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Text 1: IMPORTANCE OF PRICING

"How much is it?^” This question is repeated many times a day in stores around the world. It shows that consumers and [organizations will buy many things if the price is right. One can design the finest products in the world, but if the price is perceived as too high or too low, the effort may be for nothing. Pricing decisions, therefore, should be completely integrated with product decisions, because price is part of the product offer, just as the package and the (brand are. Price is one way in which the seller can differentiate his or I her offer from those of competitors.

Text 2: PRICING OBJECTIVES

One of the factors that has raised pricing to the top of the strategic planning process is the tendency of marketing managers to concentrate on short-run pricing strategies. Figure lists some of the pricing objectives a firm might take. Note that some of them, such as "build traffic" and "help on the sale of weak items in the line", are short-run objectives. Often the competitive and internal corporate environments are such that short-run considerations dominate decision-making. The economic environment today is so unstable that long-run considerations such as "growth" and "maximum long-run profits" are becoming more important. In fact, survival in the market has become a major goal for many firms.

Firms must establish realistic and measurable pricing goals if marketing strategy is to be effective. Some firms aim for a target I return on investment. Firms such as General Motors, du Pont, Alcoa, and General Electric have set such goals. A specific target return objective enables these firms to determine a required level of profit. This, in return, helps in the setting of prices and other marketing mix variables.

 

Survival

Maximum short-run profits

Maximum long-run profits

Growth

Build traffic (attract people to the store)

Maintain price-leadership

Discourage entrants

Avoid government investigation and control

Maintain loyalty of middlemen and get their sales support

Enhance image of firm

Be regarded as "fair¹¹ by customers (ultimate)

Create interest and excitement about the item

Make a product "visible"

High return on Investment

Share of the market

Meet competition

Help in the sale of weak items in the tine

Figure 1-10. Potential pricing objectives.

Some firms use market share as a pricing goal. In the past firms such as Sears, Exxon, and American Can have had such a strategy. There is sometimes a measurable link between share of market and return on investment, but that link is much less reliable in the economic environment.of the In the sear increased share of the market, firms might cut prices and hurt their profit margins.

Another pricing objective used extensively in the past is to meet competition. Companies such as Goodyear and National Steel have used such strategies. The steel industry, the tire industry, and many other fundamental industries in the United States are suffering greatly from such past practices. Many firms are going bankrupt, and the survivors are being forced to radically change their marketing strategies, including pricing.

Some firms set a profit-maximization objective, where the goal is to earn "as much as possible". Such a policy cannot usually be implement over the long run because of competitive and government forces, but in the short run it can be quite effective. Suppose, for example, a firm has spent millions of dollars developing a new product that can be copied relatively easy, but for which the set -up time is 2 years or more. The firm could price its product as high as "traffic will bear," hoping to get back all its research and development money and a reasonable profit return before competitors entered the market. As competition entered, the firm would probably shift to a more competitive pricing strategy, such as meeting competition.

Pricing objectives are based on a firm's overall objectives, the market segments being served, competition, market conditions, and many other variables. The basic overall objective is to establish mutually beneficial exchange relationships with selected target markets.

Pricing objectives should be influenced by other marketing decisions regarding product design, packaging, branding, and promotion. All these marketing decisions are interrelated.

 

Text 3: HOW ARE PRICES DETERMINED?

We are so accustomed to thinking of pricing as something done by the seller that it is difficult to think of pricing decisions coming from anyone other than the seller. But a moment's reflection will show you that it is often the buyer who sets the price. For example, how many times have you told a seller that you would give him or her a certain amount of money for something? In this section we shall show how prices are determined by the interactions between buyers and sellers.

People also feel rather intuitively that the price charged for a product must bear some relation to the cost of producing the product in fact, we would generally agree that prices are usually set somewhere above cost. But as we shall see, prices and cost are not always related.

Text 4: COST-BASED PRICING

Karl Marx was perhaps the most widely known economist who tried to explain the relation between the cost of production and price. He felt that the price of a good was, and should be, based on the amount of labour needed to produce it. But it does not take much research to show this just is not so. In fact, there is often very little correlation between the price of something and its cost of production. Does a quarterback earn more than a physician because it costs more to produce a quarterback? Does a rare stamp cost a thousand times more than a regular stamp because one cost more to produce? Obviously not.

Nevertheless, producers often use cost as a primary basis for setting price. They develop elaborate cost accounting systems to measure production costs (including materials, labour, and overhead), add in some margin of profit, and come up with a satisfactory price. The question is whether the price will be satisfactory to the market as well. In the long run, the market determines what the price will be, not the producer.

Text 5: BREAK-EVEN ANALYSIS

One strategic decision marketing managers must make is whether or not to produce a product at all. Break-even analysis is one tool that helps in such decisions. It is used in both product and price (decisions. Break-even analysis tells them whether the firm would be able to make money (or break even) at a particular price, given a certain sales volume.

Break-even analysis usually involves break-even charts that show total costs and total revenues. Marketers can develop a series of break-even charts to eliminate obviously unrealistic prices.

Text 6: PRICING STRATEGIES

Let's say a firm has just developed a new product, such as video recorders. The firm has to decide how to price these recorders. One strategy would to price the recorders high to recover the costs of developing the recorder and to take advantage of the fact that there are few competitors. A skimming price strategy is one in which the product is priced high to make optimum profit while there is little competition.

A second strategy, therefore, is to price the recorders low. This would attract more buyers and discourage others from making recorders because the profit is so low. This strategy enables the firm to penetrate or capture a large share of the market quickly. A penetration strategy, therefore, is one in which the product is priced low to attract more customers and discourage competitors. The Japanese successfully used a penetration strategy with videotape recorders.

Text 7: SOME PRICING TERMS

It is impossible to cover all pricing concepts in this detail book. However, you should at least be familiar with the following terms:

10. Adaptive pricing allows an organization to vary its prices based on factors such as competition, market conditions, and resource costs. Rather than relying on one set price, the firm adjusts the price to fit different situations.

11. Competition-oriented pricing is a strategy based on what competitors are doing. It may be the opposite of pricing leader

12. Cost-oriented pricing is the strategy of setting prices primarily on the basis of cost. For example, retailers often use cost plus a certain markup, and producers use a system of cost – plus pricing.

13. Customary pricing means that most sellers will adapt the product to some established, universally accepted price such as price for gum or candy bars. Notice that when the customary price goes up, almost all producers adjust their price upward.

5. Demand-oriented pricing is the strategy of setting prices on the basis of consumer demand rather then cost. Sometimes different prices are charged different consumers (discriminatory pricing), as is the case with movie theatres (less for children), and drugstores (senior citizens get a discount).

6. Market price is that price that is determined by supply and demand and is not controllable by the seller. For example, farmers have a little control over the price they receive for grain or cattle. Market prices exist for many goods and services besides farm products.

7.    Pricing leadership is the procedure by which all the competitors in an industry follow the pricing practices of one or more dominant firms. When one firm lowers or raises its prices, the others follow almost immediately. You may have noticed this tendency among oil companies and cigarette companies.

8. Product-line pricing is the procedure used to set prices for a group of products that are similar but are aimed at different market segments. For example, a Deer producer might have a low-priced beer, (a popular-priced beer,) and a premium-priced beer.

9. Target pricing means that an organization will set some goal such as a certain share of the market or a certain return on investment as a basis for setting a price. Usually market conditions prevent a firm from establishing prices this way, but such goals do give some direction to pricing policies.

10.  Uniform pricing, also known as a "single-price policy" means that all customers buying the product (given similar circumstances) will pay the same price. Although the most common policy in the United States, uniform pricing is unusual in many foreign markets, especially among private sellers.

Text 8: ODD PRICING AND PRICE LINING

Another pricing strategy is called psychological pricing. No doubt you have noticed that retailers often price goods at $9.98 instead of $10.00 and so on. That practice is known as odd pricing. Retailers believe that odd prices (for example $99,95) are psychologically more attractive than even prices (for example $100).

Some retailers offer merchandise at a limited number of prices rather than have individual prices for each item. For example, a shoe store may offer several lines of shoes priced at $30, $40, and $50. This practice of having a few, set prices is known as price lining. The advantages of price lining are that (1) it makes pricing of goods easier, (2) it makes the checking out of goods easier, and (3) it appeals to a specific market segment that is looking for a given price level.

The disadvantage of price lining include (1) prices are more difficult to change, (2) cost increases from producers are difficult to pass on to consumers without changing the whole store image, and (3) the sets prices may not appeal to a wide enough market segment.

Text 9: RETAIL PRICING (MARKUPS)

Retailers tend to base their price on some desired profit goal. The easiest way to calculate how much a retailer makes on each sale is to subtract cost from the sale price to find how much was made. Markup is the term retailers use to describe selling price minus cost. Thus the markup percentage (how much they make percentage-wise) is calculated as follows:

Selling price $3

Cost $2

Markup (in dollars) $1

Markup percentage = Markup in dollars / selling price = $1/$3 = 1/3= 33 1/3%

To calculate what the percentage markup on cost is, given > percentage markup on sales, you see this equation:

Percentage markup on cost = Percentage markup on selling price /

100% - Percentage markup on selling price = ½ = 50%

 

it is important for a business major to be able to work with simple mathematics such as the equation above, because markup is such a fundamental concept.

Text 10: NONPRICE COMPETITION

In spite of the emphasis on price in microeconomics theory, marketers often compete on product attributes other than price. You may have noted that price differences between products such as gasoline, cigarettes, candy bars, and even major products such as compact cars are often small, if there is any price difference at all. Very rarely will you see price used as a major promotional appeal on television. Instead marketers tend to stress product images and consumer benefits such as comfort, style, convenience, and durability.

Many organizations promote the services that accompany basic products rather than price. The idea is to make a relatively homogeneous product "better." For example, airlines stress friendliness, promptness, more flights, better meals, and other such services. Motels stress "no surprises" or cable TV, swimming pools and other extras. Quite often the reason marketers emphasize non-price differences is because prices are so easy to match. Few competitors can match the image of a friendly, responsive, consumer-oriented company.

5. C omprehension questions. Завдання 5. Підготуйте письмові відповіді на питання:

What are pricing objectives?

How are prices determined?

Is break-even point analysis the only technique for price setting?

How do retailers set prices?

Why is cost not an effective basis for pricing?

6. Discussion questions. Завдання 6. Підготуйте коротку інформаціюб використовуючи запитання як план:

1. Look around at the different shoes that the students are wearing. What product qualities were they looking for when they chose those shoes? What was the importance of price, style, brand name manufacturer reputation, and colour? Do different students buy shoes for different reasons?

2. For each of the following products discuss whether a marketer should emphasize price, location or word of mouth in his or her promotional campaign and explain why:

a. Babysitting;

b. A resort motel;

c. Bottled water;

d. A dentist;

e. A bank;

A candy bar.

7. G roup activities. Завдання 7. Підготуйтесь до бесіди, використайте задану ситуацію:

Discuss how the faculty at your institute could increase student satisfaction by working more closely with students in developing new products (courses) and changing existing products (courses). Would it be a good idea for all marketers to work with their customers that way? Discuss your answers.