MSc in Digital Marketing Week 7

By Paul Morris

Note: these notes are aimed as a memory mnemonic for my MSc in Digital Marketing 

Week 7 – Pricing

Pricing can be highly tactical & the most flexible tool in the marketing mix.

Price change can have immediate impact e.g. 1% price change has 20xgreater effect on sales than 1% change in ad budget (price elasticity)

However this mad stat of course varies in relation to:

–      macro-economics: legal, regulatory, world markets, (parallel imports)

–      distribution channels

–      Marketing objectives, product life cycle & demand

Various ways of Pricing the Product:

  • Cost-plus pricing
  • Customer driven pricing
  • Competition driven pricing
  • Promotional pricing
  • Generic pricing strategies
  • Life Cycle Pricing
  • Segmented Pricing
  • Product mix pricing
  • Psychological Pricing

Pricing Objectives will vary:

  • Survival
  • Maximise current profits, Cash flow, ROI, etc
  • Maximise market share
  • Maximum market skimming
  • Product Quality Leadership
  • Not for Profit

Determining Demand

Good old price elasticity of demand!

  • Price sensitivity

–      Definitely increased by internet

  • Less price sensitivity

–      Low cost items

–      Items bought infrequently

–      Fewer substitutes or competitors

–      When they don’t notice higher price

–      Slow to change behaviour

–      Higher Prices are thought to be justified

–      Price is small part of cost of obtaining/operating/servicing  product over lifetime

6 steps to setting prices:

  • Select pricing objective
  • Determine Demand
  • Estimate Costs
  • Analyse competitors costs/prices/offers
  • Select pricing method
  • Select the final price

Review of related research in the pricing strategy of e-marketing (Yan, 2009) Dolan and Moon (2000)

–      Studied pricing & market making on internet & found it is optimal for firms to use a different pricing mechanism on different channels

  • Baker et al. (2001); Kung et al. (2002)

–      Showed that the e-markets do not drive prices down and may help firms to design better pricing strategies

  • Ancarani and Shankar (2004)

–      Study revealed  that multi-channel retailers have highest prices & pure play e-marketers may have the lowest prices in the e-marketing if shipping costs are included

  • Kurata and Bonifield (2007)

–       Used an analytical model to determine the optimal pricing strategy of  e-business in the hotel and airline industries and showed that e-business can improve its profit by taking into account customer segmentation

Pricing & Returns (Yan, 2009)

  • The author demonstrates that an optimal returns policy and pricing strategy exists when firms sell products through an e-market.
  • When a firm uses an e-market to sell its product, its optimal returns policy and pricing strategy is to offer a more generous returns policy and to charge a higher price when the product web-fit is strong.
  • Furthermore, the results also show that while the returns policy always is valuable for the e-marketer, the value of returns policy increases with the product web-fit.

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