Download MKT0039 - Ch 8

CHAPTER
8
Pricing Strategy
O. C. Ferrell
Michael D. Hartline
Pricing Strategy
  Is
a key factor in producing revenue for the firm
  Is
the easiest of all marketing variables to change
  Is
an important consideration in competitive
intelligence
  Is
considered to be the only real means of
differentiation in highly commoditized markets
  Is
among the most complex decisions in the marketing
plan
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Discussion Question
One of the key themes of today’s economy is the
challenge of marketing goods and services in
mature markets that are plagued by
commoditization. In what ways is pricing strategy
related to commoditization? How can a firm offer
good value in a mature market where price is the
only visible means of differentiation? Are most
firms too concerned about their costs to really
deliver value in other ways? Explain.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
The Role of Pricing in Marketing
Strategy
  The
 
Price is about what the seller will accept in exchange for a
product. Sellers consider four key issues:
 
 
 
 
Costs
Demand
Customer value
Competitors’ prices
  The
 
Seller’s Perspective on Pricing
Buyer’s Perspective on Pricing
Price is about what the buyer is willing to give up in exchange
for a product. Buyers consider two key issues:
 
 
Perceived value
Price sensitivity
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
A Shift in the Balance of Power
  A
  A
buyer’s market occurs when:
 
Large number of sellers in the market
 
Many substitutes for the product
 
Economy is weak
seller’s market occurs when:
 
Products are in short supply
 
Products are in high demand
 
Economy is strong
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
The Relationship Between Price
and Revenue
  Myth
#1 – When business is good, a price cut will
capture greater market share.
  Myth
#2 – When business is bad, a price cut will
stimulate sales.
  Price
cutting is generally not in the best interests of the
firm unless sales volume will increase.
  A
better strategy is to build value into the product
offering at the same (or even a higher) price.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Key Issues in Pricing Strategy
  Pricing
Objectives
  Supply
and Demand
  The
Firm’s Cost Structure
  Competition
and Industry Structure
Perfect competition
  Monopolistic competition
  Oligopoly
  Monopoly
 
  Stage
of the Product Life Cycle
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Common Pricing Objectives
(Exhibit 8.1)
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Pricing Strategy Over the Product
Life Cycle (Exhibit 8.2)
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Pricing Service Products
  Service
pricing is critical because price may be the only
cue to quality in advance of purchase.
  Service
when:
pricing becomes more important and difficult
Service quality is hard to detect prior to purchase
  Costs are difficult to determine
  Customers are unfamiliar with the service process
  Brand names are not well established
  Customers can perform the service themselves
  The service has poorly defined units of consumption
  Advertising within the service category is limited
  The total price of the service is difficult to state beforehand
 
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Discussion Question
Pricing strategy associated with services is
typically more complex than the pricing of
tangible goods. As a consumer, what pricing
issues do you consider when purchasing services?
How difficult is it to compare prices among
competing services, or to determine the complete
price of the service before purchase? What could
service providers do to solve these issues?
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Service Pricing and
Yield Management
  Service
pricing becomes a key issue in balancing
supply and demand during peak and off-peak demand
times.
  Yield
management allows the firm to simultaneously
control capacity and demand.
Control capacity by limiting available capacity at certain price
points
  Control demand through price changes and overbooking
capacity
 
  Yield
management also allows service firms to
segment markets based on price elasticity.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Yield Management for a
Hypothetical Hotel (Exhibit 8.3)
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Price Elasticity of Demand
  Refers
to customers’ sensitivity to changes in price
  The
relative impact on the demand for a product, given
specific increases or decreases in the price charged
for that product
 
Inelastic demand – Customers are not sensitive to price
changes; demand remains relatively the same
 
Elastic demand – Customers are sensitive to price changes;
demand falls as the price increases
 
Unitary demand – Change in price and demand offset, so total
revenue remains the same
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Price Elasticity of Demand
(Exhibit 8.4)
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Situations That Increase Price
Sensitivity
  Availability
 
of Product Substitutes
Customers are more sensitive to price changes when they can
choose among a number of substitute products.
  Higher Total
 
The higher the total expense, the more elastic the demand.
  Noticeable
 
Differences
Products having heavily promoted prices tend to experience
more elastic demand.
  Easy
 
Expenditure
Price Comparisons
Customers are more price sensitive if they can shop around for
a better price.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Situations That Decrease Price
Sensitivity
  Lack
 
Customers are less price sensitive when they have fewer
options.
  Real
 
of Substitutes
or Perceived Necessities
These products have very inelastic demand because customers
have to have them.
  Complementary
 
Products
If the price of one product falls, customers will be less sensitive
to the price of complementary products.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Situations That Decrease Price
Sensitivity (continued)
  Perceived
 
Sometimes, products are “just worth it” to consumers.
  Situational
 
Product Benefits
Influences
Customers are less price sensitive in certain situations (time
pressure, emergencies, gift giving, etc.)
  Product
Differentiation
Differentiation reduces the number of perceived substitutes.
  The goal of product differentiation is to make the demand curve
for a product more inelastic.
 
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Discussion Question
Price elasticity often varies for the same product
based on the situation. What situational factors
might affect the price elasticity of these products:
a) 
sporting event or concert tickets?
b) 
staple goods such as milk, eggs, or bread?
c) 
an electric razor?
d) 
eye surgery to correct vision?
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Pricing Strategies in Consumer
Markets
  Base
Pricing Strategies
Market introduction pricing (skimming and penetration)
  Prestige pricing
  Value-based pricing (EDLP)
  Competitive matching
  Nonprice strategies
 
  Adjusting
Prices in Consumer Markets
Promotional discounting
  Reference pricing
  Odd-Even pricing
  Price bundling
 
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Pricing Strategies in Business
Markets
  Adjusting
Prices in Business Markets
Trade discounts
  Discounts and allowances
  Geographic pricing
  Transfer pricing
  Barter and countertrade
 
 
Price discrimination
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Fixed vs. Dynamic Pricing
  Pricing
levels in a negotiated pricing situation
Opening position
  Aspiration price
  Limit
 
  Guidelines
for making concessions
Avoid being the first side to make a concession
  Avoid making concessions early in the negotiation
  Start with modest concessions and make them smaller as you
proceed
 
 
Do not give up anything without getting something in return
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Major Online Auction Strategies
(Exhibit 8.5)
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Legal and Ethical Issues in Pricing
  Price
Discrimination
  Price
Fixing
  Predatory
Pricing
  Deceptive
Pricing
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.