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Chapter 10 - 11. Pricing Products: Pricing Considerations and Approaches Pricing Strategies. Learning Goals. Identify and define the internal factors affecting a firm’s pricing decisions

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Chapter 10 11

Chapter 10 - 11

Pricing Products: Pricing Considerations and Approaches

Pricing Strategies


Learning goals

Learning Goals

  • Identify and define the internal factors affecting a firm’s pricing decisions

  • Identify and define the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value

  • Contrast the three general approaches to setting prices


Learning goals1

Learning Goals

  • Identify and define the internal factors affecting a firm’s pricing decisions

  • Identify and define the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value

  • Contrast the three general approaches to setting prices


Definition

Definition

  • Price

    • The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.


Price has many names

Rent

Fee

Rate

Commission

Assessment

Tuition

Fare

Toll

Premium

Retainer

Price has Many Names

  • Bribe

  • Salary

  • Wage

  • Interest

  • Tax


What is price

What is Price?

  • Dynamic Pricing on the Web allows SELLERS to:

    • Monitor customer behavior and tailor offers.

    • Change prices on the fly to adjust for changes in demand or costs.

    • Aid consumers with price comparisons.

    • Negotiate prices in online auctions and exchanges.


Online travel seller orbitz guarantees the lowest price

Online travel seller Orbitz guarantees the lowest price


What is price1

What is Price?

  • Price and the Marketing Mix

    • Only element to produce revenues

    • Most flexible element

    • Can be changed quickly

  • Common Pricing Mistakes

    • Reducing prices too quickly to get sales

    • Pricing based on costs, not customer value


Factors to consider when setting price

Marketing objectives

Marketing mix strategies

Costs

Organizational considerations

Market positioning influences pricing strategy

Other pricing objectives:

Survival

Current profit maximization

Market share leadership

Product quality leadership

Factors to Consider When Setting Price

Internal Factors


In these ads state farm positions on relationships allstate positions on price

In these ads, State Farm positions on “relationships,” Allstate positions on “price”


Factors to consider when setting price1

Marketing objectives

Marketing mix strategies

Costs

Organizational considerations

Pricing must be carefully coordinated with the other marketing mix elements

Target costing is often used to support product positioning strategies based on price

Non-price positioning can also be used

Factors to Consider When Setting Price

Internal Factors


Factors to consider when setting price2

Marketing objectives

Marketing mix strategies

Costs

Organizational considerations

Types of costs:

Variable

Fixed

Total costs

How costs vary at different production levels will influence price setting

Experience (learning) curve affects price

Factors to Consider When Setting Price

Internal Factors


The experience curve

The Experience Curve


Factors to consider when setting price3

Marketing objectives

Marketing mix strategies

Costs

Organizational considerations

Who sets the price?

Small companies: CEO or top management

Large companies: Divisional or product line managers

Price negotiation is common in industrial settings where pricing departments may be created

Factors to Consider When Setting Price

Internal Factors


Learning goals2

Learning Goals

  • Identify and define the internal factors affecting a firm’s pricing decisions

  • Identify and define the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value

  • Contrast the three general approaches to setting prices


Factors to consider when setting price4

Nature of market and demand

Competitors’ costs, prices, and offers

Other environmental elements

Types of markets

Pure competition

Monopolistic competition

Oligopolistic competition

Pure monopoly

Consumer perceptions of price and value

Price-demand relationship

Demand curve

Price elasticity of demand

Factors to Consider When Setting Price

External Factors


Chapter 10 11

  • The Mastercard “Priceless” campaign helps show that prices are somewhat intangible and can be relative to the consumer and the situation

Marketing in Action


Factors to consider when setting price5

Nature of market and demand

Competitors’ costs, prices, and offers

Other environmental elements

Types of markets

Pure competition

Monopolistic competition

Oligopolistic competition

Pure monopoly

Consumer perceptions of price and value

Price-demand relationship

Demand curve

Price elasticity of demand

Factors to Consider When Setting Price

External Factors


The demand curve

The Demand Curve


Factors to consider when setting price6

Nature of market and demand

Competitors’ costs, prices, and offers

Other environmental elements

Consider competitors’ costs, prices, and possible reactions when developing a pricing strategy

Pricing strategy influences the nature of competition

Low-price low-margin strategies inhibit competition

High-price high-margin strategies attract competition

Benchmarking costs against the competition is recommended

Factors to Consider When Setting Price

External Factors


Chapter 10 11

Prices for MP3 players get more competitive with the help of online shopping agents like PriceGrabber.com


Factors to consider when setting price7

Nature of market and demand

Competitors’ costs, prices, and offers

Other environmental elements

Economic conditions

Affect production costs

Affect buyer perceptions of price and value

Reseller reactions to prices must be considered

Government may restrict or limit pricing options

Social considerations may be taken into account

Factors to Consider When Setting Price

External Factors


Learning goals3

Learning Goals

  • Identify and define the internal factors affecting a firm’s pricing decisions

  • Identify and define the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value

  • Contrast the three general approaches to setting prices


Major considerations in setting price

Major Considerations in Setting Price


General pricing approaches

General Pricing Approaches

  • Cost-Based Pricing: Break-Even Analysis and Target Profit Pricing

    • Break-even charts show total cost and total revenues at different levels of unit volume.

    • The intersection of the total revenue and total cost curves is the break-even point.

    • Companies wishing to make a profit must exceed the break-even unit volume.


General pricing approaches1

General Pricing Approaches

Break-Even Analysis and Target Profit Pricing

Revenues

1000

800

600

400

200

Target Profit $200,000

Total Costs

Break-even point

Thousands of Dollars

Fixed Costs

010203040

Quantity To Be Sold To Meet Target Profit

Sales Volume in Thousands of Units


Cost based versus value based pricing

Cost-based versus Value-based Pricing


General pricing approaches2

General Pricing Approaches

  • Value-Based Pricing:

    • Uses buyers’ perceptions of value rather than seller’s costs to set price.

    • Measuring perceived value can be difficult.

    • Consumer attitudes toward price and quality have shifted during the last decade.

    • Value pricing at the retail level

      • Everyday low pricing (EDLP) vs. high-low pricing


Chapter 10 11

The discount retailer Target has begun to offer “no wait” medical clinics in some stores at lower prices than traditional health care institutions

10 - 38

Marketing in Action

Source: Business Week


General pricing approaches3

General Pricing Approaches

  • Competition-Based Pricing:

    • Also called going-rate pricing

    • May price at the same level, above, or below the competition

    • Bidding for jobs is another variation of competition-based pricing

      • Sealed bid pricing


Competitive prices on music downloads

Competitive Prices on Music Downloads

Marketing in Action


Learning goals4

Learning Goals

  • Identify and define the internal factors affecting a firm’s pricing decisions

  • Identify and define the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value

  • Contrast the three general approaches to setting prices


Pricing strategies

Pricing Strategies


Learning goals5

Learning Goals

  • Describe the major strategies for pricing imitative and new products

  • Explain how companies find a set of prices that maximize the profits from the total product mix

  • Discuss how companies adjust their prices to take into account different types of customers and situations

  • Discuss the key issues related to imitating and responding to price changes


Definitions

Definitions

  • Market-Skimming Pricing

    • Setting a high price for a new product to skim maximum revenues layer by layer from segments willing to pay the high price.

  • Market-Penetration Pricing

    • Setting a low price for a new product in order to attract a large number of buyers and a large market share.


Skimming pricing example

Skimming Pricing Example

  • Most consumer electronic products enter at a high price with skimming.

  • For example, the iPod entered around $259 in 2004. Check the current price at amazon.com

Click on iPod for website

Marketing in Action


Learning goals6

Learning Goals

  • Describe the major strategies for pricing imitative and new products

  • Explain how companies find a set of prices that maximize the profits from the total product mix

  • Discuss how companies adjust their prices to take into account different types of customers and situations

  • Discuss the key issues related to imitating and responding to price changes


Product mix pricing strategies

Product Mix Pricing Strategies

  • Product Line Pricing

    • Setting price steps between product line items.

      • Price points

  • Optional-Product Pricing

    • Pricing optional or accessory products sold with the main product


Product line pricing

Product Line Pricing

Oral B has a full line of electric toothbrushes. Visit the site to see the products and examine attributes which justify price differences

Click on screenshot for website

Marketing in Action


Product mix pricing strategies1

Product Mix Pricing Strategies

  • Captive-Product Pricing

    • Pricing products that must be used with the main product

      • High margins are often set for supplies

    • Services: two-part pricing strategy

      • Fixed fee plus a variable usage rate


Captive product pricing

Captive Product Pricing

Companies like Gillette will often price the razor at or below cost and make the profit on the blades

Marketing in Action


Product mix pricing strategies2

Product Mix Pricing Strategies

  • By-Product Pricing

    • Pricing low-value by-products to get rid of them

  • Product Bundle Pricing

    • Pricing bundles of products sold together


How does aol bundle

How does AOL bundle?

Click on screenshot for website

Marketing in Action


Learning goals7

Learning Goals

  • Describe the major strategies for pricing imitative and new products

  • Explain how companies find a set of prices that maximize the profits from the total product mix

  • Discuss how companies adjust their prices to take into account different types of customers and situations

  • Discuss the key issues related to imitating and responding to price changes


Price adjustment strategies

Discount / allowance

Segmented

Psychological

Promotional

Geographical

International

Types of discounts

Cash discount

Quantity discount

Functional (trade) discount

Seasonal discount

Allowances

Trade-in allowances

Promotional allowances

Price Adjustment Strategies

Strategies


This small inn located in a summer resort uses seasonal discounts

This small inn located in a summer resort uses seasonal discounts

Marketing in Action


Price adjustment strategies1

Discount / allowance

Segmented

Psychological

Promotional

Geographical

International

Types of segmented pricing strategies:

Customer-segment

Product-form pricing

Location pricing

Time pricing

Also called revenue or yield management

Certain conditions must exist for segmented pricing to be effective

Price Adjustment Strategies

Strategies


Movie theatres resorts and hotels often use segmented pricing for children

Movie theatres, resorts and hotels often use segmented pricing for children

Marketing in Action


Price adjustment strategies2

Price Adjustment Strategies

Conditions Necessary for Segmented Pricing Effectiveness

  • Market must be segmentable

  • Segments must show different demand

  • Pricing must be legal

  • Costs of segmentation cannot exceed revenues earned

  • Segmented pricing must reflect real differences in customers’ perceived value


Price adjustment strategies3

Discount / allowance

Segmented

Psychological

Promotional

Geographical

International

The price is used to say something about the product.

Price-quality relationship

Reference prices

Differences as small as five cents can be important

Numeric digits may have symbolic and visual qualities that psychologically influence the buyer

Price Adjustment Strategies

Strategies


Psychological pricing

Psychological Pricing

This ad for a luxury priced car attempts to show that Mercedes owners form important relationships with their cars

Marketing in Action


Price adjustment strategies4

Discount / allowance

Segmented

Psychological

Promotional

Geographical

International

Temporarily pricing products below the list price or even below cost

Loss leaders

Special-event pricing

Cash rebates

Low-interest financing, longer warranties, free maintenance

Promotional pricing can have adverse effects

Price Adjustment Strategies

Strategies


Promotional pricing

Promotional Pricing

Cell phone marketers will take a loss on the phone to use as a promotional discount

Marketing in Action


Price adjustment strategies5

Price Adjustment Strategies

Promotional Pricing Problems

  • Easily copied by competitors

  • Creates deal-prone consumers

  • May erode brand’s value

  • Not a legitimate substitute for effective strategic planning

  • Frequent use leads to industry price wars which benefit few firms


Price adjustment strategies6

Discount / allowance

Segmented

Psychological

Promotional

Geographical

International

Types of geographic pricing strategies:

FOB-origin pricing

Uniform-delivered pricing

Zone pricing

Basing-point pricing

Freight-absorption pricing

Price Adjustment Strategies

Strategies


Price adjustment strategies7

Discount / allowance

Segmented

Psychological

Promotional

Geographical

International

Prices charged in a specific country depend on many factors

Economic conditions

Competitive situation

Laws / regulations

Distribution system

Consumer perceptions

Corporate marketing objectives

Cost considerations

Price Adjustment Strategies

Strategies


Learning goals8

Learning Goals

  • Describe the major strategies for pricing imitative and new products

  • Explain how companies find a set of prices that maximize the profits from the total product mix

  • Discuss how companies adjust their prices to take into account different types of customers and situations

  • Discuss the key issues related to imitating and responding to price changes


Price changes

Initiate price cuts when a firm:

Has excess capacity

Faces falling market share due to price competition

Desires to be a market share leader

Initiate price increases when a firm

can increase profit

faces cost inflation

faces greater demand than can be supplied

Price Changes


Price changes1

Price Changes

  • Alternatives to Increasing Price

    • Explore more cost effective production or distribution

    • Reduce product size

    • Remove features

    • Unbundle the product


Price changes2

Price Changes

  • Buyer reactions to price changes must be considered.

  • Competitors are more likely to react to price changes under certain conditions.

    • Number of firms is small

    • Product is uniform

    • Buyers are well informed


Responding to competitors price changes

Responding to Competitors’Price Changes

  • Responding to competitors’ price changes

    • Evaluate the competitors’ reason for the price change

    • Evaluate marketplace response to the price change

    • Considers own product’s strategy


Responding to competitors price changes1

Responding to Competitors’ Price Changes


Kellogg s responds to price cuts

Kellogg’s Responds to Price Cuts

  • In 1995, a government study called “Consumers in a Box” called for lowering of cereal prices.

  • Cereal prices had increased faster than most other food products.

Marketing in Action


Kellogg s responds to price cuts1

Kellogg’s Responds to Price Cuts

  • In 1996, Kraft announced 20% across the board price cut.

  • Kellogg’s followed with 19% cut.

  • Kellogg’s also introduced lower price bagged cereal.

Marketing in Action


Public policy and pricing

Public Policy and Pricing

  • Pricing within Channel Levels

    • Price-fixing

      • Competitors cannot work with each other to set prices

    • Predatory pricing

      • Firms may not sell below cost with the intention of punishing a competitor or gaining higher long-run profits or running a competitor out of business.


Public policy and pricing1

Public Policy and Pricing

  • Pricing across Channel Levels

    • Price discrimination

    • Retail price maintenance

    • Deceptive pricing

      • Bogus reference / comparison pricing

      • Scanner fraud

      • Price confusion


Learning goals9

Learning Goals

  • Describe the major strategies for pricing imitative and new products

  • Explain how companies find a set of prices that maximize the profits from the total product mix

  • Discuss how companies adjust their prices to take into account different types of customers and situations

  • Discuss the key issues related to imitating and responding to price changes


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