pricing products: pricing considerations and approaches pricing strategies chapter 10 - 11
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Pricing Products: Pricing Considerations and Approaches
Pricing Strategies
Chapter 10 - 11
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Learning Goals
1. Identify and define the internal factors affecting a firm’s pricing decisions
2. Identify and define the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value
3. Contrast the three general approaches to setting prices
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Learning Goals
1. Identify and define the internal factors affecting a firm’s pricing decisions
2. Identify and define the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value
3. Contrast the three general approaches to setting prices
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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.
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Price has Many Names
Rent Fee Rate Commission Assessment
Tuition Fare Toll Premium Retainer
• Bribe• Salary• Wage• Interest• Tax
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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.
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Online travel seller Orbitz guarantees the lowest price
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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
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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
Internal Factors
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In these ads, State Farm positions on “relationships,” Allstate positions on “price”
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Factors to Consider When Setting Price
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
Internal Factors
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Factors to Consider When Setting Price
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
Internal Factors
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The Experience Curve
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Factors to Consider When Setting Price
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
Internal Factors
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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
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Factors to Consider When Setting Price
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
External Factors
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The Mastercard “Priceless” campaign helps show that prices are somewhat intangible and can be relative to the consumer and the situation
Marketing in Action
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Factors to Consider When Setting Price
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
External Factors
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The Demand Curve
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Factors to Consider When Setting Price
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
External Factors
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Prices for MP3 players get more competitive with the help of online shopping agents like PriceGrabber.com
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Factors to Consider When Setting Price
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
External Factors
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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
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Major Considerations in Setting Price
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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 Approaches
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Break-Even Analysis and Target Profit Pricing
General Pricing Approaches
Fixed Costs
Total Costs
Revenues
Sales Volume in Thousands of Units
Thousands of Dollars
0 10 20 30 40
1000
800
600
400
200
Break-even point
Target Profit $200,000
Quantity To Be Sold To Meet Target Profit
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Cost-based versus Value-based Pricing
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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
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The discount retailer Target has begun to offer “no wait” medical clinics in some stores at lower prices than traditional health care institutions
Marketing in Action Source: Business Week
10 - 38
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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
General Pricing Approaches
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Competitive Prices on Music Downloads
Marketing in Action
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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
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Learning Goals
1. Describe the major strategies for pricing imitative and new products
2. Explain how companies find a set of prices that maximize the profits from the total product mix
3. Discuss how companies adjust their prices to take into account different types of customers and situations
4. Discuss the key issues related to imitating and responding to price changes
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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
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
Marketing in Action
Click on iPod for website
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Learning Goals
1. Describe the major strategies for pricing imitative and new products
2. Explain how companies find a set of prices that maximize the profits from the total product mix
3. Discuss how companies adjust their prices to take into account different types of customers and situations
4. Discuss the key issues related to imitating and responding to price changes
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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
Oral B has a full line of electric toothbrushes. Visit the site to see the products and examine attributes which justify
price differences
Marketing in Action
Click on screenshot for website
Product Line Pricing
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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
Companies like Gillette will often price the razor at or below cost and make the profit on the blades
Marketing in Action
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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
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Learning Goals
1. Describe the major strategies for pricing imitative and new products
2. Explain how companies find a set of prices that maximize the profits from the total product mix
3. Discuss how companies adjust their prices to take into account different types of customers and situations
4. Discuss the key issues related to imitating and responding to price changes
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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
StrategiesStrategies
This small inn located in a summer resort uses seasonal discounts
Marketing in Action
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Price Adjustment Strategies
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
StrategiesStrategies
Movie theatres, resorts and hotels often use segmented pricing for children
Marketing in Action
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Price Adjustment StrategiesConditions 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
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Price Adjustment Strategies
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
StrategiesStrategies
Psychological Pricing
This ad for a luxury priced car attempts
to show that Mercedes owners
form important relationships with
their cars
Marketing in Action
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Price Adjustment Strategies
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
StrategiesStrategies
Promotional Pricing
Cell phone marketers will take a loss on the phone
to use as a promotional
discount
Marketing in Action
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Price Adjustment StrategiesPromotional 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
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Price Adjustment Strategies
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
StrategiesStrategies
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Price Adjustment Strategies
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
StrategiesStrategies
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Learning Goals
1. Describe the major strategies for pricing imitative and new products
2. Explain how companies find a set of prices that maximize the profits from the total product mix
3. Discuss how companies adjust their prices to take into account different types of customers and situations
4. Discuss the key issues related to imitating and responding to price changes
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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
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Price Changes
Alternatives to Increasing Price Explore more cost effective production or
distribution Reduce product size Remove features Unbundle the product
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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
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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 Changes
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
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
Kellogg’s Responds to Price Cuts
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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.
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Public Policy and Pricing
Pricing across Channel Levels Price discrimination Retail price maintenance Deceptive pricing
Bogus reference / comparison pricing Scanner fraud Price confusion
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Learning Goals
1. Describe the major strategies for pricing imitative and new products
2. Explain how companies find a set of prices that maximize the profits from the total product mix
3. Discuss how companies adjust their prices to take into account different types of customers and situations
4. Discuss the key issues related to imitating and responding to price changes
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