is that customers will easily make up for the profit lost on the loss leader item by purchasing other items that are not following loss leader pricing. For instance, a convenience store may advertise a very low price for cups of coffee in order to generate traffic to the store with the hope that customers will purchase regularly priced products to go along with the coffee purchase. Marketers should beware that some governmental agencies view loss leaders as a form of predatory pricing and thus consider it illegal. Predatory pricing occurs when an organization is deliberately selling products at or below cost with the intention of driving competitors out of business. Of course, this differs from our discussion which considers loss leader pricing as a form of promotion and not a form of anti-competitor activity. In the U.S. several state governments have passed laws under the heading Unfair Sales Act, which prohibits the selling of certain products below cost. The main intention of these laws is to protect small firms from below-cost pricing activities of larger companies. Some states place this restriction on specific product categories (e.g., gasoline, tobacco) but Oklahoma places this restriction on most products and goes as far as requiring the pricing of products be at least 6% above cost.
  • 24. 24 Sales Promotions marketers may offer several types of pricing promotions to simulate demand. While we have already discussed “sale” pricing as a technique to build customer interest, there are several other sales promotions that are designed to lower price. These include rebates, coupons, trade-in, and loyalty programs. Bundle Pricing Another pricing adjustment designed to increase sales is to offer discounted pricing when customers purchase several different products at the same time. Termed bundle pricing, the technique is often used to sell products that are complementary to a main product. For buyers, the overall cost of the purchase shows a savings compared to purchasing each product individually. For example, a camera retailer may offer a discounted price when customers purchase both a digital camera and a how-to photography DVD that is lower than if both items were purchased separately. In this example the retailer may promote this as: “Buy both the digital camera and the how-to photography DVD and save 25%.” Bundle pricing is also used by marketers as a technique that avoids making price adjustments on a main product for fear that doing so could affect the product’s perceived quality level (see our discussion above under Step 3: Set Standard Price Adjustments). Rather, the marketer may choose to offer adjustments on other related or complementary products. In our example the message changes to: “Buy the digital camera and you can get the how-to photography DVD for 50% less.” With this approach the marketer is presenting a price adjustment without the perception of it lowering the price of the main product. Dynamic Pricing The concept of dynamic pricing has received a great deal of attention in recent years due to its prevalent use by Internet retailers. But the basic idea of dynamic pricing has been around since the dawn commerce. Essentially dynamic pricing allows for the point-of-sale (i.e., at the time and place of purchase) price adjustments to take place for customers meeting certain criteria established by the seller. The most common and oldest form of dynamic pricing is haggling; the give-and-take that takes place between buyer and seller as they settle on a price. While the word haggling may conjure up visions of transactions taking place among vendors and customers in a street market, the concept is widely used in business markets as well where it carries the more reserved label of negotiated pricing. Advances in computer hardware and software present a new dimension for the use of dynamic pricing. Unlike haggling, where the seller makes price adjustments based on a person-to-person discussion with a buyer, dynamic pricing uses sophisticated computer technology to adjust price. It achieves this by combining customer data (e.g., who they are, how they buy) with pre-programmed price offerings that are aimed at customers meeting certain criteria. For example, dynamic pricing is used in retail stores where
  • 25. customers’ use of loyalty cards triggers the store’s computer to access customer information. If customers’ characteristics match requirements in the software program they may be offered a special deal such as 10% off if they also purchase another product. Dynamic pricing is also widely used in airline ticket purchasing where type of customer (e.g., business vs. leisure traveler) and date of purchase can affect pricing. On the Internet, marketers may use dynamic pricing to entice first time visitors to make a purchase by offering a one-time discount. This is accomplished by comparing information stored in the marketer’s computer database with identifier information gathered as the person is visiting a website. One way this is done is for a website to leave small data files called “cookies” on a visitor’s computer when they first access the marketer’s website. A cookie can reside on the visitors computer for some time and allows the marketer to monitor the user’s behavior on the site such as how often they visit, how long they spend on the site, what webpages they access and much more. The marketer can then program special software, often called campaign management software, to send visitors a special offer such as a discount. For instance, the marketer may have a discount offered if the visitor has come to the site at least five times in the last six months but has never purchased. Step 5: State Ownership and Payment Options With the price decided, the final step for the marketer is to determine in what form and in what timeframe customers will make payment. As one would expect payment is most often in a monetary form though in certain situations the payment may be part of a barter arrangement in which products or services are exchanged. 25 Form of Payment The monetary payment decision can be a complex one. First marketers must decide in what form payments will be accepted. These options include cash; check, money orders, credit card, online payment systems (e.g., PayPal) or, for international purchases, bank drafts, letters of credit, and international reply coupons, to name a few. Timeframe of Payment One final pricing decision considers when payment will be made. Many marketers find promotional value in offering options to customers for the date when payment is due. Such options include: Immediate Payment in Full – Requires the customer make full payment at the time the product is acquired. Immediate Partial Payment – Requires the customer make a certain amount or percentage of payment at the time the product is acquired. This may be in the form of a down payment. Subsequent payments occur either in one lump sum or at agreed intervals (e.g., once per month) through an installment plan.
  • 26. Future Payment – Provides the buyer with the opportunity to acquire use of the product with payment occurring some time in the future. Future payment may require either payment in fuOther Considerations marketers must consider many factors when making a pricing decision. We conclude our discussion of pricing by suggesting several other issues that can impact how price is set. These include: 26 Ownership Options Early Payment Incentives Currency Considerations Auction Pricing Ownership Options An important decision faced by marketers as they are formulating their marketing strategy deals with who will have ownership of the product (i.e., holds legal title) once an exchange has taken place. The options available include: Buyer Owns Product Outright – The most common ownership option is for the buyer to make payment and then obtain full ownership. Buyer Has Right to Use but Does Not Have Ownership – Many products, especially those labeled as services, permit customers to make payment in exchange for the right to use a product but not to own it. This is seen in the form of usage, rental or lease payment for such goods and services as: mobile phone services, manufacturing equipment and Internet access. It should be noted that under some lease or rental plans there may be an option for customers to buy the product outright (e.g., car lease) though this often requires a final payment. Early Payment Incentives For many years marketers operating primarily in the business market offered incentives to encourage their customers to pay early. Typically, business customers are given a certain period of time, normally 30 or 60 days, before payment is due. To encourage customers to pay earlier, and thus allow the seller to obtain the money quicker, marketers have offered early payment discounts often referred to as “cash terms”. This discount is expressed in a form that indicates how much discount is being offered and in what timeframe. For example, the cash terms 2/10 net 30 indicates that if the buyer makes payment within 10 days of the date of the bill then they can take a 2% discount off some or all of the items on the invoice, otherwise the full amount is due in 30 days. While this incentive remains widely used, its effectiveness in getting customers to pay early has greatly diminished. Instead, many customers, especially large volume buyers simply remove the discount from the bill’s total and then pay within the required “net” timeframe (or later!). For this reason many companies are discontinuing offering this discount.
  • 27. 27 Other Considerations marketers must consider many factors when making a pricing decision. We conclude our discussion of pricing by suggesting several other issues that can impact how price is set. These include: Ownership Options Early Payment Incentives Currency Considerations Auction Pricing Auction Pricing One pricing approach that does not fit neatly into the price setting process we’ve described is the auction pricing model. Auction pricing is the reverse of bid pricing, which we discussed earlier, since it is the buyer who in large part sets the final price. This pricing method has been around for hundreds of years, but today it is most well known for its use in the auction marketplace business models such as eBay and business-to-business marketplaces. While marketers selling through auctions do not have control over final price, it is possible to control the minimum price by establishing a price floor or reserve price. In this way the product is only sold if someone’s bid is at least equal to the floor price. Currency Considerations Product pricing can be dramatically altered by international monetary exchange rates. A company that desires to be a low-price market leader may find this strategy works in their home market but currency differences may move their product’s price to a mid-price level in other countries. This could dramatically impact the perceived value of the product by customers in these markets. Any marketer selling internationally must be very aware of the price their product takes on in foreign countries once the price has been converted into the local currency.
  • 28. Pricing strategies in the Product Life Cycle (PLC) As we have already seen the competitive situation for a product changes throughout the life cycle of a product. Each different phase in the cycle may require a different strategy. Pricing plays a particularly important role in this respect. We now discuss some of the ways in which price may be used at various stages of the product life cycle. Once again, it should be noted that considerable care should be used in interpreting the possible strategic implications of each of the life cycle stages. Pricing in the introductory stage of the life cycle With an innovatory product its developers can expect to have a competitive edge, at least for a period of time. With innovatory new products, a company can elect to choose between two extreme pricing strategies (Lancaster and Massingham, 2001) • Price skimming: introducing new products at a high price level • Price penetration: Introducing new products at a low price level 28
  • 29. 29 1. Price skimming The setting of a high initial price can be interpreted as an assumption by management that eventually competition will enter the market and erode profit margins. The company therefore sets the high price so as to “milk” the market and achieve the maximum profits available in the shortest period of time. This “market skimming” strategy involves the company estimating the highest price the customer is willing or able to pay, which will involve assessing the benefits of the product to the potential customer. This strategy has in the past been successfully carried out by firms marketing innovative products with substantial consumer benefits. After the initial introduction stage of the product the company will tend to lower the price of the products so as to draw in the more price conscious customers. When a company adopts this kind of strategy the following variables are usually present: • The demand for the product is high • The high price will not attract early competition • The high price gives the impression to the buyer of purchasing a high quality product from a superior firm. 2. Price penetration The setting of a low price strategy or “market penetration strategy” is carried out by companies whose prime objective is to capture a large market share in the quickest time period possible. The conditions which usually prevail for penetrating pricing to be effective include: • The demand for the product is price sensitive • A low price will tend to discourage competitors from entering the market • Potential economies of scale and/or significant experience curve effects
  • 30. International pricing Geographic pricing becomes an issue when the company serves geographically distant markets, and transportation constitutes an important component of transaction costs. Depending on the competitive conditions in those markets and on the threat of entry, it may be more profitable to charge uniform standardized prices in all markets or locally adapted prices. Price setting within individual country markets is driven by the typical corporate issues and objectives. Also, the major problem areas in international pricing have been meeting local competition, cost, lack of competitive information, distribution and channel factors, and government barriers. Multinationals tend to make pricing decisions close to each market's prevailing conditions, but the relationship is symbiotic: Coordination and strategic direction come from headquarters, yet short-term 30 pricing decisions are made locally. Price escalation. In preparing a quotation, the international marketer must be careful to include unique export-related costs as well as normal costs shared with the domestic side of the business, such as:
  • 31. The cost of modifying the product for foreign markets. Operational costs of the export operation (e.g. subsidiary costs): personnel, market research, additional shipping and insurance costs, communications costs with foreign customers, and overseas promotional costs. Foreign market entry costs: tariffs and taxes; commercial credit and political risks associated with a buyer in a different market; and foreign exchange risks. The combined effect of clear-cut and hidden costs causes export prices to accelerate. Price escalation can result in different-sized price increases across markets. Customers who shop around for lower prices or distributors unhappy about their margins in certain markets might force a marketer to abandon a market altogether. International marketers combat price escalation through accurate information and creative strategies such as the following methods, which emphasize cutting costs: • Reorganize the channel of distribution: Eliminate some distribution levels. But, shortening the value chain might incur other new costs such as new intermediaries' demands for better discounts. • Adapt the product. Use less expensive ingredients or unbundle costly features. Remaining features, such as packaging, can also be cheapened. If price escalation causes differentials between markets that customers might discover, alter the product by changing styling and packaging, for example. • Emphasize nonprice benefits: Quality, after-Sales service, warranties, etc. (not necessarily price concessions), can add to the value the customer receives, or at least perceives, from your offer. • Assemble or produce the product overseas: Through foreign sourcing, the exporter may receive an additional benefit to lower cost: duty draw backs. 31
  • 32. 32 Transfer pricing Transfer (intra-corporate) pricing is the pricing of sales to members of the multinational corporate family. With rapid globalization and consolidation across borders, estimates have up to two-thirds of world trade taking place between related parties, including shipments and transfers from parent company to affiliates as well as trade between alliance partners. Transfer pricing must be managed in a world of varying different tax rates, foreign exchange rates, governmental regulations, and other economic and social challenges. Allocating resources among multinational units requires central management to achieve these objectives: Competitiveness in the international marketplace; Reduction of taxes and tariffs; Management of cash flows; Minimization of foreign exchange risks; Avoidance of conflicts with home and host governments; and Internal concerns, such as goal congruence and motivation of subsidiary managers.
  • 33. CASE STUDY 33 Braun as part of Gillette Today the marketer of the Oral-B brand is Braun AG of Germany, which was acquired in 1967 by Gillette, thus entering the electric shaving and small electrical appliances sectors. In 1984, the Gillette acquired Oral-B Laboratories Inc, which added to its power toothbrushes business. Gillette’s core business is still Blades and Razors, which accounted for 40% of sales in 2002. The Duracell division represented a further 22% of sales in that year. Gillette’s small electrical appliances, as defined in this report, fall under two divisions: Oral Care and Braun, which together accounted for 27% of revenue in 2002. The Oral Care business includes both manual and power toothbrushes sold under the Oral-B and Braun brands. The Braun division sells electric shavers under the Braun brand and hair depilators under the Silk-Epil brand, as well as a range of small household and personal diagnostic appliances under the Braun brand. Gillette’s smallest division, Personal Care, includes shaving preparations, after-shave products and deodorants and antiperspirants. Gillette’s Braun subsidiary, which manufactures most of its small electrical appliances, is based in Germany, but sells its products worldwide. This represented 12% of Gillette’s total sales. Gillette operates a global production network, with 32 manufacturing facilities in 15 countries around the world. The Braun subsidiary has 10 plants in seven countries, namely Germany, Ireland, France, Spain, Mexico, the US and China, and has a daily production output of around 250,000 units
  • 34. New low-priced Braun Power toothbrush product Gillette’s main threat in the US power toothbrushes is Procter & Gamble, which acquired Dr John’s Spinbrush in late 2000 and achieved phenomenal success when it was re-launched under the Crest brand. In response to the erosion of its power toothbrush share by the low-priced Crest brand, Gillette launched the Oral-B Cross Action Power toothbrush in 2001 for less than US$10. The Oral-B Cross Action Power toothbrush, designed to improve on the performance of the Oral-B Cross Action manual toothbrush. Available for less than US$10, Cross Action Power marks Gillette's entry in the budget battery toothbrush segment, the fastest growing sector in the US oral care market, and is designed to encourage manual users to trade up to the battery segment, and eventually to the premium rechargeable toothbrushes segment, e.g. the Oral-B Professional Care 7000 Series. The product uses Gillette’s patented Crises Cross bristle technology, which reaches deep between teeth and along the gum line to eliminate plaque, while the rotating Power Head surrounds teeth to take plaque from surfaces and hard to-reach back teeth. The product also features an ultra-thin, manual-like handle with a soft, rubberized grip designed to provide greater comfort and control. Gillette continued to innovate. In April 2003, the company introduced the Oral-B Professional Care 7000 Series in the premium power toothbrushes segment. The line features significantly faster brushing, at 40,000 pulsations per minute and 8,800 oscillations per minute. It also features a timer, which signals every 30secs to let users know when to brush a new quadrant of the mouth. Power toothbrushes represent one of the smallest and most immature sectors of the small electrical appliances market, but was the fastest growing sector over the review period. As a result, by 2002, it represented 5.2% of small electrical appliances volume sales, compared with just 1.6% in 1998. The strong growth in this market was due to low household penetration and generally stemmed from low bases in most markets. The strongly declining prices of these products encouraged more consumers to purchase them, particularly in response to growing concerns over maintaining healthy teeth and gums. Recommendations by dentists to use electric toothbrushes in preference to manual brushing led to higher demand worldwide, although as these are still seen mainly as luxury purchases, sales are still very low in developing markets. The main impetus to global growth was the phenomenal development of low-priced, mass-market battery-operated toothbrushes, particularly in the US but also worldwide.This was triggered in the US by the acquisition of Dr John's Spinbrush by consumer products giant Procter & Gamble in late 2000. The product was relaunched under the Crest name in 2001 and carried a retail price of just US$6. Hence, the market was opened up to a new segment of consumers than previously when prices typically retailed at over US$60. Similar products soon followed from other dental care brands, including Colgate. The success of these small appliances also encouraged manufacturers with a longer heritage in the sector to offer products at lower price points, giving mass market consumers a possible point of entry into their brands. 34
  • 35. 35 Global Sales The global market for power toothbrushes (power tooth brushes) amounted to just 47 million units in 2002, but this was a significant improvement on the level of 12.5 million units recorded in 1998. Exceptionally high growth levels of 46.2% and 64.4% were recorded in 2000 and 2001, with growth beginning to stabilize in 2002 at 29.2%. Growth was underpinned by the development of cheap, battery-operated toothbrushes, which opened up a new market and allowed products to be sold through mass-market outlets at affordable prices. Regional Sales North America far outweighed any other region in terms of power toothbrushes sales by volume. The market developed very rapidly over the review period, overtaking Western Europe by 2000, and accounting for 61.5% of the global market by 2002. However, by value North America is much lower in importance. While still the largest regional market, sales in North America were only slightly ahead of those of Western Europe by value, with the two markets combined representing almost 86% of global value sales in 2002. All regions recorded impressive growth over the review period – even Latin America, which suffered a decline in most markets. Nevertheless, growth rates were from relatively small bases. North America was the fastest growth region between 1998 and 2002, recording an increase of 804%, while in Latin America sales progressed by 459.8%, from just 32,000 to 180,000 units. How Companies Price : Companies do their pricing in a variety of ways. In small companies, prices are often set by the boss. In large companies, pricing is handled by division and product-line managers. Even here, top management sets general pricing objectives and policies and often approves the prices proposed by lower levels of management . In industries where pricing is a key factor (aerospace, railroads, oil companies ), companies will often establish a pricing department to set or assist others in determining appropriate prices. This department reports to the marketing department, finance department, or top management. Others who exert an influence on pricing include sales managers, production managers, finance managers, and accountants. Executives complain that pricing is a big headache and one that is getting worse by the day. Many companies do not handle pricing well, and throw up their hands at "strategies" like this: "We determine our costs and take our industry's traditional margins." Other common mistakes are: Price is not revised often enough to capitalize on market changes; price is set independently of the rest of the marketing mix rather than as an intrinsic element of market-positioning strategy; and price is not varied enough for different product items, market segments, distribution channels, and purchase
  • 36. occasions. Others have a different attitude: They use price as a key strategic tool. These "power pricers" have discovered the highly leveraged effect of price on the bottom line. They customize prices and offerings based on segment value and costs. The importance of pricing for profitability was demonstrated in a 1992 study by McKinsey & Company. Examining 2,400 companies, McKinsey concluded that a 1 percent improvement in price created an improvement in operating profit of 11.1 percent. By contrast, 1percent improvements in variable cost, volume, and fixed cost produced profit improvements, respectively, of only 7.8 percent, 3.3 percent, and 2.3 percent. Effectively designing and implementing pricing strategies requires a thorough understanding of consumer pricing psychology and a systematic approach to setting, adapting, and changing prices .Price Supply Demand Quantity Fig : Graph showing how the supply and demand for the goods generally affects prices Because there is a relationship between price and quantity demanded, it is important to understand the impact of pricing on sales by estimating the demand curve for the product. For existing products, experiments can be performed at prices above and below the current price in order to determine the price elasticity of demand. Inelastic demand indicates that price increases might be feasible. There are many ways to price a product which have been discussed in detail in the paper .Premium Pricing .Penetration Pricing .Economy Pricing. Price Skimming .Psychological Pricing .Product Line Pricing. Optional Product Pricing .Captive Products Pricing .Product Bundle Pricing. Promotional Pricing .Geographical Pricing. Value Pricing .A successful pricing strategy must be built on a solid analytical foundation which goes well beyond high-level customer values or competitive anecdotes. It requires quantified models of customer decision-making, competitive economics, and segmented internal economics. 36 Common pricing Mistakes : Pricing is too cost oriented. Companies do not take enough account of the overall market demand and consumer psychology. Prices are not revised often enough to take advantage of changed conditions in the market place. Prices are set independently of the rest of the marketing plan. Prices are not varied enough for different product items and market segments. Prices are set to match or better a competitor without justification or analysis.
  • 37. CONCLUSION Gillette has a long, distinguished history. It remains innovative. Its scientists, technicians and product engineers are continually trying out new features and production techniques with a view to improving product performance e.g. how to:  get the closest and most comfortable shave  make longer-lasting batteries, which meet the changing needs of the consumer  produce increasingly effective and best in class electric and manual toothbrushes  design the ultimate userfriendly ear thermometer, or the most technically advanced shaver. The company's longstanding interest in being 'first to get it right' remains a key element of its continuing prosperity and progress. Its scientists, technicians and product engineers are continually trying out new features and production techniques with a view to improving product performance. 37
  • 38. BIBLOGRAPHY 38 Book reference “Marketing Strategy and plan” Michael vag, Website www.business.gov.in www.wikianswar.com www. businesscasestudies.com www. gillette.com

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