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Transcript
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.