marketing management pricing in the economic and competitive environment

Marketing Management

Pricingin the Economic and Competitive Environment

Paul “J.B.” Dishman, Ph.D.Department of Business Management

Marriott School of Management

Brigham Young University

Lecture 12

Paul Dishman, Ph.D.


Bad Carma

Paul Dishman, Ph.D.


Designing Pricing StrategiesDesigning Pricing Strategies

There ain’t no brand loyalty that two-cents-off can’t overcome.--Anonymous

The real issue is value, not price.--Robert T. Lindgren

Paul Dishman, Ph.D.


Pricing in the News!!Dell Unveils SmartStep PC,Its Cheapest Computer EverBy GARY MCWILLIAMS Staff Reporter of THE WALL STREET JOURNAL

Dell Computer Corp., which rocketed to the top of the personal-computer market on the strength of its custom-made PCs, unveiled Monday a prebuilt PC designed to compete with off-the-shelf models sold in retail stores.The world's largest PC maker said its SmartStep PC, which comes as a one-size-fits-all system complete with monitor, aims to woo U.S. customers that typically shop for PCs in chain stores. Starting at $599, the PC is the lowest-price home PC the Austin, Texas, company has ever sold.

Source: www.wsj.com 10/29/01

Chrysler Says Later Entry To Zero Financing Hurt SalesBy JOCELYN PARKER

Of DOW JONES NEWSWIRES DETROIT -- The Chrysler Group of DaimlerChrysler AG (DCX) said Tuesday sales fell 28% even though it offered deep discounts on many of its vehicles.Gary Dilts, Chrysler's senior vice president of sales, said sales fell, in part, because it offered its 0% financing program a few days after General Motors Corp. (GM) and Ford Motor Co. (F) began the same offer. September was also a tough comparison with last year because there was a big incentive push on many vehicles last September, Dilts said.


These Licenses May Be a Colossal BlunderMicrosoft faces a serious backlash from customers, especially small and midsize businesses, angry with its XP pricing policies

Stodgy old England would hardly seem the place for a revolt against the status quo. But that's precisely what has erupted over the past few months as Britain's corporate powerhouses have squared off against the Colossus of Redmond.

At issue are the new software-licensing policies Microsoft has introduced for Windows XP, its new operating system that officially comes to market on Oct. 25. A British trade group called the Infrastructure Forum (known as .tif) claims that the changes constitute price gouging that could increase software costs for its 98 member companies by $1.25 billion over the next four years.

SOURCE: www.businessweek.com 10/25/01

U.S., Bayer Reach Deal on Cipro Price;Florida Postal Workers Get AntibioticsA WALL STREET JOURNAL ONLINE News Roundup

Federal officials reached agreement Wednesday on a lower price for the antibiotic Cipro, the most popular anti-anthrax drug.Bayer AG, which makes the drug, agreed to sell the government 100 million pills at 95 cents each, representing a savings of $95 million from its original price, the Department of Health and Human Services said. If more pills are needed the price will be reduced further.


http://www.wsj.com/

http://www.wsj.com/

http://www.businessweek.com/

http://interactive.wsj.com/inap-bin/bb?sym=g.bay&page=0

http://www.wsj.com/

Paul Dishman, Ph.D.


Price

• Price is the sum of all the values that consumers exchange for the benefits of having or using the product or service.

• Price has been the major factor affecting buyer choice; nonprice factors have become increasingly important in buyer-choice behavior.

• Price is the only element in the marketing mix that produces revenues; all others represent costs.

Paul Dishman, Ph.D.


Factors Affecting Price Decisions( Fig. 10.1)

PricingDecisions

PricingDecisions

Internal Factors

Marketing ObjectivesMarketing Mix StrategyCostsOrganizational considerations

Internal Factors

Marketing ObjectivesMarketing Mix StrategyCostsOrganizational considerations

External Factors

Nature of the market and demandCompetitionOther environmental factors (economy, resellers, government)

External Factors

Nature of the market and demandCompetitionOther environmental factors (economy, resellers, government)

Paul Dishman, Ph.D.


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

Paul Dishman, Ph.D.


Factors Affecting Pricing:Marketing Objectives

• Other specific objectives include:– Set prices low to prevent competition from entering

the market,– Prices might be reduced temporarily to create

excitement or draw more customers.

• Nonprofit and public organization may have other pricing objectives such as:– University aims for partial cost recovery,– Hospital may aim for full cost recovery,– Theater may price to fill maximum number of seats.

Paul Dishman, Ph.D.


Price

Product Design

Distribution

Promotion

NonpricePositions

Internal Factors Affecting Pricing Decisions: Marketing Mix

Paul Dishman, Ph.D.


Scenario #1

• Assume the role of President Bateman (or the VP of Finance or some similar role at BYU). Enrollment at BYU has been capped and there is no longer overcapacity. There is pressure to raise tuition to maintain revenue growth now that enrollment is capped.

What internal and external pricing factors do you need to consider before making your decision?

Paul Dishman, Ph.D.


Types of Cost Factors that Affect Pricing Decisions

Total CostsSum of the Fixed and Variable Costs for a Given

Level of Production

Total CostsSum of the Fixed and Variable Costs for a Given

Level of Production

Variable Costs

Costs that do varydirectly with the

level of production.

Raw materials

Fixed Costs(Overhead)

Costs that don’tvary with sales or production levels.

Executive Salaries, Rent

Paul Dishman, Ph.D.


Types of Cost Factors that Affect Pricing Decisions

• As a firm gains experience in production, it learns how to do it better.

• The experience curve (or the learning curve) indicates that average cost drops with accumulated production experience.

• Strategy: company should price products low; sales increases; costs continue to decrease; and then lower prices further.

• Risks are present with this strategy.

Paul Dishman, Ph.D.


Market andDemand

Competitors’ Costs, Prices, and Offers

Other External FactorsEconomic Conditions

Reseller NeedsGovernment Actions

Social Concerns

External Factors Affecting Pricing Decisions

Paul Dishman, Ph.D.


Pure CompetitionPure CompetitionMany Buyers and Sellers

Who Have Little Effect on the Price

Pure CompetitionPure CompetitionMany Buyers and Sellers

Who Have Little Effect on the Price

Monopolistic Monopolistic CompetitionCompetition

Many Buyers and Sellers Who Trade Over a

Range of Prices

Monopolistic Monopolistic CompetitionCompetition

Many Buyers and Sellers Who Trade Over a

Range of Prices

Pricing in Different Types of Markets

Market and Demand Factors Affecting Pricing Decisions

Oligopolistic Oligopolistic CompetitionCompetition

Few Sellers Who AreSensitive to Each Other’s

Pricing/ Marketing Strategies

Oligopolistic Oligopolistic CompetitionCompetition

Few Sellers Who AreSensitive to Each Other’s

Pricing/ Marketing Strategies

Pure MonopolyPure MonopolySingle Seller

Pure MonopolyPure MonopolySingle Seller

Paul Dishman, Ph.D.


Demand Curves andPrice Elasticity of Demand

A Demand Curve is a Curve that Shows the Number of Units the Market Will Buy in a Given Time Period at Different Prices that

Might be Charged.

Price Elasticity Refers to How Responsive Demand Will be to a Change in Price.

Price Elasticity of Demand = % Change in Quantity Demanded

% Change in Price

Paul Dishman, Ph.D.


Price Elasticity of DemandPri

ce

Quantity Demanded per Period

A. Inelastic Demand - Demand Hardly Changes Witha Small Change in Price.

P2

P1

Q1Q2

Pri

ce

Quantity Demanded per Period

P’2P’1

Q1Q2

B. Elastic Demand -Demand Changes Greatly Witha Small Change in Price.

Paul Dishman, Ph.D.


Major Considerations in Setting Price (Fig. 10.5)

Paul Dishman, Ph.D.


Cost-Based Pricing

Certainty About Costs

Pricing is Simplified

Price Competition Is Minimized

UnexpectedSituational

Factors

Attitudes of

Others

Ethical

Ignores Current

Demand & Competitio

n

Cost-Plus Pricing is an

Approach That Adds a

Standard Markup to the

Cost of the Product.

Simplest Pricing Method

Much Fairer to Buyers & Sellers

Paul Dishman, Ph.D.


Breakeven Analysis orTarget Profit Pricing

2

4

6

8

10

12

200 400 600 800 1,000

Total Revenue

Total Cost

Fixed Cost

Target Profit($2 million)

Sales Volume in Units (thousands)Cost

in

Dolla

rs (

mill

ion

s)

Tries to Determine the Price at Which a Firm Will Break Even or Make a Certain Target

Profit.

Paul Dishman, Ph.D.


Setting Prices

Sealed-BidCompany Sets Prices Based on What They Think Competitors

Will Charge.

Going-Rate Company Sets Prices Based on What

Competitors Are Charging.

??

Competition-Based Pricing

Paul Dishman, Ph.D.


Scenario #2

• Medtronic AVE, a high-technology medical device company, has developed a new coronary stent. This stent can save lives and prevent patients from needing open-heart surgery. It has been proven that coronary stents save lives, minimize hospital stays and reduces damage to the heart. The new stent was initially priced at ~$2000 per device. What pricing approach does Medtronic AVE appear to be using? Is this approach justified? Is demand for this stent likely to be price elastic?

Paul Dishman, Ph.D.


Scenario #3

• The federal government has accused Microsoft of monopolistic practices in tying (or bundling) sales of its popular Windows ’95, ’98, and 2000 operating systems software to its Web browser product. In a controversial ruling, a federal judge has agreed that Microsoft is acting like a monopolist. What pricing strategy does Microsoft seem to be using? Take a side in the monopoly debate and state how you would resolve this ongoing problem.


Pricingwithin the firm

Paul Dishman, Ph.D.Department of Business Management

Marriott School of Management

Brigham Young University

Lecture 13

Paul Dishman, Ph.D.


New Product Pricing Strategies

Market Skimming

Setting a High Price for a New Product to “Skim” Maximum Revenues from the Target Market.

Results in Fewer, But More Profitable Sales.

Market Skimming

Setting a High Price for a New Product to “Skim” Maximum Revenues from the Target Market.

Results in Fewer, But More Profitable Sales.

• Use Under These Conditions:– Product’s Quality and

Image Must Support Its Higher Price.

– Costs Can’t be so High that They Cancel the Advantage of Charging More.

– Competitors Shouldn’t be Able to Enter Market Easily and Undercut the High Price.

Paul Dishman, Ph.D.


New Product Pricing Strategies

Market Penetration

Setting a Low Price for a New Product in Order to “Penetrate” the Market Quickly and Deeply.

Attract a Large Number of Buyers and Win a Larger Market Share.

Market Penetration

Setting a Low Price for a New Product in Order to “Penetrate” the Market Quickly and Deeply.

Attract a Large Number of Buyers and Win a Larger Market Share.

• Use Under These Conditions:– Market Must be Highly Price-

Sensitive so a Low Price Produces More Market Growth.

– Production/ Distribution Costs Must Fall as Sales Volume Increases.

– Must Keep Out Competition & Maintain Its Low Price Position or Benefits May Only be Temporary.

Paul Dishman, Ph.D.


Product Mix-Pricing Strategies:Product Line Pricing

• Involves setting price steps between various products in a product line based on:– Cost differences between

products,– Customer evaluations of

different features, and

– competitors’ prices.

Paul Dishman, Ph.D.


Product Mix- Pricing Strategies

• Optional-Product– Pricing optional or

accessory products sold with the main product. i.e camera bag.

• Captive-Product– Pricing products that

must be used with the main product. i.e. film.

Paul Dishman, Ph.D.


Product Mix- Pricing Strategies

• By-Product– Pricing low-value

by-products to get rid of them and make the main product’s price more competitive.

– i.e. sawdust, Zoo Doo

• Product-Bundling– Combining

several products and offering the bundle at a reduced price.

– i.e. theater season tickets.

Paul Dishman, Ph.D.


Discount and Allowance Pricing

Cash Discount Seasonal Discount

Quantity Discount Trade-In Allowance

Functional Discount Promotional Allowance

Adjusting Basic Price to Reward Customers

For Certain Responses

Paul Dishman, Ph.D.


Psychological Pricing

• Considers the psychology of prices and not simply the economics.

• Customers use price less when they can judge quality of a product.

• Price becomes an important quality signal when customers can’t judge quality; price is used to say something about a product.

Value $22.00Sale $14.99

Buyer reaction to pricing.

When Gibson lowered its prices, sales fell. Why?

What is it about a guitar that would cause this to happen?

What other products share these qualities?

•Computers?•Cars?•What else?

Click or press spacebar to return.

Paul Dishman, Ph.D.


Special-Event PricingSpecial-Event Pricing

Cash RebatesCash Rebates

Low-Interest FinancingLow-Interest Financing

Longer WarrantiesLonger Warranties

Free MerchandiseFree Merchandise

DiscountsDiscounts

Loss LeadersLoss Leaders Temporarily Pricing Products Below List Price

to Increase Short-Term Sales

Through:

Promotional Pricing

This Sprint ad offers f ree long distance on Fridays.

Why can Sprint afford t o offer this promotion on Fridays rat her than on another day (like Monday)?

Paul Dishman, Ph.D.


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

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

International Pricing

Geographical Pricing

Other Price Adjustment Strategies

Paul Dishman, Ph.D.


Initiating Price Changes

Why?

Excess Capacity

Falling Market Share

Dominate Market Through Lower

Costs

Why?

Cost Inflation

Overdemand: Company Can’t

Supply All Customer’s Needs

Paul Dishman, Ph.D.


Being Replaced by Newer Models

Being Replaced by Newer Models

Current Models Are Not Selling Well

Current Models Are Not Selling Well

Company is in Financial TroubleCompany is in

Financial Trouble

Quality Has Been Reduced

Quality Has Been Reduced

Price Comes Down Further

Price Comes Down Further

Price Cuts Are Seen by Buyers As:

Reactions to Price Changes

Number of Firms is Small

Number of Firms is Small

Product is UniformProduct is Uniform

Buyers are Well Informed

Buyers are Well Informed

Competitor Reactions When:

Paul Dishman, Ph.D.


Public Policy Issues in Pricing (Fig. 11.2)

Retail pricemaintenance.DiscriminatoryPricing

Retailer 1

Price-fixingPredatory Pricing

Retailer 2

Retailer 1

Price-fixingPredatory Pricing

Retailer 2

DeceptivePricing

Manufacturer A

Price-fixingPredatory pricing

Manufacturer B

Manufacturer A

Price-fixingPredatory pricing

Manufacturer B

ConsumersConsumers

DeceptivePricing

Paul Dishman, Ph.D.


DeceptivePricing

Occurs When a Seller States

Prices or PricesSavings that

Available To Consumers

DeceptivePricing

Occurs When a Seller States

Prices or PricesSavings that

Available To Consumers

Pricing Across Channel Levels

PriceDiscrimination

Ensure Sellers Offers the Same PriceTerms to a Given Level

Of Trade

PriceDiscrimination

Ensure Sellers Offers the Same PriceTerms to a Given Level

Of Trade

Resale PriceMaintenance

Manufacturer Can’t Require

Dealers to Charge a

Specified RetailPrice for Its

Product

Resale PriceMaintenance

Manufacturer Can’t Require

Dealers to Charge a

Specified RetailPrice for Its

Product

Paul Dishman, Ph.D.


Scenario #4

• Some analysts see predatory pricing by a strong, competitive marketer as extremely damaging to competition and a well-functioning economy. Others view it simply as good, healthy competition. Take a stand on this issue and discuss your view. Consider questions of ethics, long-term survival, the competitive environment, consumer benefits and welfare, and stock-holder profit.

Paul Dishman, Ph.D.


Scenario #5

• Formulate rules that might govern (a) initiating a price cut, (b) initiating a price increase, c) a negative reaction on the part of buyers to a price change by your company, (d) a competitor’s response to your price change, and (e) your response to a competitor’s price change. State the assumptions underlying your proposed rule.

Paul Dishman, Ph.D.


Remember

• All pricing is…psychological…based on internal cost structures vs.

market characteristics…All pricing has legal implications

marketing management pricing in the economic and competitive environment

Documents

importantif price

price changesbeing

price increase

price elasticity

competitors price change

marketing managementscenario

marketing managementpricing

marketing managementreactions