Lesson 7 - Pricing

In any market, there are 2 fools :
“One charges too much
The other does not charge enough” Russian proverb.


What is pricing.?
In economic term, what we need to give up to receive/acquire something we want/desire.

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Why study pricing.
- Pricing is everywhere – rental, tuition fees, salary etc
- Pricing is a MAJOR determinant of how buyer make decision, esp. in poorer countries, among lower income segment, with commodity type product eg agriculture produce - rice, natural resource - oil, minerals.
- Of course, there are also non price factor when buyer make a decision – eg luxury good.
- Price is a MAJOR determinant in a company’s profitability (so, how to max. profit?) and market share (to gain market share that leads to lower production cost, increase entry barrier).
- Price is the only element in marketing mix that result in revenues, the others are cost – eg marketing, place.
- Price can be change quickly unlike the other market mix – eg product features (need time to redesign, incorporate etc).


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How is pricing done (process)
Setting corporate policy/objectives(to max profit, recover cost, penetrate market) - select pricing method  select pricing strategy that achieve the objectives.
Objectives : profit max is not the only objective, eg : social welfare may price to cater the income segment they serve, art theather (eg Esplanade) may price their production to fill seats (eg if their corporate mission is to introduce art to
the heartland population.)
Differentiate between pricing method and pricing strategy.
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What are the types of pricing methods ? – see 6P.
Understand the method and WHY –
Eg : cost plus – the cost (to breakeven) Plus the margin needed to make a profit . Who can use this method – Not suitable for every companies – depend on the industry, competitive landscape, etc . eg if the company production cost Is high, it cannot use this method, they will be priced out. Sometime, it is not necessary to use this method if there are not many competitors or the company need to skim. Thus pricing should be dynamic. Understand the rationale why.
Pricing strategy – see 6P.
There is a difference between psychological pricing(a strategy) and the psychology of pricing( understanding behaviour (eg the different type of goods/customer type (eg : innovator/laggard) to price. ).
Psychological pricing eg : priced at $1999, (HOPEFULLY and not working these days as it is used too often by too many companies) customer will think it is cheap. $188 per table (for Chinese New Year dinner) – play on the Chinese mentally that “8” represent prosperity and assuming everyone believe that it will bring luck/prosperity.

Others : promotional pricing (eg loss leader- why- draw traffic), discriminatory pricing – why to max profit/sales usually for providing the same service to different target group – eg airticket, buffet, cinema, discriminate based on timing, demographic, location.
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Some elements (determinants) of pricing – demand, cost
Understand whether demand is elastic or inelastic?
What is elastic demand/What is inelastic demand.
Elastic – demand quantity is sensitive to price change.
Inelastic - demand quantity is NOT so sensitive to price change.
So what are the factors affecting price sensitivity ?(see 6P)
Eg : substitute awareness effect – if consumers are more aware of available substitute, they are more price sensitive.

Marginal Cost. – see 6P,
Eg in airline, what is the cost to serve one more passenger – cost of his/her meal?? Etc maybe fuel cost (the heavier the plane load, the more fuel it consume) but neglible, others are fixed ie regardless of how many passengers eg ; staff to check in, airplane parking charges, number of pilots needed per flight etc

What other factors (from marketing standpoint eg : potential market size, niche market etc) to consider when pricing – see 6P.