Pricing – Marketing

What differentiates price from the other 3 components of the marketing mix?
1. Price is the most flexible of the 4P’s
2. While product, place and promotion are focused on cost, pricing is focused on creating wealth
Discuss the relationship between supply and demand and how elasticity impacts this relationship:
For most products, an increase in price, results in a fall in demand for the product
Only Veblen or giffen goods contradict this law of demand
If a product is price elastic, then a small change in price will cause a proportionally large change in demand
What is price framing?
How the offered price is communicated to the customer
Methods of framing include complex pricing , time limited and baiting approached
What are the 3 Cs of pricing methods and how do these determine a pricing boundaries of a product?
1. Cost based pricing – sets the floor
2. Customer value and
3. competition set the ceiling
What is cost based (cost plus) pricing?
Cost-plus pricing adds a standard mark-up to the cost of producing the product
Examples include break even and target profit pricing
Advantages of cost plus pricing include:
1. Sellers can be confident every sale contributes to profit
2. The price is justified to customers
3. Improved efficiency directly contributes to competitiveness
Disadvantages of cost plus pricing include:
1. It is inwardly focused – ignores demand and competitors
2. Ignores WTP, a firm could potentially charge more
3. Can be hard to predict sales in order to determine price
What is competitor pricing?
Pricing that is determined relatively to their competitors
Advantages of competitor based pricing include:
1. Pricing is flexible so a firm can choose to an extent who they compete with
2. Best chance of gaining a competitive advantage
Disadvantages of competitor based pricing include:
1. Dependant on a firms ability to compete with other firms or even restricted by weak competition
2. Does not consider other customer values such as quality, loyalty and brand reputation
What is customer based pricing?
Price is determined on the customer’s WTP and the value a firm believes they can offer
Advantages of customer based pricing include:
1. Effective for firms with strong customer loyalty and a differentiated product
2. Can allow a firm to make a higher profit per item than cost based – think Apple
3. Takes into consideration market and customer factors
Disadvantages of customer based price include:
1. With an undifferentiated product, price will match competitors
2. Customer WTP will vary from customer to customer
Name the 3 main pricing tactics:
1. Price Skimming
2. Penetration Pricing
3. Prestige Pricing
What is price skimming and which customers does this tactic aim to sell to?
Involves charging a higher price initially to ‘skim the cream’ then reducing price later.
Demand will be limited to innovators and early adopters willing to pay a premium price and take a risk
Conditions for effective price skimming are:
1. markets where innovative is strong and the PLC is short
2. demand is fairly price inelastic
3. Fashionable brand image
What is penetration pricing and what is the aim of firms employing this tactic?
Involves offering products at low prices to generate large a volume of sales.
It aims to capture large market shares, achieve economies of scale and create barriers to entry
Conditions for effective penetration pricing are:
1. Potential for economies of scale and cost saving
2. Strong competition
3. High price elasticity
What is prestige pricing and how does it go beyond price skimming?
Prestige pricing like skimming also involves operating at the top end of the market however, it goes beyond skimming in that it is permanently doing so.
It uses price to promote ideas of status, quality and luxury.
This often incorporates a matching corporate culture.
List 4 types of price adjusting (fine tuning) strategies:
1. Price promotions such as discounts
3. Psychological pricing
4. Bundling/packages
5. Segmented pricing – same product at varying prices