7.2/ FACTORS TO CONSIDER WHEN SETTING PRICES

7.2.1/ Internal factors

7.2.1.1/ Marketing objectives

- Pricing strategy depends on a company’s marketing positioning and on how a company has selected its target market.

- Some additional objectives that a company may seeks: survival, current profit maximization, market-share maximization and product-quality leadership.

 Survival 

-A company chooses survival as its objective when its face heavy competition or changing consumer wants.

- It may set low price as long as their prices can cover costs. 

Current profit maximization

-If a company chooses to maximize its current profit, it will estimate what demand and costs will be at different prices and choose the price that will produce the maximum current profit, cash flow or return on investment.  Market-share leadership

-Firms that follow market-share leadership objective will usually set prices as low as possible.  Product-quality leadership

-To achieve product-quality leadership objective, firms will charge high price to cover such quality and the high cost of R&D.

7.2.1.2/ Marketing-mix strategy -Price decisions must be coordinated with product design, distribution and promotion decisions to form a consistent and effective marketing program. Decisions made for other marketing-mix variables may affect pricing decisions.

7.2.1.3/ Costs

-Costs set the floor for the price that a company can charge customers for its product. The price that a company wants to charge is as much as it can both covers all its costs for producing, distributing and selling the product, and delivers a fair rate of return for its effort and risk. 

Types of cost - Costs take two forms:

Fixed costs and variable costs.

- Fixed cost are costs that do not vary with production or sales level

-Variable costs are costs that vary directly with the level of production. - Total costs are the sum of the fixed and variable costs for any given level of production. Management wants to charge a price that will at least cover the total production costs at a given level of production.  Costs at different levels of production

- Costs usually vary with different levels of production. Cost per product is high if a factory just produces a few products per day. However, cost per unit will fall when the number of products produced per day increases.  Costs at different production experience -Average cost tends to fall as a company gain experience in production.

7.2.1.4/ Organizational considerations - Different organizations may assign different people who are in charge of setting prices.

7.2.2/ External factors External factors that affect pricing decisions are the nature of the market and demand, competition and other environmental elements.

7.2.2.1/ The market and demand  Pricing in different types of market The seller’s pricing freedom varies with different types of market. Economists recognize four types of market, each presenting a different pricing challenge.

The four types of market include pure competition, monopolistic competition, oligopolistic monopoly and pure monopoly

- Under pure competition market, no single buyer or seller has influence on the ongoing market price.

- In monopolistic competition market, marketers have some control over prices. - Under oligopolistic competition market, pricing decisions by each seller are likely to affect the market but no single seller controls it .

- In a pure monopoly market, sellers have considerable control over the price.  Consumer perceptions of price and value

- Before decide whether to buy a product or not, consumers will decide if the product’s price is reasonable or not. Thus, pricing decisions must be buyer-oriented.

- Effective, buyer-oriented pricing involves understanding how much value consumers place on the benefits they receive from the product and setting a price that fits this value. - Consumers assign different values to different product features, thus, marketers usually vary their pricing strategies for different segments.

They offer different sets of product features at different prices.  Analyzing the price-demand relationship -Each price that a company charges consumers will result in a level of demand. Usually, demand and price has an inverse relationship: the higher the price, the lower the demand. Consumers with limited budget will probably buy less amount of something if its price is too high.

 Price elasticity of demand

- Price elasticity is a measure of the sensitivity of demand to changes in price. If demand hardly changes with a small change in price, we say the demand is inelastic. If demand changes greatly, we say the demand is elastic.

- For products that have elastic demand, marketers have to be careful when they set the price because small changes in price can affect the demand significantly.

7.2.2.2/ Competitors’ costs, prices and offers. -Other factors affect a company’s pricing decisions is its competitors’ costs and prices, and possible competitor reactions to the company’s pricing moves.

7.2.2.3/ Other external factors

-Economic conditions (such as boom or recession, inflation, interest rates..) can have a strong impact on the firm’s pricing strategies. - Resellers are also a factor that a company should consider.

-Government and social concerns may also have to be taken into account.

7.5/ PRICE-ADJUSTMENT STRATEGIES Companies usually adjust their basic prices to account for various customer differences and changing situations.

There are seven price-adjustment strategies: discount and allowance pricing, segmented pricing, psychological pricing, promotional pricing, value pricing, geographical pricing and international pricing.

7.5.1/ Discount and allowance pricing

-Discount and allowance prices are prices adjusted to reward customers for certain responses, such as early payment of bills, volume purchases and off-season buying. These price adjustments can take many forms:

+ A cash discount is a price reduction to buyers who pay their bills promptly.

+ A quantity discount is a price reduction to buyers who buy large volumes.

+A trade discount (or a functional discount) is a price reduction offered by the seller to trade channel members that perform certain functions, such as selling, storing and record keeping.

+A seasonal discount is a price discount to buyers who buy merchandise or services out of season.

+ Trade-in allowances are price reductions given for turning in an old item when buying a new one. + Promotional allowances are payments or price reductions to reward dealers for participating in advertising and sales-support programmes.

7.5.2/ Segmented pricing A company may adjust their prices to different groups of customers, products or locations. In segmented pricing, the company sells a product or service at two or more prices. There are several forms:

+ Customer-segment pricing. Different customers pay different prices for the same product or service.

+ Product-form pricing. Different versions of the product are priced differently, but not according to differences in their costs.

+ Location pricing. Different locations are priced differently, even though the cost of offering each location is the same.

+ Time pricing. Prices vary by the season, the month, the day and even the hour.

7.5.3/ Psychological pricing -Psychological pricing is a pricing approach that considers the psychology of prices and not simply the economics; the price is used to say something about the product. (Ex: customers usually perceive higher priced products to have higher quality)

-Another aspect o psychological pricing is reference prices which prices that buyers carry in their minds and refer to when looking at a given product. The reference price might be formed by noting current prices, remembering past prices or assessing the buying situation. Sellers can influence these consumers’ reference prices in setting price.

7.5.4/Promotional pricing -Promotional pricing means temporarily pricing products below the list price, and sometimes even below cost, to increase short-run sales. -Several forms: Loss leader, special event pricing, cash rebates, low-interest financing, longer warranties, free maintenance and discount

-Loss leader is usually used by supermarkets and department stores, they will price a few products as loss leader to attract customers to the store in the hope that they will also buy other items at normal price.

- Special-event pricing is used in certain seasons to draw in more customers.

- Cash rebates is popular with carmakers and producers of durable products. Manufacturers offer cash rebates to consumers who buy the product from dealers within a specified time; the manufacturer sends the rebate directly to the customer.

- Discount is the direct reduction from normal prices to increase sales and decrease stock.

7.5.5/ Geographical pricing Firms may set different prices for people in different part of the world or a country:

- FOB-origin pricing is a geographic pricing strategy in which goods are placed free on board a carrier; the customer pays the freight from the factory to the destination.

- Uniform delivered pricing is a geographic pricing strategy in which the company charges the same price plus freight to all customers, regardless of their location.The freight charged will be set at the average freight cost.

- Zone pricing is a geographic pricing strategy in which the company sets up two or more zones. All customers within a zone pay the same total price; the more distant the zone, the higher the price.

- Basing-point pricing is a geographic pricing strategy in which the seller designates some city as a basing point and charges all customers the freight cost from that city to the customer location, regardless of the city from which the goods are actually shipped.

-Freight-absorption pricing—A geographic pricing strategy in which the company absorbs all or part of the actual freight charges in order to get the business.

7.5.6/ International pricing -The price that a company should charge in a specific country depends on many factors, including economic conditions, competitive situations, laws and regulations, and development of the wholesaling and retailing system. Consumer perceptions and preferences may also vary from country to country. All of them require companies to set different prices.

- Costs play an important role in setting international prices. The higher costs of selling in foreign markets is the result of the additional costs of modifying the product, higher shipping and insurance costs, import tariffs and taxes, costs associated with exchange-rate fluctuations and higher channel and physical distribution costs