O. C. Ferrell Michael D. Hartline
C H A P T E R

• Is a key factor in producing revenue for the firm
•
Is the easiest of all marketing variables to change
• Is an important consideration in competitive intelligence
•
Is considered to be the only means of differentiation in highly commoditized markets
•
Is among the most complex decisions in the marketing plan
8-2

• One of the key themes of today’s economy is the challenge of marketing goods and services in mature markets that are plagued by commoditization. In what ways is pricing strategy related to commoditization?
How can a firm offer good value in a mature market where price is the only visible means of differentiation?
Are most firms too concerned about their costs to really deliver value in other ways? Explain.
8-3

The Role of Pricing in
Marketing Strategy
(1 of 2)
• The Seller’s Perspective on Pricing
–
Four key issues:
• Costs
•
Demand
• Customer value
• Competitors’ prices
• The Buyer’s Perspective on Pricing
–
Two key issues:
•
Perceived value
• Price sensitivity
8-4

The Role of Pricing in
Marketing Strategy
(2 of 2)
• A Shift in the Balance of Power
– A buyer’s market occurs when:
• Large number of sellers in the market
•
Many substitutes for the product
• Economy is weak
– A seller’s market occurs when:
• Products are in short supply
• Products are in high demand
• Economy is strong
8-5

The Relationship Between
Price and Revenue
• Myth #1 – When business is good, a price cut will increase market share.
•
Myth #2 – When business is bad, a price cut will stimulate sales.
•
Price cutting is generally not in the best interests of the firm unless sales volume will increase.
•
A better strategy is to build value into the product offering at the same (or even a higher) price.
8-6

• Pricing Objectives
•
Supply and Demand
• The Firm’s Cost Structure
•
Competition and Industry Structure
– Pure Competition
–
Monopolistic Competition
–
Oligopoly
–
Monopoly
•
Stage of the Product Life Cycle
8-7

Common Pricing Objectives
Exhibit 8.1
8-8

Pricing Strategy Over the Product Life Cycle
Exhibit 8.2
8-9

•
Is critical because price may be the only cue to quality
•
Becomes more important and difficult when:
–
Service quality is hard to detect prior to purchase
– Costs are difficult to determine
–
Customers are unfamiliar with the process
– Brand names are not well established
–
Customers can perform the service themselves
– Service has poorly defined units of consumption
–
Advertising within the service category is limited
– The total price of the service is difficult to state beforehand
8-10

•
Pricing strategy associated with services is typically more complex than the pricing of tangible goods. As a consumer, what pricing issues do you consider when purchasing services?
How difficult is it to compare prices among competing services, or to determine the complete price of the service before purchase? What could service providers do to solve these issues?
8-11

Price Elasticity and Yield
Management
• Allows simultaneous control of capacity and demand
– Control capacity by limiting available capacity at certain price points
– Control demand through price changes and overbooking capacity
8-12

Yield Management for a Hypothetical Hotel
Exhibit 8.3
8-13

(1 of 2)
Exhibit 8.4
8-14

(2 of 2)
• Situations that increase price sensitivity:
–
Availability of product substitutes
– Higher total expenditure
–
Noticeable differences
– Easy price comparison
•
Situations that decrease price sensitivity:
– Real or perceived necessities
– Lack of product substitutes
–
Complementary products
– Product differentiation
–
Perceived product benefits
– Situational influences
8-15

•
Price elasticity often varies for the same product based on the situation. What situational factors might affect the price elasticity of these products:
– sporting event or concert tickets
– staple goods such as milk, eggs, or bread
– an electric razor
– eye surgery to correct vision
8-16

Pricing Strategies
(1 of 2)
• Base Pricing Strategies
–
Market Introduction Pricing (skimming and penetration)
–
Prestige Pricing
– Value-Based Pricing (EDLP)
– Competitive Matching
– Non-Price Strategies
•
Adjusting Prices in Consumer Markets
– Promotional Discounting
– Reference Pricing
– Odd-Even Pricing
–
Price Bundling
8-17

• Chrysler’s initial price skimming strategy for the
Pacifica was not successful in attracting customers. Why would customers balk at a $40,000 price tag for the
Pacifica? What are the issues affecting price sensitivity in this situation?
8-18

Pricing Strategies
(2 of 2)
• Adjusting Prices in Business Markets
–
Trade discounts
–
Discounts and allowances
– Geographic pricing
– Transfer pricing
– Barter and countertrade
–
Price discrimination
8-19

Fixed vs. Dynamic Pricing
• Pricing levels in a negotiated pricing situation:
–
Opening position
–
Aspiration price
– Limit
• Guidelines for making concessions:
–
Avoid being the first side to make a concession
–
Start with modest concessions and make them smaller as you proceed
–
Avoid making concessions early in the negotiation
– Do not give up anything without something in return
8-20

Major Online Auction Strategies
Exhibit 8.5
8-21

Legal and Ethical Issues in Pricing
• Price Discrimination
•
Price Fixing
• Predatory Pricing
•
Deceptive Pricing
8-22

Selling at a Loss
•
Sony is expected to lose money on each PlayStation 3 console due to the cost of the cell processor and the Blu-ray DVD drive. Sony plans to make up for the loss in games and accessories. Is this a sound pricing strategy? How can Sony minimize the loss on each console?
Beyond the Pages 8.2
8-23