Pricing Decisions

What is Price?
In general terms price is a component of an exchange or transaction that takes
place between two parties and refers to what must be given up by one party
(i.e., buyer) in order to obtain something offered by another party (i.e., seller).

Buyers’ View – For those making a purchase, such as final customers, price
refers to what must be given up to obtain benefits. In most cases what is given
up is financial consideration (e.g., money) in exchange for acquiring access to
a good or service.

Sellers’ View - To sellers in a transaction, price reflects the revenue generated

for each product sold and, thus, is an important factor in determining profit.
For marketing organizations price also serves as a marketing tool and is a key
element in marketing promotions. For example, most retailers highlight
product pricing in their advertising campaigns.
 Five Cs of Pricing
The factors affecting pricing
• The Five Cs of pricing are as follows
• Company objectives
• Customers
• Costs
• Competition
• Channel members
 1.) Company Objectives: Even though all company methods and
objectives may ultimately be oriented towards making profit, firms
implement a profit orientation specifically by focusing on target profit
pricing, maximizing profits, or target return pricing.
❖ Profit Orientation
Firms usually implement target profit pricing when they have a particular profit
goal as a major concern.
❖ Sales Orientation
Firms using a sales orientation to set prices believe that increasing sales will help
the firm more than increasing profits
❖ Competitor Orientation
When the firms take a competitor orientation, they strategize according to the
premise that they should measure themselves primarily against their
competition. Some firms focus on competitive parity, Which means they set
prices that are similar to those of their major competitors.
❖ Customer Orientation
A Customer orientation invokes the concept of value. Sometimes a firm may
attempt to increase value by focusing on customer satisfaction and setting
prices to match customer expectations.
2.) Customers : When the firm has developed their company
objective, they turn to understanding consumer reactions to
different prices. The second C of five Cs of pricing focuses on
customers.
❖ Demand Curves and Pricing
A demand curve shows how many units of product or services
consumers will demand during a specific period of time at
different prices.
❖ Price Elasticity of Demand
Price elasticity refers to % change in quantity demanded to % change in price.
There are certain exceptions to this theory for certain products.
 Factors Influencing Price Elasticity of
Demand
1.) Income Effect
Generally as people’s income increases, their spending behaviour changes. They
tend to shift their demand from lower priced products to higher priced
alternatives.
2.) Substitution Effect
The substitution effect refers to consumer’s ability to substitute other products for
the present or focal brand. The greater the availability of substitutes products,
the higher the price elasticity of demand for any given product will be.
3.) Cross-Price Elasticity
Cross-Price Elasticity is the percentage change in quantity of Product A demanded
compared with percentage change in price of Product B. This happens in the
case of complementary products
 3.) Costs: To make effective pricing decisions, firms must
understand their cost structures so they can determine the degree
to which their products or services will be profitable at different
prices.
❖ Variable Costs
Variable are those costs, primarily labor and material that vary with production
volume.
❖ Fixed Costs
Fixed costs are those costs that remain essentially at same level, regardless of any
changes in volume of production.
❖ Total Costs
Finally, the total cost is simply the sum of fixed and variable costs.
4.) Competition: The fourth C, competition has profound impact on
pricing strategies. There are three levels of competition- oligopolistic,
monopolistic and pure.
5.) Channel Members: Channel members-manufacturers, wholesalers
and retailers can have different views when it comes to pricing strategies.
The manufacturer may like to convey the brand image and reputation by
pricing the product higher but the channel member that is primarily
concerned with increasing its sales may desire to keep lower prices and will
accept lower profits to move the product regardless of consumer impressions
of the brand.
 Pricing Strategies

Cost Based Pricing Strategies Value Based

Competitor Based
1.) Cost Based Methods:
Cost based pricing method determine the final price to be charged starting with the
cost. Cost based methods do not recognize the role that consumers or competitors
prices play in the marketplace.

2.) Competitor Based Methods:

In competitor based pricing method the prices are set to reflect the way they want
consumers to interpret their own prices relative to competitors offering.

3.) Value Based :

Value based pricing methods include approaches to setting prices that focus on
overall value of product offering as perceived by consumers. Consumers
determine value by comparing the benefits they expect the product to deliver with
the sacrifice they will need to make to acquire the product.
 Quality
Low High

Economy Penetration
Strategy e.g. Telewest
Low
e.g. Tesco
spaghetti
cable phones
Price
Skimming Premium
High e.g. New film or e.g. BA first
album class
 Pricing Methods
• Premium pricing
• Uses a high price, but gives a good product/service

• Penetration pricing
• offers low price to gain market share - then increases
price

• Economy pricing
• placed at ‘no frills’, low price
• Price skimming
• where prices are high - usually during introduction
• ultimately prices will reduce to the ‘parity’

• Psychological pricing
• to get a customer to respond on an emotional, rather than
rational basis
• .e.g 99p not £1.01 ‘price point perspective

• Pricing variations
• ‘off-peak’ pricing, early booking discounts,etc
• Optional product-pricing
• e.g. optional extras - BMW famously
under-equipped
• Captive product pricing
• products that complement others
• e.g Gillette razors (low price) and blades (high
price)
• Product-bundle pricing
• sellers combine several products at the same price
• e.g software, books, CDs
• Geographical pricing
• different prices for customers in different parts of
the world
• [Link] shipping costs, or place onPLC
• Value pricing
• usually during difficult economic conditions
• e.g. Value menus at McDonalds
 Distribution Channels

What is a Distribution Channel?

A set of interdependent organizations
(intermediaries) involved in the process of
making a product or service available for
use or consumption by the consumer or
business user.

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 Why are Marketing
Intermediaries Used?
• The use of intermediaries results from their greater
efficiency in making goods available to target markets.
• Offer the firm more than it can achieve on it’s own through
the intermediaries:
– Contacts,
– Experience,
– Specialization,
– Scale of operation.
• Purpose: match supply from producers to demand from
consumers.

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Distribution Channel Functions
Distribution Key Function Channel

Gathering and distributing marketing research

Information about the environment
Developing and spreading persuasive
Promotion communications about an offer
Finding and communicating with prospective
Contact buyers

Matching Shaping and fitting the offer to the buyer’s need

Agreeing on price and terms of the offer so

Negotiation ownership or possesion can be transfered

Physical Distribution: transporting and storing goods

Acquiring and using funds to cover the costs of

Financing channel work
Assuming financial risks such as the inability to sell
Risk Taking inventory at full margin

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 Type of Channel Members

Channel activities may be carried out by the marketer or the marketer

may seek specialist organizations to assist with certain functions.
Resellers
These organizations, also known within some industries as
intermediaries, distributors or dealers, generally purchase or take
ownership of products from the marketing company with the
intention of selling to others. If a marketer utilizes multiple
resellers within its distribution channel strategy the collection of
resellers is termed a Reseller Network. These organizations can be
classified into several sub-categories including:
Retailers – Organizations that sell products directly to
final consumers.

Wholesalers – Organizations that purchase products from

suppliers, such as manufacturers or other wholesalers, and
in turn sell these to other resellers, such as retailers or other
wholesalers.

Industrial Distributors – Firms that work mainly in the

business-to-business market selling products obtained from
industrial suppliers.
 Specialty Service Firms
❖ These are organizations that provide additional services to help
with the exchange of products but generally do not purchase the
product (i.e., do not take ownership of the product):
❖ Agents and Brokers – Organizations that mainly work to bring
suppliers and buyers together in exchange for a fee.
❖ Distribution Service Firms – Offer services aiding in the
movement of products such as assistance with transportation,
storage, and order processing.
❖ Others – This category includes firms that provide additional
services to aid in the distribution process such as insurance
companies and firms offering transportation routing assistance.
 Number of Channel Levels
Channel Level - Each Layer of Marketing Intermediaries that Perform Some
Work in Bringing the Product and its Ownership Closer to the Final Buyer.

0-level channel – Direct

Producer Consumer

1-level channel
→
Producer Retailer Consumer

2-level channel
→ →
Producer Wholesaler Retailer Consumer

3-level channel
→ → → →
Producer Wholesaler Jobber Retailer Consumer
 Factors Affecting Distribution Channel

❖ Product Issues
The nature of the product often dictates the distribution options available
especially if the product requires special handling. For instance, companies
selling delicate or fragile products, such as flowers, look for shipping
arrangements that are different than those sought for companies selling
extremely tough or durable products, such as steel beams.
❖ Promotion Issues
Besides issues related to physical handling of products, distribution decisions are
affected by the type of promotional activities needed to sell the product to
customers. For products needing extensive salesperson-to-customer contact
(e.g., automobile purchases) the distribution options are different than for
products where customers typically require no sales assistance (i.e., bread
purchases).
❖ Pricing Issues
The desired price at which a marketer seeks to sell their product can
impact how they choose to distribute. As previously mentioned, the
inclusion of resellers in a marketer’s distribution strategy may affect a
product’s pricing since each member of the channel seeks to make a
profit for their contribution to the sale of the product. If too many
channel members are involved the eventual selling price may be too
high to meet sales targets in which case the marketer may explore
other distribution options.
❖ Target Market Issues
A distribution system is only effective if customers can obtain the product.
Consequently, a key decision in setting up a channel arrangement is for
the marketer to choose the approach that reaches customers in the most
effective way possible. The most important decision with regard to
reaching the target market is to determine the level of distribution
coverage needed to effectively meet customer’s needs. Distribution
coverage is measured in terms of the intensity by which the product is
made available .
 Level of Distribution Coverage
There are three main levels of distribution coverage - mass
coverage, selective and exclusive.
• Mass Coverage - The mass coverage (also known as intensive
distribution) strategy attempts to distribute products widely in
nearly all locations in which that type of product is sold. This level
of distribution is only feasible for relatively low priced products
that appeal to very large target markets (e.g., see consumer
convenience products). A product such as Coca-Cola is a classic
example since it is available in a wide variety of locations
including grocery stores, convenience stores, vending machines,
hotels and many, many more. With such a large number of
locations selling the product the cost of distribution is extremely
high and must be offset with very high sales volume.
• Selective Coverage - Under selective coverage the marketer
deliberately seeks to limit the locations in which this type of
product is sold. To the non-marketer it may seem strange for a
marketer to not want to distribute their product in every possible
location. However, the logic of this strategy is tied to the size
and nature of the product’s target market. Products with
selective coverage appeal to smaller, more focused target
markets compared to the size of target markets for mass
marketed products. Consequently, because the market size is
smaller, the number of locations needed to support the
distribution of the product is fewer.
• Exclusive Coverage - Some high-end products target very
narrow markets that have a relatively small number of
customers. These customers are often characterized as
“discriminating” in their taste for products and seek to satisfy
some of their needs with high-quality, though expensive
products. Additionally, many buyers of high-end products
require a high level of customer service from the channel
member from whom they purchase. These characteristics of the
target market may lead the marketer to sell their products
through a very select or exclusive group of resellers.
 Distribution Systems
1. Direct Distribution Systems

2. Indirect Distribution Systems

3. Multi-Channel or Hybrid Distribution Systems

 Distribution Systems: Direct

• Direct Marketing Systems – With this system the customer places the
order either through information gained from non-personal contact with the
marketer, such as by visiting the marketer’s website or ordering from the
marketer’s catalog, or through personal communication with a customer
representative who is not a salesperson, such as through toll-free telephone
ordering.
• Direct Retail Systems – This type of system exists when a product
marketer also operates their own retail outlets.
• Personal Selling Systems – The key to this direct distribution system is
that a person whose main responsibility involves creating and managing
sales (e.g., salesperson) is involved in the distribution process, generally by
persuading the buyer to place an order. While the order itself may not be
handled by the salesperson (e.g., buyer physically places the order online or
by phone) the salesperson plays a role in generating the sales.
• Assisted Marketing Systems – Under the assisted marketing system,
the marketer relies on others to help communicate the marketer’s products
but handles distribution directly to the customer. The classic example of
assisted marketing systems is eBay, Home Shop 18 etc. which helps bring
buyers and sellers together . Other agents and brokers would also fall into
this category.
 Distribution Systems: Indirect

• Single-Party Selling System - Under this system the marketer engages

another party who then sells and distributes directly to the final customer. This
is most likely to occur when the product is sold through large store-based retail
chains or through online retailers, in which case it is often referred to as a trade
selling system.
• Multiple-Party Selling System – This indirect distribution system has
the product passing through two or more distributors before reaching the final
customer. The most likely scenario is when a wholesaler purchases from the
manufacturer and sells the product to retailers.
 Distribution Systems: Multi-Channel (Hybrid)
• In cases where a marketer utilizes more than one distribution design the
marketer is following a multi-channel or hybrid distribution system. The
multi-channel approach expands distribution and allows the marketer to reach a
wider market.
Promotion Mix
 What is Promotion?
Promotion is a form of corporate communication
that uses various methods to reach a targeted
audience with a certain message in order to
achieve specific organizational objectives. Nearly
all organizations, whether for-profit or
not-for-profit, in all types of industries, must
engage in some form of promotion.
 Types of Promotion Objectives

• The possible objectives for marketing promotions may include the following:
• Build Awareness – New products and new companies are often unknown to
a market, which means initial promotional efforts must focus on establishing an
identity. In this situation the marketer must focus promotion to: 1) effectively
reach customers, and 2) tell the market who they are and what they have to offer.

• Create Interest – Moving a customer from awareness of a product to

making a purchase can present a significant challenge. Customers must first
recognize they have a need before they actively start to consider a purchase. The
focus on creating messages that convince customers that a need exists has been
the hallmark of marketing for a long time with promotional appeals targeted at
basic human characteristics such as emotions, fears, sex, and humor.
• Provide Information – Some promotion is designed to assist customers
in the search stage of the purchasing process. In some cases, such as when a
product is so novel it creates a new category of product and has few
competitors, the information is simply intended to explain what the product is
and may not mention any competitors. In other situations, where the product
competes in an existing market, informational promotion may be used to help
with a product positioning strategy. Marketers may use promotional means,
including direct comparisons with competitor’s products, in an effort to get
customers to mentally distinguish the marketer’s product from those of
competitors.

• Stimulate Demand – The right promotion can drive customers to make a

purchase. In the case of products that a customer has not previously purchased
or has not purchased in a long time, the promotional efforts may be directed at
getting the customer to try the product by providing them free trial of the
product. For products with an established customer-base, promotion can
encourage customers to increase their purchasing by providing a reason to
purchase products sooner or purchase in greater quantities than they normally
do.
Reinforce the Brand – Once a purchase is made, a marketer can use
promotion to help build a strong relationship that can lead to the purchaser
becoming a loyal customer. For instance, many retail stores now ask for a
customer’s email address so that follow-up emails containing additional product
information or even an incentive to purchase other products from the retailer
can be sent in order to strengthen the customer-marketer relationship.
 Integrated Marketing
Communications
Advertising Personal selling

Sales promotion
Public relations

Direct marketing

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39
Purchase
Conviction
Preference
Liking
Knowledge
Awareness
Step 2. Determining the Communication Objectives
Buyer Readiness Stages
Step 1. Identifying the Target Audience
Communication
Steps in Developing Effective
 Steps in Developing Effective
Communication
Step 3. Designing a Message

Message Content
Rational Appeals
Emotional Appeals Message Structure
Moral Appeals Draw Conclusions
Argument Type Message Format
Argument Order Headline, Illustration,
Copy, & Color
Body Language

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41
Step 6. Measure the Communication’s Results
Step 5. Selecting the Message Source
Non Personal Communication Channels Personal Communication Channels
Print, Broadcast and Display Media Face to Face, Telephone, Presentation
Step 4. Select the Communication Channels
Communication
Steps in Developing Effective
What is Advertising?

Advertising is Any Paid Form of

Nonpersonal Presentation and
Promotion of Ideas, Goods, or
Services by an Identified
Sponsor.

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What is Sales Promotion?
Sales promotion describes promotional methods
using special short-term techniques to persuade
members of a target market to respond or
undertake certain activity. As a reward,
marketers offer something of value to those
responding generally in the form of lower cost
of ownership for a purchased product .(e.g.,
lower purchase price, money back) or the
inclusion of additional value-added material
(e.g., something more for the same price).

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What is Public Relations?

Public relations involves the cultivation of

favorable relations for organizations and products
with its key publics through the use of a variety of
communications channels and tools. Traditionally,
this meant public relations professionals would
work with members of the news media to build a
favorable image by publicizing the organization or
product through stories in print and broadcast
media.

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What is Personal Selling?

Personal selling is a promotional method in which

one party (e.g., salesperson) uses skills and
techniques for building personal relationships with
another party (e.g., those involved in a purchase
decision) that results in both parties obtaining
value. In most cases the "value" for the
salesperson is realized through the financial
rewards of the sale while the customer’s "value" is
realized from the benefits obtained by consuming
the product.

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What is Direct Marketing?

Direct marketing is a sometimes controversial

sales method by which advertisers approach
potential customers directly with products or
services. The most common forms of direct
marketing are telephone sales, solicited or
unsolicited emails, catalogs, leaflets, brochures
and coupons. Successful direct marketing also
involves compiling and maintaining a large
database of personal information about
potential customers and clients.

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Setting the Promotion Mix
Reach Many Buyers, Repeat Message
Advertising Many Times, Impersonal, Expensive

Personal Personal Interaction, Relationship

Selling Building, Most Expensive Promo Tool

Sales Wide Assortment of Tools, Rewards

Promotion Quick Response, Efforts Short-Lived

Public Very Believable, Dramatize a Company

Relations or Product, Underutilized

Direct Nonpublic, Immediate, Customized,

Marketing Interactive

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48
Competitive-Parity Objective-and-Task
Based on the Competitor’s Based on Determining
Promotion Budget Objectives & Tasks, Then
Estimating Costs
Percentage of Sales Affordable
Based on a Certain Percentage Based on What the
of Current or Forecasted Sales Company Can Afford
Company is How Much to Spend on Promotion.
One of the Hardest Marketing Decisions Facing a
Budget
Setting the Total Promotion
Factors in Setting Promotion
Mix
Strategy
Selected
Strategy that Depends Strategy that
Calls for on: Calls for Using
Spending A Lot the Salesforce
Type of
on Advertising and Trade
Product-Mar
and Consumer Promotion to
ket &
Promotion to Push the
Build Up (Pull) Product
Product Through
Consumer Life-Cycle
the Channels.
Demand. Stage

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 Major Advertising Decisions
Message Decisions
•Message Strategy
•Message Execution

Objectives Setting Setting the

•Communication Budget Campaign Evaluation
objectives •Communication Impact
•Sales Objectives •Sales Impact

Media Decisions
•Reach, Frequency, Impact
•Major Media Types
•Specific Media Vehicles
•Media Timing

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 Tourism, 3e ©2003 Pearson
51 Marketing for Hospitality and
Reminder Advertising
Keeps Consumers Thinking
About a Product
Informative Advertising
Persuasive Advertising Inform Consumers or
Build Selective Demand Build Primary Demand
Setting Advertising Objectives
 Message Decisions

Message
Generation

Message Evaluation
&
Selection

Message Execution

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53
Step 4. Deciding on Media Timing
Scheduling of Advertising Over the Course of a Year
Pattern of Ads: Continuity or Pulsing
Step 3. Selecting Specific Media Vehicles
Specific Media Within a Given Type, i.e. Magazines.
Must Balance Media Cost Against Media Factors:
Audience Quality & Attention, Editorial Quality
Step 2. Choosing Among Major Media Types
Media Habits of Target Consumers,
Nature of the Product, Types of Message, Cost
Step 1. Decide on Reach, Frequency,
and Impact
Media Decisions
Measuring Measuring
the the
Sales Effect Communication Effect
Campaign Evaluation