Marketing Management
Pricing
in the Economic and
Competitive Environment
Paul “J.B.” Dishman, Ph.D.
Department of Business Management
Marriott School of Management
Brigham Young University
Lecture 12
Marketing Management
Bad Carma
Paul Dishman, Ph.D.
Marketing Management
Designing 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.
Marketing Management
Pricing in the News!!
Chrysler Says Later Entry To Zero Financing
Hurt Sales
Dell Unveils SmartStep PC,
Its Cheapest Computer Ever
By GARY MCWILLIAMS
Staff Reporter of THE WALL STREET JOURNAL
By 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.
Source: www.wsj.com 10/2/01
These Licenses May Be a Colossal
Blunder
Microsoft 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.
Dell Computer Corp., which rocketed to the top of the personalcomputer 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
U.S., Bayer Reach Deal on Cipro Price;
Florida Postal Workers Get Antibiotics
A 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.
Source: www.wsj.com 10/24/01
Paul Dishman, Ph.D.
SOURCE: www.businessweek.com 10/25/01
Marketing Management
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.
Marketing Management
Factors Affecting Price Decisions
( Fig. 10.1)
External Factors
Internal Factors
Marketing Objectives
Marketing Mix Strategy
Costs
Organizational
considerations
Pricing
Decisions
Nature of the market
and demand
Competition
Other environmental
factors (economy,
resellers, government)
Paul Dishman, Ph.D.
Marketing Management
Internal Factors Affecting Pricing
Decisions: Marketing Objectives
Survival
Low Prices to Cover Variable Costs and
Some Fixed Costs to Stay in Business.
Marketing
Objectives
Current Profit Maximization
Choose the Price that Produces the
Maximum Current Profit, Etc.
Market Share Leadership
Low as Possible Prices to Become
the Market Share Leader.
Product Quality Leadership
High Prices to Cover Higher
Performance Quality and R & D.
Paul Dishman, Ph.D.
Marketing Management
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.
Marketing Management
Internal Factors Affecting Pricing
Decisions: Marketing Mix
Product Design
Nonprice
Positions
Price
Distribution
Promotion
Paul Dishman, Ph.D.
Marketing Management
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.
Marketing Management
Types of Cost Factors that
Affect Pricing Decisions
Fixed Costs
(Overhead)
Variable Costs
Costs that don’t
vary with sales or
production levels.
Costs that do vary
directly with the
level of production.
Executive Salaries, Rent
Raw materials
Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production
Paul Dishman, Ph.D.
Marketing Management
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.
Marketing Management
External Factors Affecting
Pricing Decisions
Market and
Demand
Competitors’ Costs,
Prices, and Offers
Other External Factors
Economic Conditions
Reseller Needs
Government Actions
Social Concerns
Paul Dishman, Ph.D.
Marketing Management
Market and Demand Factors
Affecting Pricing Decisions
Pricing in Different Types of Markets
Pure Competition
Many Buyers and Sellers
Who Have Little
Effect on the Price
Monopolistic
Competition
Many Buyers and Sellers
Who Trade Over a
Range of Prices
Pure Monopoly
Single Seller
Oligopolistic
Competition
Few Sellers Who Are
Sensitive to Each Other’s
Pricing/ Marketing
Strategies
Paul Dishman, Ph.D.
Marketing Management
Demand Curves and
Price 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.
Marketing Management
Price
Price Elasticity of Demand
A. Inelastic Demand Demand Hardly Changes With
a Small Change in Price.
P2
P1
Price
Q2 Q1
Quantity Demanded per Period
B. Elastic Demand Demand Changes Greatly With
a Small Change in Price.
P’
2
P’1
Q2
Q1
Quantity Demanded per Period
Paul Dishman, Ph.D.
Marketing Management
Major Considerations in Setting
Price (Fig. 10.5)
Paul Dishman, Ph.D.
Marketing Management
Cost-Based Pricing
Certainty About
Costs
Price Competition
Is Minimized
Much Fairer to
Buyers & Sellers
Unexpected
Situational
Factors
Pricing is
Simplified
Cost-Plus
Ethical
Pricing is an
Approach That
Adds a
Standard
Markup
to the
Attitudes
Costofof the
Others
Product.
Simplest
Pricing
Method
Ignores
Current
Demand &
Competition
Paul Dishman, Ph.D.
Marketing Management
Breakeven Analysis or
Target Profit Pricing
Cost in Dollars (millions)
Tries to Determine the Price at Which a Firm
Will Break Even or Make a Certain Target Profit.
Total Revenue
12
10
Target Profit
($2 million)
8
6
Total Cost
4
Fixed Cost
2
200
400
600
800
1,000
Sales Volume in Units (thousands)
Paul Dishman, Ph.D.
Marketing Management
Competition-Based Pricing
Setting Prices
Going-Rate
Company Sets Prices Based on What
Competitors Are Charging.
?
?
Sealed-Bid
Company Sets Prices Based on
What They Think Competitors
Will Charge.
Paul Dishman, Ph.D.
Marketing Management
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.
Marketing Management
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.
Paul Dishman, Ph.D.
Marketing Management
Pricing
within the firm
Paul Dishman, Ph.D.
Department of Business Management
Marriott School of Management
Brigham Young University
Lecture 13
Marketing Management
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.
• 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.
Marketing Management
New Product Pricing Strategies
• Use Under These
Conditions:
– Market Must be Highly PriceSensitive 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.
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.
Paul Dishman, Ph.D.
Marketing Management
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.
Marketing Management
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.
Marketing Management
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.
Marketing Management
Discount and Allowance Pricing
Adjusting Basic Price to Reward Customers
For Certain Responses
Cash Discount
Seasonal Discount
Quantity Discount
Trade-In Allowance
Functional Discount
Promotional Allowance
Paul Dishman, Ph.D.
Buyer reaction to pricing .
When Gibson lowered its prices, sales fell. Why?
Marketing Management
Psychological Pricing
What is it about a
guitar that would
cau se this to happen?
What other products
share these qualities?
•Computers?
•Cars?
•What else?
Click or press spacebar to return.
• 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.
Paul Dishman, Ph.D.
This Sprint ad offers f ree long distance on Fridays.
Marketing Management
Promotional Pricing
WhycanSprint affordt ooffer this promotion on Fridays rat her
than onanother day (like Monday)?
Loss Leaders
Temporarily Pricing
Products Below List
Price to Increase
Short-Term Sales
Through:
Special-Event Pricing
Cash Rebates
Low-Interest Financing
Longer Warranties
Free Merchandise
Discounts
Paul Dishman, Ph.D.
Marketing Management
Other Price Adjustment
Strategies
Adjusting Prices to Account
for the Geographical Location
of Customers.
• i.e. FOB-Origin, UniformDelivery, Zone Pricing, Basing
Point, & Freight-Absorption.
•
Geographical Pricing
International Pricing
• Adjusting Prices for
International Markets.
• Price Depends on Costs,
Consumers, Economic
Conditions, Competitive
Situations & Other Factors.
Paul Dishman, Ph.D.
Marketing Management
Initiating Price Changes
Why?
Why?
Excess Capacity
Cost Inflation
Falling Market Share
Overdemand:
Company Can’t
Supply All Customer’s
Needs
Dominate Market
Through Lower Costs
Paul Dishman, Ph.D.
Marketing Management
Reactions to Price Changes
Price Cuts Are Seen by Buyers As: Competitor Reactions When:
Being Replaced by
Newer Models
Number of Firms is
Small
Current Models Are Not
Selling Well
Product is Uniform
Company is in Financial
Trouble
Buyers are Well
Informed
Quality Has Been
Reduced
Price Comes Down
Further
Paul Dishman, Ph.D.
Marketing Management
Public Policy Issues in Pricing (Fig. 11.2)
Manufacturer A
Price-fixing
Predatory pricing
Manufacturer B
Retailer 1
Retail price
maintenance.
Discriminatory
Pricing
Price-fixing
Predatory Pricing
Deceptive
Pricing
Consumers
Retailer 2
Deceptive
Pricing
Paul Dishman, Ph.D.
Marketing Management
Pricing Across Channel Levels
Price
Discrimination
Resale Price
Maintenance
Deceptive
Pricing
Ensure Sellers
Offers the
Same Price
Terms to a
Given Level
Of Trade
Manufacturer
Can’t Require
Dealers to
Charge a
Specified Retail
Price for Its
Product
Occurs When a
Seller States
Prices or Prices
Savings that
Available
To Consumers
Paul Dishman, Ph.D.
Marketing Management
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.
Marketing Management
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.
Marketing Management
Remember
• All pricing is
…psychological
…based on internal cost structures vs.
market characteristics
…All pricing has legal implications
Paul Dishman, Ph.D.