Price Concepts & Setting Price

Post Graduate Diploma in Business Management

Marketing Management

PGDBM 502

G. G Dayasumana WD/011

G.J Gajanayaka WD/016

L.K Balasooriya WD/006

Faculty of Graduate Studies

University of Colombo

Pricing Concepts

Price

There are several descriptions for price.

a. That which is given up in an exchange to acquire a good or service.

b. Price is the value placed on what is exchanged

c. Pricing is the process of determining what a company will receive in exchange for its products.

d. The amount of money charged for a product/service

e. The sum of the values that consumers exchange for the benefits of purchasing and/or using the product/service.

But in this assignment I would like to define the price as "The value paid for a product in a marketing exchange." as it typically fits for the topic going to describe. Price is only one of the marketing mix tools that a firm uses to achieve its marketing objectives.

The Nature of Price

Price is the value placed on what is exchanged. Something of value is exchanged for satisfaction and utility, includes tangible (functional) and intangible (prestige) factors. Many factors influence the assessment of value. In most situations the price is apparent to buyer and seller; however, price does not always take the form of money paid Can be barter. Barter is the trading of products and is the oldest form of exchange in which money may or may not be involved.

Buyers must determine if the utility gained from the exchange is worth the buying power that must be sacrificed. Price represents the value of a good/service among potential purchases and for ensuring competition among sellers in an open market economy.

Buyers' interests in price relates to their expectations about the usefulness or a product or the satisfaction they may derive from it. Marketers need to understand the value consumers derive from a product and use this as a basis for pricing a product--must do this if we are customer oriented.

Terms Used to Describe Price

Different terms can be used to describe price in different circumstances and for different forms of exchange, such as "tuition," "fines," "fees," "rent," "commissions," "dues," "deposits," "tips," "interest," and "taxes."

The Importance of Price to Marketers

* Often the only element the marketer can change quickly in response to demand shifts.

* Relates directly to total revenue TR = Price * Qtty

Profits = TR - TC

-effects profit directly through price, and indirectly by effecting the qtty sold, and effects total costs through its impact on the qtty sold, (ie economies of scale)

* Can use price symbolically, emphasize quality or bargain.

* Deflationary pressures, consumers very price conscious.

Price and Nonprice Competition

Pricing decisions are often made according to price or nonprice competitive situations.

Price Competition

Match, Beat the price of the competition. To compete effectively, need to be the lowest cost producer. Must be willing and able to change the price frequently. Need to respond quickly and aggressively. Competitors can also respond quickly to your initiatives. Customers adopt brand switching to use the lowest priced brand.

A major advantage of price competition is its flexibility: Prices can be adjusted to compensate for an increase in the firm's operating costs, to offset changes in demand, or to counteract a competitor's pricing strategy.

A disadvantage of price competition is that competitors usually have price flexibility too and can quickly respond by lowering their prices--potentially sparking a price war. Chronic price wars can reduce profits and weaken an organization.

Non-price Competition

Emphasize product features, service, quality etc. Can build customer loyalty towards the brand. Must be able to distinguish brand through unique product features. Customer must be able to perceive the differences in brands and view them as desirable. Should be difficult (impossible) for competitors to emulate the differences (PATENTS).

Must promote the distinguishing features to create customer awareness. Price differences must be offset by the perceived benefits. Sellers shift the demand curve out to the right by stressing distinctive attributes A major advantage of non-price competition is that a firm can build customer loyalty toward its brand. If customers prefer a brand because of non-price factors, it is more difficult for competitors to lure these customers away.

For non-price competition to work, a company must be able to distinguish its brand through unique product features, higher product quality, promotion, packaging, or excellent customer service. Buyers must view the non-price product features as important, and the features must be difficult for competitors to imitate.

Analysis of Demand

Marketing research and forecasting techniques yield estimates of sales potential, or the quantity of a product that could be sold during a specific period.

The Demand Curve

For most products, there is an inverse relationship between price and demand. The quantity demanded goes up as the price goes down and goes down as the price goes up.

A demand curve is a graph of the quantity of products expected to be sold at various prices, if other factors remain constant.

The classic demand curve illustrates that as price falls, the quantity demanded usually increases.

Demand depends on other factors in the marketing mix, including product quality, promotion, and distribution.

There are many types of demand, and not all conform to the classic