Genesis Management Services Pty Ltd gmservices.com.au
genesis
SERVICES
EXPERIENCE
PRICING STRATEGY
1. Introduction
Price is major determinant of demand and closely related to other marketing-mix variables.
Price is the only element of the marketing mix that creates sales revenues; the other elements are all costs.
2. Setting Price
Target Market Objectives
Current profit maximization
Market-share leadership (long-run profitability via a dominant market share) where market is price-sensitive, economies of scale can be realized, and low price will discourage competition.
Market skimming (setting a high initial price to yield a high profit margin per unit sold) where sufficient buyers with high demand, economies of scale not realizable, high price will not attract competitors, and high price creates an impression of a superior product.
Product-quality leadership.
Marketing-Mix Strategy
Pricing Policies and Constraints
Must take into account compatibility with company policies and external constraints imposed by distributors, suppliers, and competitors.
Public policy issues are also important.
Pricing Strategy
Is the task of defining the initial price range and planned price movement through time that the company will use to achieve its marketing objectives in the target market.
Cost-oriented pricing strategies, including markup pricing (cost-plus) and target pricing (using a specified target rate of return).
Demand-oriented pricing strategies (based on consumer perceptions and demand intensity where prices are set on the basis of the product's perceived value by determining the market's perception of the relative value of a company's offer versus a competitor's offer.
Competition-oriented pricing strategies including going-rate pricing (price at the average level charged by the industry) and sealed-bid pricing.
Pricing Tactics
Psychological pricing tactics is where the final price set takes the psychology of the buyer into account including setting the price ending in odd numbers and usually just below the dollar amount, price lining (limited number of prices for selected lines of merchandise), prestige pricing (high price that generally indicates high quality), promotional pricing (below markup or below cost, e.g. price leaders, special-event pricing, and psychological discounting.)
Discount pricing tactics call for establishing a list price and a set of discounts and allowances as special incentives including cash discounts, quality discounts, trade discounts, seasonal discounts, trade-in allowances and promotional allowances, etc.
3. Initiating Price Changes
Price cuts. Consider when there is excess capacity, falling market share in the face of rigorous price competition and when you want a drive for dominance through lower costs.
Price Increases. Consider when persistent cost inflation and/or over-demand.
Buyer's Reactions to Price Changes
Price elasticity of demand is defined as the percentage change in quantity demanded divided by percentage change in price.
Perceptual factors in buyers' response affect consumers' reaction to price changes.
Competitors' Reactions to Price Changes. Particularly important where there are a number of firms, the product offering is homogeneous, and the buyers are discriminating and informed.
4. Responding to Price Changes
Ask questions about competitors' actions
Best response requires an analysis of the situation.
5. Pricing the Product Line
Modify thinking when pricing product lines.
Product line pricing situations
One situation consists of pricing related optional products such as accessories for automobiles or liquor at restaurant
Another deals with captive products (after-market products) like razor blades, camera film, and copier paper.
A third situation concerns pricing by-products that result from production of processed meats, petroleum products, and other chemicals.