Pricing aspect of 4Ps

Sunday, 4 June 2023 3:34 pm

Price as most important marketing mix variable for corporate value

Which factors are influencing the management of ‘price’?

- The information revolution is destroying the simplicity of uniform pricing and bringing back individually negotiated
prices. With more information available, markets are becoming more price-sensitive

Major, traditional pricing concepts

- Mark-up pricing: Most popular among accountants, solicitors, and contractors
- Target-return pricing: Most popular among capital-intensive businesses such as public utilities and car companies.

Fundamental problems with these pricing concepts

- They ignore demand—they are based on cost estimates.
- They ignore the perceived value of the product to the customer—they are based on what the manager thinks the
project is worth.
- They ignore the value created by effective marketing—they are based on ridged accounting and finance metrics.
- They ignore competition—they are based on an internal view of the company (usually a product or production
view). Auction is a good e.g.

So what are the principles that underlie effective pricing?

1. Pricing should be based on the value that the product offers to customers, not on its costs of production. The existence of a customer surplus means that
2. Since different customers attach different values to a given product (good or service), prices should be customized a company is leaving money on the table; the
so that these value differences can be capitalized on. company is missing out on cash-flow.
3. Pricing decisions should anticipate the reactions of competitors and their long-run objectives in the market. A
1. Customer company has to anticipate that a competitor will react strongly to any attempts to capture its market share. For Minimize consumer surplus by charging
pers. example, a competitor may not just match a price reduction, but may under cut the price, resulting in a downward different prices to different customers
2. Differentiation spiral in prices leaving all participants worse off (eg. Airlines: economy, business, first class)
(diff values) - For pricing decisions, managers to consider
3. Competitor ▪ How will competitors react and what are the subsequent effects on profits?
4. Firm's ▪ Is there a way of influencing competitors towards less damaging responses? Cooperation in pricing manifest in price
positioning - These competing reactions and the ability to shape these responses depend on the nature of the industry: signalling.
▪ Number of competitors—competitor cooperation is more difficult to achieve with many competitors. 1. Involves tactics (e.g., advanced
▪ Differences among competitors—where companies have large differences in cost structures, market announcements of price increases, public
shares, and product ranges, agreements on pricing cooperation are difficult. announcements of intentions not to lower
▪ Price transparency—transparent processes encourage cooperation. If rivals can immediately observe prices) to make transparent what a firm’s
price cuts, aggressive pricing is deterred. objective is. Trust among competitors is
▪ Any short-term price gains from price cutting—the bigger the short-term gains, the more likely price created.
competition will break out. 2. In ‘tit-for-tat’. Involves simply matching the
4. Pricing should be integrated with a firm’s broad strategic positioning. That is, prices have to be designed to fit into competitor’s price moves, thus not
a firm’s market position strategy; prices that are set too high for what is offered will yield a brand that is perceived undercutting it. Again, trust (= more
to be of poor value. cooperation) among competitors is created.
- What has been the typical approach to the price-strategy relationship?
Design the product > determine the costs to make it > observe the competitions’ prices > set ones own
price for the product > position the product in the target market segment with a brand at the set price.
- What is a value-based approach to pricing? (reversal)
Determine a position for the product in the target market segment with a brand > derive an acceptable
price > determine an acceptable level of cost for the product > design the product.

 Price determines cost if shareholder value is to be maximized; not the other way around.

Three-tier price segmentation of markets

- Economic position. • Niche business: compete in 1 segment
- Mid-range position • Compete in all price segments to achieve economies of scale a
- Luxury position. • number of price segments is growing to include such segments as premium economy and premium segments.

Price-cut effects:
- Price elasticity within a price segment is normally higher than between brands in different value segments. That is,
a price cut by a mid-market brand will draw more sales from other mid-market brands than from other value
segments. (i.e. effect within own segment)
- Switching that occurs between price segments is not symmetrical. That is, price cuts in a higher-quality tier are
more powerful in pulling customers up from lower-price segments than price cuts in a lower-price segment is in
pulling customers down from upper tiers.

Setting price to max. corporate value

- Decide on a price position – a skimming price or a penetration price. Def.
1. When should a skimming price be selected? A skimming price is a price set to maximize
Note: The following ▪ There are four conditions under which price skimming yields maximum corporate value: how much money can be charged for a given
factors should also □ High barriers to entry (e.g., patents make it hard for competitors to enter a market). product.
be taken into □ Demand is price inelastic (e.g., in high-end strategy consulting or for super-luxury products).
account: □ High-value segments (e.g., premium and luxury segments). Penetration pricing is a price set to maximize
- Core strategy. □ Few economies of scale (e.g., where experience and scope does not reduce costs of production) sales volume.
- Strategic 2. When should a penetration price be selected?
objectives. ▪ There are four conditions under which price penetration yields maximum corporate value:
- Strategic focus. □ Low barriers to entry (e.g., internet business are relatively easy to set up and high prices would
- Benefits be rapidly eroded by competitors).
needed. □ Demand is price elastic (e.g., in commodity markets, quality and performance are similar and
- Competitors price becomes the most important market share driver).
and PEST. □ Network effects (e.g., xbox console and games, Microsoft word processor).
□ Large economies of scale (e.g., where experience and scope can reduce costs of production).
- Decide on a price variation policy – when and how to vary the price with promotional tools.
○ Trade promotions (e.g., discounts and allowances).

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○ Trade promotions (e.g., discounts and allowances).
○ Consumer promotions (e.g., coupons, cash rebates, low-interest financing).

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