Chapter 10 - 11
Pricing Products: Pricing Considerations
and Approaches
Pricing Strategies
Learning Goals
1.
2.
3.
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
2
Learning Goals
1.
2.
3.
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
3
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.
4
Price has Many Names





Rent
Fee
Rate
Commission
Assessment





Tuition
Fare
Toll
Premium
Retainer
•
•
•
•
•
Bribe
Salary
Wage
Interest
Tax
5
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.
6
Online travel seller Orbitz guarantees the
lowest price
7
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
8
Factors to Consider When Setting
Price
Internal Factors






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
9
In these ads, State Farm positions on
“relationships,” Allstate positions on “price”
10
Factors to Consider When Setting
Price
Internal Factors




Marketing objectives
Marketing mix strategies
Costs
Organizational
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
11
Factors to Consider When Setting
Price
Internal Factors

Types of costs:





Marketing objectives
Marketing mix strategies
Costs
Organizational
considerations




Variable
Fixed
Total costs
How costs vary at different
production levels will influence
price setting
Experience (learning) curve
affects price
15
The Experience Curve
16
Factors to Consider When Setting
Price
Internal Factors




Marketing objectives
Marketing mix strategies
Costs
Organizational
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
17
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
18
Factors to Consider When Setting
Price
External Factors

Types of markets





Nature of market and
demand
Competitors’ costs, prices,
and offers
Other environmental
elements




Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
Consumer perceptions of
price and value
Price-demand relationship


Demand curve
Price elasticity of demand
19

The Mastercard
“Priceless” campaign
helps show that
prices are somewhat
intangible and can be
relative to the
consumer and the
situation
Marketing in Action
20
21
22
23
Factors to Consider When Setting
Price
External Factors

Types of markets





Nature of market and
demand
Competitors’ costs, prices,
and offers
Other environmental
elements




Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
Consumer perceptions of
price and value
Price-demand relationship


Demand curve
Price elasticity of demand
24
The Demand Curve
25
Factors to Consider When Setting
Price
External Factors





Nature of market and
demand
Competitors’ costs, prices,
and offers
Other environmental
elements
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
26
Prices for MP3 players get more competitive with the help
of online shopping agents like PriceGrabber.com
27
Factors to Consider When Setting
Price
External Factors

Economic conditions




Nature of market and
demand
Competitors’ costs, prices,
and offers
Other environmental
elements




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
28
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
29
Major Considerations in
Setting Price
30
General Pricing Approaches

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.
33
General Pricing Approaches
Break-Even Analysis and Target Profit Pricing
Revenues
1000
Target Profit $200,000
800
Thousands
of Dollars
Total Costs
Break-even
point
600
400
Fixed Costs
200
0
10
20
30
40
Sales Volume in Thousands of Units
Quantity To Be Sold To
Meet Target Profit
34
Cost-based versus
Value-based Pricing
35
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
36
37
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
1038- 38
Source: Business Week
General Pricing Approaches

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 competitionbased pricing

Sealed bid pricing
39
Competitive Prices on
Music Downloads
Marketing in Action
40
41
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
42
Pricing Strategies
Learning Goals
1.
2.
3.
4.
Describe the major strategies for pricing imitative
and new products
Explain how companies find a set of prices that
maximize the profits from the total product mix
Discuss how companies adjust their prices to take
into account different types of customers and
situations
Discuss the key issues related to imitating and
responding to price changes
45
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.
46
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
Click on iPod for website
Marketing in Action
Learning Goals
1.
2.
3.
4.
Describe the major strategies for pricing imitative
and new products
Explain how companies find a set of prices that
maximize the profits from the total product mix
Discuss how companies adjust their prices to take
into account different types of customers and
situations
Discuss the key issues related to imitating and
responding to price changes
48
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
49
Product Line Pricing
Oral B has a full line of
electric toothbrushes.
Visit the site to see the
products and examine
attributes which justify
price differences
Click on screenshot for
website
Marketing in Action
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
51
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
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
53
54
How does AOL bundle?
Click on screenshot for
website
Marketing in Action
Learning Goals
1.
2.
3.
4.
Describe the major strategies for pricing
imitative and new products
Explain how companies find a set of prices
that maximize the profits from the total product
mix
Discuss how companies adjust their prices to
take into account different types of customers
and situations
Discuss the key issues related to imitating and
responding to price changes
56
Price Adjustment
Strategies
Strategies

Types of discounts







Discount / allowance
Segmented
Psychological
Promotional
Geographical
International




Cash discount
Quantity discount
Functional (trade) discount
Seasonal discount
Allowances


Trade-in allowances
Promotional allowances
57
This small inn located in a summer resort uses seasonal
discounts
Marketing in Action
Price Adjustment
Strategies
Strategies

Types of segmented pricing
strategies:







Discount / allowance
Segmented
Psychological
Promotional
Geographical
International





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
59
Movie theatres,
resorts and
hotels often use
segmented
pricing for
children
Marketing in Action
Price Adjustment
Strategies
Conditions 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
61
Price Adjustment
Strategies
Strategies

The price is used to say
something about the product.







Discount / allowance
Segmented
Psychological
Promotional
Geographical
International



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
62
Psychological Pricing
This ad for a luxury
priced car attempts
to show that
Mercedes owners
form important
relationships with
their cars
Marketing in Action
Price Adjustment
Strategies
Strategies






Discount / allowance
Segmented
Psychological
Promotional
Geographical
International

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
64
Promotional Pricing
Cell phone
marketers will take
a loss on the phone
to use as a
promotional
discount
Marketing in Action
Price Adjustment
Strategies
Promotional 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
66
Price Adjustment
Strategies
Strategies






Discount / allowance
Segmented
Psychological
Promotional
Geographical
International

Types of geographic pricing
strategies:





FOB-origin pricing
Uniform-delivered pricing
Zone pricing
Basing-point pricing
Freight-absorption pricing
67
Price Adjustment
Strategies
Strategies






Discount / allowance
Segmented
Psychological
Promotional
Geographical
International

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
68
Learning Goals
1.
2.
3.
4.
Describe the major strategies for pricing
imitative and new products
Explain how companies find a set of prices
that maximize the profits from the total product
mix
Discuss how companies adjust their prices to
take into account different types of customers
and situations
Discuss the key issues related to imitating and
responding to price changes
69
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
70
Price Changes

Alternatives to Increasing Price




Explore more cost effective production or
distribution
Reduce product size
Remove features
Unbundle the product
71
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
72
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
73
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
Kellogg’s Responds to
Price Cuts



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
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.
77
Public Policy and Pricing

Pricing across Channel Levels



Price discrimination
Retail price maintenance
Deceptive pricing



Bogus reference / comparison pricing
Scanner fraud
Price confusion
78
Learning Goals
1.
2.
3.
4.
Describe the major strategies for pricing imitative
and new products
Explain how companies find a set of prices that
maximize the profits from the total product mix
Discuss how companies adjust their prices to take
into account different types of customers and
situations
Discuss the key issues related to imitating and
responding to price changes
79