Price – Marketing mix

Price
Amount of money charged for a product or service, or the sum of values consumers exchange for the benefits of having or using the product or service.
What can price do?
• Positioning
perception of quality
e.g. wine, perfume
• Gain market position
Sell more units
e.g. lower price to increase demand
• Manage demand
Increase or decrease
e.g. time or day or season of product
• Achieve financial objective
Profit, cash flow, share price
• Manage competition
Discourage entry or get rid of them
Helps get rid of competitors
Stops future competitors
Influences on price
Positioning
Overall marketing mix should reflect the desired positioning

Costs – * sell product higher than it costs
Costs set the price floor
* Fixed costs
Do not vary with quantity produced or sold
Larger quantities will each unit will then carry a lower share of fixed costs
e.g. factories
* Variable costs
Vary directly with the level of production
e.g. packaging, ingredients, time
* Total costs – Sum of fixed and variable, for any given quantity.

Cost plus pricing
adding a standard mark-up to the cost of product

unit cost = variable cost + (fixed cost/unit sales)
sell price = unit cost + mark-up

Breakeven analysis
Number of units (how many sales need) to cover your costs (fixed and variable)

Break-even volume = fixed cost/unit sell price – unit variable cost
Less than break-even volume = no money made
think about viability of product
manipulate and calculate prices

Customer perceptions
Perceived consistency of positioning
Perception of value
Elasticity of demand
Demand curves
Low level of price sensitivity
price changes do not greatly affect demand
total revenue increases, when price increases
High level of price sensitivity
price changes markedly affect demand
total revenue decreases when price decreases
Price sensitivity
Factors that affect price sensitivity
• the perceived importance or necessity of the product to the consumer
• availability of substitutes
• the perceived quality, prestige or exclusiveness of the product
• the proportion of the expenditure on the product relative to income
• e.g. plane ticket
• a proportion of the cost is borne by another party
• lower sensitivity
e.g. someone else paying for you – dinner
• the product is used in conjunction with previously purchased assets
The competition (nature of industry)
* Pure competition
Commodity product, with many buyers and sellers
price is at its lowest

* Monopolistic competition
Many buyers and sellers, with differentiated products across different prices

* Oligopolistic competition
A few sellers who are sensitive to each other’s pricing
e.g. Coles, Woolworths

* Pure monopoly
One seller in market place, no substitute, increase price

Legal and ethical factors
◦ Government
The ACCC and Competition and Consumer Act
fine for breaking the rules

◦ Price fixing
competitors come together to set a fixed price
can be small or global scale

◦ Price discrimination
some difference in certain conditions
e.g. women pay more for a haircut

◦ Deceptive pricing
put price that doesn’t represent true cost
e.g. advertise cheap price, no product, buy alternative
e.g. values added on top of discount/sales

◦ Pricing information
laws what have to be revealed. e.g. supermarkets – unit price and labeling

Pricing approaches
• Value-based pricing
◦ setting price based on buyer’s perception of value rather than seller’s cost
◦ marketing strategy aims to enhance perceived value in customer’s minds
▪ price is set to match this value
Cost-based pricing
• What is the cost of making the product?
• What unit margin is needed to target volume
• Price is set to produce the desired unit margin and profitability
Value-based pricing
• Cost targets are set to meet profit objectives
• Net price, after distribution costs is determined
• Price discounted to intermediaries to achieve margin requirements
Price ceiling (maximum) and price floor (minimum)
• Highest possible price to charge based on customer value
• Determine costs, minimum profit need to make to stay in business
• Price range in between

* Issues
• Ensuring costs are managed appropriately
• Ensuring we can charge an appropriate price

Competition-based
• economic-value pricing
i. going to be closer to bottom
ii. depending on what competition is doing

• going-rate
i. what everyone is doing

• sealed bid/tender
i. don’t know what customer is willing to pay
ii. make best guess, best offer

Performance-based
• Seller paid on basis of performance of offer
i. e.g. auction houses or goods based on percentage
New product pricing strategies
• Price skimming
• setting a high price for new products to maximise profit
e.g. fashion items, new tech items, recordable DVD players

• Penetration Pricing
• setting a low for a new product to attract a large number of buyers and gain a dominant market share.
e.g. some new consumer pharmaceuticals

Price adjustment strategies
•Discounting allowances
– fashion items out of season
– large quantity —> discounted

• Segmented pricing
concession on public transport

• Psychological pricing
$9.99 cheaper than $10
$8.88 lucky number in China

• Promotional pricing
– relate to sth special
– e.g. at events
– at a certain period of time —> revert back to original afterwards

•Geographical and international pricing
another form of segmented pricing

Product mix pricing strategies
• Line pricing
different varieties of product, different pricing

• Optional product pricing
essential product and additional components
e.g. burgers with add on sauce

•Captive product pricing
element of product are tied together
e.g. print cartridges
charge higher price after buying printer

• By-product pricing
Minimising waste
Use by-product to sell, transform product
e.g. Vegemite

• Product-bundle pricing
Put products together for a cheaper deal
e.g. shampoo and conditioner, value meal