Текст книги "Marketing and Pricing"

THEME 12. METHODS AND PRICING STRATEGY

1. Pricing methods based on production costs

Consider the different pricing methods in more detail.

Cost method (full costs). Methods based on production costs, are most often used in practice pricing, especially, for the cost method.

Price is formed by the calculated unit cost of products, given the amount of profit, indirect taxes and mandatory deductions in off-budget funds.

The advantages of this method are as follows:

• The use of the method provides complete coverage of all costs and obtaining the planned profit margins;

• Relative simplicity and versatility of the method.

Disadvantages of the method are shown in that:

• Ignored the influence of price elasticity of demand;

• Does not take into account changes in consumer preferences, does not take into account use-value goods, and, consequently, the demand price;

• Reduced competitive incentives to minimize costs.

Full cost method is used:

• Enterprises with well-defined commodity diversification for consideration couple of prices on traditional products, as well as for the establishment of the original price of brand-new items that do not have pricing cases;

• For products produced on single orders or individual characteristics;

• For the products of a dominant position on the market;

• When calculating the price of goods or reduced competitiveness of the goods, the level of which is limited solvency of the population;

• In-plant pricing.

Method of manufacturing cost. The price is formed of the full amount of costs (per unit) for raw materials, components, semi-finished products, the amount (percentage or rate of return) corresponding to their own contribution to the formation of the enterprise value of the product.

Advantages of the method lie in the fact that, thanks to this method, the self-contribution of the company can be accounted for in the unit cost of the product.

Disadvantages of the method are shown in the fact that the method is not suitable adoption of pricing decisions for the long term and only adds cost method (the method of full costs).

Cost method is used in the manufacture of specific conditions when making decisions:

• build on the mass of profit due to the increase in production;

• to change the assortment structure of production and changes in product mix;

• on a one-off (individual, small-lot) orders.

The method of marginal costs. The price is formed of the variables of distribution cost per unit of production, the amount (percentage) covering fixed costs and providing an adequate rate of return.

This method provides greater opportunities for pricing, education, namely, the full coverage of fixed costs and maximizing in-were. The use of the simplified official introduction into account practice of classifying and reporting costs for semi-variable and semi-fixed.

Marginal cost method is applicable to virtually any pre-enterprises, which is another advantage of it.

Method of return on investment. The method is based on the fact that any industrial project should provide a margin not less than the cost of borrowed funds. For the total cost per unit of output is added the amount of interest for the loan.

This is the only method that takes into account the payment for the financial resources necessary for the production and sale of goods. However, its use is complicated by high rates on loans, and the relative uncertainty in the time in terms of inflation.

ROI method can be used:

• In companies with a wide range of products, each of which requires its own variable costs;

• For traditionally produced goods with established market price for new products;

• When deciding on the amount of production of a new product for the company with a known market price.

The method of structural analogy. In accordance with the method of structural analogy it is necessary to determine the price for a new product to:

1. structure set price or cost (depending on what the object definitions) in a similar product to that used statistical or factual data on the proportion of each type in costs in the price or cost of similar products;

2. choose the main cost elements in the cost or price of the analogous product, or one of the major (based on the specific allocation is taken weight of each cost element in the cost or the price of a similar goods);

3. determine the monetary value of the primary costs of a new product, that can be done according to the drawings, prototypes, application rates;

Aggregate method. When using the method of aggregation price the sum consists of the sum of the prices of individual structural elements that have been identified with the addition of costs for their assembly and layout.

Aggregate method is applied in cases where the product consists of the combination of individual products, as well as when the product is collected from the unified-plated elements, components, parts.

2. Methods of pricing, quality-oriented and consumer product properties

Among low-cost pricing methods a worthy place occupies parametric methods that allow setting the price of the product, focusing on its assessment of the consumer. To determine the price of the product by these methods require a base for comparison (the goods which are the functional characteristics similar to the study, with a certain price).

One of the main advantages of parametric methods is based on an assessment of consumer goods, the allocation of those properties which, from the point of view of the customer, the price is formed.

The disadvantage of this approach is that the direct cost of production and sales play the secondary role in the process of pricing.

The method of specific indicators. The method of specific parameters is used for difficult products, if one can isolate one qualitative in the main index, which determines the price (power, productivity, content of the main component).

If it is required to take into account some minor performance quality of further coefficients, the price is calculated (increasing or lowers the price) reflecting the change in other consumer properties of the new (modified) products.

Ranking point method. Ranking point method is used for the commodities and commodity groups, whose properties do not lend themselves to the consumer (or difficult to under-given) directly quantifiable and therefore it is the first, do not have specific quality indicators. Examples of such qualities can serve design, fashion, taste, aesthetics, etc. This method is used to justify the prices of food products, such as drinks, beer, vodka, tobacco, perfumes and cosmetics, household appliances.

The algorithm for determining the price of a new or modified product may be represented by the following steps:

• Selection of the main indicators of the quality of products available to consumers of paramount importance;

•Choice of analogue or base product with which it is compared, which requires the establishment of price;

• Formation of a commission of independent experts that evaluate each option of base and new products in scores on pre-established scale comprising their quantitative values;

The method of correlation and regression analysis. It is possible to use this method under the following conditions:

• The product must be clearly classified under the relevant parameter group;

• In each parameter group of products from all of the technical and economic parameters it is necessary to identify the parameters that have the most impact on price;

• For each parameter group must be identified relationships with a price.

In the selection of technical and economic parameters to produce equations depending on a number of requirements must be observed:

• selected parameters should be fixed in the specifications, standards or specifications (for example, the following parameters on the equipment can be indicators of capacity, capacity, productivity, the batch of products, factors of complexity of the repair, alignment);

• a set of selected parameters must more fully characterize technological and operational properties of the products included in the parametric range;

• a set of these parameters should have a close correlation relationship with the price.

In practice, it is possible to use a linear, linear-power, power-law and other functions. Pricing method of regression analysis assumes statistical evaluation of the initial information, the reliability of the equation of dependence and the correct interpretation of this equation.

Described parametric pricing methods have varieties and can be expressed special pricing formulas, spread on certain commodity markets.

3. Methods of pricing, demand-driven, the level of competition

A separate group consists of methods for the determination of the initial price with the demand for the product and the level of competition. These methods are characteristic of developed markets, where there are conditions close to perfect competition or monopolistic competition.

The method of following the leader (leadership and following the leader in pricing policy). Each firm in the market can choose the role of a leader or going for a leader in pricing as well as it can make a strategic choice to develop new items or commodity simulate commercially available products.

To be a leader in price, the company does not have to be large-necks in the industry or have the lowest prices. Price leadership assumed a position of such firms in the market in which it is considered to be one of the most active in establishing the general price levels in the industry, the introduction of innovation in the structure of prices and one of the first to change the price for the goods, if it is justified by the external and internal conditions of its activities.

Leadership or when a new price level or a change in the price structure most likely when:

• the offer of new and modified products and the introduction of new technologies;

• rapid changes in market conditions;

• selling unique products and services;

• achievement of goods maturity life cycle when innovation in the structure of prices may again generate sales;

• significant change in production costs;

• the availability of opportunities to attract new customers and creating a market price.

Methods of marketing assessments. This group of methods suffer from uncertainty of evaluation, because often prices are set almost arbitrarily.

The method of assessing the response the buyer (the method of perceived value). The method of assessing the response buyer seller attempt to find the price, according to which the buyer is definitely buy goods. There are several options of consumer reaction to the price of products, which should be taken into account when making decisions on pricing:

▪ Psychological price limits reflect the value of such prices at which the sales may rise or fall dramatically depending on the level of set price.

For example, in industrialized countries, supermarket managers always set their prices taking into account the tangible response to the buyer’s behavior in relation to the goods for which prices are set slightly above or slightly below U.S. $ 1 (it can be any other number, usually round 10, 15, 20, etc.). Thus, the goods at a price of 89 cents can be often sold as well as costs 98 cents, but if the price rises to $ 1.09, the difference is noticeable, and therefore, with respect, undesired.

Buyers, of course, know the difference between 4.95 and 4.97 dollars and they can calculate, but in practice act as if they are the same. Even for capital goods and consumer durables principle of pricing at a level below the threshold of an important tangible.

The scale of prices for various products classiness applied in that case, when there are traditionally formed the scale of prices for certain types of products, which adapt producers and traders.

▪ Pricing, guided by the purpose of the goods, are assumed to warns that the same product has some purpose, and to be more profitable to sell, the goods should be priced in such a way as to correspond to the destination.

The main moment in the process of pricing is the preliminary formation of the buyer relationship to the cost of the goods.

▪ Setting a price based on the quality characteristics of goods pa, based on subjective assessments of consumer goods, such as:

– Feedback from the use of the product (taste, caloric, vitamins, environment);

– Psychological benefits (level of service, store design, attractive packaging, compliance with fashion trends);

– The level of after-sales service and its availability.

The method of fair value. Prices in this method are set to increase the competitiveness of the goods and do not satisfy the requirements of the enterprise in the financial resources to cover the costs. This method can be used by the company in introducing to the market a new product or offer.

Company, going to market with a new product, sets the price at the lowest level. It is believed that this method is more secure because the company hopes to reduce the risk that exists due to the uncertain reaction customers to the new product by setting prices at a lower level, than the prices of products known competitors. Low prices are a way to gain time on a certain market share, enhance the competitiveness of their products. Furthermore, by this method a firm can create a reputation for product pricing, which will be constantly to act as long as it is offered in the market. However, if necessary, to correct (increase) the price is much more difficult than the lower, as the price reputation, like the first impression is hard to change.

The method of «proposals in the dark» or tendering method. Tender method is that sellers (producers) anonymously participate in the competition offers (tenders), and the winner is the one whose price proposals provides the buyer the maximum profit.

During the auction the buyer announces a competition for sellers (producers) for goods with certain technical and economic characteristics.

Goods may be government contracts lot of raw material, unique equipment, construction of production or non-production purposes and others

The level of prices charged by the auction depends on:

1. Goals and objectives pursued by the company, the bidder medium which can do:

– Maximization of profits by obtaining the order;

– Capacity utilization;

– Survival in the market.

2. Internal capabilities of the enterprise in terms of availability of sufficient production capacity, skilled labor, the financial resources necessary to fulfill the order;

3. The possibility of winning trades at different price levels, which assumes a good knowledge of their competitors and their financial capacity.

As a result of trading order get that firm, which offered a minimum price and made the required quality and more acceptable (short) timing of the order.

4. Market-based pricing strategy

A strategy is a choice of a particular enterprise dynamics of commodity prices, aiming to maximize profit in the framework of the plan period.

Market pricing strategies are divided into four groups, each of which in turn comprises several partial policies.

1. Differential pricing strategy:

• Strategy discount on the second market;

• Strategy seasonal (periodic) discounts;

• Strategy of random discounts;

• Strategy for the discount when purchasing large quantities;

• Strategy for the discount on the sale of goods which do not conform to the standard.

Differentiated strategies include the following strategies:

The strategy of discount on the second market is that for the same product or service on the other (second) market price is below.

The second market can be demographic, geographic, and external. For example, in the second demographic markets, i.e. the markets for seniors, children, and students can work at lower prices (hairdressing, public services, tickets to theaters and cinemas, museums, tickets for public transport). Discount rates can be used in a different geographic region (markets of the administrative-territorial division), in the external market (dumping).

Strategy of seasonal (periodic) discounts based on the non-uniformity of consumer demand over time and is used for its stimulation. This strategy is used when selling goods seasonal demand during the off-season, the goods out of fashion, as well as setting the prices of vegetables and fruits on their seasonal harvesting, tariffs for telecommunication services different times of day tickets for the afternoon and evening performances, etc. This strategy allows firms to provide a more uniform utilization of production capacity and expands sales.

The strategy of «random discount» suggests that a price reduction is adjustable at random on the basis of the theory of large numbers, for example, for every hundredth, thousandth customer. This strategy is oriented on buyers interested in low prices, as a rule, people with low, middle income countries, which often overestimate their savings derived from the purchase at that price.

The strategy of the discount when purchasing large quantities of goods is to provide discounts when buying large or relatively large volumes of products, with those for each product concept of «large volume» may be different.

The strategy of the discount on the sale of goods which do not correspond to the standard provides for a discount if the products does not satisfy the requirements for packing, packaging and labeling of goods, as well as some technical and operational characteristics.

2. Competitive strategy:

• strategy of «cherry-picking»;

• strategy of market penetration;

• signaling pricing strategy.

Competitive strategy includes the following strategies.

The strategy of «cherry-picking» is similar to the policy with an appropriate name.

The strategy of market penetration is that initially the firm sets a relatively low price for the goods, after gains a certain part (segment) of the market firm raises the price without changing the quality of the product.

The strategy is based on the prices of signaling that the price can serve as a basis for evaluating the purchaser of goods. The high price premium is often used as a tool to identify the model of class «luxury» of conventional models. The value of price premiums in such cases is usually much greater than the difference in production costs models of class «luxury» and normal. Thus, a higher price may be an essential element in establishing the reputation of the company with goods Shih Roca nomenclature, as well as be a source of an additional income. However, using this strategy, the firm can sell low quality goods at high prices, using the effect of – «a high quality of always means higher prices.»

3. Assortment strategies:

• Commodity Strategy sets;

• strategy of varying profitability;

• strategy of «image» – the price;

• strategy of leadership in losses;

• strategy of setting prices above face value.

Assortment strategy combines the following types of strategies.

The strategy of product sets is that the price of the set (shaving and blades, camera and film, cosmetic sets) is set lower than the sum of the prices of its components. In this case, at a lower price can be sold basic products, and related goods are sold at a higher one. This strategy benefits both buyers and sellers.

The strategy of varying profitability is used in the pricing of substitute goods or services. In this case, the firm sets prices for similar goods in a way that made more money on expensive models, and sometimes even the loss of cheap and generally has the average rate of profit. Models of the goods or services that differ in price and quality characteristics, designed for different categories buyers. The strategy of «image» is used most price-competitiveness of firms that have a strong reputation in the market and produce a prestigious products (such as vintage wines, cognacs, branded clothing and footwear).

Leadership strategy at losses is applied, as a rule, in retail trade, when a firm sells a product that is imported in large an amount at a significant discount, sometimes at cost or below.

The strategy of setting prices above face value is used for durable goods when the goods have similar characteristics, but are designed for different groups of customers, and therefore pro-given at different prices.

4. Monopoly pricing strategy:

• Establishment of monopoly (monopsony) price;

• Establishment of dumping prices.

Monopolistic pricing strategies cover the following strategies.

The strategy of establishing monopoly (monopsony) price is applied in the case where the firm has a dominant position in the market, which gives her the opportunity to exercise decisive influence on the general commodity circulation in the relevant market or adopt the hindered access to the commodity market to competitors.

The strategy of establishing dumping prices is that firms at penetration (winning) or a segment of the market, as well as to prevent entry of other companies sets a price below the cost price. Since the firm (monopoly) has taken up this dominant position and received monopoly profits, it has sufficient financial resources to sell products at dumping prices.

In the process of price formation there are different types of policies. Consider the main types of pricing policies.

Policy conquest of the market is that the initial product is displayed on the market at a relatively low price in order to stimulate demand, after the conquest of a certain capacity of the market; the company leads you to market a modified product and begins to sell at higher price.

The policy of «cherry-picking» is used in the event of such a situation in the market, when it is possible to use readiness of buyers to pay more for the goods the normal market price, because at this point it is for them of great value. Pricing policy «cherry-picking» is aimed to earn at these buyers. After some time, when a sector of the market is saturated, the company has gradually lowers the price in order to move to the development of other sectors of the market.

Policy of rapid receipt of proceeds from the sale is used in the case where the company does not expect that the market for their goods will exist for a long period of time, or undergoes an urgent need for cash. Under such conditions firm seeks to set prices for their products in such a way as to bring them on sale revenues in the short term.

The policy of cost recovery and ensure the necessary standards of profitability per unit of production is that the price is formed on the basis of unit costs, and reasonable rates of profitability, the company needed for its operations.

The policy of market segmentation implies that the firm analyzes the market, divides it into segments, and each segment of the market, depending on the conditions set different prices for the same products at the same cost of production.

The policy of following the leader is similar to the tactics of the market price.

Psychological pricing policy is based on a deep knowledge of the psychology of buyers.

The policy involves the use of price discounts or preferential stimulating prices, which are an integral part of the strategy’s sales of goods.

Policy of resilient (flexible) prices is that the firm can sell their goods at a specified price or once a policy of flexible (floppy) prices depending on the market situation.

Tactics of pricing includes a set of concrete measures on management prices of products used to address the goals and objectives of the firm.

There are four major tactical pricing:

> tactics of high prices;

> tactics low prices;

> tactics discounts;

> tactics market price.

The tactics of the high price allows:

High prices are used as means to recover from the market everything that it can give, and then walk away from it when more effective producers with low prices appear. Profits derived from the sale of one product at high prices, is used to develop new products.

Tactics of low prices:

The tactics of low prices aimed at generating long-term, rather than «fast» profit. Expenditure on research and development in such a case shall be reimbursed for a long time than the previous tactics.

Tactics of discounts is based on the use of various types of discounts at different markets, both territorial and demographic.

The tactics of the market price implies that the firm sets the price at the market average, but the price may vary depending on the quality characteristics of the goods.