PRICING
Often the only marketing mix variable allowing for immediate
competitive response
Important part of product positioning
Long term effects of pricing decisions—your decisions may come
back to haunt you!
BUAD 307
PRICING
Lars Perner, Instructor
1
Learning Objectives
• Understanding
– Price choices faced by
managers, the constraints
faced on these choices (e.g.,
legal), and the consequences
of these choices
– “Signaling” effects of product
prices
– The respective interests of
manufacturers and retailers in
product pricing
• Appreciating the advantages
and disadvantages of different
pricing strategies
BUAD 307
PRICING
Lars Perner, Instructor
2
One View of Price
• Price =
• Ways to change the
price:
resources given up
_____________________________________
goods received
• E.g., 12 bullets for $6.00
= $0.50 per bullet
– Sticker price
– Quantity—same
sticker price but lesser
quantity
– Quality—use of lower
cost materials—e.g.,
“gooeye” stuff rather
than chocolate in
candy
– Terms
• E.g., support,
accessories,
payment terms,
delivery
BUAD 307
PRICING
Lars Perner, Instructor
3
Views of Consumers and Price
Response
• Economics
• Marketing
– Assumed to have
perfect information
about
– Consumer knowledge
of product quality and
prices is imperfect
– Due to imperfect
information, a higher
price may sometimes
be used by
consumers to infer
greater quality
• Quality of all
brands
• Prices of each
brand at all
locations
– Elasticity: A
“down-sloping”
demand curve
means that a
higher quantity will
be demanded
when the price is
reduced
BUAD 307
(Research suggests that
actual product quality as
rated by Consumer Reports
accounts for about 25% of
product price differences
among brands)
PRICING
Lars Perner, Instructor
4
Supply, Demand, and Quantities
Supplied and Demanded
BUAD 307
PRICING
Lars Perner, Instructor
5
Supply, Demand, and Quantities
Supplied and Demanded
•
Supply: The “schedule,” or “curve,”
of quantities supplied by the sellers
at various prices offered by buyers
–
•
•
Tends to increase with price—a
greater quantity will be supplied at
a higher level of incentive to
produce
–
Demand: The “schedule,” or
“curve,” of quantities demanded by
the buyers at various prices offered
by sellers
–
–
Tends to decrease with price—the
marginal value of additional
quantity tends to decline with a
greater price
Occasionally, higher prices may
lead to higher quantity demanded
due to a possible “signal” of quality
BUAD 307
PRICING
Equilibrium: The intersection of the
supply and demand curves—
neither side is interested in buying
or selling more or less given the
resultant market prices
This equilibrium may be temporary
and may change once the market
changes—e.g.,
•
•
•
•
•
Changes in the availability  change
in supply
Changes in cost of production 
change in supply
Availability of new substitutes 
change in demand
Quantity supplied: The quantity
that will be supplied (sold) by
sellers at a given price point
Quantity demanded: The quantity
that will be demanded (bought) by
buyers at a given price point
Lars Perner, Instructor
6
Illustration: Food Prices
OTHER
FARMERS
IMPORTS
SUBSTITUTES
DEMAND
SUPPLY
FARMER
WHOLESALER
DEMAND
MANUFACTURER
SUPPLY
DEMAND
RETAILER
SUPPLY
DEMAND
BUAD 307
PRICING
CONSUMER
Lars Perner, Instructor
7
Price Discrimination
• Explicit
– Only some customers
are eligible for special
pricing—e.g.,
• Student discounts on
software
• Senior citizen discounts
• Geographic: Only
customers in the 900**935** zip code areas
are eligible for discount
Disneyland Admission
BUAD 307
• Implicit
– No outright rule, but
discounted deal is
unattractive to some
customers
PRICING
• Airlines: Saturday night
stay-over or advance
purchase requirement
• Daily special meal—one
cheaper meal but no choice
• Periodic discounting
(products going on and off
sale)
Lars Perner, Instructor
8
Some Approaches to Pricing
• Cost-plus: Add fixed percentage
markup
• Skimming: high intro price --->
take advantage of price
insensitive consumers
• Penetration pricing: low intro
price ---> volume
• Buyer-based
• Perceived value
• Going-rate (competition)
---> Balancing cost and
market considerations
BUAD 307
PRICING
Lars Perner, Instructor
9
Skimming Pricing
350
300
P1
250
P2
200
150
P3
100
50
Q1
0
0
200
Q3
Q2
400
600
800
1000
1200
The product is introduced at a high price, P1. Very few
customers—only the least price sensitive ones—buy at this
price. When the price is later lowered to P2 and then to P3,
other customers who value the product less will start to buy.
The least price sensitive customers pay a premium for quick
access to the new product.
BUAD 307
PRICING
Lars Perner, Instructor
10
Penetration Pricing
350
300
250
200
P1
150
100
50
0
0
200
400
600
Q1
800
1000
1200
The product is immediately introduced at a relatively low price.
The seller sacrifices the higher margins that would have resulted
from selling to some customers at a higher price, but, in return
gains immediate sales. Fewer competitors are attracted into the
market since the apparent profits are not as high. Because of
economies of scale and experience curves—the tendency of
production costs to decline with the cumulative production—
costs are reduced.
BUAD 307
PRICING
Lars Perner, Instructor
11
“Sticky” Prices
• Manufacturers tend to wait to
pass on both anticipated cost
savings and cost increases
onto consumers until these
occur
• When costs of manufacturing
decline, manufacturers are
usually better off if no one
passes on reduced costs to
the customer (especially
when prices may increase
again)
BUAD 307
PRICING
Lars Perner, Instructor
12
Legal Issues
• Banned by Federal law:
– Discrimination in prices
paid by firms which
compete against each
other unless supported
by evidence of cost
savings
• OK to charge restaurants
more than grocery stores
• Can only charge Wal-Mart
less than Joe’s
Supermarket if volume
savings can be proven—
and the price difference
must be no greater than
the actual provable cost
savings.
BUAD 307
PRICING
• Banned by some state
laws:
– Gender discrimination (e.g.,
charging more for dry
cleaning women’s clothes
than men’s clothes)
– Discrimination between
consumers in general
• Senior citizen discounts
are explicitly permitted
in California
Lars Perner, Instructor
13
More Legal Issues
• Federal and State bans
on:
– Collusion (coordinating or even
discussing prices with
competitors)
– Predation (offering temporary
prices below cost of production to
drive competitors out of business
and then raising prices)
• In general, fully absorbed
average cost must be used—
cannot use marginal cost
– Using monopoly power in one
market to “subsidize” new market
BUAD 307
PRICING
Lars Perner, Instructor
14
Price Maintenance
• In 2007, the U.S. Supreme Court reversed
the longstanding ban on explicit agreements
between manufacturers that the branded
product would not be sold below an agreed
upon “floor” price
–
–
Although setting minimum retail prices for a brand
reduces intra-brand competition (competition between
different retailers selling the brand), some believe that
minimum prices may encourage investment in service and
brand building to the extent that competition between
brands increases (inter-brand competition)
Manufacturers generally cannot enforce minimum price
agreements on existing inventory, but they can “cut off”
offending retailers
• “Gray market” goods: Retailers in the U.S.
generally have an absolute right to sell
products that they have bought legally at a
price lower than the suggested retail price.
–
Diversion: Legitimate retailers buy up extra quantity to be
resold to unauthorized dealers and/or geographic
shipment. (More details will be given under distribution).
BUAD 307
PRICING
Lars Perner, Instructor
15
Other Manufacturers’ “Suggested”
Retail Prices (MSRPs)
• U.S. manufacturers often put
an exorbitantly high
“suggested” price on a
product so that even full
service retailers can look
good by selling below the
MSRP
• In some EU countries, selling
below the MSRP may not be
legal—manufacturers must
therefore be careful not to
“recommend” excessive
prices
BUAD 307
PRICING
Lars Perner, Instructor
16
REMINDER
INCOME
≠
WILLINGNESS
TO SPEND!
BUAD 307
PRICING
Lars Perner, Instructor
17
Price Adjustments For and
Discrimination Among Consumers
• Cars: List price –
manufacturer discounts
and rebates – dealer
discount
• Tuition: List price –
scholarships – financial
aid
Text, p. 263. Copyright © 2005 McGraw-Hill.
BUAD 307
PRICING
Lars Perner, Instructor
18
Introductory Effects
• In an experiment,
laundry detergent
was introduced at
$0.49 in one
condition and
$0.79 in another.
• After 8 weeks,
price was raised
to $0.79 for low
price intro
condition.
• There were
higher
cumulative sales
in high price
intro.
BUAD 307
1200
1000
800
Units
sold
Low price
intro
High price
intro
600
400
200
0
8
16
Weeks
PRICING
Lars Perner, Instructor
19
Consumer Price Awareness
• A survey revealed of
consumers who had just
selected a product suggested:
• Avg. time spent before
departing from product
area: 12 seconds
• Avg. no. of products
inspected: 1.2; only 21.6%
claimed to check price of
non-chosen brand
• 55.6% could state price of
just chosen product within
5%
BUAD 307
PRICING
Lars Perner, Instructor
20
Consumer Reference Prices
• Consumers typically have some
expectation of what they will pay.
This is based on:
• previous experience
• common sense
• perceived fairness
• Two kinds of reference prices:
• Internal: Based on
consumer’s memory.
• External: Based on
environment (e.g., signs, other
products in the store)
BUAD 307
PRICING
Lars Perner, Instructor
21
Internal Reference Prices
• Consumers tend to develop some
memory of prices of frequently
purchased items ---> to make store
prices look low, you may want to price
especially salient products lower
• More knowledgeable consumers
typically have tighter price range
expectations
• Reference prices are constantly
updated to some extent, but are hard
to change upwards--certain
unreasonable “stimuli” (prices) may be
rejected as unreal
• Consumer reference prices tend to be
lower than actual prices ---> “sticker
shock”
BUAD 307
PRICING
Lars Perner, Instructor
22
Sample Exam Question
BUAD 307
PRICING
Lars Perner, Instructor
23
External Reference Prices
• Reference prices provided by
seller or environment
• E.g.,
• “MSRP $3.99; our price
$2.49”
• “Sold elsewhere for $20.00;
our price $14.99”
• “Was $100.00; now $69.95”
BUAD 307
PRICING
Lars Perner, Instructor
24
The Promotion Signal
• A segment of consumers will respond to
negligible discounts--e.g., “SALE! $3.95
(Was $4.02).
• However, merely placing a sign
“EVERYDAY LOW PRICE” randomly also
increased sales of affected products.
BUAD 307
PRICING
Lars Perner, Instructor
25
Odd/Even Pricing--Does It Have
an Impact?
• Theory: $3.00 is rounded to $3.00
while $2.99 is rounded to “$2.00
plus change”
• Reality: Studies in U.S. have found
a small impact; no impact found in
Germany
• Note that odd pricing may signal
receiving a bargain, which may nor
may not be compatible with the
desired product image
• Odd pricing has typically been used
by tradition (initially implemented to
force cashiers to ring up
purchases).
BUAD 307
PRICING
Lars Perner, Instructor
26
Pricing Interests of Retailers and
Manufacturers
• Retailers generally seek to maximize
category profits--for most product
categories, price cuts lead to
switching between brands--not
higher category sales. Thus,
retailers are reluctant to pass
through any price cuts to consumers.
– Attempting to maximize the total
retailer profits on the product
category, rather than each bran, is
known as category management
• In the opposite direction, manufacturers
may also resent their products being
used as loss leaders (this is believed
to hurt brand image).
BUAD 307
PRICING
Lars Perner, Instructor
27
Contrasts…
BUAD 307
PRICING
Lars Perner, Instructor
28