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Summary chapter 12 Marketing Fundamentals by Bronis Verhage
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Summary Chapter 12Marketing Fundamental
By Bronis Verhage
2nd edition
Chapter 12 – Pricing strategies and price determination
Contents
12.1 The pricing decision
12.2 Demand curve
12.3 New product pricing
12.4 Pricing objectives
12.5 Pricing methods
12.6 Cost-oriented pricing
12.7 Demand-oriented pricing
12.8 Competition-oriented pricing
Learning goals
1. Explain the significance of price to the customers and its relationship to other
marketing variables.
2. Understand the role of the pricing mechanism and the meaning of the demand
curve.
3. Compare two opposite pricing strategies for new products.
4. Systematically develop a pricing strategy, including pricing objectives.
5. Identify the most widely used types of discounts and allowances.
6. Discuss common cost-based approaches to pricing and their advantages,
constraints and risks.
7. Understand the concepts of demand-oriented pricing and price elasticity of
demand.
8. Recognise the nature of price competition in different types of market structures.
© Stan Meuwissen ZUYD University of applied science
,One of the firm’s most critical marketing decisions is what price to charge for a product.
This decision has a direct effect on public perception of the product, on who buys it, and
on the firm’s profitability. Thus, prices are the key to revenues, which in turn are the key
to any company’s profits. The role of price in a firm’s profitability is demonstrated by the
so-called profit equation:
Profit= Total revenues – Total cost
(Unit price x Quantity sold) – Total cost
The price will also affect the quantity sold. Thus, when you ask a high price for your
product is not always equal to a higher profit. The product can be more attractive to
more people with a lower price.
12.1 The pricing decision
The key question with price setting is how much money the product or service is worth
to the buyer. From a marketing perspective it would be best to view price setting as the
art of ‘translating’ the product’s value in the eyes of the customer into the amount of
money he is willing to pay. This is not just about the physical product, but total package
or bundle of benefits that consumers buy, including the augmented product and the
intangible features.
In the picture below you can see the multistage approach to pricing. It’s shows each step
in the pricing decision reduces the range of feasible prices for the product to the point
where, from the small set of remaining price options, we select the best alternative.
In setting the optimum price for our products, we must have an understanding of the
needs and wants, spending behaviour and purchasing habits of the prospective buyers
we are targeting. We should also examine their perception of the product’ s value,
relative its price. After all, the price is the exchange value of the product, expressed in
terms of the amount of money the buyer is willing to pay in returns for the desired
product or service.
© Stan Meuwissen ZUYD University of applied science
,Understanding consumers’ value perception and deciding on the product’s intended
image are essential in determining the price ceiling, especially in pursuing a price
discrimination price strategy. Price discrimination refers to charging different buyers
(for example, customers in different regions or purchasing at different point in time)
different prices for the same quantity and quality of products or services. Hence, these
prices are not based on different in costs, but on differences in customers’ price
sensitivity.
Loss leaders: products that are sold at a lower than usual mark-up for the purpose of
increasing store traffic, are an exception. The retailer hopes that the loss of the regular
mark-up on these products will be made up by profits on other items that customers
also buy once they are in the store. Pricing at less than cost, however, is not a common
strategy.
For effective pricing decisions, understanding the nature of different types of costs is
crucial. A variable cost, such as the cost of raw materials, is a cost that varies directly
with the number of units produced and marketed. By contrast, fixed costs, often called
overhead costs, tend to remain stable at any production level. They include rent, lease
payments and insurance premiums.
The pricing strategy must be consistent with the company’s objectives and marketing
strategy. To illustrate, a company strategy that calls for targeting an upscale market
segment justifies prestige pricing: a relatively high price that lends an air of exclusivity
to high-end products appealing to status-conscious consumers. if, on the other hand, the
company intends to increase market share, it may be necessary to lower prices as a key
component of a repositioning strategy, the more clearly the corporate objectives and
marketing strategy are spelled out, the more capable we are of developing an effective
pricing strategy to achieve the intended results.
In oligopolistic markets, the less a product is differentiated from its competitors, the
more likely competitors will adopt a follow-the-leader approach and conform to a price
change.
Sometimes companies compete not only with identical products or services, but also
with substitutes. For example, in response to the increased prices of new and previously
owned aircraft, NetJets Europe is promoting fractional jet ownership periodically and
encourages them to join other firms in buying shares in a new jet, saving money in the
process.
The impact of a product’s price on sales of closely related items should certainly be
examined for complementary products. These are products sold or used jointly with
other products, such as printers and ink cartridges or razors and blades.
Predatory pricing: a practice where on company tries to drive out competitors by
temporarily pricing at such a low level that rivals cannot match their cuts and still profit.
© Stan Meuwissen ZUYD University of applied science
,12.2 Demand curve
The price determines not only the firm’s sales volume (in units), but also its sales
revenue (expressed as money). Revenue is the unit price multiplied by the number of
units sold. The marketer must set a price for his product that generates enough revenue
to cover the costs of producing and marketing it, and to allow for a satisfactory profit.
Price affects both demand and supply. If the price is high, there is relatively little
demand, but because of the profit motive, plenty of supply. This, in turn, increases
competition. It also creates a downward pressure on prices, as a result of which more
consumers will buy the product. The demand will therefore go up. For companies,
however, the price decrease – due to the more intense competition – will lead to lower
margins and eventually to a reduction in market supply. This phenomenon is called the
price mechanism.
Price mechanism: described above is one of the main forces at work in the economic
system. From a macro-economic perspective, the price mechanism performs three vital
functions:
1. Comparison. The price level and price fluctuations allow buyers and suppliers to
compare the value and potential scarcity of various products.
2. Stimulation and reduction. The price of a product may stimulate production by
suppliers or reduce consumption by its users. Since most markets are dynamic,
capable of adjusting rapidly to the price or quantity of goods available, price will
balance supply and demand, unless the market mechanism is distorted by
government subsidies or price guarantees (as with some agricultural products).
Artificially low prices may result in secondary markets, like online auctions.
3. Rationing. The price mechanism largely determines who makes certain
purchases. As a product becomes more expensive, fewer people are able to buy it.
Thus, scarce products are rationed in society through pricing decisions.
To gain a better understanding – from a marketing perspective –of the effect of price on
the quantity demanded of a product, we can project it in the form of a graph using the
demand curve. The demand curve shows the maximum number of products that
customer will buy in a market during a period of time at various prices if all other
factors remain the same. We will first look at movement along the demand curve and
then at shifts of the demand curve.
For most products and services, demand is a function of price: demand increases as
price increases, and vice versa. Thus, an inverse relationship exists between price and
demand. Since the typical demand curve slopes downward and to the right, the tendency
of demand to vary inversely with price is called a movement along the demand curve.
© Stan Meuwissen ZUYD University of applied science
, The figure below shows this relationship. As price is reduced from €8 to €6,75, the
quantity demanded increases along the demand curve from 4 unites to 6 units.
Something quite different from a movement along the demand curve is a shift or the
entire demand cure. Such shifts are not caused by price changes, but by one of the more
fundamental forces behind the growth in demand, such as a change in consumer
preferences, a more effective advertising campaign of the introduction of a new product
to the market. The figure below illustrates both an upward and a downward shift in
demand. With an upward shift of the demand curve, the company can expect to sell a
larger number of products at each price level. Assuming the upward shift in the diagram
below, the company can expect to sell then unites at a price of €6 each, whereas with the
original demand curve it could expect to sell only seven units at that same price. An
example of an upward shift in demand is the demand curve for ice cream that shifts to
the right when the weather gets warm; at the same price, the demand of ice cream goes
up.
© Stan Meuwissen ZUYD University of applied science
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