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McGraw-Hill/Irwin Copy right 2008 by the McGraw-Hil l Com panies, Inc. All r igh ts reserved.

Marketing

Dhruv Grewal

Michael Levy

Chapter 13

Pricing Concepts forEstablishing Value

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Panera Bread

Patrons spend on average$4 more

Offers upscale food andambiance

Consumers willing to paymore will choose Panera,

others will choose otheroptions

13-2

http://www.panera.com/http://www.panera.com/

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Price

Benefits vs. Sacrifice

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Price is a Signal

Prices can be both toohigh and too low

Price too lowmay signalpoor quality

Price set too high mightsignal low value

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Prices Role in the Marketing Mix

Price is the only marketing mix element thatgenerates revenue

Price is usually ranked as one of the most

important factors in purchase decisions

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Test YourKnowledge

The key to successful pricing is to match the product or servicewith the consumers _______________.

A) income levelB) value perceptions

C) shopping habitsD) brand consciousness

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The 5 Cs of Pricing

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1st C: Company Objectives

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Profit Orientation

Maximizing

profits

Target

profitpricing

Targetreturnpricing

ProfitOrientation

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Sales Orientation

Focus on increasingsales

More concerned withoverall market share

Does not always implylow setting low prices

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Competitor Orientation

Competitive parity

Status quo pricing

Value is not part of

this pricing strategy

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Customer Orientation

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Focus on customer expectations by matching pricesto customer expectations

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Test YourKnowledge

Which of the following is NOT an example of how a firm mightinvoke the concept of value?

A) Set a no-haggle priceB) Set prices to match consumer expectations

C) Change prices to meet those of the competitionD) Offer very high-priced, state-of-the-art products

or services

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Implementing Pricing Strategies toAchieve Objectives

How can a consumers perception of value affect a

firms pricing strategy?

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Case in Point: Ursinus College

Challenge

Answer

Results

Raise tuition. A consultant hadfound that the tuition was too lowcompared to other schools of similarquality and thus signaling lowerquality.

Tuition was raised by 17.6 percentand within 4 years the size of thefreshman class had increased 35%.

College was losing applicants.

http://www.ursinus.edu/http://www.ursinus.edu/

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2nd C: Customers

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Demand Curves and Pricing

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Demand curves

Knowing demand curve enables to

see relationship between price anddemand.

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Demand Curves

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Not all are downward sloping

Prestige product or services have upwardsloping curves.

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Price Elasticity of Demand

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Elastic (price sensitive)

Inelastic (price insensitive)

Consumers less sensitiveto price increases fornecessities

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Price Elasticity of Demand

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Entrepreneurial Marketing 13.1:JetBlue Provides Value

2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

Founder David Neelamdecided to focus oncreating value

Emphasize those servicesthat mattered most

New model = low prices +high customer service

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Factors Influencing Price Elasticity ofDemand

Income

effect

Substitutioneffect

Cross-

priceelasticity

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Test YourKnowledge

Consumers are generally less sensitive to price increases forwhich of the following items?

A) milkB) steak

C) carsD) clothing

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Substitution Effect

Consider Pete, collegestudent on a budget

Old Spice SportDeodorant user

At the store he noticesthat Old Spice is moreexpensive

Pete decides to giveanother brand a try andsave money

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Substitution Effect

How can a firm win market share in the highlycompetitive technology arena?

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Case in Point: HD DVD Players

Challenge

Answer

Results

Toshiba introduces a $500 HDDVD player to compete with SonysBlu-ray technology DVD playersretailing for $1000 - $1800.

Toshiba has undercut the market onprice and has convinced somecompanies to produce HD DVDsrather than Blu-ray versions. Thewinner is not yet determined.

To win the market for this newtechnology.

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Cross-Price Elasticity

Consider Kendra, self-supporting college student

Buys a new printer on sale

for a great price Learns it requires special ink

cartridges* that cost morethan the printer

*complementary products

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3rd C: Costs

Variable Costs

Vary with productionvolume

Fixed Costs Unaffected by

production volume

Total Cost

Sum of variable andfixed costs

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Test YourKnowledge

In general, prices should not be based on cost becauseconsumers make purchase decisions based on their_______________.

A) cross-price elasticity

B) Internet researchC) substitution effectD) perceived value

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Break Even Analysis and DecisionMaking

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Break Even Analysis

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Break Even to Achieve Target Profit

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Test YourKnowledge

When a firms profits hits the break-even point, their profits are_____________.

A) less than expectedB) more than expected

C) zeroD) undetermined

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4th C: Competition

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Ethical Dilemma 13.1: Do ProtectionistLaws Hurt or Help Consumers

Keep some companies from conducting business in a particular region The Wright Amendment

Prohibits Southwest from flying directly from Dallas Love Field tocertain places

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5th C: Channel Members

Manufacturers, wholesalers andretailers can have differentperspectives on pricing strategies

Manufactures must protect againstgray market transactions

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Macro Influences on Pricing

The Internet

Increased price sensitivity

Growth of online auctions

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Economic Factors

Economic factors

Localeconomic

conditions

Increasingdisposable

income

Increasingstatus

consciousness

Cross-shopping

Increasingglobalization

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Economic Factors

How can a large retailer gain market share in anenvironment where even status-consciousshoppers want to shop cheap?

Case in Point: Wal Mart Answers the

http://www.walmart.com/http://www.walmart.com/http://www.walmart.com/http://www.walmart.com/

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Case in Point: Wal-Mart Answers theNeed for Lower Priced Drugs

Challenge

Answer

Results

Stem the rising cost ofprescription drugs for consumers.

Wal-Mart announced that it hadlowered the cost on 291 genericdrugs to $4/prescription.

Initially launched in Florida, Wal-Martplans to expand the programthroughout the US. Target matchedthe program and KMart has launcheda competing program that may in factbe cheaper.

http://www.walmart.com/http://www.walmart.com/http://www.walmart.com/http://www.walmart.com/

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Chapter 13 Glossary

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Competitive parity:A firms strategy of setting prices that are similarto those of major competitors.

Complementary products: Products whose demand curves arepositively related, such that they rise or fall together.

Cross-price elasticity: The percentage change in demand for productA that occurs in response to a percentage change in price of productB.

Cross-shopping: The pattern of buying both premium and low-pricedmerchandise or patronizing both expensive, status-oriented retailersand price-oriented retailers.

Demand curves:Shows how many units of a product or serviceconsumers will demand during a specific period at different prices.

Gray market: Employs irregular but not necessarily illegal methods;generally, it legally circumvents authorized channels of distribution tosell goods at prices lower than those intended by the manufacturer.

Income effect:Refers to the change in the quantity of a productdemanded by consumers due to a change in their income.

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Chapter 13 Glossary (continued)

Maximizing profit:A pricing strategy that relies primarily on economic theory;identifies the price at which profits are maximized by using a specificmathematical model that captures all the factors required to explain andpredict sales and profits.

Prestige products or services:Those that consumers purchase for statusrather than functionality.

Status quo pricing:A competitor-oriented strategy in which a firm changesprices only to meet those of competition.

Substitution effect:Refers to consumers ability to substitute other productsfor the focal brand, thus increasing the price elasticity of demand for the focalbrand.

Target profit pricing:A pricing strategy implemented by firms when theyhave a particular profit goal as their overriding concern; uses price to stimulate

a certain level of sales at a certain profit per unit. Target return pricing:A pricing strategy implemented by firms less

concerned with the absolute level of profits and more interested in the rate atwhich their profits are generated relative to their investments; designed toproduce a specific return on investment, usually expressed as a percentage ofsales.