Chapter 10 - 11

1. Chapter 10 - 11 Pricing Products: Pricing Considerations and Approaches Pricing Strategies

2. 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

3. 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

4. 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.

5. Rent Fee Rate Commission Assessment Tuition Fare Toll Premium Retainer Price has Many Names • Bribe • Salary • Wage • Interest • Tax

6. 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.

7. Online travel seller Orbitz guarantees the lowest price

8. 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

9. 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

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

11. 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

12. 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

13. The Experience Curve

14. 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

15. 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

16. 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

17. The Mastercard “Priceless” campaign helps show that prices are somewhat intangible and can be relative to the consumer and the situation Marketing in Action

21. 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

22. The Demand Curve

23. 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

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

25. 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

26. 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

27. Major Considerations in Setting Price

28. 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.

29. 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 0 10 20 30 40 Quantity To Be Sold To Meet Target Profit Sales Volume in Thousands of Units

30. Cost-based versus Value-based Pricing

31. 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

33. 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

34. 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

35. Competitive Prices on Music Downloads Marketing in Action

37. 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

38. Pricing Strategies

39. 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

40. 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.

41. 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

42. 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

43. 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

44. 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

45. 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

46. 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

47. 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

49. How does AOL bundle? Click on screenshot for website Marketing in Action

50. 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