Competit ionBased Pricing

Consumers will base their judgements of a product's value on the prices that competitors charge for similar products. Here, we discuss two forms of competition-based pricing: going-rate pricing and scaled-bid pricing.

going-rate pricing Setting price based largely on following competitors' prices rather than on company costs or demand.

• Going-Rate Pricing

In going-rate pricing, the firm bases its price largely on competitors' prices, with less attention paid to its own costs or to demand. The firm might charge the same as, more, or less than its chief competitors. In oligopolistic industries that sell a commodity such as steel, paper or fertilizer, firms normally charge the same price. The smaller firms follow the leaden they change their prices when the market leader's prices change, rather than when their own demand or costs change. Some firms may charge a bit more or less, but they hold the amount of difference constant. Thus, minor petrol retailers usually charge slightly less than the big oil companies, without letting the difference increase or decrease.

Going-rate pricing applies to complex products as well as commodities. Fierce competition between aerospace producers cut world aircraft prices by a fifth between 1996 and 1998. Manfred Bischoff, chief executive of Daimler-Benz's Dasa, cites Boeing as the chief culprit. 'There is a crumbling of prices in certain markets,' he says. 'The price is dictated by Boeing. We are followers in this case.'19

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Eurostar consider their competition when setting prices aimed at the business traveller.

Eurostar consider their competition when setting prices aimed at the business traveller.

Although it gives firms little control of their revenue, going-rate pricing can he quite popular. When demand elasticity is hard to measure, firms feel that the going price represents the collective wisdom of the industry concerning the price that will yield a fair return. They also feel that holding to the going price will prevent harmful price wars.

• Sealed-Kid Pricing

Competition-based pricing is also used when firms bid for jobs. Using sealed-bid pricing, a firm bases its price on how it thinks competitors will price, rather than on its own costs or on the demand. The firm wants to win a contract and winning the contract requires pricing less than other firms.

Yet the firm cannot set its price below a certain level. It cannot price below cost without harming its position. In contrast, the higher the company sets its price above its costs, the lower its chance of getting the contract.

The net effect of the two opposite pulls can be described in terms of the expected profit of the particular bid (see Table 16.3). Suppose a bid of 89,500 would yield a high chance (say, 0.81) of getting the contract, but only a low profit (say, 0100). The expected profit with this bid is therefore #81. If the firm bid SI ] ,000, its profit would be .S"l,600, but its chance of getting the contract might be reduced to 0.01. The expected profit would be only $16. Thus the company might bid the price that would maximize the expected profit. According to Table 16.3, the best bid would be SI 0,000, for which the expected profit is S216.

sealed-bid prilling

Setting price bused on how the film thinks eompetitars tciH price Tiither than on its own costs or demand - used when a company bids forjobs.

Effects of different bids on expected profit

PROBABILITY OF WINNING

WITH THIS RID (ASSUMED)

EXPECTED PROFIT

COMPANY'S PROFIT {$)

9,500 10,000 10,500 11,000

100 600

1,100 1,600

81 216 99 16

Using expected profit as a basis for setting price makes sense for the large firm that makes many bids. In playing the odds, the firm will make maximum profits in the long run. But a firm that hids only occasionally or needs a particular contract badly will not find the expected-prof it approach useful. The approach, for example, does not distinguish between a $100,000 profit with a 0.10 probability and a 812,500 profit with a 0.80 probability. Yet the firm that wants to keep production going would prefer the second contract to the first.

Despite the increased role of non-price factors in the modern marketing process, price; remains an important element in the marketing mix. Many internal and external factors influence the company's pricing decisions. Internal factors include the firm's marketing objectives, marketing-mix strategy, costs and organisation/or pricing.

The pricing strategy is largely determined by the company's target market and positioning objectives. Common pricing objectives include survival, current profit maximization, market-share leadership and product-quality leadership.

Price is only tine of the marketing-mix tools that the company uses to accomplish its objectives, and pricing decisions affect and are affected by product design, distribution and promotion decisions. Price decisions must be carefully co-ordinated with the other marketing-mix decisions when designing the marketing programme.

Coses set the floor for the company's price - the price must cover all the costs of making and selling the product, plus a fair rate of return. Management must decide who within the organization is responsible for setting price. In large companies, some pricing authority may be delegated to lower-level managers and salespeople, but top management usually sets pricing policies and approves proposed prices. Production, finance and accounting managers also influence pricing.

External factors that influence pricing decisions include the nature of the market and demand; competitors' prices and offers; and factors such as the economy, reseller needs and government actions. The seller's pricing freedom varies with different types of market. Pricing is especially challenging in markets characterized by monopolistic competition oligopoly.

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