1.Basic Elements of Pricing:

-> DEF PRICE: The amount of money charged for a product, or the sum of the values that consumers exchange for the benefits of having/using the product or service.

-> Why is IMPORTANT:

• Determines Business profitability;
• Determines Demand;
• Determines positioning & Distinctiveness;

-> Price & Marketing Mix:

• Only element to produce revenues;
• Most flexible element;
• Can be changed quickly;
• First strong communication.

A. Price as a tool of Competition

B. Pricing is a process!

Common Price Mistakes:

• Determine costs and take traditional industry margins;
• Failure to revise price to capitalize on market changes;
• Setting price independently of the rest of the marketing mix;
• Failure to vary price by product item, market segment, distribution channels, and purchase occasion;
• Determine price without considering the customer;
• Nobody sets the price, all are determining the price;
• “Dart Doard” pricing.

MARKUP: percentage that  is sum to production costs to determinate the sell price that cover general costs and profit realization.

-> Price is 33%, is a markup;

Drivers:

-> Affecting Pricing:

• General economic situation;
• Elasticity of demand;
• Product lifecycle;
• Laws and norms

-> And the four key elements:

• Objectives of the company;
• Cost structure;
• Competitive system;
• Customer value.

Environmental Influences on Pricing Decisions.

• Currency Fluctuation
• Inflationary environment
• Government Controls, Subsidies, Regulations
• Competitive Behaviour
• Sourcing
• Distribution costs
• Marketing costs
• Taxes (Vat: Value Added Taxes) and Duty: due to the transportation from a country to another.

2.Steps to Set the Price:

-> Is so important because:

• Determines business profitability;
• Determines demand;
• Determines positioning and distinctiveness.

How to set the price:

-> Are required 6 steps:

1. Defining pricing objectives;
2. Forecasting demand;
3. Cost estimation and marginality;
4. Analysis of competitors’ behavior;
5. Selection of the pricing method;
6. Pricing decision;

1.Defining pricing objectives:

ORIENTATION	PRICING OBJECTIVES:
Market	Volume Market share Growth rate
Profit	Contribution margin; Short-term profit; Long-term profit; ROI; Rapid recovery of R&D investment;
External Environment	Create brand image Increasing intermediaries’ loyalty;
Survival	Cash flow; Use of the plants.

2.Demannd forecasting:

3.Cost Analysis (How set the price):

-> First it’s necessary to cover COGS then also other costs

-> Methods:

• Job Order Costing;
• Preocess Costing;
• Operational Costing;
• Activity Based Costing;

-> Increase on sale to keep the same margin in value:

-> Tells us how many product do we have to sell, considering different prices and different pieces, to have the same amount of margin.

4.Analysis of Compeittors’ behaviour:

• Product has a limited market price range set by competition;
• Premium price is obtainable if our product is distintive;
• Don’t start pricing war, we don’t have examples of winner.

5.Selecting the Pricing Method:

-> Framework of reference (3 C Model):

-> Methods:

	TRADITIONAL	INNOVATIVE
COST-Based Pricing	Markup Pricing: once the cost is calculated you add a markup Break even pricing Target return pricing	Real-Time Pricing
CUSTOMER-based Pricing	Perceived value pricing
COMPETITOR-based Pricing	Going-rate pricing

A.Cost-Plus / Markup:

-> Price = product cost + mark-up (fixed)

-> CHAR:

• ✔️Easy to understand;
• ❌Need to estimate product costs (not so easy, in reality);
• ❌No impact of demand elasticity;
• ❌No impact of the product lifecycle.

❌Limit of the Cost Approach:

✔️Advantage of Coast Approach:

Several methods to detect the costs that lead to different costs and relative prices (accounting technique affects the price); There is no comparison with the market ( competitors and consumers ); Pricing responsibilities for corporate/operation functions “distant” from the market reality; Particularly negative in the definition of the price of a product line, not justified by the market possible differences; Particularly negative if different factories with different cost base.

Relatively easy to do; Responding “quickly” to the needs of financial/strategic objectives; It does not require a structure and/or people ” dedicated full time ” on these issues.

 

B.Going Rate Pricing:

-> Pricing is fixed analyzing competitors (often market leaders):

• Easy and widely adopted
• In industrial market competitors’ price is hard to know (negotiation, unreal catalogues, etc.)
• Needs a deep analysis not to lose important opportunities

❌Limits:	✔️Advantages:
It requires a market analysis capabilities It requires a function and / or people dedicated to this theme It requires a budget Difficult to have all the data A price based than the competitors can not cover costs If the competitor wrong price policy we risk it wrong we	Market understanding The activities carried out for the pricing were held together with those of the analysis of competition on the whole mix mktg Can increase contribution margins The positioning is ” wanted ” by the company, also with long- term impact

C.Value Based Pricing:

-> DEF: Effective, customer-oriented pricing involves understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value.

• Use buyer’s perception of value rather than the seller’s cost to set price
• Measuring perceived value can be difficult
• Customer attitude toward price and quality have shifted during the last year
• Consider the lifetime value of the client
• Without understanding the real VALUE of the project for the customer, you will likely only scope the “traditional” way.

-> Example of the value curve:

❌Limits:

• It requires a market analysis skills (knowledge of techniques and listening skills )
• It requires a function and/or people dedicated to this theme
• It requires a “budget” of more’ or less significant spending on ” market research “
• Difficult to have all the data needed
• A customer-oriented price can not cover costs
• Follow the customer in the various demands can lead to too much tactical attitude and can make you lose significant margins

Innovative Methods

• Dinamic pricing;
• Autcions;
• Group pricing;
• Yield management (next chapter).

D.Dinamic Pricing:

-> DEF: Every transaction has ideally a different price

-> CHAR:

• eCost.com fixes price at the lowest competitors’ price in that moment
• Example: Amazon Price’s Policies

📌it can generate the perception of being discriminated

E.Auctions:

-> DEF: price is not decided a priori but is discovered throuth the process of competitive and open bidding.

• Internet has transformed auctions: now products may be offered for bidding by anyone from anywhere and at any time, e.g. eBay.com

F.Group Pricing:

-> DEF: Exploits quantity discount by grouping buyers e.g. student discounts

G.Skimming Pricing:

1. High entry Price:

-> OBJ: acquiring segments low iin elasticity (thus higher in value)

1. Successive Reduction:

-> OBJ: enlarging customer base in time;

✔️ When there are entry barriers (e.g. patents);

❌When customer segments are unclear

H.Penetration Pricing:

-> LOW ENTRY PRICE > OBJ: acquiring the higherst market share asap to accomplish economies of scale & scope.

-> Suited For

• Product without defects at the launch;
• Rapid adoption by customers;
• Enough capability to meet demand;
• Efficient distribution channels;
• High potential demand.

I.Price Discrimination:

-> DEF: Innovative pricing methods allow price discrimination.

-> To capture the market’s consumer surplus, by setting the maximum price a specific consumer or consumer segment will pay.

-> Allow to generate the most revenue possible for a product or service.

6.Price Decision:

-> Define the value of the price.

-> Several factors involved:

Psychological factors (price-quality schema) Product life cycle List price e discounts

Line product price Price and channels Pocket price Component included in the price

Pay per use Inflaction Company’s pricing policies Possible customer reactions

Anchoring effect:

-> DEF: is the tendency we have to fixate on a value or number that in turn gets compared to everything else.

• Individuals tend to see (and value) the difference in price, but not the overall price itself. This is why some restaurant menus feature very expensive entrees, while also including more (apparently) reasonably priced ones.

3.Yield Management or Revenue management

-> DEF: particular pricing strategy based on understanding, anticipating and influencing consumer behavior.

• Commonly applied in tourism services such as airline and hotel, but also other service industries such as gym, energy, telecommunication, TV advertising, and so on.
• Use variable pricing strategy to maximize revenues or profits from a fixed, time-limited resource.

• It’s about “how create more revenue & profit based on the currentresource & market condition” (and not “how improve productivity or sell more).
• RESULT: price + which product + market segment + period time…
• Extend the application of market basic principles.
• Applies in the industries where the cusotmers need the same service but have different expectations from this sevice & different motivations in using this service.

-> EXAMPLE: Inter-continental flights

-> Business travelers:  – Minimize waste of time: priority boarding, more hand luggage  – Comfort in cabin so that it’s possible to get rest during the flight  – Possibility to work and stay connected during the travel  – Flexibility to change in case of their schedule change

-> CHAR:  – High fixed cost structure;  – Relatively fixed capacity;  – Perishable inventory;  – Variable and uncertain demand (🔗 big data);  – Varying customer price sensitivity.

Key Factors:

Physical factors (product-related factors):	Transaction factors, for example:	Consumption factors, for example:
Basic product ▪  Travel class on a flight ▪  Size, furnishing, and location of a hotel room ▪  Seat location in a theater Amenities ▪  Free breakfast at hotel ▪  Spa access Service level ▪  Increase luggage allowance ▪  Priority waiting list	Time of purchase/booking: Advance booking vs. last minute Location of purchase/booking: Booking the same flight from different countries may differ in price Terms and conditions: Free reservation vs. paid in advance Free cancellation vs. nonrefundable	Time of consumption ▪  Happy hours/”Aperitivo” ▪  Nights of working days vs. weekends in hotel ▪  Minimum duration of stay Location of consumption ▪  Pick-up and drop-off locations of rented car ▪  One-way vs. return vs. multi-destination flights

Historical Data – Statistics, demand & trends:

-> Historical data can be useful in forecasting the future. For example:

 – Rises and falls of booking by day of week

 – Rises and falls by season of year

 – Probability of no-shows

 – Unexpected events

-> Many data could be broken down to more detailed levels:

• Type of room
• Length of stay
• How far in advance does the customer book

Overall Strategy:

-> DEF: Some strategic decisions have to made in order to provide input to the mathematical optimization.

Challenges of Yield:

• Loss of competitive focus – when pricing becomes a mathematical exercise

• Customer alienation – customers may perceive price difference unfair

• Unethical practices – for example, purposely withholding capacity to last minute

• Overbooking – when estimation of demand is not accurate or information system fails

• Requirement of centralized information system – centralized information system needs to be synchronized in real time to ensure proper management