POM MODULE 2 Marketing-mix Strategy

In the narrowest sense, price is the amount Price is only one of the marketing-mix tools
of money charged for a product or service. that a company uses to achieve its
More broadly, price is the sum of all the marketing objectives. Price decisions must
values that consumers exchange for the be coordinated with product design,
benefits of distribution,
having or using the product or service. and promotion
Price is the only element in the marketing Many firms support such price-positioning
mix that produces revenue; all other strategies with a technique called target
elements costing, a
represent costs. Price is also one of the most potent strategic weapon. Target costing
flexible elements of the marketing mix. reverses the usual process of first designing
a new
Factors to Consider When Setting product, determining its cost
Prices
A company’s pricing decisions are affected Costs
both by internal company factors and by Costs set the floor for the price that the
external environmental factors (see Figure company can charge for its product.
1). Types of Cost
Internal Factors : 1.Marketing objectives A company’s costs take two forms, fixed
and variable. Fixed costs (also known as
2. Marketing mix strategy 3. Costs overheads) are costs that do not vary with
production or sales level.
Pricing decision Variable costs vary directly with the level
External factors: 1. Nature of the market & of production. Each personal computer
produced involves a cost of computer chips,
demand
wires, plastic, packaging, and other inputs.
2. Competition Total costs are the sum of the fixed and
variable costs for any given level of
3. costs & pricing production.
Organizational Considerations
Management must decide who within the
Internal factors affecting pricing include the organization should set prices.
company’s marketing objectives,
Pricing decisions are affected by external
marketing-mix strategy, costs, and factors such as the nature of the market and
organization. demand, competition, and other
environmental elements.
Marketing objectives. Before setting price, the The Market and Demand
company must decide on its strategy for the Whereas costs set the lower limit of prices,
product. the market and demand set the upper limit.
Both consumer and industrial buyers
Examples of common objectives are
balance the price of a product or service.
survival, current profit maximization,
market-share maximization and product-
quality leadership
Economists recognize four types of decisions. Finally, social concerns may
market, each presenting a different have to be considered. In setting prices, a
pricing company’s
challenge. short-term sales, market share and profit
goals may have to be tempered by broader
Under pure competition, the market societal considerations.
consists of many buyers and sellers trading New Product Pricing Strategies
in a Pricing strategies usually change as the
uniform commodity such as wheat, copper, product passes through its life cycle.
or financial securities.
.Under monopolistic competition, the Figure 2 shows four possible positioning
market consists of many buyers and sellers strategies. First, the company might decide
that to
trade over a range of prices rather than a use a premium pricing strategy –
single market price. producing a high-quality product and
Under oligopolistic competition, the charging the highest
market consists of a few sellers that are price. At the other extreme, it might decide
highly on an economy pricing strategy –
sensitive to each other’s pricing and producing a lower-quality product but
marketing strategies. The product can be charging a low price.
uniform (steel, The good-value strategy represents a way to
aluminum) or non-uniform (cars, attack the premium pricer.
computers). Using an overcharging strategy, the
In a pure monopoly, the market consists of company overprices
one seller. The seller may be a government the product in relation to its quality.
monopoly (a postal service), a private They can choose between two strategies:
regulated monopoly (a power company) or a Market-skimming pricing
private non Many companies that invent new products
regulated monopoly. initially set high prices to ‘skim’ revenues
. Non - regulated monopolies are free to layer by layer from the market, a strategy
price at what the market will bear. called market-skimming pricing.
.a fear of government regulation. Market-penetration pricing
Rather than setting a high initial price to
Other External Factors
skim off small but profitable market
When setting prices, the company must also
segments,
consider other factors in its external
some companies use market-penetration
environment. Economic conditions can
pricing.
have a strong impact on the firm’s pricing
Cost -Based Pricing
strategies.
Is the practice of setting prices based on the
Economic factors such as boom or
cost of the goods or services being sold. A
recession, inflation and interest rates affect
profit percentage or fixed profit figure is
pricing decisions
added to the cost of an item, which results in
. The company must also consider what
the price at which it will be sold.
impact its prices will have on
cost-plus pricing – adding a standard mark-
The government is another important
up to the cost of the product.
external influence on pricing
break-even pricing, or a variation called
 POM MODULE 2

Target profit pricing. The firm tries to Profit-Oriented Pricing

determine the price at which it will break - It places an emphasis on the finances
even or make of the product and business.
the target profit it is seeking. A business’s profit is the money left after all
Value-based pricing uses buyers’ costs are covered. In other words, profit =
perceptions of value, not the seller’s cost, as revenue – costs.
the key Price is a component of the value equation,
to pricing. Value-based pricing means that but if the product fails to deliver value, it
the marketer cannot design a product and will be difficult to generate sales.
marketing Finally, profit-oriented pricing is often a
program and then set the price. Price is difficult strategy for marketers to succeed
considered along with the other marketing- with because it limits flexibility. If the price
mix is too high, then the marketer must adjust
variables before the marketing program is other aspects
set. of the marketing mix to create more value. If
Cost-based pricing is the marketer invests in the other three Ps—
product driven. by, say, making improvements to the
product, increasing promotion, or adding
Cost-based pricing : product, cost, distribution
price, value, customers channels—that investment will probably
Value-based pricing: Customers, value, require additional budget, which will further
price,cost, product. raise the
price.
Competition-Based Pricing It is standard for retailers to use some profit-
-Consumers will base their oriented pricing—applying a standard
judgements of a product’s value on the mark-up over wholesale prices for products,
prices that for instance—but that is rarely their only
competitors charge for similar products. strategy.
Successful retailers will also adjust pricing
Here, we discuss two forms of for some or all products to increase the value
competition-based pricing: going-rate they
pricing and sealed-bid pricing. provide to customers

Going-Rate Pricing
-the firm bases its price largely on
competitors’ prices, with less
attention paid to its own costs or to demand.
letting the difference increase or decrease.
Sealed-bid pricing
-a firm bases its price on how it thinks
competitors will price rather
than on its own costs or on demand. Would-
be suppliers can submit only one bid and
cannot
 Mark-up/mark-down - The difference
between selling price and cost as a
Price - is the amount of money charged for percentage of
a product or service, or the sum of the values selling price or cost.
that Break-even pricing (target profit pricing)
consumers exchange for the benefits of – Setting price to break even on the costs of
having or using the product or service. making and marketing a product; or setting
Dynamic Pricing - is charging different price to make a target profit.
prices depending on individual customers Value-based pricing – Setting price based
and on buyers’ perceptions of product values
situations. rather than
Target costing – A technique to support on cost.
pricing decisions, which starts with deciding Value pricing – Offering just the right
a target combination of quality and good service at a
cost for a new product and works back to fair price.
designing the product. Going-rate pricing – Setting price based
Fixed costs – Costs that do not vary with largely on following competitors’ prices
production or sales level rather than
Variable costs - Costs that vary directly on company costs or demand.
with the level of production. NegOr_Q4_Principles of Marketing12_Module2_v2
Total costs - The sum of the fixed and 23
variable costs for any given level of First-price sealed-bid pricing – Potential
production. buyers submit sealed bids, and the item is
Pure competition – A market in which awarded
many buyers and sellers trade in a uniform to the buyer who offers the best price.
commodity Second-price sealed bid – Sealed bids are
– no single buyer or seller has much effect submitted but the contender placing the best
on the going market price. bid
Monopolistic competition – A market in pays only the price equal to the second-best
which many buyers and sellers trade over a bid.
range of Profit-Oriented/Based Pricing- Profit-
prices rather than a single market price. oriented pricing places an emphasis on the
Oligopolistic competition – A market in finances of
which there are a few sellers that are highly the product and business. A business’s profit
sensitive is the money left after all costs are covered.
to each other’s pricing and marketing In
strategies. other words, profit = revenue – costs.
Pure monopoly – A market in which there
is a single seller – it may be a government
monopoly, a private regulated monopoly, or
a private non-regulated monopoly.
Net profit – The difference between the
income from goods sold and all expenses
incurred.
Cost-plus pricing - Adding a standard
mark-up to the cost of the product.