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T8: Setting the Price: Six step process (Step 5: Select a pricing method p…
T8:
Setting the Price: Six step process
Step 3:
Estimating costs at different output levels
'costs set the floor on price'
'demand generally sets the ceiling on price'
Important to analyse when economies of scale will be significant, and of course when they will be lost, upper and lower end
Experience-curve pricing
Pros:
Drive competitors out
Make the pie bigger by bringing in more price sensitive buyers
Cons:
Assumes smaller players will follow and not just innovate into something else
Cheapen the product, company, and/or industry
Big company must be ready to respond to increased demand of lowering the price, i.e. production/ordering capacity, support, etc
A bigger player has lower costs due to gains in efficiency through experience and thereby drive the price down while still making better profits than smaller competitors
Accumulated production leads to reduced costs through efficiencies, this is the
'experience or learning curve'
Target costing
Determines the target price first, then the target profit, what is left is the target cost a product must be able to be produced for
If not possible, development should discontinue
Like the opposite to 'mark-up pricing'
Step 4:
Analysing competitors' costs, pricing and offers
Sinek - Stick to tactical analysis, not strategic which buys into finite game play
Must have an overview of the environment
Step 2:
Determine the demand and its price relationship
Demand-based pricing
Aims to test demand levels at different price points and have a demand curve to illustrate the relationship and optimal points
The research needs to control for other variables, such as changing perceptions and competitive effects, etc
Very expensive to get and conclusive price-demand study so generally not used by smaller firms
Some ways to estimate demand
Substitute products (could be competitors products)
Survey potential buyers
From experience
Statistical analysis (past company records, industry or govt stats)
Experimentation - actually sell but under controlled conditions
Price sensitivity
INELASTIC DEMAND:
Some products not so effected by price
Basic necessities
Expenditure is small v buyers income
High quality/prestige/exclusive products
Product is more distinctive
Expenditure small compared to total cost
Part of the cost is borne by another party
Barriers to change
Difficult to change products/providers
Product is used with assets already purchased
Substitutes
Hard to compare quality of subs
Buyer is less aware of options
None available (some medicines)
Buyers cannot store the product
Higher price appears justified
ELASTIC DEMAND:
Other products are highly sensitive to price changes
Price elasticity can be short-run or long-run in the effects so sometimes it takes time to know the full effect
Step 5
: Select a
pricing method
p.476
Mark-up pricing
Most basic/simple method - popular
Add set mark-up to production costs
Does not consider demand or competition factors
Administratively simple to work with large product ranges
Generally considered 'fair' by buyers and sellers
If all competitors use this method, reduces price based competition
Target-return pricing
Based on expected ROI
Largely ignores price elasticity and competitors prices
Relies on reaching the anticipated demand level
Perceived-value pricing
Company needs to be able to communicate the added-value
Better to offer more extra value than the extra price
Based on consumers perceived value
Value pricing
Set low price for high quality
Aims to build customer loyalty
EDLP - Everyday low pricing - e.g. Bunnings
Extreme EDLP is reflected in $2 shops etc
Avoid costly promotional requirements of sales
Stop erosion of confidence in shelf-prices and company credibility
High-low pricing - e.g. Briscoes
Aim is not to just lower prices a bit, but to significantly increase efficiencies in order to lower prices by a lot which maintaining higher product or service - e.g. Southwest Air using same planes
Going-rate pricing - set where they want to sit relative to competition
Auction-type pricing - set by consumers through auctions
Three Cs model
Competitors prices and prices of substitutes
Costs
Customers assessment of unique product features
Step 1
: Pricing objectives
Product-quality leadingship
Common in the affordable luxury niche
E.g. CGC and MF
Maximum market skimming
Aims to gain maximum revenue from demand-inelastic buyers
Then gradually reduce price for other segments
Common in tech industry where 'innovators' and 'early adopters' will pay significantly more to be first
Maximum market share
Allows company to control pricing in the industry
Discourage competition
Gains from economies of scale
Maximum current profit
Requires detailed demand and cost information
May jeopardise long-term objectives
Survival (CGC)
Usually due to extreme competition or big changes in demand
Just keeping company alive
Step 6:
Select the final price
Select price
Coordinate with other marketing mix elements
Ensure price fits with relevant company policies
Make sure it will work with all stakeholders, distributors/dealers/govt/suppliers/etc