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Chapter 26 .docx

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Management Studies
MGST 391
Ahmad Ali Sohrabi

Chapter 26 : Price PRICING CONSIDERATIONS AND APPROACHES “Price is the sum of the values that consumer exchange for the benefits of having or using the product. Only element to produce revenues Most flexible element Could be Fixed or Dynamic Price Setting Cost Competition Demand (Elastic / Inelastic) Common Pricing Mistakes 1). Pricing is too cost-oriented. 2). Prices are not revised often enough to reflect market changes. 3). Prices do not take into account the other elements of the marketing mix. 4). Prices are not varied for different products, market segments, and purchase occasions. Internal Factors Affecting Pricing Decisions 1. Marketing objectives 2. Marketing mix strategies 3. Costs 4. Organizational considerations 1. Marketing objectives: • Survival • Current profit maximization • Market share leadership • Product quality leadership • Other objectives  To prevent competitors  To keep loyalty and support of reseller  To avoid govt. intervention  To create excitement or draw attention of new customers  To help the sale of other product in product line 2. Marketing mix strategy: Price decisions must be coordinated with product design, place, and promotion decisions to form a consistent and effective marketing program. Companies often make their pricing decisions first and then base other marketing-mix decisions on the prices that they want to charge. Target costing is positioning of product on price and then tailoring other marketing decisions to the price they want to charge. But remember that consumers rarely buy on price alone. 3. Costs Set the floor for the price that the company can charge. (price below this is not acceptable) Companies want to charge a price that covers all its costs for producing, distributing, and selling the product, and provides a fair rate of return for its effort and risk. To price wisely, management needs to know how its costs vary with levels of production. The experience curve (or the learning curve) indicates that average cost drops with accumulated production experience 4. Organizational considerations. Management must decide within the organization who should set prices.  Small companies: CEO or top management  Large companies: Divisional or product line managers  Some companies have pricing departments External Factors Affecting Pricing Decisions 1) Nature of market and demand 2) Competitors’ costs, prices, and offers 3) Other environmental elements 1) Nature of market and demand Pure competition No single buyer or seller has much effect on the going market price. Monopolistic competition Market consists of many buyers and sellers who trade over a range of prices because they can differentiate their products. Oligopolistic competition Market consists of a few sellers who are highly sensitive to each other’s pricing and marketing strategies. Pure monopoly Monopolists do not always charge a full price because: 1]. They do not want to attract competition. 2]. They want to penetrate the market faster. 3]. They fear government regulation. Price-demand relationship  Demand curve  Price elasticity of demand Factors affecting Demand / Price elasticity of demand/ Consumer choice  Price  Price of substitute and complementary goods  Consumer income  Taste and fashion  Advertisement and Training  After sale services and grant of credit 2) Competitors’ costs, prices, and offers 3) Other environmental elements a). Economic conditions (such as boom or recession, inflation, or interest rates). b). Reseller’s policies (reactions) must be considered especially if they do not match the supplier’s. c). The government (because of its regulatory power) must be considered. d). Social concerns may affect the firm’s short-term sales, market share, and profit goals. General Pricing Approaches/Methods Price will be set between 2 extremes.  Roof / Ceiling i.e. Customer’s value  Floor i.e. Cost Price will be set between these 2
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