Setting the Price of products

Setting the Price of products:-

A firm must set a price for the first time when it develops a new product, when it introduces its regular product into a new distribution channel or geographical area, and when it enters bids on new contract work. The firm must decide where to position its product on quality and price. Most markets have three to five price points or tiers. Marriott Hotels is good at developing different brands or variations of brands for different price points: Marriott Vacation Club—Vacation Villas (highest price), Marriott Marquis (high price), Marriott (highmedium price), Renaissance (medium-high price), Courtyard (medium price), TownePlace Suites (medium-low price), and Fairfield Inn (low price). Firms devise their branding strategies to help convey the price-quality tiers of their products or services to consumers.30 The firm must consider many factors in setting its pricing policy. summarizes the six steps in the process.

Step 1: Selecting the Pricing Objective The company first decides where it wants to position its market offering. The clearer a firm’s objectives, the easier it is to set price. Five major objectives are: survival, maximum current profit, maximum market share, maximum market skimming, and product-quality leadership.

SURVIVAL Companies pursue survival as their major objective if they are plagued with overcapacity, intense competition, or changing consumer wants. As long as prices cover variable costs and some fixed costs, the company stays in business. Survival is a short-run objective; in the long run, the firm must learn how to add value or face extinction.

MAXIMUM CURRENT PROFIT Many companies try to set a price that will maximize current profits. They estimate the demand and costs associated with alternative prices and choose the price that produces maximum current profit, cash flow, or rate of return on investment. This strategy assumes the firm knows its demand and cost functions; in reality, these are difficult to estimate. In emphasizing current performance, the company may sacrifice long-run performance by ignoring the effects of other marketing variables, competitors’ reactions, and legal restraints on price.
MAXIMUM MARKET SHARE Some companies want to maximize their market share. They believe a higher sales volume will lead to lower unit costs and higher long-run profit. They set the lowest price, assuming the market is price sensitive. Texas Instruments (TI) famously practiced this market-penetration pricing for years. TI would build a large plant, set its price as low as possible, win a large market share, experience falling costs, and cut its price further as costs fell. The following conditions favor adopting a market-penetration pricing strategy:
(1) The market is highly price sensitive and a low price stimulates market growth;
(2) production and distribution Marriott’s hotel brands differ in price points and the levels of service they offer.

Setting a Pricing Policy:-

1. Selecting the Pricing Objective
2. Determining Demand
3. Estimating Costs
4. Analyzing Competitors’ Costs, Prices, and Offers
5. Selecting a Pricing Method
6. Selecting the Final Price

SHAPING THE MARKET OFFERINGS costs fall with accumulated production experience; and a low price discourages actual and potential competition. MAXIMUM

MARKET SKIMMING Companies unveiling a new technology favor setting high prices to maximize market skimming. Sony is a frequent practitioner of market-skimming pricing, in which prices start high and slowly drop over time. When Sony introduced the world’s first high-definition television (HDTV) to the Japanese market in 1990, it was priced at $43,000. So that Sony could “skim” the maximum amount of revenue from the various segments of the market, the price dropped steadily through the years—a 28-inch Sony HDTV cost just over $6,000 in 1993, but a 40-inch Sony HDTV cost only $600 in 2010. This strategy can be fatal, however, if a worthy competitor decides to price low. When Philips, the Dutch electronics manufacturer, priced its videodisc players to make a profit on each, Japanese competitors priced low and rapidly built their market share, which in turn pushed down their costs substantially. Moreover, consumers who buy early at the highest prices may be dissatisfied if they compare themselves to those who buy later at a lower price. When Apple dropped the iPhone’s price from $600 to $400 only two months after its introduction, public outcry caused the firm to give initial buyers a $100 credit toward future Apple purchases.32 Market skimming makes sense under the following conditions:

(1) A sufficient number of buyers have a high current demand;
(2) the unit costs of producing a small volume are high enough to cancel the advantage of charging what the traffic will bear;
(3) the high initial price does not attract more competitors to the market;
(4) the high price communicates the image of a superior product.

PRODUCT-QUALITY LEADERSHIP A company might aim to be the product-quality leader in the market. Many brands strive to be “affordable luxuries”—products or services characterized by high levels of perceived quality, taste, and status with a price just high enough not to be out of consumers’ reach. Brands such as Starbucks, Aveda, Victoria’s Secret, BMW, and Viking have positioned themselves as quality leaders in their categories, combining quality, luxury, and premium prices with an intensely loyal customer base. Grey Goose and Absolut carved out a superpremium niche in the essentially odorless, colorless, and tasteless vodka category through clever on-premise and off-premise marketing that made the brands seem hip and exclusive. OTHER OBJECTIVES Nonprofit and public organizations may have other pricing objectives. A university aims for partial cost recovery, knowing that it must rely on private gifts and public grants to cover its remaining costs. A nonprofit hospital may aim for full cost recovery in its pricing. A nonprofit theater company may price its productions to fill the maximum number of seats. A social service agency may set a service price geared to client income. Whatever the specific objective, businesses that use price as a strategic tool will profit more than those that simply let costs or the market determine their pricing. For art museums, which earn an average of only 5 percent of their revenues from admission charges, pricing can send a message that affects their public image and the amount of donations and sponsorships they receive.

Step 2: Determining Demand Each price will lead to a different level of demand and have a different impact on a company’s marketing objectives. The normally inverse relationship between price and demand is captured in a demand curve: The higher the price, the lower the demand. For prestige goods, the demand curve sometimes slopes upward. One perfume company raised its price and sold more rather than less! Some consumers take the higher price to signify a better product. However, if the price is too high, demand may fall. PRICE SENSITIVITY The demand curve shows the market’s probable purchase quantity at alternative prices. It sums the reactions of many individuals with different price sensitivities. The first step in estimating demand is to understand what affects price sensitivity. Generally speaking, customers are less price sensitive to low-cost items or items they buy infrequently. They are also less price sensitive when

(1) there are few or no substitutes or competitors;
(2) they do not readily Apple created an uproar among its early-adopter customers when it significantly lowered the price of its iPhone after only two months. DEVELOPING PRICING STRATEGIES AND PROGRAMS notice the higher price;
(3) they are slow to change their buying habits;
(4) they think the higher prices are justified; and

(5) price is only a small part of the total cost of obtaining, operating, and servicing the product over its lifetime. A seller can successfully charge a higher price than competitors if it can convince customers that it offers the lowest total cost of ownership (TCO). Marketers often treat the service elements in a product offering as sales incentives rather than as value-enhancing augmentations for which they can charge. In fact, pricing expert Tom Nagle believes the most common mistake manufacturers have made in recent years is to offer all sorts of services to differentiate their products without charging for them. Of course, companies prefer customers who are less price-sensitive. lists some characteristics associated with decreased price sensitivity. On the other hand, the Internet has the potential to increase price sensitivity. In some established, fairly big-ticket categories, such as auto retailing and term insurance, consumers pay lower prices as a result of the Internet. Car buyers use the Internet to gather information and borrow the negotiating clout of an online buying service. But customers may have to visit multiple sites to realize these savings, and they don’t always do so. Targeting only price-sensitive consumers may in fact be “leaving money on the table.

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