pricing products: pricing considerations and approaches pricing strategies chapter 10 - 11

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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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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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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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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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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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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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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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




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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


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


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Competitive Prices on Music Downloads

Marketing in Action

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Learning Goals




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

http://www.ipod.com/

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Learning Goals





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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

How does AOL bundle?

Marketing in Action

Click on screenshot for website

http://www.aol.com/

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Learning Goals





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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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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


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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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


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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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


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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Types of geographic pricing strategies: FOB-origin pricing Uniform-delivered pricing Zone pricing Basing-point pricing Freight-absorption pricing


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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


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Learning Goals





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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





pricing products: pricing considerations and approaches pricing strategies chapter 10 - 11

Documents

price internal factors

lowest price slide

price nonprice positioning

price comparisons

definition price

price setting experience

pricing considerations

pricing objectives