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The Marketing Mix - Pricing - Coggle Diagram
The Marketing Mix - Pricing
Promotions used as an incentive to encourage purchasing behaviour.
Communication device signalling inferred quality, exclusivity or expertise.
Types of pricing
Cost based
Working out how many units would need to be sold at different price levels to cover the full cost of production, distribution and marketing using break-even analysis and whether it is, therefore, worthwhile offering a product (Jobber and Ellis-Chadwick, 2013; Kotler and Armstrong, 2016)
A limitation of this approach is that if sales fall, prices would need to be raised to compensate and break even, which could jeopardise further sales, but the approach is useful for highlighting costs and the price required for an initial profit (Jobber and Ellis- Chadwick, 2013).
Only taking account of costs that increase as sales go up is called direct cost pricing or marginal cost pricing (Jobber and Ellis-Chadwick, 2013).
fixed costs would need to be covered at other times.
Cost-plus pricing involves adding a percentage for profit to the cost of a product. This approach is called mark-up pricing when it is used by retailers to set a price by adding a ‘mark-up’ or margin to the price they paid for their stock of the product to obtain a profit.
Competitor based
Competitor-based pricing is where pricing is set in relation to competitors. A company may choose to charge a similar price to competitors (referred to as ‘going-rate pricing’ by Jobber and Ellis-Chadwick, 2013) if there is little differentiation.
When comparing against competitors, Kotler and Armstrong (2016, p. 332) recommend asking the following questions:
How does the company’s market offering compare with competitors’ offerings in terms of customer value?
How strong are current competitors?
What are their [competitors’] current pricing strategies?
If a company’s offering is perceived to offer greater value to customers than its competitors, then a higher price may be charged. If lower, then a company may have to charge a lower price unless it is able to increase the offering’s perceived value.
Another form of competitor-based pricing is competitive bidding, in which companies price their services in relation to what they think competitors might charge in their bids (Jobber and Ellis-Chadwick, 2013)
Customer based
Customer-based pricing (also referred to as ‘customer-value-based pricing’ and ‘market-orientated pricing’) involves setting the price of an offering on its value to customers.
Demand pricing – This is setting a price based on customers’ professed willingness to buy a company’s offering at various price options (Blythe, 2006).
Good-value pricing – This involves setting a fair price based on a balance of quality against price; this might mean offering budget versions at a lower price, ‘the same quality for less’, or higher-quality versions at a reasonable price (Kotler and Armstrong, 2016, p. 327).
Value-added pricing – This is adding features or services to increase the value of an offering to consumers that differentiates it from competitors and enables a higher price to be charged (Kotler and Armstrong, 2016).
Psychological-based pricing – This involves using price to elicit an emotional response, for example using prestige pricing to signal quality or odd-even pricing (setting a price that ends in an odd number such as £7.99 rather than £8) to encourage lower price perceptions
(Blythe, 2006).
Factors affecting pricing decisions
Cost
Competition
Value perception
Objectives
Marketing mix
STEEPLE factors
Product mix pricing
Product line pricing – This is pricing different products in a range based on the level of value each offers to buyers. E.g cars - mercedes a class has different variants
Optional-product pricing – This is offering optional products or accessories alongside the principal product. E.g phone cases, headphones when selling a phone
Captive-product pricing – These are associated products needed to use the principal product. E.g replacement ink cartridges for printers
By-product pricing – This is a process of offsetting the cost of a principal product by finding a way to sell by-products incurred in the principal product’s production, allowing the principal product’s price to be set more competitively
Product bundle pricing – This involves selling a set of related products in a bundle at a price lower than if purchased individually. e.g meal deals
Pricing in business markets
trade or functional discounts – a discount offered by a producer for undertaking a particular function such as the provision of storage, transportation, processing, selling and possibly credit
quantity discounts – one-off or cumulative discounts for buying in large quantities that reduce the discounter’s costs
cash discounts – discounts offered to encourage cash payment or payment within a short time period
seasonal discounts – discounts offered for buying out of season
allowances – price reductions for related actions by the buyer that help the allowance-granter to achieve their goals in some way.
Approaches for informing pricing decisions
General survey – This is the simplest approach. It involves asking customers in different segments for feedback on a company’s prices or in the case of a new product how much they would be prepared to pay or the likelihood of buying the product. The problem is that customers may well respond that a product’s price is too high, which provides little insight, or state intentions do not accurately reflect behaviour. Grigsby (2015) summarises the general survey as providing ‘nice-to-know’ information but limited insights for pricing.
Van Westendorp survey, also called a price sensitivity analysis – This involves asking customers questions that assess changes in their sensitivity to price over time, which are then plotted on to a ‘price map’, enabling a company to identify the levels at which a price is deemed too high or too low.
Conjoint analysis – This presents customers with a scenario and then asks them to make a series of choices relating to product purchase. Grigsby (2015) acknowledges that this approach can be useful in the case of new products for seeing how attributes compare in importance for customer purchasing, but its artificiality limits its usefulness otherwise.
Elasticity modelling – This is rarely used, but Grigsby (2015) argues it can be helpful for assessing customers’ sensitivity to unit price changes.
Experimentation – Using this approach, a company may test customers’
perceptions of a product’s value.
Ethical decisions
Some forms of pricing can raise ethical concerns as they might be perceived as discriminating between customers or lacking transparency
Dynamic pricing – This involves assessing the needs and characteristics of individual buyers and adjusting the price offered accordingly (Kotler and Armstrong, 2016). For example, internet retailers reportedly tailor their prices based on mining their customers’ data to assess their means and desires (Kotler and Armstrong, 2016).
Segmented pricing – This is charging different prices for a product or service based on differences in customers, products or locations (Kotler and Armstrong, 2016). While some forms may not be controversial, forexample charging students and senior citizens less for the same product or service offered to the wider population of consumers, some forms of price discrimination are illegal.
Super-sized pricing – This is pricing used to entice consumers into purchasing more than they need by offering a greater quantity at a low unit price. It has ethical implications when it has negative consequences. For example, research has demonstrated that super-sized pricing can increase purchase and consumption of food and lead to value considerations taking precedence over health goals (Haws and Winterich, 2013). Super-sizing of other products can lead to wastage, which is a concern from an environmental perspective.