D.V. Madhusudan RaoDept. MBA,

School of Graduate Studies,Jigjiga University

ETHOPIA

MARKETING MANAGEMENT

Developing Pricing Strategies

- - 1822013

PP1000

1

Learning ObjectivesAfter studying this chapter, you should be able to:

1. Describe the major strategies for pricing initiative 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 initiating and responding to price changes

- - 1822013

PP1000

2

Pricing Products

• New-Product Pricing Strategies

• Product Mix Pricing Strategies

• Price Adjustment Strategies

• Price Changes

Topic Outline

Price is the only element in the marketing mix that produces revenue; all other elements represent costs.So Cost =FACT;Price (cost+Margin) = POLICY

What Is a Price?

- - 1822013

PP1000

4

Pricing PuzzlePricing Puzzle

• Production costs• Indirect costs• Advertising costs• Distribution costs• Manufacturer’s

margin• Distributor’s margin• Seller’s margin

Product performance• Usefulness & Quality

Image / Aspirations• Brand Equity

Availability• Distribution Strategy

Service• Before/During & After sales

Minimize Optimize Maximize

Costs + Margins = PRICE

VALUE

A Secret Pie

• Impact of a 1 % price increase on profits

– Coca-Cola 6,4 %– Nestlé 17,5 %– Ford 26,0 %– Philips 28,7 %

Synonyms for Price

• Rent• Tuition• Fee• Fare• Rate• Toll• Premium• Honorarium• Wage

• Special assessment• Bribe• Dues• Salary• Interest• Donation• Commission• Tax

- - 1822013

PP1000

7

Common Pricing Mistakes• Determine costs and take traditional

industry margins• Failure to revise price to capitalize

on market changes• Setting price independently of the

rest of the marketing mix• Failure to vary price by product

item, market segment, distribution channels, and purchase occasion

- - 1822013

PP1000

8

Customer Perceptions of Value

Understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value

A price

Pricing Puzzle

4 P’s• PRODUCT• PRICE• PLACE• PROMOTION

4 C’s• CUSTOMER VALUE• COST• CONVENIENCE• COMMUNICATION

Seller’s Dilemma

Pricing Puzzle

4 P’s• PRODUCT• PRICE• PLACE• PROMOTION

4 C’s• CUSTOMER VALUE• COST• CONVENIENCE• COMMUNICATION

“ Tomorrow’s winner companies willbe those who offer distinct products at

comparatively low market prices ”

• Physical Differences– Features, performance, durability, conformance, design, etc…

• Availability Differences– Distribution channels ; Stores, mail-order, internet, etc…

• Service Differences– Delivery, installation, training, consulting, maintenance, etc…

• Price Differences– Price positioning (Very high / High / Medium / Low / Very Low)

• Image Differences– Symbols, atmosphere, events, media, etc…

Key = DifferentiationThe key to drive value is to offer relevant and

distinctive product differentiation

• Physical Differences– Levi’s Engineered Jeans (Ergonomic construction, durability, style)

• Availability Differences– Dell Computer’s customized production, Volkswagen “e.lupo”

• Service Differences– Acıbadem Hospital – Mother Care Division, Nissan “5-year

Warranty”

• Image Differences– Audi vs Mercedes, DuPont (Innovation Leader)

Differentiation : ExamplesKey = Differentiation

• Perdue Chicken (USA)– Guaranteed tenderness (30 % market-share, 10 % premium

pricing)

• Flora Drinking Water (Turkey – Sabancı Holding)– Service, packaging, attributes, operation

• Starbuck’s Coffee (USA)– Atmosphere, standard service

Differentiating commodities…Key = Differentiation

Everything can be differentiated !...

Pricing Decisions• INTERNAL FACTORS

– Marketing Objectives• Positioning• Target Group

– Marketing Mix Strategy• 4 P’s

– Costs• Fixed & Variable

– Management Approach• Responsibility• Perspective

• EXTERNAL FACTORS– Market

• Pure Competition• Monopolistic Competition• Oligopolistic Competition• Pure Monopoly

– Demand• Elastic / Inelastic

– Competition• Competitors’ offers• Competitiors’ reactions

– Economy• Buying power

– Government Influence• Laws & Regulations

Consumer Psychology and Pricing

Reference Prices

Price-quality inferences

Price endings

Price cues

- - 1822013

PP1000

16

Table 14.1 Possible Consumer Reference Prices

• “Fair price”• Typical price• Last price paid• Upper-bound

price

• Lower-bound price

• Competitor prices• Expected future

price• Usual discounted

price

- - 1822013

PP1000

17

Price–Quality Inferences: An Image pricing for ego-sensitive products. Eg: Perfumes, cars (over-valued and under-valued)When information about true quality is known, price becomes a less significant indicator of quality. When information is not available, price acts as a signal of quality.

Price endings: Price tags end with 0 and 5 or 9 are commonly seen examples.

Price Cues

• “Left to right” pricing ($299 vs. $300)

• Odd number discount perceptions• Even number value perceptions• Ending prices with 0 or 5• “Sale” written next to price

- - 1822013

PP1000

19

20

Steps in Setting the Price

- - 1822013

PP1000

Pricing Strategies

- - 1822013

PP1000

21

Marketing

Objectives

SurvivalLow Prices to Cover Variable Costs

andSome Fixed Costs to Stay in

Business.Current Profit Maximization Choose the Price that Produces the

Maximum Current Profit, Etc.

Market Share LeadershipLow as Possible Prices to Become

the Market Share Leader.

Product Quality LeadershipHigh Prices to Cover Higher

Performance Quality and R & D.

Internal Factors Affecting Pricing Decisions: Marketing Objectives

CHPT: 14-22

Price

Product Design

Distribution

Promotion

NonpricePositions

Internal Factors Affecting Pricing Decisions: Marketing Mix

CHPT: 14-23

Market andDemand

Competitors’ Costs, Prices, and Offers

Other External FactorsEconomic Conditions

Reseller NeedsGovernment Actions

Social Concerns

External Factors Affecting Pricing Decisions

Competitor Costs

This ad by LCI International accuses its competitors of using unfair practices in pricing, hiding fees incurred by rounding up.

Hidden fees, defined as“cramming” by theFCC, are the numberone source of billingcomplaints amonglong-distancecustomers.

Why is LCI focusing onthis practice?

CHPT: 14-24

Market Skimming

- - 1822013

PP1000

25

New-Product Pricing Strategies

• Market-skimming pricing

• Market-penetration pricing

• Intermediate Pricing

Market-skimming pricing is a strategy for setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price, the company make fewer (low volume) but more profitable sales.• Product quality and image must support the price• Buyers must want the product at the price• Costs of producing the product in small volume should not cancel the advantage of higher prices• Competitors should not be able to enter the market easily•Suitable for products that have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out)•Examples include: Playstation, jewellery, digital technology, new DVDs, Bic, Biro etc

• For example when Sony introduced the world first high definition television (HDTV) to the Japanese market , the high tech sets cost 43,000$ . These televisions were purchased only by customers who really wanted the new technology and afford to pay high prices.

Market-skimming pricing

- - 1822013

PP1000

28

Penetration Pricing

- - 1822013

PP1000

29

Market-penetration pricing sets a low initial price in order to penetrate the market quickly and deeply to attract a large number of buyers quickly to gain market share

• Price sensitive market• Production and distribution costs must

fail as sales volume increases.• Low prices must keep competition out

of the market

• For example ,Dell used penetration pricing to enter the personal computer market, selling high quality computer products through lower cost direct channels.

Market-penetration pricing

- - 1822013

PP1000

31

32

Price-Quality Strategies• Philip Kotler identified 9 price-quality strategies

PremiumHighValue

SuperValue

OverCharging

MidValue

GoodValue

Rip-offFalseEconomy

Economy

High QualityHigh Quality

Low QualityLow Quality

High PriceHigh Price Low PriceLow Price

- - 1822013

PP1000

Middle Quality

Mid Price

Product Line PricingProduct Line PricingSetting Price Steps Between Product Line Items

i.e. $299, $399

Product Line PricingProduct Line PricingSetting Price Steps Between Product Line Items

i.e. $299, $399

Optional-Product PricingOptional-Product PricingPricing Optional or Accessory Products

Sold With The Main Producti.e. Car Options

Optional-Product PricingOptional-Product PricingPricing Optional or Accessory Products

Sold With The Main Producti.e. Car Options

Captive-Product PricingCaptive-Product PricingPricing Products That Must Be Used

With The Main Producti.e. Razor Blades, Film, Software

Captive-Product PricingCaptive-Product PricingPricing Products That Must Be Used

With The Main Producti.e. Razor Blades, Film, Software

By-Product PricingBy-Product PricingPricing Low-Value By-Products To Get Rid

of Themi.e. Lumber Mills, Zoos

By-Product PricingBy-Product PricingPricing Low-Value By-Products To Get Rid

of Themi.e. Lumber Mills, Zoos

Product-Bundle PricingProduct-Bundle PricingPricing Bundles Of Products Sold Together

i.e. Season Tickets, Computer Makers

Product-Bundle PricingProduct-Bundle PricingPricing Bundles Of Products Sold Together

i.e. Season Tickets, Computer Makers

Product Mix Pricing Strategies

ProductMix

PricingStrategies

ProductMix

PricingStrategies

- - 1822013

PP1000

33

Product line pricing takes into account the cost differences between products in the line, customer evaluation of their features, and competitors’ prices

* For example channel offers 20 different collections of bags of all shapes and sizes at price that range from under $50 to more than $1,250.

• Optional-product pricing takes into account optional or accessory products along with the main product

• For example : a car buyer may choose to order a GPS navigation system & Bluetooth wireless communication.

• Refrigerators come with optional ice maker

• Captive-product pricing involves products that must be used along with the main product

• Examples of Captive products are razor blade cartridges , Gillette once you bought the razor, you are committed to buying replacement cartridges at $25 an eight pack

• Two-part pricing involves breaking the price into: – Fixed fee– Variable usage fee– For example : Jawwal company charge a

flat rate for a basic calling plan, then charge for minutes over what the plan allows.

The service firm must decide how much to charge for the basic service and how much for the variable usage.

– Another example is when you visit a park , you pay a ticket charge + fee for food and additional feature

• By-product pricing refers to products with little or no value produced as a result of the main product. Producers will seek little or no profit other than the cost to cover storage and delivery.

• petroleum products often results in by-products.

Product bundle pricing combines several products at a reduced price

For example : fast food restaurants bundle a burger , fries and a soft drink at a combo price

Step 2: Determining Demand

1.Price Sensitivity

2. Estimating Demand Curves

3. Price Elasticity of Demand

- - 1822013

PP1000

40

Fig 14.2 Inelastic and Elastic Demand

- - 1822013

PP1000

41

Table 14.3 Factors Leading to Less Price Sensitivity

• The product is more distinctive• Buyers are less aware of substitutes• Buyers cannot easily compare the quality of

substitutes• Expenditure is a smaller part of buyer’s total income• Expenditure is small compared to the total cost• Part of the cost is paid by another party• Product is used with previously purchased assets• Product is assumed to have high quality and prestige• Buyers cannot store the product

- - 1822013

PP1000

42

Influence of Elasticity• Any pricing decision must be mindful of

the impact of price elasticity • The degree of price elasticity impacts

on the level of sales and hence revenue• Elasticity focuses on proportionate

(percentage) changes• PED = % Change in Quantity

demanded/% Change in Price

- - 1822013

PP1000

43

Price Elasticity of Demand

Influence of Elasticity• Price Inelastic:• % change in Q < % change in P• e.g. a 5% increase in price would be met

by a fall in sales of something less than 5% • Revenue would rise• A 7% reduction in price would lead to a rise

in sales of something less than 7%• Revenue would fall

- - 1822013

PP1000

45

Influence of Elasticity• Price Elastic:• % change in quantity demanded > %

change in price• e.g. A 4% rise in price would lead to

sales falling by something more than 4%• Revenue would fall• A 9% fall in price would lead to a rise in

sales of something more than 9%• Revenue would rise

- - 1822013

PP1000

46

Step 3: Estimating Costs• Types of costs

• Cost Terms and Production• Fixed costs• Variable costs• Total costs• Average cost• Cost at different levels of production

• Accumulated production• Activity-based cost accounting• Target costing

- - 1822013

PP1000

47

Figure 14.3 Cost Per Unit at Different Levels of Production

- - 1822013

PP1000

48

Figure 14.4 Estimating Cost per Unit as a Function of Accumulated Production

- - 1822013

PP1000

49

Target Costing

- - 1822013

PP1000

50

Step 4: Analysing Competitors’ Costs, Prices and Offers

Step 5: Selecting a Pricing Method• Markup pricing• Target-return pricing• Perceived-value pricing• Value pricing• Going-rate pricing• Auction-type pricing

Markup /Cost-Plus Pricing

- - 1822013

PP1000

53

Markup/ Cost-Plus Pricing• Calculation of the average cost (AC)

plus a mark up• AC = Total Cost/OutputEg: An Immersion Rod mfg. costs are: Variable C=$10,

FC=$300,000, Expected unit sales = 50,000.A Unit Cost = VC + FC/Unit sales =10+300k/50k = $16.

IF mfr. Wants to earn a 20% markup on sales,Markup price = Unit cost/ 1-desired return on sales = $16/1-0.2 = $20 per unitHence Mfr can sell to Dealers at $ 20 and earn $4 as profit

- - 1822013

PP1000

54

BEP / Target-return pricing

An expected percentage of profit on mfr’s investment(Return on Invst)

Target-return pricing = unit cost + desired return x invested capital Unit sales

Break-even volume = Fixed cost (price-variable cost)

Figure 14.6 Break-Even Chart

- - 1822013

PP1000

56

• BE= Fixed Costs/Contribution (SP-VC)• Example - Meal - SP = $20, VC = $8• Fixed costs are $2400 a day• BE=$2400/$12 = 200• Need to sell 200 meals @ $20 to break-

even• VC = 40%, contribution = 60%• BE = $2400/.6 = $4000

Break-even

Break-even Analysis or Target Profit Pricing

Perceived Value PricingTable 14.2 Consumer Perceptions vs. Reality for Cars

Overvalued Brands• Land Rover• Kia• Volkswagen• Volvo• Mercedes

Undervalued Brands

• Mercury• Infiniti• Buick• Lincoln• Chrysler

Some important pricing definitions

• Utility: The attribute that makes it capable of want satisfaction

• Value: The worth in terms of other products

• Price: The monetary medium of exchange.

Value Example: CaterpillarTractor is $100,000 vs.

Market $90,000$90,000 if equal 7,000 extra durable 6,000 reliability 5,000 service 2,000 warranty $110,000 in benefits -

$10,000 discount!

Value Pricing

- - 1822013

PP1000

61

Value Pricing

• Price set in accordance with customer perceptions about the value of the product/service

• Examples include status products/exclusive products

Companies may be able to set prices according to perceived value.

Copyright: iStock.com

- - 1822013

PP1000

62

Going Rate (Price Leadership)

- - 1822013

PP1000

63

Going Rate (Price Leadership)• In case of price leader, rivals have difficulty in

competing on price – too high and they lose market share, too low and the price leader would match price and force smaller rival out of market

• May follow pricing leads of rivals especially where those rivals have a clear dominance of market share

• Where competition is limited, ‘going rate’ pricing may be applicable – banks, petrol, supermarkets, electrical goods – find very similar prices in all outlets

- - 1822013

PP1000

64

Auction / Tender Pricing

- - 1822013

PP1000

65

Auction-Type Pricing

English auctions

Dutch auctions

Sealed-bid auctions

Step 6: Selecting the Final Price

• Impact of other marketing activities

• Company pricing policies

• Gain-and-risk sharing pricing

• Impact of price on other parties

Price-Adjustment/ Adaption Strategies

Price Adaptation StrategiesPrice Adaptation Strategies

Discount & AllowanceReducing Prices to Reward

Customer Responses such asPaying Early or Promoting

the Product.

Discount & AllowanceReducing Prices to Reward

Customer Responses such asPaying Early or Promoting

the Product.

SegmentedAdjusting Prices to Allow

for Differences in Customers,Products, or Locations.

SegmentedAdjusting Prices to Allow

for Differences in Customers,Products, or Locations.

Cash DiscountCash Discount

Quantity DiscountQuantity Discount

Functional DiscountFunctional Discount

Seasonal DiscountSeasonal Discount

CustomerCustomer

Product FormProduct Form

LocationLocation

TimeTime

Trade-In AllowanceTrade-In Allowance- - 1822013

PP1000

68

Price-Adjustment Strategies

• Adjusting Prices for Psychological Effect.•Price Used as a Quality Indicator.

• Temporarily Reducing Prices to Increase Short-Run Sales.• i.e. Loss Leaders, Special-Events

• Adjusting Prices to Account for the Geographic Location of Customers.• i.e. FOB-Origin, Uniform-Delivered, Zone Pricing, Basing-Point, & Freight-Absorption.

• Adjusting Prices for International Markets.• Price Depends on Costs, Consumers, Economic Conditions & Other Factors.

Psychological Pricing

Promotional Pricing

Geographical Pricing

International Pricing

- - 1822013

PP1000

69

Price-Adjustment Strategies

Geographical pricing is used for customers in different parts of the country or the world

• FOB pricing• Uniformed-delivery pricing• Zone pricing• Basing-point pricing• Freight-absorption pricing• Counter trade (Barter,Compensation deal, Buyback arrangement, Offset)

Price Adjustment Strategies

• FOB (free on board) pricing means that the goods are delivered to the carrier and the title and responsibility passes to the customer

• Uniformed-delivery pricing means the company charges the same price plus freight to all customers, regardless of location

Price Adjustment Strategies

• Zone pricing means that the company sets up two or more zones where customers within a given zone pay a single total price

• Basing-point pricing means that a seller selects a given city as a “basing point” and charges all customers the freight cost associated from that city to the customer location, regardless of the city from which the goods are actually shipped

Price-Adjustment Strategies

• Freight-absorption pricing means the seller absorbs all or part of the actual freight charge as an incentive to attract business in competitive markets

Price-Adjustment Strategies

Dynamic pricing is when prices are adjusted continually to meet the characteristics and needs of the individual customer and situations

Ex. Alaska airlines creates unique prices and advertisements for people as they surf the web

Price Adjustment Strategies

International pricing is when prices are set in a specific country based on country-specific factors

• Economic conditions• Competitive conditions• Laws and regulations• Infrastructure• Company marketing objective

• For example : Boeing sells its jetliners at about the same price everywhere, whether in the United states , Europe or the third world

• A pair of Levi’s selling for $30 in Canada might go for $ 63 in Tokyo and $ 88 in Paris

International pricing

- - 1822013

PP1000

76

Discount and allowance pricing reduces prices to reward customer responses such as paying early or promoting the product

• Discounts• Allowances

Price-Adjustment Strategies

Price Discounts and Allowances

Quantity discountQuantity discount:: The more you buy, the cheaper it becomes-- cumulative and non-cumulative.Trade discounts” functional”Trade discounts” functional”:: Reductions from list for functions performed-- storage, promotion.Cash discountCash discount:: A deduction granted to buyers for paying their bills within a specified period of time, (after first deducting trade and quantity discounts from the base price)

- - 1822013

PP1000

Price Adjustment StrategiesFunctional discount: discount offered by a manufacturer to trade-channel members if they will perform certain functions.Seasonal discount: a price reduction to those who buy out of season.Allowance: an extra payment designed to gain reseller participation in special programs. a)Trade in allowances: are price reductions given for turning in an old item when buying a new one ( Automobiles industry)b)Promotional allowances: are payments or price reductions to reward dealer for participating in advertising and sales support program

- - 1822013

PP1000

Promotional Pricing Tactics

• Loss-leader pricing• Special-event pricing• Cash rebates• Low-interest

financing• Longer payment

terms• Warranties and

service contracts• Psychological

discounting

Price-Adjustment StrategiesPromotional pricing is when prices are

temporarily priced below list price or cost to increase demand

• Loss leaders• Special event pricing• Cash rebates• Low-interest financing• Longer warrantees• Free maintenance

Price-Adjustment strategies

Promotional Pricing• Loss-leader pricing: supermarkets and

department stores often drop the price on well known brands to stimulate additional store traffic

• Special-event pricing: sellers well establish special pricing in certain seasons to draw in more customers

• Cash rebates: companies offer cash rebates to encourage purchase of the manufacturers products within a specified time period

• Low-interest financing: the company can offer customers low-interest financing

- - 1822013

PP1000

Price-Adjustment strategies

• Longer payment terms: sellers especially mortgage banks and auto companies stretch loans over longer periods and thus lower the monthly payment

• Warranties and service contracts: companies can promote sales by adding a free or low cost warranty or service contract

- - 1822013

PP1000

Price-Adjustment Strategies

Risks of promotional pricing• Used too frequently, and copies by

competitors can create “deal-prone” customers who will wait for promotions and avoid buying at regular price

• Creates price wars

Differentiated/segmented Pricing

• Customer-segment pricing• Product-form pricing• Image pricing• Channel pricing• Location pricing• Time pricing• Yield pricing

- - 1822013

PP1000

85

Price-Adjustment Strategies

Segmented pricing is used when a company sells a product at two or more prices even though the difference is not based on cost

a) Customer segment pricing: different customers pay different prices for the same product or service . For ex. Museums charge a lower admission for students .

b) Product from pricing: different versions of the product are priced differently but not according to differences in their costs

c) Location pricing: company charges different prices for different locations

d) Time pricing : a firm varies it prices by the season , the month , the day and even the hour

Segmented pricing

- - 1822013

PP1000

87

Price-Adjustment Strategies

To be effective:• Market must be segmentable• Segments must show different

degrees of demand• Watching the market cannot exceed

the extra revenue obtained from the price difference

• Must be legal

Segmented Pricing

Price-Adjustment Strategies• Psychological pricing occurs when sellers

consider the psychology of prices and not simply the economics” the price is used to say something about the product”

• Reference prices are prices that buyers carry in their minds and refer to when looking at a given product– Noting current prices– Remembering past prices– Assessing the buying situations– For example : a company could display its

product next to more expensive ones in order to imply that it belongs in the same class

Initiating and Responding to Price Changes

InitiatingPrice

Increases

CompetitorReactions

toPrice

Changes

Initiating Price Cuts

Buyer Reactions

to Price

Changes

Price Changes

- - 1822013

PP1000

90

Traps in Price Cutting Strategies

• Low-quality trap• Fragile-market-share trap • Shallow-pockets trap• Price-war trap

- - 1822013

PP1000

91

Should We Raise Prices?

- - 1822013

PP1000

92

Methods for Increasing Prices

• Delayed quotation pricing• Escalator clauses• Unbundling• Reduction of discounts

- - 1822013

PP1000

93

Price ChangesInitiating Pricing Changes

Price ChangesBuyer Reactions to Pricing Changes

Price Changes

Questions– Why did the competitor change the

price?– Is the price cut permanent or

temporary?– What is the effect on market share

and profits?– Will competitors respond?

Responding to Price Changes

Price Changes

Solutions– Reduce price to match competition– Maintain price but raise the perceived

value through communications– Improve quality and increase price– Launch a lower-price “fighting” brand

Responding to Price Changes

Brand Leader Responses to Competitive Price ChangesBrand Leader Responses to Competitive Price Changes

Hold Current Price;Continue to MonitorCompetitor’s Price.

Hold Current Price;Continue to MonitorCompetitor’s Price.

Reduce PriceReduce Price

Raise PerceivedQuality

Raise PerceivedQuality

Improve Quality& Increase PriceImprove Quality& Increase Price

Launch Low-Price“Fighting Brand”

Launch Low-Price“Fighting Brand”

Has Competitor CutPrice?

Has Competitor CutPrice?

Will Lower Price Negatively Affect Our

Market Share & Profits?

Will Lower Price Negatively Affect Our

Market Share & Profits?

Can/ Should EffectiveAction be Taken?

Can/ Should EffectiveAction be Taken?

Yes

No

No

No

- - 1822013

PP1000 98

Public Policy and Pricing

Price fixing: Sellers must set prices without talking to competitors

Predatory pricing: Selling below cost with the intention of punishing a competitor or gaining higher long-term profits by putting competitors out of business , this will protect small sellers from larger ones

Pricing Within Channel Levels

Public Policy and Pricing

Robinson-Patman Act prevents unfair price discrimination by ensuring that the seller offer the same price terms to customers at a given level of trade

Pricing Across Channel Levels

Public Policy and Pricing

Robinson-Patman Act• Price discrimination is allowed:

– If the seller can prove that costs differ when selling to different retailers

– If the seller manufactures different qualities of the same product for different retailers

Pricing Across Channel Levels

Public Policy and Pricing

Retail (or resale) price maintenance is when a manufacturer requires a dealer to charge a specific retail price for its products

Pricing Across Channel Levels

Public Policy and Pricing

Deceptive pricing occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers

• Scanner fraud failure of the seller to enter current or sale prices into the computer system

• Price confusion results when firms employ pricing methods that make it difficult for consumers to understand what price they are really paying

Pricing Across Channel Levels

Loss Leader

- - 1822013

PP1000

104

Loss Leader

• Goods/services deliberately sold below cost to encourage sales elsewhere

• Typical in supermarkets, e.g. at Christmas, selling bottles of gin at £3 in the hope that people will be attracted to the store and buy other things

• Purchases of other items more than covers ‘loss’ on item sold

• e.g. ‘Free’ mobile phone when taking on contract package

- - 1822013

PP1000

105

Psychological Pricing

- - 1822013

PP1000

106

Psychological Pricing

• Used to play on consumer perceptions

• Classic example - £9.99 instead of £10.99!

• Links with value pricing – high value goods priced according to what consumers THINK should be the price

- - 1822013

PP1000

107

Price Discrimination

- - 1822013

PP1000

108

Price Discrimination

• Charging a different price for the same good/service in different markets

• Requires each market to be impenetrable

• Requires different price elasticity of demand in each market

Prices for rail travel differ for the same journey at different times of the day

Copyright: iStock.com

- - 1822013

PP1000

109

Destroyer Pricing/Predatory Pricing

- - 1822013

PP1000

110

Destroyer/Predatory Pricing

• Deliberate price cutting or offer of ‘free gifts/products’ to force rivals (normally smaller and weaker) out of business or prevent new entrants

• Anti-competitive and illegal if it can be proved

- - 1822013

PP1000

111

Absorption/Full Cost Pricing

- - 1822013

PP1000

112

Absorption/Full Cost Pricing

• Full Cost Pricing – attempting to set price to cover both fixed and variable costs

• Absorption Cost Pricing – Price set to ‘absorb’ some of the fixed costs of production

- - 1822013

PP1000

113

Marginal Cost Pricing

- - 1822013

PP1000

114

Marginal Cost Pricing

• Marginal cost – the cost of producing ONE extra or ONE fewer item of production

• MC pricing – allows flexibility • Particularly relevant in transport where fixed

costs may be relatively high• Allows variable pricing structure – e.g. on a

flight from London to New York – providing the cost of the extra passenger is covered, the price could be varied a good deal to attract customers and fill the aircraft

- - 1822013

PP1000

115

Marginal Cost Pricing

• Example:

Aircraft flying from Bristol to Edinburgh – Total Cost (including normal profit) = £15,000 of which £13,000 is fixed cost*

Number of seats = 160, average price = £93.75

MC of each passenger = 2000/160 = £12.50

If flight not full, better to offer passengers chance of flying at £12.50 and fill the seat than not fill it at all! *All figures are estimates only

- - 1822013

PP1000

116

Contribution Pricing

- - 1822013

PP1000

117

Contribution Pricing

• Contribution = Selling Price – Variable (direct costs)

• Prices set to ensure coverage of variable costs and a ‘contribution’ to the fixed costs

• Similar in principle to marginal cost pricing

• Break-even analysis might be useful in such circumstances- - 1822013

PP1000

118

Target Pricing

- - 1822013

PP1000

119

Target Pricing• Setting price to ‘target’ a specified

profit level• Estimates of the cost and potential

revenue at different prices, and thus the break-even have to be made, to determine the mark-up

• Mark-up = Profit/Cost x 100

- - 1822013

PP1000

120

Chapter Questions• How do consumers process and evaluate

prices?• How should a company set prices initially

for products or services?• How should a company adapt prices to

meet varying circumstances and opportunities?

• When should a company initiate a price change?

• How should a company respond to a competitor’s price challenge?

- - 1822013

PP1000

121

One Final Word

“ A product is not a product unless it sells.Otherwise, it’s just a museum piece…”

Ted Levitt

For Review• How do consumers process and evaluate

prices?• How should a company set prices initially

for products or services?• How should a company adapt prices to

meet varying circumstances and opportunities?

• When should a company initiate a price change?

• How should a company respond to a competitor’s price challenge?

- - 1822013

PP1000

123

Marketing Debate

Is the right price a fair price?

Take a position:1. Prices should reflect the value that consumers are willing to pay.

or

2. Prices should primarily just reflect the costinvolved in making a product.

Marketing Discussion

Think of all the pricing methods described in the chapter.

As a consumer, which pricing method do you personally prefer to deal with?

Why?

Reference• Kotler, Kelly, Koshy and Jha (2009) Marketing Management:

A South Asian Perspective, 14th ed. Pearson Prentice Hall, pp.368-99