GLOBAL MARKETING
Pricing Management
Pricing...
• Converts the underlying value of a product
offering or service into revenues and profits.
• Is a fundamentally important activity to the
firm--pricing power.
• Is not a simple process.
Basic Concepts & Jargon
• Marginal costs--the unit costs of production
– In a competitive market, establishes the lowest
feasible price a firm can set.
• Value price--the highest price the market
will bear
– Establishes an upper bound on prices, though
competition usually prevents value prices from
being realized.
The Pricing Range
Value Price
Downward price pressure
From competitive substitutes
Upward price pressure
through marketing efforts
Our Price
Feasible
Price
Range
Marginal Cost
Our
Premium
0
Price Sensitivity
• How customers respond to price changes
• Price elasticity of demand
– Demand is less elastic when:
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Few or no substitutes or competitors
Buyers do not notice the higher price
Buyers are slow to change their buying habits
Buyers think the higher prices are justified
Pricing Methods
• Mark-up pricing/Cost-plus pricing
– Add a standard mark-up to the product’s costs
unit cost
Mark-up =
(1-desired return on sales)
price
– So, if unit cost = $16, and the manufacturer
wants to earn a 20% mark-up on sales, what
would the mark-up price be?
• Target-return pricing
– The firm determines price based on desired target rate of return on
investment (ROI)
desired return x invested capital
Target-return Unit
= cost +
unit sales
price
– So, if the unit cost is $16, unit sales are expected to be 50,000, the
manufacturer has invested $1 million and wants to earn a 20%
return, what would the target-return price be?
• Perceived value pricing
– Base price on customers’ perceived value
– Have to deliver more value than the competitor and
demonstrate this to prospective buyers
• Value pricing
– Based on firm becoming a low-cost producer while
maintaining quality
– Targets value-conscious consumers
– Everyday low pricing
• Going-rate pricing
– Base prices primarily on competitors’ prices
– The same, more, or less than major competitor
• Auction-type pricing
• Group pricing
Pricing Goals
• Determining pricing tactics depends on
what goals are to be accomplished
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Maximize cash flow
Penetrate market
Social objectives
Short-term survival
Effective Pricing Management
• Discriminate between customers according to market
segments.
• Coordinate incentives across intermediaries and
consumers.
• Effectively deal with competition.
• Integrate with the firm’s other marketing efforts.
• Understand consumers’ willingness to pay.
• Understand pricing effects throughout product line.
• Understand influences on global pricing strategies.
Customer Discrimination
• Different segments of customers often have
different value prices for the same product.
• Ideally, firms would like to charge each
customer his/her value price.
• Discrimination, in the sense of charging
different prices for the same good to
reasonably identical customers is generally
considered illegal.
Discrimination (continued)
• There are legal exceptions to discrimination:
– Price-customization opportunities
• Business-to-business, service relations
– Customers self-select into appropriate price tiers
• Choose between differently priced options
– Quantity discounts
– Loyalty programs
• Proactively shape customers into what is desired
Incentive Coordination
• Directly link incentives to desired behavior
• Three areas of incentive coordination:
– Salesperson incentives and price flexibility
– Intermediary margins and push
Salesperson Incentives
• The degree of pricing flexibility allocated to the
salesperson directly affects selling behavior.
• Direct link between incentives and salesperson’s
compensation plan.
– If commission is tied to volume, the salesperson will
discount heavily and frequently in order to maximize
quantity sold.
– If commission is tied to profitability, the salesperson
will try to hold prices high in order to maximize
margins, but low sales volume may result.
Intermediary Incentives
• The margin built into a price provides
resellers with incentives to push the
product.
• Trade promotions are another type of
incentive:
– Quantity discounts
– Compensate marketing efforts
Dealing with Competition
• In a competitive environment, have to set prices
with competitor actions in mind.
– Commodity market: often use fluctuating prices
– Mature products: high use of discounts and promotions
• Promotions can result in forward buying
• Take price out of the equation
– Automatic Price Protection
• Loyalty programs
– Useful in product categories marked by low
differentiation
Integration With Other Marketing
Efforts
• Price should reflect the value of the product
or service.
• High prices--skimming
– Obtain low market share with high margins.
– Marketing program needs to communicate
product benefits.
– Intensive selling.
– Maximize intermediary push.
Integration (continued)
• Low prices--penetration
– Obtain high market share with low margins.
– Marketing program should focus on generating
general awareness.
– Focus on productive capacity.
Consumers’ Willingness to Pay
• What is the impact of consumers’
willingness to pay on demand and a firm’s
net income?
– At various price levels
– When price is changed
• Behavioral price vs. objective price
– “How fair of a deal am I getting?” vs. “How
good of a deal am I getting?”
A survey of managers….
• 84% were well-informed on the variable
cost of providing their product.
• 81% were well-informed on the fixed cost
of providing their product.
• 75% were well-informed on the price of
competitors’ products.
Survey (continued)
• 61% were well-informed on the value of
their product to the customer.
• 34% were well-informed on how consumers
would respond to price changes.
• 21% were well-informed on consumers’
willingness to pay at various price levels.
Survey (continued)
• Most managers understand the economic
perspective of pricing:
– Consumers buy when perceived value exceeds
price.
• Most managers do not understand the
psychological perspective of pricing
Psychological Update #1
• Willingness to pay is impacted by relative
incentives.
In determining willingness to pay, a consumer
will consider both absolute “economic utility”
from the transaction [i.e., perceived value actual price] and relative incentive to enter the
transaction [i.e., (perceived value - actual
price)/actual price].
Psychological Update #2
• Willingness to pay is impacted by a salient
reference price.
In determining willingness to pay, a consumer
will consider economic utility from the
transaction [i.e., perceived value - actual price]
and the consistency between the actual price
and a salient reference price [i.e., actual price reference price].
• The most common basis for a reference
price is the previous price paid for a
product.
Psychological Update #3
• Willingness to pay is impacted by cost of
goods sold.
In determining willingness to pay, a consumer
will consider his/her economic utility from the
transaction [i.e., perceived value - actual price]
and the economic utility of the firm [i.e., actual
price - cost of goods sold].
• Consumers do not want to be taken
advantage of.
Psychological Update #4
• Perceptions of fairness vary across product
categories.
– In determining willingness to pay, the degree to
which a consumer will rely upon economic
utility from the transaction [i.e., perceived
value - actual price] will vary across product
categories.
• Necessary vs. discretionary purchases.
• Luxury vs. utilitarian products.
Managing Perceptions of
Transaction Fairness
• Strategy #1: Actively manage price
expectations.
– Establish credible reference prices.
• Customary prices
• Odd prices
– Manage product price trends.
– Encourage favorable comparisons.
– Avoid unfavorable comparison through product
differentiation.
Managing Perceptions...
• Strategy #2: Actively manage perceptions of
cost of goods sold.
– Focus attention of fully-loaded cost of goods
sold.
– Bundle products to obscure cost of goods sold.
– Focus attention of consumer value.
Product Line Pricing
• The pricing of one product in product line
may affect sales of other products in
product line.
• Price elasticity of demand
– The degree of responsiveness of demand to a
price change.
• Cross-elasticity of demand
– The degree to which changing the price of one
product affects demand for another product.
Cross-elasticity of Demand
• Products with positive cross-elasticity are
substitutes.
– Lowering the price of Product A decreases
demand for Product B without any change in
the price of Product B.
• Products with negative cross-elasticity are
complementary products.
– Lowering the price of Product A increases
demand for both Product A and Product B
without any change in the price of Product B.
Influences on Global Pricing
• Currency fluctuations
• Exchange rate clauses
– Protect parties from unforeseen large swings in
currencies
– Review quarterly
– Usually compare on three-month daily average
to initial average
• Government controls and subsidies
• Gray market goods
– Trademarked products exported from one
country to another, where they are sold by
unauthorized persons or organizations
– Sell at prices that undercut those set by
legitimate importers
• Dumping
– The sale of an imported good at a price lower
than that normally charged in a domestic
market or country of origin
• Transfer pricing
– Related to intracorporate exchange
– In global situation, need to consider
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Taxes
Duties nd tariffs
Country profit transfer rules
Conflicting objectives of joint venture partners
Government regulations
Global Pricing Policy Alternatives
• Extension/ethnocentric
– The price of the product is the same around the world;
the importer absorbs freight and import duties
• Adaptation/polycentric
– Subsidiary or affiliate managers set prices desirable in
their circumstances
• Invention/geocentric
– Pricing is flexible to recognize individual country
differences, but coordinated by corporate headquarters