Chapter 9: Setting the list or quoted price

1. Chapter 9:Setting the list or quoted price

2. Learning outcomes After this study unit, you should be able to: • Explain the three c’s model; • Explain what differential pricing is and the different forms of it; • Discuss the impact of costs on setting a final price, as well as the criticisms of using costs only to establish a final price; • Explain the dangers of using the marginal analysis to establish a final price; • Discuss other influences on setting a final price level that should be considered; • Explain the different factors affecting the price sensitivity of consumers when considering a final price.

3. Introduction • Once the approximate level is determined, the marketer must determine the list price, in other words, the price at which the product or service will be sold to the intermediary or the final consumer. • A list price is generally accepted to be the price that is quoted to the end-user, in other words the price that is shown on the price list- hence the name of a list price. • Setting of a final price is more complex than it initially appears, due to for example the number of pricing objectives and the methods of setting an approximate pricing level.

4. The Three C’s model • Costs – these help to set a floor level or threshold for the organization. If the price is set below the cost level the organization will not make any profit. • Competition – the prices of competitors and their products are also a key driver. The greater the number of competitors and the competitive structure of the industry the more difficult it is to set a price. • Customers – the customer’s perception of how relevant and unique the product offer is can also affect the ability to set a final price. The more relevant and unique the customer sees the product the higher a price the customer is willing to pay.

5. Considerations in choosing a final price • The decision as to differentiated pricing • In order to follow a differentiated pricing approach the following conditions should exist • The market should be made up of different segments with different price sensitivities. • The method used should try to avoid creating bad will among the customer base. • The customer paying lower prices shouldn’t be able to resell to those customers paying higher prices. • Four versions of differentiated pricing • Negotiated pricing; • secondary market pricing; • periodic discounting; • random discounting.

6. Considerations in choosing a final price cont… • The consideration as to profit levels • Cost-plus pricing • Here the pricing is set to cover the costs plus the desired profit level. • This method is popular because it is easy and simple to use, and the calculations are not difficult. • Another benefit is that all customers are treated equally. • Costs help to set the floor level, the level below which price drops the company makes no money. • Some organizations do price below costs at times, but they cannot leave the prices at those levels for any length of time.

7. Considerations in choosing a final price cont… • The impact of marginal costs and revenues • Marginal analysis deals with trying to balance the incremental costs and revenues from producing when facing a downward-sloping demand curve. • The generally accepted theory is that when a company is trying to maximize profitability, then maximum profit is made when the marginal cost of the products is equal to the marginal income of the product. • The problem with marginal analysis is that it assumes consistent price/quantity relationships. • The use of methods like break-even analysis and marginal analysis presupposes constant predictable markets. • In volatile markets a combination of techniques is better due to the reasons mentioned above

8. Other influences on final price • The positioning strategy - A marketer will have to keep the positioning in mind before setting a final price irrespective of the method used to set the final price. A strong middle of the road positioning may be hard to maintain if the product is facing creeping cost price increases due to factors such as the increasing petrol price. • Other marketing activities - The other activities in terms of quality, status, branding and marketing communication could influence the final price set. In fact, although price is important it is not always the top ranked criteria, though it is often in the top five criteria. • Company pricing policies - every customer would like consistency in terms of pricing. Some organizations even penalize customers when flexibility in terms of the final price is requested.

9. Other influences on final price cont… • Gain-and-risk sharing marketing - This is when the organization considers the use of risk-reduction devices for the customers, such as written guarantees and reduced prices if full value is not delivered. • Other parties - The marketer often does not work in isolation, and may have to use distribution channels with intermediaries to reach the market. Suppliers are also involved here, and in fact there may need to be a stakeholder analysis to see how pricing could impact all of the stakeholders.

10. Factors impacting price sensitivity • Size of expenditure - buyers are more price sensitive for large expenditure than smaller expenditure. • Shared costs - buyers are less price sensitive when some or all of the purchase price is paid by others. • Perceived risk - buyers are less price sensitive when comparing possible suppliers is difficult and the costs of not getting the expected benefits from a purchase are high. • Importance of end-benefit - buyers are less price sensitive when the product is a small part of the cost of a benefit with high economic or psychological importance.

11. Factors impacting price sensitivity cont… • Price-quality perceptions - buyer’s are less sensitive to a product’s price to the extent that the price signals the level of quality of the purchase. • Perceived fairness - buyer’s are more sensitive to price when they think the price is beyond the “fair or reasonable” range. • Price framing - buyers are more sensitive when the price is paid separately for a product than when it is part of a bundle price, also when they see price as a loss than as a gain they didn’t take advantage of.

12. Summary • The chapter highlights the complexity of setting the final price. • Aspects such as costs, competitors, demand and legislation could all impact the price set- hence the emphasis that setting the final price is not as easy and clean a process as is often made out. • Marketers should consider using a variety of techniques to be able to have a good idea of what impacts are caused by certain drivers and to consider all the relevant aspects that need to be considered to set a final price that helps the organisation to meet its revenue goals.