Pricing

Quantitative Marketing

Pricing is one of the four aspects of marketing. The other three parts of the marketing mix are product management, promotion, and distribution. It is also a key variable in microeconomic price allocation theory.

Pricing

Research Questions

1.

 

Pricing

Definition of Price

In economics and business, the price is the assigned numerical monetary value of a good, service or asset. The concept of price is central to microeconomics where it is one of the most important variables in resource allocation theory (also called price theory). Price is also central to marketing where it is one of the four variables in the marketing mix that business people use to develop a marketing plan.
Historically, price value has superseded the barter value of pre-monetary systems, in which bartering was used to determine a value of a good or service. Economists, strictly speaking, view price as an exchange ratio between goods. Thus it exists also in a barter system. From this point of view, price is akin to opportunity cost, that is, what you have to give up in exchange for the good or service that you are purchasing.
The price of an item is also called the price point, especially where it refers to stores that set a limited number of price points. For example, Dollar General is a general store or "five and dime" store that sets price points only at even amounts, such as exactly one, two, three, five, or ten dollars (among others). Other stores (such as dollar stores, pound stores, euro stores, 100-yen stores, and so forth) only have a single price point (1$, 1?, 1?, 100?), though in some cases this may get more than one of some very small items.

Pricing

Pricing

Pricing involves asking questions like:

  • How much to charge for a product or service?
  • What are the pricing objectives?
  • Do we use profit maximization pricing?
    How to set the price?: ( cost-plus pricing, demand based or value-based pricing, rate of return pricing, or competitor indexing)
  • Should there be a single price or multiple pricing?
  • Should prices change in various geographical areas, referred to as zone pricing?
  • Should there be quantity discounts?
  • What prices are competitors charging?
  • Do you use a price skimming strategy or a penetration pricing strategy?
  • What image do you want the price to convey?
  • Do you use psychological pricing?
  • How important are customer price sensitivity and elasticity issues?
  • Can real-time pricing be used?
  • Is price discrimination or yield management appropriate?
  • Are there legal restrictions on retail price maintenance, price collusion, or price discrimination?
  • Do price points already exist for the product category?
  • How flexible can we be in pricing? : The more competitive the industry, the less flexibility we have.
    • The price floor is determined by production factors like costs (often only variable costs are taken into account), economies of scale, marginal cost, and degree of operating leverage
    • The price ceiling is determined by demand factors like price elasticity and price points
  • Are there transfer pricing considerations?
  • What is the chance of getting involved in a price war?
  • How visible should the price be? - Should the price be neutral? (ie.: not an important differentiating factor), should it be highly visible? (to help promote a low priced economy product, or to reinforce the prestige image of a quality product), or should it be hidden? (so as to allow marketers to generate interest in the product unhindered by price considerations).
  • Are there joint product pricing considerations?
  • What are the non-price costs of purchasing the product? (e.g.: travel time to the store, wait time in the store, disagreeable elements associated with the product purchase - dentist -> pain, fishmarket -> smells)
  • What sort of payments should be accepted? (cash, cheque, credit card, barter)
     

A well chosen price should do three things:

  • achieve the financial goals of the firm (e.g..: profitability)
  • fit the realities of the marketplace (will customers buy at that price?)
  • support a products positioning and be consistent with the other variables in the marketing mix
    • price is influenced by the type of distribution channel used, the type of promotions used, and the quality of the product
    • price will usually need to be relatively high if manufacturing is expensive, distribution is exclusive, and the product is supported by extensive advertising and promotional campaigns
    • a low price can be a viable substitute for product quality, effective promotions, or an energetic selling effort by distributors
       

Pricing

Pricing terms

From the marketers point of view, an efficient price is a price that is very close to the maximum that customers are prepared to pay. In economic terms, it is a price that shifts most of the consumer surplus to the producer.

The effective price is the price the company receives after accounting for discounts, promotions, and other incentives.

Price lining in the use of a limited number of prices for all you product offerings. This is a tradition started in the old five and dime stores in which everything cost either 5 or 10 cents. Its underlying rationale is that these amounts are seen as suitable price points for a whole range of products by perspective customers. It has the advantage of ease of administering, but the disadvantage of inflexibility, particularly in times of inflation or unstable prices.

A loss leader is a product that has a price set so low that it acts as a promotional device and draws customers into the store.

Promotional pricing refers to an instance where pricing is the key element of the marketing mix.

The price/quantity relationship refers to the perception by most consumers that a relatively high price is a sign of good quality. The belief in this relationship is most important with complex product that are hard to test, and experiential products that cannot be tested until used (such as most services). The greater the uncertainty surrounding a product, the more consumers depend on the price/quantity hypothesis and the more of a premium they are prepared to pay.

Premium pricing (also called prestige pricing) is the strategy of pricing at, or near, the high end of the possible price range. People will buy a premium priced product because:

  1. They believe the high price is an indication of good quality;
  2. they believe it to be a sign of self worth - "They are worth it" - It authenticates their success and status - It is a signal to others that they are a member of an exclusive group; and
  3. They require flawless performance in this application - The cost of product malfunction is too high to buy anything but the best - example : heart pacemaker


Demand-based pricing is any pricing method that uses consumer demand - based on perceived value - as the central element. These include : price skimming, price discrimination and yield management, price points, psychological pricing, bundle pricing, penetration pricing, price lining, and premium pricing.
 

Pricing

Aspects

In microeconomics, production is the act of making things, in particular the act of making products that will be traded or sold commercially. Production decisions concentrate on what goods to produce, how to produce them, the costs of producing them, and optimizing the mix of resource inputs used in their production. This production information can then be combined with market information (like demand and marginal revenue) to determine the quantity of products to produce and the optimum price to charge.

(In macroeconomics, production is measured by gross domestic product and other measures of national income and output.)

Aspects of production and pricing theory

  • Production theory basics
    • production efficiency
    • factors of production
    • total, average, and marginal product curves
    • marginal productivity
    • isoquants
    • the marginal rate of technical substitution
  • Economic rent
    • classical factor rents
    • Paretian factor rents
  • Production possibility frontier
    • what products are possible given your resources
    • the trade-off between producing one product rather than another
    • the marginal rate of transformation
  • Production function
    • inputs
    • diminishing returns to inputs
    • the stages of production
    • shifts in a production function
  • Cost theory
    • the different types of costs
      • opportunity cost
      • accounting cost or historical costs
      • transaction cost
      • sunk cost
      • marginal cost
    • the isocost line
  • Cost-of-production theory of value
  • Long-run cost and production functions
    • long-run average cost curves
    • long-run production function and efficiency
    • returns to scale and isoclines
    • minimum efficient scale
    • plant capacity
  • Economies of scale
    • the efficiency consequences of increasing or decreasing the level of production
  • Economies of scope
    • the efficiency consequences of increasing or decreasing the number of different types of products produced, promoted, and distributed
  • Optimum factor allocation
    • output elasticity of factor costs
    • marginal revenue product
    • marginal resource cost
  • Pricing
    • various aspects of the pricing decision
  • Transfer pricing
    • selling within a multi-divisional company
  • Joint product pricing
    • price setting when two products are linked
  • Price discrimination
    • different prices to different buyers
    • types of price discrimination
    • yield management
  • Price skimming
    • price discrimination over time
  • Two part tariffs
    • charging a price comprised of two parts, usually an initial fee and an ongoing fee
  • Price points
    • the effects of a non-linear demand curve on pricing
  • Cost-plus pricing
    • a markup is applied to a cost term in order to calculate price
    • cost-plus pricing with elasticity considerations
    • cost plus pricing is often used along with break even analysis
  • Rate of return pricing
    • calculate price based on the required rate of return on investment, or rate of return on sales
  • Profit maximization
    • determining the optimum price and quantity
    • the totals approach
    • the marginal approach