CHAPTER III.pdf
- 2. 2 Learning outcomes ➢Analyse the financial services pricing process ➢Analyse the importance of price as an element of the marketing mix ➢Analyse the difficulties of price setting for financial services ➢Compare the range of different pricing approaches for financial services ➢Examine ways of pricing savings products, brokerage and investment products, credit products and insurance products ➢Analyse the relationship between demand and price ➢Analyse the relationship between price and other elements of the marketing mix Learning objectives
- 3. 3 One of the most complex decisions involved in the marketing mix is deciding on the price of the product or service. Buyers have only limited resources and have to make decisions about what they will and will not buy. Introduction In a market, the suppliers wish to set price at the highest level that they can, whilst still obtaining adequate sales – by doing so, they maximise their profit. On the other hand, customers will want to see prices at as low a level as possible to reduce their outgoings.
- 4. 4 The importance of price Pricing is vital for the following reasons: ➢Price brings together three of the other elements of the marketing mix and affects each one of them. ➢Price determines the firm's income and profits for each product and each market. A relatively small increase in price can lead to a very large increase in profits, unless of course the higher price means customers buy competing products instead. ➢Price contributes to the firm's business and financial objectives. Pitching a low price will probably increase unit sales (at the cost of losing profit), so price can be used to control demand, perhaps in order to maintain efficient use of production capacity.
- 5. 5 ➢Price operates as a competitive tool, if done with care. Competing by reducing prices can lead to retaliation by competitors, and a price war will always favour the firm with the most cash resources. Because price has an immediate effect on the value proposition, it can be used to boost sales temporarily (for example, a sales promotion which offers a discount). ➢Price acts as an important surrogate for judging quality. People tend to assume that the higher priced product is better quality, and if the price/quality ratio is right, higher priced products actually represent better value for money since they offer more benefits: people often think that paying extra is worthwhile in order to obtain a better product. Of course, the product has to meet the customers' expectations, or no repeat purchases will result.
- 6. 6 The difficulties of price setting in financial services ❑ Economic factors ❑ Comparison issues ❑ Quality ❑ Pricing for profit ❑ Funding cost ❑ Long-term products ❑ Uncertainty ❑ Ethical issues and regulations
- 7. 7 How to set prices The first stage of setting a price is to select a pricing objective. This pricing objective must be consistent with: ➢Overall objectives of the organization ➢Marketing objectives Objectives serve a number of purposes including ➢ Sense of direction ➢ Focus for decision making ➢ Motivate employees ➢ Controlling mechanism ➢ Profitability ➢ Growth ➢ Shareholder value ➢ Customer satisfaction
- 8. 8 Determining demand The next stage is to determine the demand for the product by considering its relationship with price. For most products, the quantity demanded falls as the price increases, as illustrated by the classic demand curve. A demand curve for a product is shown as D1 below.
- 9. 9 Examples of factors which will cause the demand curve to shift include: ➢Changes in the quality of the product (product) ➢Advertising campaigns (promotion) ➢Online availability (place) ➢Restructuring of the branch network (place) ➢Competence of staff (people)
- 10. 10 Price elasticity of demand measures the relationship between price and demand. If a price change has a relatively significant impact on demand, demand is said to be elastic. Demand for basic financial services might be relatively inelastic. This means that changes in the price only have a slight effect on the demand for these products.
- 11. 11 The break-even point is the point at which the costs of producing a product equal the revenue made from selling it. It is important to know how many units are required to break even when determining the price. total fixed costs Break-even point = Sale price per unit - variable costs per unit
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- 13. 13 Determining a basis for pricing ➢ Cost-based pricing In a cost-based approach, a monetary amount or percentage is added to the product cost. There are two main types of cost-based pricing: cost plus, and mark-up. ➢ Market-based pricing (also known as perceived value pricing) ❖ This kind of pricing takes account of a wide range of factors: 1) Marketing strategy 2) Competition 3) Costs 4) Product line pricing 5) Value to the customer 6) Negotiating margins 7) Price-quality relationships 8) Political factors 9) Explicability 10) Effect of distributors/retailers ❖ The price set must reflect the product's marketing strategy and be in line with the rest of the marketing mix.
- 14. 14 ➢Regulation-based pricing: Financial services are heavily regulated and in some cases, the pricing of services may be dictated by the regulations. For example, for some types of lending a maximum interest rate may be specified. The important point to note is that prices must be set in accordance with the relevant laws and ➢Promotional pricing : Other special events, break holiday, seasonal, …ect.
- 15. 15 Credit product pricing 1).Collateralised and non-collateralised credit 2).Time frame 3).Credit rating 4).Fixed or variable rates
- 16. 16 ➢Savings product pricing ➢Brokerage and investment service pricing 1) Mutual funds 2) Ethics