PRICING STRATEGY

Pricing strategy

Revenue=price times quantity
Prices around the world account for differences in currencies, taxes/tariffs, and consumer demand.  Firms take considerable pains to discover and anticipate the pricing strategies and tactics of other firms.  Pricing is given a great deal of attention because it is given a great deal of attention because it is considered to be the only real means of differentiation in mature markets plagued by commoditization.  Guessing is never a good strategy in marketing; it can be downright deadly when it comes to setting pricesThe Role of Pricing in Marketing Strategy

Pricing is often a major source of confrontation between sellers and buyers.  Sellers obviously want to sell a product for as much as possible, whereas buyers would love to get the products they want for free.

Seller’s Perspective on Pricing
Have a tendency to inflate prices because they want to receive as much as possible in an exchange with a buyer.  If a buyer cannot be found, then the homeowner is guilty of letting sentiment cloud his or her perception of market reality.  Sound pricing strategy should ignore sentimental feelings of worth and instead focus on the market factors that affect the exchange process.  Four key issues: cost, demand, customer value, competitor’s prices.
Cost
direct costs-finished goods/components, materials, supplies, sales commission, transportation
indirect costs-administrative expenses, utilities, rent
Firms make money either through profit margin, high sale volume, or both.
Manufacturers of tangible goods who do not sell a product today can sell that same product tomorrow.  Service firms, like airlines, use complex pricing systems in an attempt to squeeze every dollar out of every seat on every plane.  Market demand is also a key issue in a seller’s pricing strategy.  More efficient firms-like low-cost airlines or discount retailers are able to cover their costs while simultaneously offering lower prices to customers.  The bottom-line impact o value delivered to the customer is often an issue in setting variable prices.  Setting a price for this product may have little to do with costs, but instead focuses on the value associated with the innovation and intellectual capital of the selling firm.  Finally, the organization must be aware of what its competitors charge for the same or comparable products.  Rather than beating a competitor’s prices, a better strategy may be to create real or perceived differentiation for the product offering.

The buyer’s perspective on Pricing
Buyers often see prices of being lower than market reality dictates.  Price is about what the buyer will give up in exchange for a product.  Buyers perspective key issues for pricing: perceived value and price sensitivity
Buyers will give up in exchange for a product depends to a great extent on their perceived value of the product.  Some customers have good value with high product quality, whereas others see value as nothing more than a low price.  Value-a customer’s subjective evaluation of benefits relative to costs to determine the worth of a firm’s product offering relative to costs to determine the Worth of a firms product offering relative to other product offerings.
Perceived value=Customer Benefits/Customer Costs
Customer Benefits-quality, satisfaction, prestige/image, and the solution to a problem.  Customer costs money, time, effort, and all non-selected alternatives (opportunity costs)
Good pricing strategy also based on an understanding of the price elasticity associated with firms goods and services.  On the buyer’s side, price elasticity translates into the unique and varying buying situations that cause buyers to be more or less sensitive to price changes.

A shift in the Balance of Power
Buyers have increase power over sellers when there is a large number of sellers in the market or when there are many substitutes for the product.  Have power when the economy is weak and fewer customers will part with their money.  Sellers have increased power over buyers when certain products are in short supply or in high demand.  Sellers have increased power during good economic times when customers will spend more money.  Buyer’s market prevails mostly.  Exists because of the large number of product choices that are available, increased commoditization among competing products and brands, and a general decline in brand loyalty among customers.

The relationship between Price and Revenue
Price cutting can also move excess inventory and generate short-term cash flow.  Any price cut must be offset by an increase in sales volume just to maintain the same level of revenue.
Percent change in Unit Volume=Gross Margin/Gross Margin % +- Price Change % -1.  Video game manufactures, often bundle games and accessories with their system consoles to increase value.  The cost of giving customers these free add-ons is low because the marketer buys them in bulk quantities.  This added expense is almost always less costly than a price cut.  And the increase in value may allow the marketer to charge higher prices for the product bundle.

Key Issues in Pricing Strategy
Firms pricing objectives, supply and demand, and the firm’s cost structure are critically important in establishing initial prices.  Increases in product quality or the addition of new product features often come with an increase in power.  Pricing is also influenced by distribution, especially the image and reputation of the outlet where the good or service is sole.  Coupons represent a combination of price and promotion that can stimulate increased sales in many different product categories.

Pricing objectives
Realistic, measurable, and attainable.  Firms make money on profit margin, volume, or some combination of the two.  Sometimes, firms simply want to maintain their prices in an effort to certain their position relative to the competition.  Status quo.  The decision to maintain prices must be done after a careful analysis of all factors that affect the pricing strategy.

Description of Common Pricing objectives
Profit-oriented-designed to maximize price relative to competitors prices, the products perceived value, their firms cost structure and Princeton efficiency.  Profit objectives are typically based on a target return, rather than simple profit max.

Volume Oriented-Set prices in order to max dollar or unit sales volume.  This objective sacrifices profit margin in favor of high product turnover.

Market Demand-sets prices in accordance with customer expectations and specific buying situations.  This objective is often known as charging what the market will bear

Market Share-Designed to increase or maintain market share regardless of fluctuations in industry sales.  Market share objectives are often used in the maturity stage of the product life cycle.

Cash Flow-Designed to match or beat competitors prices.  The goal is to maintain the perception of good value relative to the competition

Prestige-Sets high prices that are consistent with prestige or high-status product.  Prices are set with little regard for the firm’s cost structure or the competition.

Status quo-Maintains current prices in an effort to sustain a position relative to the competition

Supply and Demand
Customer expectations regarding pricing/

The firm’s cost structure
The cost must be factored out of the revenue equation in order to determine profits, and ultimately the survival of the firm.   A most popular way to associate costs and prices is through breakeven pricing.
Breakeven in units=Total Fixed Costs/Unit Price-Unit Variable Cost
Another way is a cost-plus pricing-a strategy that is quite common in retailing
Selling price=Average Unit Cost/1-Markup percent (decimal)
Cost-plus pricing is easy to use but has a weakness in determining the correct markup percentage.
Different firms have different cost structures.

Competition and Industry Structure
Firms that use competitive matching pricing objectives face a constant struggle to monitor and respond to competitor’s price changes.  However, a firm does not always have to  match competitor’s prices to compete effectively

• Perfect competition-a market containing an unlimited number of sellers and buyers who exchange for homogeneous products
• Monopolistic competition-a market containing many sellers an buyers who exchange for relatively heterogeneous products.  The heterogeneous nature of the products gives firms some control over prices.
• Oligopoly-a market containing relatively few sellers who control the supply of a dominant portion of the industry’s product
• Monopoly-a market dominated by a single seller who sells a product with no close substitutes.

Stage of the Product Life Cycle
Pricing strategy in the introduction stage is critical because it sets the standard for pricing changes over time.  Firms must look inward to find ways to cut costs and maintain profits later in the life cycle.  Also, very few firms enjoy the luxury of raising prices during the decline stage.

Pricing Service Products
When buying services, customers have a difficult time determining quality prior to purchase
If the service provider sets prices too low, customers will have inaccurate perceptions and expectation about quality.

• Service quality is hard to detect prior to purchase
• The costs associated with providing the service are difficult to determine
• Customers are unfamiliar with the service process
• Brand names are not well established
• Customers can perform the service themselves.
• The services have poorly defined units of consumption
• Advertising within a service category is limited
• The total price of the service experience is difficult to site beforehand,…

Most services suffer from the challenges associated with determining costs because intangible expenses such as labor, insurance, and overhead must be taken into account.
When services that customers can do for themselves, the firm I competing with the customers’ evaluation of his or her time and ability, in addition to other competing service providers.
Customers often balk at the high prices of service providers because they have a limited ability to evaluate the quality or total cost until the service process has competed.  The heterogeneous nature of these services limits standardization, therefore, customer knowledge about pricing is limited.
Due to the limited capacity associated with most services, service pricing is also a key issue with respect to balancing supply and demand during peak and off-peak demand times.
Yield management allows the service firm to simultaneously control capacity and demand in order to maximize revenue and capacity utilization.  Accomplished 2 ways:
1) The service firm controls capacity by limiting the available capacity at certain price points
In the off-season, many hotels schedule routine maintenance and remodeling and reduce rates for conventions in order to fill unused capacity.  Airlines do this by selling a limited number of sears at discount prices three or more weeks prior to a flight’s departure.
2) The service firm controls demand through price changes over time and by overbooking capacity.  These activities ensure that service demand will be consistent and that any unused capacity will be minimized.  These practices are common in services characterized by high fixed costs and low variable costs, such as airlines, hotels, rental cars, cruises, transportation firms, and hospitals.  Firms will sell some capacity at reduced prices in order to maximize utilization.
Yield management systems are also useful in their ability to segment markets based on price elasticity.  Consultants are less price sensitive because their clients reimburse them for expenses.  Many other firms can reach different market segments with attractive off-peak pricing.  Many customers take advantage of the lower prices at theme parks and beach resorts by traveling during the off-season.  Similar situations occur in lower-priced movie matinees and lower prices for lunch items at most restaurants.

Price elasticity of demand
Pricing has intricate connections to issues such as demand, competition, and customer expectations.
Price elasticity customer’s responsiveness or sensitivity to changes in price.  The relative impact on the demand for a product given specific increases or decreases in the price charged for that product.
Price elasticity of demand=Percentage Change in Quantity demanded/Percentage Change in Price
Inelastic-number less than 1, price change does not significantly affect the quantity demanded
elastic demand
Price elasticity is not uniform over time and place because demand is not uniform over time and place.

Situations that increase price sensitivity
More sensitive to price when they have many different choices or option for fulfilling their needs and wants.

• Availability of Product Substitutes-much more sensitive to price differences. Name-brand products
• Higher total expenditure-higher total expense, the more elastic the demand for that product will be
• Noticeable differences-products having heavily promoted prices tend to experience more demand.
• Easy price comparisons-more price sensitive if they can easily compare prices among competing products.  Industries such as retailing, supermarkets, travel, toys, and books.  Fetchbook.info, customers can find the lowest prices on books across 145 different bookstores.

Situations that decrease price sensitivity customers become much less sensitive to price when they have few choices or options for fulfilling their needs and wants.  Price elasticity is lower (more inelastic) in these situations:

• Lack of substitutes-baking/cooking ingredients, add-on or replacement parts, one-of-a-kind antiques, collectibles or memorabilia, unique sporting events, and specialized vacation destinations
• Real or perceived necessities-food, water, medical care, cigarettes, and prescription drugs, have extremely inelastic demand because customers have real or perceived needs for them.  Some product categories are price inelastic because customers perceive those products as true necessities.
• Complementary products
• Perceived Product Benefits-fine wines, gourmet chocolates, imported coffee, or trips to a day spa.  Other customers base their entire purchasing patterns on buying the best products in all categories.
• Situational influences-Time pressures or purchase risk increase to the point that an immediate purchase must be made or the availability of product substitutes falls dramatically.  Other influences resolve around purchase risk, typically the social risk in aiming a bad decision.
• Product differentiation-make the demand for the curve for a product more inelastic.  Product differentiation does not have to be based on real differences in order to make customers less price sensitive.

Pricing Strategies
Most firms have developed a general and consistent approach or general pricing strategy to be used in establishing prices.  The way that members of the target market perceive the price.  Customer psychology and information processing.

Base Pricing Strategies
A film’s base pricing strategy establishes the initial price and sets the range of possible price movements throughout the product’s life cycle.  Different approaches to base pricing, market introduction pricing, prestige pricing, value-based pricing (ELDP), competitive matching, and nonprice strategies.