Session 24 MG 220 Marketing Management MBA 10

1. MG 220 Marketing Management
MBA 10
Fall 2010
Muhammad Talha Salam, Asst. Professor
talha.salam@nu.edu.pk
Access it online: www.slideshare.net/talhasalam
Part 5:
Shaping the Marketing Offerings
> Setting the Price
> Adapting the Price
> Initiating and Responding to Price Changes
Class Presentation | Session 24 | 4 Nov 2010

2. Access it online: www.slideshare.net/talhasalam
Setting the Price
Process Review
Concept of Price-Tiers
• In some markets, as many as eight price points or price-tiers can be found:
– Ultimate
– Gold Standard
– Luxury
– Special Needs
– Middle
– Ease/Convenience
– Me too, but cheaper
– Price Alone
• Some or all of these price points may exist in a certain market
MG 220 Marketing Management 2

3. Access it online: www.slideshare.net/talhasalam
Setting the Price
Process Review
Concept of Price-Tiers
• Consumers often rank products based on price tiers for a certain category
• Within any tier, there are price bands
• Example of Ice-cream brands:
Steps in Setting the Price
• Step 1: Setting the Price Objective
• Step 2: Determining Demand
• Step 3: Estimating Objectives
• Step 4: Analyzing Competitors’ costs,
prices & offer
• Step 5: Selecting the price method
• Step 6: Selecting the final price
MG 220 Marketing Management 3

4. Access it online: www.slideshare.net/talhasalam
Setting the Price
Step 1: Selecting the Pricing Objective
Key Price Objectives
• Survival
– Short-term
• Maximum Current Profit
• Maximum Market Share
– Setting lowest price to stimulate demand
– Conditions: Highly price sensitive market | production & distribution costs fall with accum. Prod. |
low price discourages competition
• Maximum Market Skimming
– Price start high and are reduced gradually
– Conditions: Sufficient no. of buyers have high demand | unit cost of producing small vol are not
high | high initial cost doesn’t attract more competition | high price: superior prod image
• Product-Quality Leadership
– “Affordable luxuries”
– Being premium, quality product yet just within reach of consumers
MG 220 Marketing Management 4

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Setting the Price
Step 2: Determining Demand
Key considerations in determining demand
• Price Sensitivity
– Companies need to understand price sensitivity
of their consumers
– Also trade-offs people are willing to make
between price and product characteristics
• Estimating Demand Curves
– Statistical analysis
– Price experiments
– Surveys
• Price Elasticity of Demand
– Responsiveness of consumers to price
– Based on elasticity, it can be determined how much effect will be on total revenue
– E.g. More elastic means, lower price will produce more total revenue
– Price elasticity depends on magnitude and direction of price change
– Long-run price elasticity is different from short-run price elasticity
MG 220 Marketing Management 5

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Setting the Price
Step 3: Estimating Costs
Types of Costs
• Fixed Costs – costs that do not vary with level of production
• Variable Costs – costs that vary with level of production
• Total Costs – sum of fixed and variable costs at any level of production
• Average Costs – cost per unit at that level of production
Accumulated Production
• Concept of Learning/Experience curve
• With more experience, costs come down
• Its not only for manufacturing costs but also for others
like marketing costs etc
• Needs to be used carefully particularly vis-à-vis competitors
ABC Cost Accounting
• Every activity is accounted for
• Costs are analyzed for different consumers, retailers
and assigned to them
Target Costing
• Establishing product functions and price at which it will sell using market research
• Then, target costing with production team(s) to achieve that level
MG 220 Marketing Management 6

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Setting the Price
Step 4: Analyzing Competitors’ costs, prices & offers
Review & Analyze Competitors’ costs
Competitors’ Prices & Offers
MG 220 Marketing Management 7

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Setting the Price
Step 5: Selecting a Pricing Method
Three Cs
• Customers’ Demand schedule
• Cost Function
• Competitors’ prices
• FLOOR Costs
• CEILING Customers’ assessment
• STARTING POINT Competitors’ prices (& prices of substitutes)
• Six different methods used
– Markup pricing
– Target-Return Pricing
– Perceived Value Pricing
– Value Pricing
– Going-Rate Price
– Auction-type Pricing
MG 220 Marketing Management 8

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Setting the Price
Step 5: Selecting a Pricing Method (…contd.)
Six different methods used
• Markup pricing
– Add markup to costs | Most simple | Ignores several key factors like competitors, perceived image
• Target-Return Pricing
– ROI target is established and is used to achieve at a price
– Break-even level has to be established
– Book’s example
• Perceived Value Pricing
– Companies base their price on customer’s perceived value
– Key is to deliver more value than competitors and demonstrate it
• Value Pricing
– Lowering pricing on high-quality offerings
– Requies re-engineering to become a low-cost producer
• Going-Rate Price
– Prices are based largely on competitors prices
• Auction-type Pricing
– Types: English (Ascending) | Dutch (Descending) | Sealed bid
MG 220 Marketing Management 9

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Setting the Price
Step 6: Selecting the Final Price
Impact of other Marketing Activities
• Studies showed that brands with higher advertising budgets were able to
charge premium
• Consumers paid more for ‘known’ brands than ‘unknown’ ones
Impact of Price on other parties
• Reaction of other stakeholders
• Particularly distributors, dealers as their profits (earnings) are dependent on
company’s pricing
• How will competitors’ react?
MG 220 Marketing Management 10

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Adapting the Price
Geographical Pricing
• Several considerations
• Should there be different prices to ‘distant’ customers to cover extra logistics’ costs
• How to accept payments
• Countertrade – Offering payment in other items than cash
• Different forms:
– Barter
– Compensation Deal
– Buyback arrangement
– Offset
Price Discounts & Allowances
• Cash Discount
• Quantity Discount
• Functional Discount
• Seasonal Discount
• Allowance
MG 220 Marketing Management 11

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Adapting the Price
Promotional Pricing
• Loss-leader pricing
• Special-even pricing
• Cash rebates
• Low-interest financing
• Longer payment terms
• Warranties and service contracts
• Psychological discounting
Differentiated Pricing
MG 220 Marketing Management 12

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Initiating & Responding to Price Changes
NOT INCLUDED IN COURSE
MG 220 Marketing Management 13

14. MG 220 Marketing Management
MBA 10
Fall 2010
Muhammad Talha Salam, Asst. Professor
talha.salam@nu.edu.pk
Access it online: www.slideshare.net/talhasalam
Covering Prev Session’s material
Class Presentation | Session 25 | 8 Nov 2010