21 1 Development of Pricing Objectives Chapter 21 Setting Prices Pricing Objectives goals that describe what a firm wants to achieve through pricing Pricing objectives influence decisions in many functional areas including finance accounting and production Different types of pricing objectives that companies might set for themselves include o Survival 21 1A o Profit 21 1B An organization will tolerate setbacks such as short run losses and internal upheaval if necessary for survival Tend to be set at levels that the owners and top level decision makers view as satisfactory Can be stated in terms of either actual dollar amounts or a percentage of sales revenues o Return on Investment 21 1C Mostly based on trial and error because not all cost and revenue data needed to project the return on investment are available when setting prices Usually used by organizations with high operational or research costs ie pharmaceutical companies o Market Share 21 1D Pricing objectives may be set to increase market share a product s sales in relation to total industry sales High relative market shares often translate into higher profits o Cash Flow 21 1E This objective may have the support of a marketing manager who anticipates a short product life cycle If this pricing objective results in higher prices competitors with lower prices may gain a large share of the market o Status Quo 21 1F Used if an organization is already in a favorable position May aim to maintain a certain level of market share meeting competitor s prices achieving price stability and maintaining a favorable public image The use of status quo pricing objectives sometimes minimizes pricing as a competitive tool leading to a climate of nonprice competition in the industry o Product Quality 21 1G This goal normally dictates a high price to cover the costs of achieving high product quality Apple iPhones BMW etc 21 2 Assessment of the Target Market s Evaluation of Price The importance of price depends on the type of product the type of market and the purchase situation Value combines a product s price and quality attributes which customers use to differentiate among competing brands Consumers are looking for good deals on products that provide better value for their money 21 3 Evaluation of Competitor s Prices Discovering competitor s prices may be a regular function of marketing research Even if a marketer has access to a competitor s price lists those lists may not reflect the actual prices at which competitive products are sold because those prices may be established though negotiation Competitor s prices and the marketing mix variables that they emphasize partly determine how important price will be to customers Some products are intended to be slightly above competitors prices to convey a premium status Other products are intended to be slightly lower than competitors prices to raise market share 21 3 Selection of a Basis for Pricing A basis for pricing must be selected cost demand or competition The selection of the basis to use is affected by the type of product the market structure of the industry the brand s market share position relative to competing brands and customer characteristics An organization can use more than one or all three bases but one is usually emphasized more than the others o Cost Based Pricing 21 4A A dollar amount or percentage is added to the cost of the product Involves calculations of desired profit margins Two common forms of cost based pricing are 1 Cost Plus Pricing 2 Markup Pricing o The seller s costs are determined and then a specified dollar amount or percentage of the cost is added to the seller s cost to establish the price o Good when production costs are difficult to predict o Good for custom made products o Goo d during times of rapid inflation o Common in industries where price competition is not intense o A product s price is derived by adding a predetermined percentage of the cost called markup to the cost of the product o Commonly used by retailers and supermarkets o The same percentage is often used to determine the prices on items within a single product category and the percentage markup may be largely standardized across an industry at the retail level o Demand Based Pricing 21 4B Customers pay a higher price when demand for the product is strong and a lower price when demand is weak Airlines hotels sporting events etc all use demand based pricing Airlines will offer discounts for seats of late night early morning flights etc Depends on the firm s ability to estimate demand accurately o Competition Based Pricing 21 4C An organization considers costs to be secondary to competitor s prices The importance of this method increases when competing products are relatively homogenous and the organization is serving markets in which price is a key purchase consideration A firm may choose to match or undercut competitor prices 21 5 Selection of a Pricing Strategy 21 5A Differential Pricing Selection of a pricing strategy is an approach designed to achieve pricing and marketing objectives Differential Pricing charging different prices to different buyers for the same quality and quantity of product ie different universities charge different prices for the same majors The market must consist of multiple segment with different price sensitivities Customers who are paying the lower prices should not be able to resell the product to the individuals and organizations that are paying the higher prices unless that is the seller s intention Differential pricing can occur in several ways o Negotiated Pricing the final price is established through bargaining between seller and customer Commonly used for houses cars used equipment etc Can help build relationships and increase understanding between different parties o Secondary Market Pricing setting one price for the primary target market and a different price for another market Secondary markets give an organization an opportunity to use excess capacity and stabilize the allocation of resources Secondary markets are often geographically isolated or economically underprivileged o Periodic Discounting the temporary reduction of prices on a patterned or systematic basis Disadvantage to the marketer because customers can expect prices to drop and Annual seasonal holiday sales thus they will wait to purchase the products then o Random Discounting temporary reduction in prices on an unsystematic basis Eliminates the problem of customers waiting for
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