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ABB 10302

Principles of Marketing
Chapter 8

PRICING STRATEGIES

Learning Outcome
8.1
8.2
8.3
8.4
8.5
8.6

Introduction
Factors affecting pricing
Types of wholesalers
Types of retailers
Selection of Distribution Channel
The nature of physical Distribution

Dr V -Principle of Marketing

What is Pricing?
Method adopted by a firm to set selling price.

Depends on the firm's average costs, and on


the customer's perceived value of the product
in comparison to his or her perceived value of
the competing products.
Different pricing methods place varying degree of
emphasis on selection, estimation,
and evaluation of costs, comparative analysis,
and market situation
Read more: http://www.businessdictionary.com/definition/pricing.html#ixzz28x6wJ1FE

PRICE
Price is one of the factors that affects buyers purchasing
decision.
Important indicator of quality and image
Provides customers with a way of making a judgement
about value for money
Importance of price can vary tremendously depending on the
product.
Marketing mix
Price PROFIT CENTER
Product, Place and Distribution COST CENTER.

jw

marketing - price

Setting of Pricing
Considerations
1. Marketing objectives
2. Marketing mix strategy

3. Costs
4. Organization for pricing
5. The nature & demand of the market
6. Competition
7. Other environmental factors (economy, resellers, government)

Dr V -Principle of Marketing

FACTORS AFFECTING PRICING DECISIONS


1. The organisations objectives
2. The marketing mix i.e 4 Ps

3. Costs
4. Competition
5. Consumer perceptions i.e JukeBox
6. Legal constraints i.e Subsidized items

PRICING STRATEGIES
Company can choose to set the
price of a product (numbers of
pricing strategies or policies it
might choose from)
LONG TERM SHORT TERM

jw

marketing - price

15 Pricing Strategies

Penetration Pricing

Penetration Pricing
Price set to penetrate the market
Low price to secure high volumes
Typical in mass market products chocolate
bars, food stuffs, household goods, etc.
Suitable for products with long anticipated life
cycles

May be useful if launching into a new market

Market Skimming

Market Skimming

Many are predicting a firesale in


laptops as supply exceeds demand.
Copyright: iStock.com

High price, Low volumes


Skim the profit from the
market
Suitable for products that
have short life cycles or
which will face competition at
some point in the future (e.g.
after a patent runs out)
Examples
include:
Playstation, jewellery, digital
technology, new DVDs, etc.

Value Pricing

Value Pricing
Price set in accordance
with customer
perceptions about the
value of the
product/service
Examples include
status
products/exclusive
products

Companies may be able to set prices


according to perceived value.
Copyright: iStock.com

Loss Leader

Loss Leader
Goods/services deliberately sold below cost to
encourage sales elsewhere
Typical in supermarkets, e.g. During Hari Raya,
selling raw chicken at RM3/kg in the hope that
people will be attracted to the store and buy
other things
Purchases of other items more than covers loss
on item sold
e.g. Free mobile phone when taking on contract
package

Psychological Pricing

Psychological Pricing
Used to play on consumer perceptions
Classic example RM 9.99 instead of
RM10.99!
Links with value pricing high value
goods
priced
according
to
what
consumers THINK should be the price

Going Rate (Price Leadership)

Going Rate (Price Leadership)


In case of price leader, rivals have difficulty in competing
on price too high and they lose market share, too low
and the price leader would match price and force smaller
rival out of market

May follow pricing leads of rivals especially where those


rivals have a clear dominance of market share
Where competition is limited, going rate pricing may be
applicable banks, petrol, supermarkets, electrical
goods find very similar prices in all outlets

Tender Pricing

Tender Pricing
Many contracts awarded on a tender basis
Firm (or firms) submit their price for carrying out the
work
Purchaser then chooses which represents best value
Mostly done in secret

Price Discrimination

Price Discrimination

Prices for rail travel differ for the same journey


at different times of the day
Copyright: iStock.com

Charging a different price


for
the
same
good/service in different
markets
Requires each market to
be impenetrable
Requires different price
elasticity of demand in
each market

Destroyer Pricing/Predatory Pricing

Destroyer/Predatory Pricing
Deliberate price cutting or offer of free
gifts/products to force rivals (normally
smaller and weaker) out of business or
prevent new entrants
Anti-competitive and illegal if it can be
proved

Absorption/Full Cost Pricing

Absorption/Full Cost Pricing


Full Cost Pricing attempting to set price
to cover both fixed and variable costs
Absorption Cost Pricing Price set to
absorb some of the fixed costs of
production

Marginal Cost Pricing

Marginal Cost Pricing


Marginal cost the cost of producing ONE extra or ONE
fewer item of production
Marginal Cost pricing allows flexibility
Particularly relevant in transport where fixed costs may
be relatively high
Allows variable pricing structure e.g. on a flight from
London to New York providing the cost of the extra
passenger is covered, the price could be varied a good
deal to attract customers and fill the aircraft

Marginal Cost Pricing


Example:

Aircraft flying from KL to KK Total Cost (including normal profit) =


RM1,500 of which RM1,300 is fixed cost*
Number of seats = 160, average price = RM 93.75
Marginal Cost of each passenger = 2000/160 = RM 12.50
If flight not full, better to offer passengers chance of flying at RM12.50 and
fill the seat than not fill it at all!
*All figures are estimates only

Contribution Pricing

Contribution Pricing
Contribution = Selling Price Variable (direct costs)

Prices set to ensure coverage of variable costs


and a contribution to the fixed costs
Similar in principle to marginal cost pricing

Break-even analysis might be useful in such


circumstances

Target Pricing

Target Pricing
Setting price to target a specified profit
level
Estimates of the cost and potential
revenue at different prices, and thus the
break-even have to be made, to determine
the mark-up
Mark-up = Profit/Cost x 100

Cost-Plus Pricing

Cost-Plus Pricing
Calculation of the average cost (AC) plus
a mark up
AC = Total Cost/Output

Influence of Elasticity

Influence of Elasticity
Any pricing decision must be mindful of the
impact of price elasticity
The degree of price elasticity impacts on the
level of sales and hence revenue
Elasticity focuses on proportionate (percentage)
changes

Influence of Elasticity
Price Inelastic:
% change in Quantity < % change in Price
5% increase in price would be met by a fall in
sales of something less than 5%
Revenue would rise

A 7% reduction in price would lead to a rise in


sales of something less than 7%
Revenue would fall

Influence of Elasticity
Price Elastic:
% change in quantity demanded > % change
in price

4% rise in price would lead to sales


falling by something more than 4%
Revenue would fall

A 9% fall in price would lead to a rise in sales


of something more than 9%
Revenue would rise

Malaysia Airlines

DISTRIBUTION
STRATEGIES

What is Wholesaler?
Person
or
firm
that buys large quantity of goods from
various producers or vendors, warehous
es them, and resells to retailers.
Wholesalers who carry only noncompeting
goods
or
lines
are
called
distributors.
Read
more: http://www.businessdictionary.com/definition/wholesaler.html#ixzz290
0U4JQz

Types of Wholesaler
1. Merchant wholesaler
2. General Merchandise
3. Single-line
4. Specialty wholesalers
5. Cash and carry wholesalers
6. Drop shippers
7. Truck wholesalers
8. Mail order wholesaler
9. Producers cooperatives
10.Rack Jobbers

What is Retailer?
A business or person that sells goods to
the consumer, as opposed to
a wholesaler or supplier, who
normally sell their goods to another
business.
Read
more: http://www.businessdictionary.com/definition/retailer.html#ixzz28zzAHP
76

Types of Retailer
1.
2.
3.
4.
5.
6.
7.

Department Store
Supermarkets
Warehouse retailers
Specialty Retailers
E-tailer (Internet based)
Convenience retailer. i,e 7-Eleven
Discount retailer

PHYSICAL DISTRIBUTION
STRATEGIES

Physical distribution
Takes place when a company decides the
channels of distribution to get their products to
the consumer
Comprises all the activities that help to ensure
that the right amount of product is delivered to
the right place at the right time. (Also known
as logistics)

Logistics
Involves order processing, transporting,
storing, stock handling, and inventory control
Involves moving products
Support physical distribution

The Storage of Goods

What is Storage
The marketing function of holding goods until
they are sold
The amount of goods is called an inventory
Each member of the channel of distribution
needs to store its products until orders are
received from customers

Reasons for storage


Production outpaced consumption
Products such as agricultural goods are only available certain
times of the year
Stabilize the price of the product
Stored at convenient locations for rapid delivery
Storage of goods ads time and place utility to goods
Products should be available when and where
consumers want them
Disadvantage -Storing products ties up capital
that
could be used as investment

Types of Storages
1. Private
Warehouse
2. Public
Warehouse
3. Distribution
Center
4. Bonded
Warehouse

Private Warehouse
A facility designed to meet the specific needs of
its owner
Valuable for companies that, over a large volume
of products
Costly to build and maintain
Consider using when there is a significant
amount of products to move and the cost is
cheaper than using a public warehouse.

Private Warehouse

Public Warehouse
Offers storage and handling facilities to
individuals or companies
Provide services such as space, shipment
consolidation, receiving, unloading, inspecting,
reshipping, order filling, and terminal operating
services
Advantage low volume businesses or seasonal
production

Types of public warehouses

Commodity warehouses
Bulk Storage warehouses

Household goods warehouse


Cold Storage warehouse
General Merchandise

Distribution Centers
A warehouse designed to speed delivery of goods and to
minimize storage costs
Main focus is to move products not to store them (cross
docking)
Planned around markets not transportation requirements
(Wal-Mart in coldwater serves MI)
Cut costs by reducing the number of warehouses and cutting
excessive inventory
Used in process-in-transit
Consolidate and redistribute products

Bonded Warehouse
public or private, store products that require
payment of a federal tax
Imported or domestic products cannot be
removed until the required tax is paid

Distribution Planning for


International Markets
Business must follow domestic and foreign trade laws
Must consider because many products are assembled from
parts made in many different countries
Must understand other countries (infrastructure) roads and
transportation facilities
Reliability of a countries channels of distribution
A countries retail establishments

1. Describe the pricing strategies adopted by the airlines


2. What explanation can you offer for the differences in the prices quoted,
both within the two tables and between them?

Group Assignment
Perform a price comparison strategies
used by the following companies : Malindo
Air, Air Asia and KLM.
If one of the companies decides to
establish a cargo business subsidiaries,
what are the facilities that they need to
develop?. Explain your answer.

References

Kotler, Philip & Gary Armstrong Principles of Marketing. Eleventh Edition

Distribution strategy. (2010, November 25). Slide Share. Retrieved October 11, 2012,
from http://www.slideshare.net/SlidesPresentation1/distribution-strategy

Distribution strategy. (2010, November 25). Slide Share. Retrieved October 11, 2012,
from http://www.slideshare.net/SlidesPresentation1/distribution-strategy

Tamadam Food Logistics Consulting. (2011). Tamadam Food Logistics


Consulting. Retrieved October 12, 2012, from
http://www.tamadam.com/about/about.php

Pricing Strategies. (2006, October). Retrieved October 17, 2012, from


http://www.bized.ac.uk