Marketing Industriale

Prof. A. P. Volpentesta
DIMEG – Università della Calabria

Lecture 9: Pricing Essentials

11-1
 Price
• Product/service attribute: The amount of
money charged for a product/service
(business view), or the sum of the values
that a customer exchanges for the benefits
of having or using the product or service
(customer view).
• Cost, Price, Value (discuss any increasing
order)

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The competitive price system

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The Customer's View of Price
Product

Perceived Service
benefits Brand
…….
Value
Money

Perceived Time
costs Energy
….

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 Perceived Functional Benefits
linked to product’s attributes that provides a
customer with functional utility. Related to:
• intrinsic attributes (e.g. healthiness)
• extrinsic aspects (e.g. convenience).

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 Perceived Non Functional Benefits
Linked to consumers’ more intimate sphere:
• Symbolical (prestige, national identity,);
• Self-Identyfying (a high quality wine for those
that consider themselves as wine experts);
• Social (belonging (or not) to a specific group or
culture)
• Psychological
• Sensorial;

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 Perceived Costs
Cost type Description
Information Time and effort spent on gathering information
Search Time and effort spent on searching for the product
Opportunity costs Value lost by not buying and/or using an alternative product

Risks Risks associated with buying and using the product

Switching costs Time, effort, and costs associated with converting other
products or activities to use the purchased product
Shopping Time and effort spent on buying the product
Monetary Costs associated with using the product
Learning Time, effort spent on learning how to extract
value from the product
Maintenance Time, effort, and costs spent in order to enjoy
the value of the product over time
Disposal Time, effort, and cost of disposing of the product
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Business view: Price considerations
• One of the four Ps of the marketing mix (price,
product, promotion, and place).
• Price is the only revenue generating element
amongst the four Ps, the rest being value
generating and cost centers.

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 Pricing strategy
• A guidance to find a competitive price of a
product or a service in order to support the
overall business strategy consistent with the
organisation's mission and values
Business Pricing Pricing
strategy strategy objectives

Pricing tactics

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 The choice interval

price floor: the price below which the organization ends up

in losses
price ceiling: the price by which the organization
experiences a no-demand situation
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 Objectives of pricing
Pricing strategy Central Pricing objectives
factor
Profit oriented product cost Maximum Current Profit; Target Return on
or cost-based or Investment; ex., “Increase net profit in
Revenue-oriented 2016 by 5 percent”
Sales oriented consumer Target revenue; Market Penetration;
demand Promoting a New Product;
Competition- competitor’s Face Competition; Remove or Keep
Oriented price Competitors Away; ex., “ market
leadership in the product category”
Customer oriented perceived To Win Confidence of Customers; To
value Satisfy Customers; ex., “Increase customer
retention”
Image-based brand equity Maintaining Image and Reputation; Price
Stability;
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 Profit-Oriented Pricing
Price per product is set higher than the total cost of
producing.
Features:
• guarantees a profit on every sale.
• If a competitor has lower costs, then it can
undercut the pricing and steal market share;
• if the product fails to deliver value, it will be
difficult to generate sales
• it can require to adjust other marketing mix
aspects to create more value (additional budget
will further raise the price). 11-12
 A test
A Profit-Oriented Pricing requires an additional
communication campaign to create more value
for a target segment of N consumers. Let P = the
price, C = the cost of the campaign, V= the
added value perceived by the consumer. When
is the campaign successful?:
• C/N<P
• C/N<V
• P<V
• C/N<P
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 Competitor-Oriented Pricing
Prices are set according to competitor prices:
•higher price: a signal for a greater product value
•lower price: a solution to carve out a market niche
Features:
• simplicity, when pricing information is easily
collected and compared.
• doesn’t fully take into account the customer value
of the product (price may be too low for the value
it provides, or too high).
• If players in a market compete exclusively on price,
they will erode their profits (Why?). 11-14
 Customer-Oriented Pricing
Set the highest price that supports the value
received by the customer (in line with marketing
oriented business)
Features:
• requires an analysis of customers and the market.
• Needs to understand the customer buying process
to know what the customer values and expects,
and how he evaluates price in the value equation
• Suitable for price discrimination that considers
how each group of customers assesses value
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 A blog test
• Try to discuss Customer-Oriented Pricing for
musical events in your area ( e.g. university
campus)

11-16
Image oriented strategy: Louis Vuitton
Louis Vuitton sells
luxury designer goods
such as these
suitcases. If Louis
Vuitton merchandise
was offered at low
prices it might
significantly undermine
the brand value, much
of which is based upon
exclusivity.
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 Mercedes: Which Pricing strategies?
Prestige (or premium) pricing

• charging a high price to

create a signal that the
product is exceptionally
fine
• it is used to maximize
profit in areas where
customers are “happy”
to pay more, where
there are no substitutes Mercedes Benz - McLaren: a
for the product, where
there are barriers to
profit and image oriented
entering the market. strategy
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 Influences on Pricing

Supply:
Demand: Environment:
perceived cost, product
the Internet,
value
competition,
government
Regulations

Pricing

Objectives
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Supply : Cost oriented: Markup pricing
Adding a percentage to the production or acquisition
cost in order to determine the final selling price
(normally used in retail or wholesale business ):
• markup as a percentage of the cost added to the
cost to create a new total :
Cost × (1 + Markup) = Sale price
or solved for Markup = (Sale price − Cost) / Cost
• markup as a percentage of the Sale price:
Cost + Sale price x Markup = Sale price
or solved for Sale price= Cost/(1 - Markup)

11-20
 Exercise 1
Find markup :
• Cost = 70 Euro
• Sale price = 100
• Which markup (as a percentage of the cost)?
Find Sale price:
• Cost = 80 Euro
• Markup (as a percentage of Sale price) = 20%
• Which Sale price?

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 Supply : Cost oriented: Cost-plus pricing
Totaling up the costs (direct and indirect costs) of
producing a product or completing a project and then
adding on a percentage or fixed profit amount (widely
used by retail companies today):

Price = cost per unit × (1 + profit margin)

Usually:
Cost per unit= direct cost + k x direct cost
Where k is a repartition coefficient of indirect costs

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Supply : Cost oriented: Rate-of-return pricing

Adding a desired rate of return on investment to

total costs (used almost exclusively by market
leaders or monopolists):
Target rate of return = Y; Q = number of
products (sale estimation); C = average unit cost
Total cost = investment = I = Q x C
Price = (I+ Yx I)/Q = (1 + Y) x I/Q = (1 + Y) x C

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 Supply : Cost oriented: Break-even Price

Breakeven price: when the money received

from the sale of a product covers the expenses
associated with producing that product.
• CF = company's total fixed costs
• Cu = variable cost per unit
• Q = desired level of production
• Price = (CF + Cu x Q)/Q = Cu + CF/Q

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Supply: Cost oriented Pricing: Considerations

Advantages:
• Simplicity
• Yields a good pricing decision

Criticism of cost oriented pricing:

• Gives little or no considerations to demand
factors
• Fails to reflect competition adequately

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 Exercise 2
• A company has adopted break-even pricing
tactic.
• Company's total fixed costs sum up to 500
keuro, and variable cost per unit is null.
• The demand function for the company’s
product is P=105 – Q
• The company wants to sell products as less as
possible
What price will be chosen by the company?

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 Supply: Product Considerations
• Perishability – Discounting the products as
they approach being no longer fit for sale
• Products can also be perishable in the sense that
demand for them is confined to a specific time
period
• Distinctiveness – Marketers can charge higher
prices if they can successfully distinguish their
products from those of their competitors
• Branding and brand equity are used to make
products distinctive

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Supply (+ demand): Product Life cycle oriented:
Skimming
Seller charges a relatively high price on a new product
initially in order to recover costs and make profits rapidly
and then lowers the price at a later date to make sales to
more price-sensitive buyers
Commercianti che a
fine giornata si
ritrovano con il
prodotto invenduto;
clienti alla ricerca
dell’offerta più
conveniente.

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Supply (+ demand): Product Life cycle
oriented: Penetration pricing
Seller charges a relatively low price on a new product
initially in order to grow a market, gain market share,
and discourage competition from entering the market

Penetration pricing has been

often practiced by Wal Mart that
also segmented market between
price sensitive and non price
sensitive buyers. They charged
relatively higher price from non
price sensitive buyers than others

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 Exercise 3
A company adopts a penetration pricing strategy for its
product. Conditions:
• company's total fixed costs sum up to 200 keuro, and
variable cost per unit is null.
• The company requires to cover at least the
investment costs.
• The pricing objective is to sell products as much as
possible.
• The demand function of the company’s product is P =
102 – Q
What price will be chosen by the company?
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 Environment: The Internet
• Much easier for consumers and organizational
buyers to compare prices
• marketers are forced to be much more
transparent in their pricing strategies

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 Environment: competition-based pricing

Setting the price on the base of what similar

products are sold by competitors.
• Going-rate pricing: sets the price of a product
according to the prevailing price trends in the
market (e.g. the average in the industry)
• Sealed-bid pricing: Bidding process in which
each seller submits a sealed bid and attempts
to price below competition in order to get the
contract

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Environment: competition-based pricing:
considerations
• Number of competitors
• Market shares, growth, and profitability of
competitors
• Likely entry of new firms into the industry
• Degree of vertical integration of competitors
• Number of products sold by competitors
• Cost structure of competitors

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 Environment: Government Regulations

Prices of certain goods and services (e.g. public

utilities) are regulated by country governments.
Strategies should ensure conformity to country
legislations. Illegal strategies (in many countries):
• Price fixing: Competitors in a market collude
to set the final price of a product
• Deceptive pricing: use deceptive means to
trick the customers into thinking that they are
paying a lower price for the product, than
what they are actually supposed to
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 References
• http://en.wikipedia.org/wiki/Cost-plus_pricing.
• http://en.wikipedia.org/wiki/Pricing_strategies.
• http://en.wikipedia.org/wiki/Value-based_pricing.
• http://en.wikipedia.org/wiki/Penetration_pricing.
• http://en.wikipedia.org/wiki/Pricing.
• http://en.wikipedia.org/wiki/Psychological_pricing.
• http://en.wikipedia.org/wiki/Pricing_strategies.
• https://courses.lumenlearning.com/boundless-
business/
• http://en.wikipedia.org/wiki/Break-
even_(economics).

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