chapter6 pricing

8/8/2019 Chapter6 Pricing

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PRINCIPLES OF MARKETING

Pricing Products:Understanding and Capturing Customer Value

Pricing Products:Pricing Strategies

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Learning Objectives

After studying this chapter, you should be ableto:

1. Answer the question What is price? and discussthe importance of pricing in todays fast-changingenvironment

2. Discuss the importance of understanding customervalue perceptions when setting prices

3. Discuss the importance of company and productcosts in setting prices

4. Identify and define the other important internal andexternal factors affecting a firms pricing decisions

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What Is Price?

Price is the amount of money chargedfor aproduct or service. It is the sum of all the

values that consumers give up in order togain the benefits of having or using aproduct or service.

Price is the only element in the marketing mixthat produces revenue; all other elementsrepresent costs

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Factors to ConsiderWhen Setting Prices

Customer Perception of Value

Value-based pricing uses the buyersperceptions of value, not the sellers

cost, as the key to pricing. Price is

considered before the marketing program

is set.

Value-based pricing is customerdriven

Cost-based pricing isproductdriven 10-6


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Customer Perception of Value

Value-based pricing

Good-value pricing Offers the right combination of quality

and good service to fair price

Value-addedpricing Existing brands are being redesigned to

offer more quality for a given price orthe same quality for less price

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Customer Perception of Value (Good-Value

Pricing)

Everyday low pricing (EDLP)involves charging a

constant everyday low price with few or no

temporary price discounts

High-low pricinginvolves charging higher prices

on an everyday basis but running frequent

promotion to lower prices temporarily on

selected items10-9


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Customer Perception of Value (Value-Added

Pricing)

Value-added pricing attaches value-added

features and services to differentiate offers,

support higher prices, and build pricing power

Pricing poweris the ability to escape pricecompetition and to justify higher prices and

margins without losing market share

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Factors to ConsiderWhen Setting

Prices

Company and Product Costs

Cost-based pricing involves setting pricesbased on the costs for producing,

distributing, and selling the product plus a

fair rate of return for its effort and risk

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Company and Product Costs

Types of costs

Fixed costs

Rent, salaries etc

Variable costs

Raw materials, packaging etc Total costs

TC = TFC + TVC

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Company and Product Costs (1) Costs as a

Function of Product Experience, Concept

Experience or learning curve is when the

average cost falls as production

increases because fixed costs are spread

over more units

* Economies of Scale

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PricesCompany and Product Cost (3) Break-Even

Analysis and Target Profit Pricing

Break-even pricing is the price at which totalcosts are equal to total revenue and thereis no profit.

TC = TR

Target profit pricing is the price at which thefirm will break even or make the profit its

seeking 10-19


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Prices

break-even = fixed cost

volume (price-variable cost)

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Break-Even Analysis and Target Profit Pricing


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Prices

Other Internal and External Considerations

Affecting Price Decisions

Customer perceptions of value set the

upper limit for prices, and costs set the

lower limit

Companies must considerinternal and

external factors when setting prices

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PricesOther Internal and External ConsiderationsAffecting Price Decisions

Internal factors

Marketing strategies Organization Who should set the price and who can influence

Objectives Survival, profit maximization, customer retention etc

Marketing mix 4 Ps (Product, Place, Promotion and Price)External factors

Market demand

Competitors strategies and prices10-22


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PricesOther Internal and External Considerations


Types of markets Pure competition

Monopolistic competition

Oligopolistic competition Pure monopoly

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PricesOther Internal and External Considerations


Pure competition is a market with many buyers andsellers trading uniform commodities where nosingle buyer or sellerhas much effect on marketprice

Monopolistic competition is a market with manybuyers and sellers who trade over a range ofprices rather than a single market price withdifferentiated offers.

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Prices

Other Internal and External ConsiderationsAffecting Price Decisions

Oligopolistic competition is a market with fewsellers because it is difficult for sellers to enterwho are highly sensitive to each others pricing andmarketing strategies

Pure monopoly is a market with only one seller. In aregulated monopoly, the government permits aprice that will yield a fair return. In a non-regulatedmonopoly, companies are free to set a marketprice.

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Prices


Th

e demand curve shows the number of units themarket will buy in a given period at different prices

Normally, demand and price are inversely related

Higher price = lower demand

For prestige (luxury) goods, higher price can equalhigher demand when consumers perceive higherprices as higher quality

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Prices


Price elasticity of demand illustrates theresponse of demand to a change in price

Inelastic demand occurs when demand hardlychanges when there is a small change in price

Elastic demand occurs when demand changesgreatly for a small change in price

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Prices


Factors affecting price elasticity of demand Unique product

Quality

Prestige

Substitute products Cost relative to income

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Prices



Competition strategies and prices

Factors to consider

Comparison of offering in terms of customer value Strength of competitors

Competition pricing strategies

Customer price sensitivity

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Prices



Other external factors

Economic conditions

Resellers response to price

Government

Social concerns

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TWO BROAD NEW-PRODUCT

PRICING STRATEGIESMarket skimming pricing

Setting a high price for a newproduct to skim maximum revenues

layer by layer from the segmentswilling to pay the high price.

Sony introduced HDTV, Blu-RayDisc Player

Market penetration pricingSetting a low price for a new

product in order to attract a largenumber of buyers and a large marketshare.

Maybelline High DefinitionMascara


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Product Mix Pricing Strategies

Product line pricing

Optional-product pricing

Captive- product pricing By-product pricing

Product bundle pricing


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1. Product Line Pricing

Setting prices for a closely related set of

products or for a product line.

Different elements of the product line can

be used to appeal to different segments

of the market.

The product can differ in small ways, such

as features or complementary

Example, Coke, Diet Coke, Cherry Coke,

and Vanilla Coke, the prices are quite

similar


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2. Optional-Product Pricing

Offering to sell optional or accessoryproducts along with their main product.

Example, I-Pod buyers may choose extraaccessories such as travel chargers,external transmitters, speakers and

armbands.


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3. Captive-Product Pricing

Applies to products that are used together

when one of the product fills a sustainable

need.

Example, Gillette prices razors rather

modestly but makes huge margins on the

blades.


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4. By-Product Pricing

Manufacturers will seek amarket for its by-productsand should accept anyprice that covers morethat the cost or storingand delivering them.

Meat processes,petroleum, agriculture

products, chemicals etc Example, zoo sells

manure to farmers


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5. Price Bundling (Product Bundle Pricing)

Takes a set of products, offers them to

customers in a package, usually price thepackage lower than sum of the individualcomponents.

Often consisting of models that slow

sellers, specially priced to eliminateinventory

But, some of the bundle can be priceshigher than the sum of the product,

example, McD-Happy Meals

Nevertheless, you as a product managershall seek ways to unbundledthe productpackage to allow customers to choosewhat they want to pay for


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Price Adjustment Strategies

Discount and allowance pricing

Segmented pricing

Psychological pricing Promotional pricing

Geographical pricing

International pricing


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Pricing Strategies

Discounts Cash discount for paying promptly

Quantity discount for buying in large volume

Functional (trade) discount for selling,storing, distribution, and record keeping

Allowances Trade in allowance for turning in an old item

when buying a new one

Promotional allowance to reward dealers forparticipating in advertising or sales support

programs 11-14


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Pricing Strategies

Discount and allowance pricing reducesprices to reward customer responses such

as paying early or promoting the product

Discounts

Allowances

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Price Adjustment StrategiesPricing Strategies

Segmented pricing is used when acompany sells a product at two or moreprices even though the difference is not

based on cost

Customer segment pricing

Product form segment pricing Different versions of the product are priced

differently

Location pricing

Charge different price for different location11-16


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Pricing Strategies

Psychological pricing occurs when sellersconsider the psychology of prices and not simplythe economics, the price is used to say somethingabout the product.

Reference prices areprices that buyers carry intheir minds and refer to when looking at a given

product Noting current prices

Remembering past prices

Assessing the buying situations

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Price Adjustment

Strategies

Promotional pricing is when prices aretemporarily priced below list price or cost to

increase demand.

Loss leaders

Special event pricing

Cash rebates Low interest financing

Longer warrantees

Free maintenance11-21

Pricing Strategies


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Pricing Strategies

Risks of promotional pricing Used too frequently, and copies by

competitors can create deal-prone

customers who will wait for promotions and

avoid buying at regular price

Creates price wars

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Pricing Strategies

Geographical pricing is used for customers in

different parts of the country or the world FOB (Free-On-Board) pricing

Uniformed delivery pricing

Zone pricing

Basing point pricing Freight absorption pricing

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Pricing Strategies

Dynamic pricing when prices are adjusted continually to meet the

characteristics and needs of the individual

customer and situations

International pricing prices are set in a specific country based on

country-specific factors Economic conditions

Competitive conditions

Laws and regulations

Infrastructure

Company marketing objective11-28


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Price Changes

Initiating Pricing Changes

Price cuts is a reduction in price

Excess capacity Increase market share

Price increases is an increase in selling price

Cost inflation Increased demand and lack of supply

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Price Changes

Buyer Reactions to Pricing Changes

Price cuts

New models will be available

Models are not selling well

Quality issues

Price increases Product is hot Company greed

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Price Changes

Responding to Price Changes

Questions Why did the competitor change the price?

Is the price cut permanent or temporary?

What is the effect on market share and

profits?

Will competitors respond?

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Price Changes

Responding to Price Changes

Solutions Reduce price to match competition

Maintain price but raise the perceived value

through communications

Improve quality and increase price

Launch a lower-price fighting brand

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Public Policy and Pricing

Pricing Within Channel Levels

Price fixing: Sellers must set prices withouttalking to competitors

Predatory pricing is prohibited.

Selling below cost with the intention ofpunishing a competitor or gaining higher long-term profits by putting competitors out ofbusiness

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Pricing Across Channel Levels

Robinson Patman Act prevents unfairprice

discrimination by ensuring that sellers offer thesame price terms to customers at a given level oftrade

Price discrimination is allowed: If the seller can prove that costs differ when selling to

different retailers

If the seller manufactures different qualities of the sameproduct for different retailers

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Retail (resale) price maintenance is when a

manufacturer requires a dealer to charge aspecific retail price for its products.

Deceptive pricing occurs when a seller states prices

or price savings that mislead consumers or are notactually available to consumers

Both are prohibited under the LAW!

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Deceptive pricing occurs when a seller states prices

or price savings that mislead consumers or are notactually available to consumers

Scanner fraud failure of the seller to enter currentor sale prices into the computer system

Price confusion results when firms employ pricingmethods that make it difficult for consumers tounderstand what price they are really paying

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chapter6 pricing

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