chp 11 principle of marketing
TRANSCRIPT
1
Chapter 11
Pricing Products:
Pricing Considerations and Strategies
2
New Product Pricing Strategies (pp. 399-400)
Market Skimming
Setting a high price to “skim” maximum revenues from the target market.
Results in fewer, but more profitable, sales.
May reduce price later to attract more price sensitive markets.
Market Skimming
Setting a high price to “skim” maximum revenues from the target market.
Results in fewer, but more profitable, sales.
May reduce price later to attract more price sensitive markets.
Use Under These Conditions: Product’s quality & image
support its higher price.
Market not price sensitive.
Costs of producing small volumes can’t be so high that they cancel the advantage of charging more (i.e., don’t need economies of scale).
Competitors shouldn’t be able to enter market easily & undercut the high price.
3
New Product Pricing Strategies (pp. 399-400)
Market Penetration
Setting a low price in order to “penetrate” the market quickly and deeply.
Attract a large number of buyers quickly & win a larger market share.
Market Penetration
Setting a low price in order to “penetrate” the market quickly and deeply.
Attract a large number of buyers quickly & win a larger market share.
Use Under These Conditions: Market is large & highly
price-sensitive so a low price produces market growth.
Production & distribution costs must fall as sales volume increases (i.e., economies of scale).
Low price can effectively keep out competition & low price position can be maintained.
4
Product Mix Pricing Strategies (pp. 400-403)
Goal – to maximize profit over the product mix:
Product Line Pricing -- Involves setting price steps between various products in a product line. Based on: Cost differences between products, or
Customer evaluations of different features, or
Competitors’ prices
(e.g., lawnmowers - $259.95, $299.95, $399.95)
Optional Product Pricing -- Pricing optional or accessory products sold with the main product.(e.g., car options)
Captive Product Pricing -- Pricing products that must be used with the main product. (e.g., razor blades, toner cartridges)
5
Product Mix Pricing Strategies (pp. 400-403)
Goal – to maximize profit over the product mix:
By-Product Pricing -- Pricing low-value by-products to get rid of them & reduce costs.
(e.g., wood chips, Zoo Doo)
Product Bundle Pricing -- Combining several products and offering the bundle at a reduced price.
e.g., season tickets, magazine subscription, computer with software, car
option packages, Costco)
6
Price-Adjustment Strategies:Discount & Allowance (pp. 403-404)
Cash discount(pay early, e.g., 2/10 net 30)
Functional discount(price to channel members)
Quantity discount(buy more from one seller)
Trade-in allowance
Seasonal discount(buy early or out of season)
Promotional allowance(to help channel members
promote product)
Adjusting the basic price to reward customers,or to provide incentives for certain responses
(most are for channel members & business buyers)
7
Example of Functional Discount (p. 404)
Functional discounts represent product prices charged channel intermediaries – compensates channel members (wholesalers & retailers) for stocking & selling the product
E.g., pricing a book – manufacturing cost ~$2.00
publisher’s suggested retail price $20.00(price a consumer pays at a bookstore)
bookstore (40% discount) 12.00
wholesaler (55% discount) 9.00
distributor (65% discount) 7.00
8
Price-Adjustment Strategies:Segmented Pricing (p. 404)
Customer segmentpricing
Location pricing
Product - Form Time pricing
Selling products at different pricesbased on differences in demand,
not on differences in cost
Product form pricing
9
Price-Adjustment Strategies:Psychological Pricing (pp. 405-407)
Considers the psychology of prices, not just the economics.
Price is an important quality signalwhen customers can’t otherwise judge quality; price is used to “say
something” about a product.
Reference prices Show price comparisons
Display with more/less expensive alternatives
Odd-pricing, even-pricing E.g., $49.99 versus $50.00
10
Loss leadersLoss leaders
Special-event pricingSpecial-event pricing
Cash rebatesCash rebates
Low-interest financingLow-interest financing
Longer warrantiesLonger warranties
Free merchandiseFree merchandise
Temporarilypricing products below
the regular price to increase short-term
sales
Price-Adjustment Strategies:Promotional Pricing (p. 408)
Danger – addictive;
over-reliance can damage brand equity & train consumers to be “deal prone”
11
Discussion Connections
Many industries have created “deal-prone” consumers through the heavy use of promotional pricing – e.g., fast foods, airlines, department stores, and others.
Pick a company in one of these industries and suggest ways that it might deal with this problem.
How does the concept of value relate to promotional pricing? Does promotional pricing add to or detract from customer value?
12
Initiating Price Changes(pp. 411-413)
Why?
•Excess capacity
•Falling market share
•Strategy to dominate market
through
lower costs
Why?
•Cost inflation
•Over-demand
•Increase profit margin
Price Cut
Price Increase
ConsumerReaction:• Positive; or• Being replaced?• Not selling?• Co. in trouble?• Quality lower?• Prices coming
down further?
ConsumerReaction:• Negative(explain,disguise?)
• Positive(“hot,”prestige)
Competitor Response:Follow? – oligopoly, perfect competitionPosition against? – monopolistic competition
13
Assessing & Responding to Competitor’s Price Changes(Fig. 11.1, pp. 413-414)
Has competitor cut price?
Will lower price negatively affect our
market share & profits?
Can / should effective action be taken?
Hold current price;continue to monitorcompetitor’s price
Reduce price
Raise perceived quality
Improve quality & increase price
Launch low-price“fighting brand”
14
Public Policy Issues:Prohibited Pricing Practices(Fig. 11.2, pp. 415-420)
Manufacturer A
• Price-fixing• Predatory pricing
Manufacturer B
Manufacturer A
• Price-fixing• Predatory pricing
Manufacturer B
• Retail pricemaintenance• Discriminatorypricing
Retailer 1
• Price-fixing• Predatory pricing
Retailer 2
Retailer 1
• Price-fixing• Predatory pricing
Retailer 2
• Deceptivepricing
Consumers
• Deceptivepricing
15
Within channel levels: Price fixing – cannot talk to each other when setting prices
Predatory pricing – cannot set low prices for purposes of driving competitors out of market
Across channel levels: Retail price maintenance – manufacturer cannot dictate
the price charged by retailers
Discriminatory pricing – cannot charge different prices to different intermediaries (except based on actual costs)
Deceptive pricing – cannot deceive consumers (e.g., through bogus reference prices, bait & switch, creating price confusion, etc.)
Public Policy Issues:Prohibited Pricing Practices(pp. 415-420)
16
Review of Concept Connections
Describe the major strategies for pricing new products.
Explain how companies set prices to maximize profits from the total product mix.
Discuss the ways companies adjust their prices to take into account different types of customers and situations.
Discuss the key issues related to initiating and responding to price changes.
Identify the key prohibited pricing practices.