Chapter 3: The role of price in the marketing mix

1. Chapter 3:The role of price in the marketing mix

2. Learning outcomes After this study unit, you should be able to: • Be able to explain the role of price in the marketing mix. • Understand the different launching pricing strategies. • Discuss the role of pricing within product strategy. • Discuss the role of pricing within distribution strategy. • Discuss the role of pricing within promotion strategy and pricing. • Value the contribution of the internet to pricing strategies. • Understand the use of price in the positioning strategy.

3. Introduction • Costs involved, quality, design and distribution all must reflect in the price of a product. • Costs should be high enough to make profits for the company but low enough to be affordable for the target market. • There are different marketing strategies and marketers should recognize the one suites their specific product in a specific time. • Customer value is important as world economic trends bring financial difficulties which influences a company’s performance. • Pricing decisions need to be made according to companies goals based on different elements such as product, place and promotion strategies.

4. The role of pricing in the marketing mix • Many firms do not handle pricing decisions well so the pricing strategy needs more attention. • Common mistakes when developing a pricing strategy • Firms set prices that are too cost-orientated. • Firms fail to revise prices to reflect market changes. • Firms fail to take the rest of the marketing mix into account and fail to set prices that are varied enough for different products, market segments and purchase decisions. • No matter how good the product, how creative the promotion or how efficient the distribution is, unless the price covers the costs, the firm will make a loss.

5. The role of pricing in the marketing mix cont… • Revenue is the price charged to customers, multiplied by the number of units sold. • Price is the monetary value the firm gets back in return for the effort it put into research, development, manufacturing and the marketing of the product. • A good marketing strategy starts with setting good pricing objectives • Survival of the business. • Maximisation of current profit, cash flow or rate of return. • Maximum sales growth.

6. The role of pricing in the marketing mix cont… • In advanced markets where technology and innovation are the main drivers in the market, cost structure frequently evolve to support the pricing strategy of the company. • Price elasticity refers to the effect a change in price has on the quantity of a product demanded by consumers. • Price elasticity of demand measures the percentage change in quantity demanded caused by a percent change in price. • Price elasticity of supply measures how the amount of goods that a company wishes to supply changes in response to a change in price.

7. Pricing strategies in relations to the product offer • Strategies marketers can use • Skimming pricing • Penetration pricing • Demand pricing • Predatory pricing • Discounts and allowances • Value based pricing

8. Skimming pricing • Skimming pricing is based on a high initial price for a product and used when • The nature of demand is uncertain • Large amounts of money is expected on research and development of the new product. • When the competition is expected to develop and launch a similar product. • Two approaches • A rapid skimming strategy is launching the new product at both a high price and high promotion intensity. • A large segment of the potential market is not aware of the product at the time of the launch and those who become aware will be eager to buy it at a high price. • In the face of potential competition a company will want to build up brand preference.

9. Skimming pricing cont… • A slow skimming strategy is launching the new product at a high price but at a low promotion intensity. • When the size of the market is limited or when most of the market is aware of the product and consumers are willing to pay a high price. • The decision about how high a skimming pricing should be depends on the level of competition in the market.

10. Penetration strategy • Penetration strategy is to enter a market with a low initial price so that a greater share of the market can be captured and used when • Dealing with markets that are price sensitive. • When a selected market does not exist and demand seems to be elastic over the entire demand curve. • To discourage competitors from entering the market or a particular market segment. • Marketing new products to existing markets.

11. Penetration strategy cont… • Two approaches • Slow penetration pricing is launching new products at a low price and low promotional intensity. • Encourage rapid product acceptance while the company will keep its promotions costs down in order to achieve a higher net profit. • Rapid penetration pricing is launching the new product at a low price, while spending heavily on promotion • Useful when the market is unaware of the product, most buyers are price sensitive, and there is strong competition in the market segment. • Penetration pricing reflects a long-term perspective in which short-term profits are sacrificed in order to establish a sustainable viable advantage.

12. Demand strategy • Demand is the quantity of product that will be sold in the market at various prices for a specified period. • The quantity of a product that a consumer will buy depends on the price. • Before setting the price marketers must understand the relationship between the price and demand for the product in the market. • Pure competition can be described as a market of buyers and sellers trading their products in financial terms.

13. Predatory pricing • The predatory company first lowers its price until it is below average costs of its competitors in order to force out competition. • The theory of predatory pricing has always assumed that a dominant company will be able to manipulate its smaller competitors to such an extent that even the potential use of predatory strategies by the smaller rivals is likely to be unsuccessful.

14. Discounts and allowances • Marketing managers use various forms of discounts and allowances to encourage customers to purchase more of their companies’ products • Types of discounts and allowances • Quantity discount • Consumers receive this discount for buying more of a certain product. • Cumulative quantity discount • A customer is not allowed a discount until consecutive purchases have been reached a specific total. • Cash discount • When the seller reduces the price of a product in return for a cash payment.

15. Discounts and allowances cont… • Functional discount • To compensate distributor channel intermediaries for performing a service or function for the manufacturer. • Seasonal discount • When a price reduction is granted to customers buying merchandise out of season. • Promotional (trade) allowance • payment to a dealer for promoting the manufacturer’s products. • Rebates • Cash refunds given to the purchaser of a product during a specific period.

16. Value-based pricing • Value-based pricing evolved out of the multi-attribute product concept, prices are based on the general motivational orientations that govern human behaviour. • Companies try to understand the attributes customers look for in a product and then estimate the value of that bundle of attributions to customers.

17. The role of pricing within product strategy • 7 important product characteristics • New product development • Changing customer tastes and preferences, technological advances and competitive pressures mean that companies cannot afford to rely on past product successes. • Product quality • Quality is one of a marketer’s major positioning tools and a key determinant of a company’s competitive position in the market. • It is the ability of the product to perform its functions. • Product innovation • Companies must continuously try to identify new features and decide which ones to add to their products.

18. The role of pricing within product strategy cont… • Product design • The more time and effort are invested in perfecting the design of the new product, the less is the marketing budget needed to convince the public that they need it. • Product support • Strengthens a company’s competitive advantage, especially in industries in which products are perceived as similar. • Companies could strengthen customer loyalty by creating long-term support relationships and delivering quality service to their customers. • Product line management • A product line is a group of products that are closely related because they perform a similar function, sold to the same customer group, marketed through the same channels or make up a particular range. • Important determinant of the sales success of companies. • Branding

19. The role of pricing within promotions strategy and pricing cont… • Companies must communicate with their customers by using one of more promotions tactics. • Sales promotion tactics • Is an marketing communication activity in which short-term incentives motivates consumers to purchase products immediately. • Personal selling and direct marketing • Is a direct communication between sales representative and one or more prospective buyers in an attempt to manipulate each other in a purchase situation.

20. The role of pricing within promotions strategy and pricing cont…

21. The role of pricing within distribution strategy • Distribution channels are organised structures of buyers and sellers that bridge the gap of time and space between the manufacturer and the customer. • In order to devise the right distribution strategy, the company must first specify the chosen market segment or niche. • Three distribution strategies • Intensive distribution • Selective distribution • Exclusive distribution

22. The role of pricing within distribution strategycont…

23. E-commerce • The internet has created a price transparency that allows both buyers and sellers to view all competitive prices. • Electronic money is a system that uses the internet and computers to exchange payments electronically.

24. The use of price in the positioning strategy • Consumers view a brand as an important part of a product branding adds value to a product. • It is evident that customers will pay more for a strong brand. • Branding helps shoppers in making their finals decision prior to the purchase because it provides more information about the products. • Marketing managers can make an extended use of pricing strategies when trying to position their brands among other within the market share.

25. Summary • Price of a product must be set according to a set parameters that will assist marketing managers in setting up the right price. • Price has to be considered according to goals, costs, profits to be made, R&D, innovation, competition and may more parameters that may influence the price. • The price should be consistent with the overall strategy of the product. • Price should match the design of the product, the quality, the message it is carrying and the media, the distribution channels and the sales method among others. • The internet has changed the way consumers look for information about the product they are willing to purchase.