The Marketing Mix

1. The Marketing Mix Price Strategies

2. The Importance of Pricing • Pricing is one of the most vital decisions made by management • Price too high and you lose the sale • Price too low and you can’t make money • Two fundamental ways to grow revenue • raise your price • increase the quantity you sell • Price is the easiest of all marketing variables to influence but among the most complex decisions to make • price changes may be implemented immediately

3. The Internet and Pricing • Instant price comparisons from thousands of vendors (e.g., www.pricescan.com ) • Name price and have it met (www.priceline.com) • Better buyer evaluation (GE lighting) • Reach select buyers (CDNOW)

4. Demand factors (Value to buyers) (Price ceiling) Competitive factors Finalpricingdiscretion Initialpricingdiscretion Corporate objectives andregulatory constraints Direct variable costs (Price floor) Conceptual Orientation to Pricing Nagle 1999

5. Example: Progressive Insurance • Collects and analyzes loss data in auto insurance better than competition • Understands what it costs to serve various customer types • Serves lucrative high risk customer no one else wants to insure • Good profits from this customer base

6. Example: McKinsey Results • 1% improvement in price leads to a 11.1% improvement in operating profit • 1 • 1% improvement in variable cost, volume, and fixed cost produced profit improvements of 7.8%, 3.3%, and 2.3%!

7. Life Cycle Costs for Competing Automobiles R. Best, Market-Based Management, 2005.

8. Example: Consumer Electronics • JVC, on its website, charges $1099.95 for a digital still/video camera • Circuit City sells it for $799.95 • Amazon sells it for $749.95 • Why is the gap large? • “We have trained the consumer electronics buyer to think he is getting 20-30% off” • Manufacturer’s price is a psychological reference tool (MSRP vs. Invoice vs. Final)

9. Price and Quality are Connected • Image pricing is useful with ego sensitive products like perfumes and expensive cars • A $100 bottle of perfume may contain $10 worth of scent • Gift givers pay the additional $$$$ to convey their regard for the receiver • Why are Carl Jr.’s and Hardee’s not introducing dollar and 99 cent menus?

10. Nine Price-Quality Strategies

11. Actual quality meets or exceeds perceived quality Mercury 42.3% Infiniti 34.1% Buick 29.7% Lincoln 25.3% Chrysler 20.8% Lexus17.4% Toyota 8.7% Cadillac 8.3% Perceived quality exceeds actual quality by percentage: Land Rover 75.3% Kia 66.6% Volkswagen 58.3% Volvo 36.0% Mercedes-Benz34.2% Mitsubishi 34.1% Hyundai 27.4% Audi 26.4% BMW12.4% Perception of car quality Some car brands have better quality than buyers think. But for some brands, buyers think the quality is better than it is.

12. Price Cues • Stereo priced at $299 instead of $300 is seen in the $200 price range • Research shows that consumers process price from left to right rather than by “rounding” • “9” endings denote bargains/discount • Brands with high price image should NOT have an odd-ending tactic • 0 and 5 endings are easier to store in memory

13. Setting the Price

14. Pricing Procedure Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price Survival Maximize current profits Maximize market share Penetration strategy Market skimming Skimming strategy Product quality leaders Partial cost recovery Setting the Price

15. Pricing Procedure Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price Understand factors that affect price sensitivity Estimate demand curves Understand price elasticity of demand Elasticity Inelasticty Setting the Price

16. Price Sensitivity • Situations That Increase Price Sensitivity • Availability of product substitutes • Higher total expenditure • Noticeable differences • Easy price comparison • Situations That Decrease Price Sensitivity • Real or perceived necessities • Lack of product substitutes • Complementary products • Product differentiation • Perceived product benefits • Situational influences

17. Price Elasticity of Demand

18. Pricing Procedure Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price Types of costs and levels of production must be considered Accumulated production leads to cost reduction via the experience curve Differentiated marketing offers create different cost levels Setting the Price

19. Pricing Procedure Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price Select method: Markup pricing Target-return pricing Perceived-value pricing Value pricing EDLP, Hi-Lo Going-rate pricing Auction-type pricing Group pricing Setting the Price

20. Example: Perceived value • Caterpillar prices tractors at $100, 000 (compared to competitors’ $90,000) • Why should the customer pay $10,000 more? • $90,000 price is equivalent to competitor • $7000 premium for durability • $6000 premium for reliability • $5000 premium for service • $2000 premium for parts • (Adding) $110,000 is the normal price • $10000 discount • Final price = $100,000 • By buying Caterpillar, customer gets $20,000 extra value!!!

21. Auction pricing • English Auctions: One seller and many buyers • Bidders raise prices • Dutch Auctions: One seller and many buyers (or) one buyer and many sellers • High initial price with slow reductions until a bidder accepts a price • Sealed-bid auctions

22. Pricing Procedure Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price Requires consideration of additional factors: Psychological pricing Gain-and-risk-sharing pricing Influence of other marketing mix variables Company pricing policies Impact of price on other parties Setting the Price

23. Adapting the Price Price Discounts and Allowances Cash Discounts Functional Discounts Quantity Discounts Seasonal Discounts Trade-in Allowances Promotional Allowances

24. Adapting the Price Loss-Leader Pricing Special Event Pricing Promotional Pricing Tactics Low Interest Financing CashRebates PsychologicalDiscounting Warranties and Service Contracts Longer Payment Terms

25. Adapting the Price Discriminatory Pricing Tactics Time Pricing Image Pricing Channel Pricing Location Pricing Product-Form Pricing Customer Segment Pricing

26. Adapting the Price • Price discrimination works when: • Market segments show different intensities of demand • Consumers in lower-price segments can not resell to higher-price segments • Competitors can not undersell the firm in higher-price segments • Cost of segmenting and policing the market does not exceed extra revenue

27. Adapting the Price Product-Mix Pricing Tactics Two-Part Pricing By-Product Pricing Product-Line Pricing Product-Bundle Pricing Captive-Product Pricing Optional-Feature Pricing

28. Price Discrimination Price Fixing Predatory Pricing Deceptive Pricing Legal and Ethical Issues in Pricing