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Pricing + Pricing Methods [Part 1] (Value/Market-Oriented Pricing…
Pricing + Pricing Methods
[Part 1]
Segmented Pricing
Based on order size, timing, demand + other factors
Can use different factors to segment markets + predict what ppl will spend. E.g Geographic Segment Pricing [May vary by country]
Becoming more common as firms collect more behavioural information through apps/websites. They can segment customers based on what they click on/purchase
Advantages
Can be effective when: The market is segmentable; Pricing reflects value perceptions of the segment; The segments exhibit different demand behaviour
Tailors the product + price offering to ppl + makes it appropriate
Disadvantages
Price Discrimination:
Argument as to whether certain segments should pay more than others. Could lead to customers misrepresenting themselves. However, usually sellers don't face backlash for this bc ppl accept students + pensioners have high price sensitivity
Varying prices are set for different groups of customers
EXAMPLE:
Odeon Cinemas offer discounted ticket prices for Teens aged 13-17, Students who have an NUS card, Family Tickets [2 adults 2 kids] etc
Negotiated Pricing
Through negotiation the price is set more than once in a back-and-forth discussion
Often used in a B2B environment but not B2C
Used by online auctions: customers enjoy the banter + it's an effective way to offload surplus inventory
Not normal in shops in the UK but often used online, e.g eBay
Advantages
The most democratic: helps customers feel they have the power + builds trust. Also gives power to the seller as they can say no
Disadvantages
Marketing representatives should beware of conceding on price too quickly before properly understanding a client's needs [Rackham 2001]
Occurs when a sale is complex + consultative
Value/Market-Oriented Pricing
Prices are set based on buyer perceptions of specific products, + reflect the value to the customer
Customers measure value in lots of different ways: basic needs, belongingness needs, safety needs etc
Need a fundamental understanding of the reasons ppl buy things - customer research is crucial
Direct contrast to the cost-oriented approach
Pricing process begins w/ the customer
Bc resources are now more readily available, consumers are more interested in obtaining even more value from what they buy
Company may not offer a cheaper price - may even be higher, if they feel it has more benefits than other products
Understand costs, but more of a focus on willingness to pay
Prices change to reflect demands in the market - higher need for the customer, the more they will be willing to pay
Advantages
Translational Device:
Helps translate features into benefits for customers. Helps ppl understand what they will get from a product. Customers don't care about features, only what something will do for them
Can work to 'smooth' demand by raising/dropping prices at certain times in the year, E.g Reducing costs of Christmas products after Christmas
Disadvantages
Requires in-depth research to understand what customers value - a lot of upfront work
Need to ensure the determined value of the product meets or exceeds the amount of work involved
EXAMPLE:
L'Oréal has used spokesmodels for a long time, like Cheryl Cole, on the basis that we should use their products bc "We're worth it".
Competitor-Oriented Pricing
Companies set prices based on competitors' prices: also called 'me too' pricing
Advantages
When prices are lower than competitors, customers are more likely to purchase from you
Penetration pricing:
Ppl will be willing to take a chance on a cheaper product bc of the reduced risk
Skim Pricing:
Gives higher profits + provides negotiation room - easier to negotiate down than up
Skim Pricing:
Portrays the product as premium bc pricing signals are often the one thing consumers understand about the perceived quality of the product. Customers will often pay more bc they believe in the quality, + perceive themselves to be able to afford premium products
Disadvantages
Can be expensive to operate bc require continuous monitoring of competitor's prices
Can lead to
price wars.
EXAMPLE:
Sony + Amazon in the UK ended up offering discounts of up to 97% on Ebooks in 2012 - clearly not sustainable in the long term [Flood 2012]
Penetration pricing:
Unsustainable. Selling goods at a loss needs funding/investment, or a super-efficient process to keep driving marginal costs down. Need to manage customer expectations or they will feel exploited when prices eventually rise
Break-Even pricing:
Risk of getting costing wrong, or having tiny margins, which is v dangerous without big investment power behind you
Skim Pricing:
Risk of customer feeling exploited: is it ethical to charge the highest possible price?
Don't always have to respond w/ a price cut - can respond w/ service improvements to offer the customer greater value for money [Rust et el 2000]
3 Segments:
Penetration Pricing, Break-Even Pricing + Skimming Pricing
Penetration Pricing
[Below Cost]
Used by new entrants to the market sometimes
Used to try + grab market share/attention
Often used w/ fast-moving consumer goods + durables
EXAMPLE:
'Freemiums' on the internet: if you want the full product you have to pay
Break-Even Pricing
[At Cost]
Requires a timely turnover of stock + assumes everyone will pay set price, not higher or lower
Assumes 100% sales
Skimming Pricing
[Above Cost/ Maximum Possible]
Firm charges the highest initial price that customers will pay + then lowers it over time
Standard approach for high tech products such as games consoles
EXAMPLE:
Nintendo dropped the price of the Nintendo 3DS dramatically 6 months after its release in 2006
The Concept of Pricing + Cost
In marketing terms, price is
the amount the customer has to pay or exchange to receive an offering
To price an offering properly we have to know what it costs us to make, produce or buy. This is what cost represents
Fixed Costs:
Not based on raw materials + don't vary according to the no. of products made/sold. E.g heating/lighting, staffing costs, rent
Variable Costs:
Vary according to the no. of products made/sold. E.g packaging, ingredients, novelty items
Value
refers to what we get for what we pay. To increase a customer's perception of the value of a product, we must either lower the price or increase the quality
Price perceptions are affected by various factors including price consciousness, price sensitivities, culture, prior experiences w/ a brand etc
Never pick a single pricing strategy for a business - it depends on lots of changing factors + so pricing strategies also need to change at different points
Companies will often experiment w lots of different solutions/product lines/markets at the same time
They do this based on their understanding of how consumers make decisions, what their business goals are + the behaviour of their competitors
Other Pricing Considerations
Positioning
List/Basic:
Companies give the price for the basic version, but know you're unlikely to be satisfied w/ that version so they can get more money out of you
Discounts
Add-ons + Extra Products/Services
Credit
Payment Methods:
E.g charge for paying by cheque, discount for online purchases bc reduces company banking costs for processing cash/card etc
Guarantees/Warranties
Refund/Cancellation Policies