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Chapter 18 Consumer Behavior and Pricing Strategy McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Conceptual Issues in Pricing • General model of the nature of marketing exchanges and the role of price in this process 18-3 Conceptual Issues in Pricing cont. 18-4 Conceptual Issues in Pricing cont. • For-profit vs. nonprofit differences • Four basic types of consumer costs – Money – Time – Cognitive activity – Behavior effect 18-5 Conceptual Issues in Pricing cont. • Four categories of marketing costs – Production – Promotion – Distribution – Marketing research 18-6 Conceptual Issues in Pricing cont. • For marketing exchanges to occur, the price consumers are willing to pay must be greater than or equal to the price at which marketers are willing to sell • Money – Most pricing research has focused on money 18-7 Conceptual Issues in Pricing cont. – Several important aspects of the dollar cost of offerings are not always considered – A number of methods can reduce the dollar amount spent for a particular item, although they often involve increasing other costs 18-8 Conceptual Issues in Pricing cont. • Time – Necessary to learn about a product or service – Required to travel to purchase a product or service – Spent in a store – Should not be treated only as the cost of purchasing 18-9 Conceptual Issues in Pricing cont. • Cognitive activity – A frequently overlooked cost of making purchases – Process of comparing purchase alternatives can be stressful – The cost involved in decision making is often the easiest one for consumers to reduce or eliminate – In some situations, consumers actively seek some form of cognitive involvement 18-10 Conceptual Issues in Pricing cont. • Behavior effect – Can be a benefit rather than a cost – Consumers are willing to take on some marketing costs to reduce the dollar amount they spend make trade-offs among various types of costs – Consumers are willing to make trade-offs among various types of costs 18-11 Conceptual Issues in Pricing cont. – In some cases consumers will take on at least part of the cost of the distribution to lower the dollar price – Consumers have several options with regard to purchase 18-12 Conceptual Issues in Pricing cont. • Value – Whatever is being purchased must be perceived to be of greater value to the consumer than merely the sum of the costs – Consumers seldom finely calculate each of the costs and benefits in making brand-level decisions 18-13 Conceptual Issues in Pricing cont. – For some purchases, all of the costs and tradeoffs may be considered by consumers – This view is important because it has direct implications for the design of marketing strategy 18-14 Price Affect and Cognition • Typically little sensory experience is connected with the price variable • Little consensus on basic issues regarding how price influences consumer choice processes and behavior • Price perceptions and attitudes 18-15 Price Affect and Cognition cont. 18-16 Price Affect and Cognition cont. – Conceptual model of cognitive processing of price information • Internal reference price • The stated price for a particular brand may be considered a product attribute • For a low-involvement product or purchase situation, dollar price may have little or no impact on consumer affect and cognition, or behavior 18-17 Price Affect and Cognition cont. • Price information may not be carefully analyzed because consumers have a particular price image for the store they are shopping in • Consumers often do not carefully store detailed information in memory 18-18 Price Behavior • Funds access • Transaction 18-19 Price Environment • Price is perhaps the most intangible element of the marketing mix • The price variable typically offers very little for the consumer to experience at the sensory level, although it may generate considerable cognitive activity and behavior effort 18-20 Price Environment cont. • Price variable may also include an external reference price • How price information is communication has an effect 18-21 Pricing Strategy • Of concern in three general situations – When a price is being set for a new product – When a long-term change is being considered of an established product – When a short-term price change is being considered 18-22 Pricing Strategy cont. 18-23 Pricing Strategy cont. • Analyze consumer-product relationships – Does the product itself have a clear competitive advantage that consumers would be willing to pay for? – Does a competitive advantage need to be created on the basis of other marketing mix variables? 18-24 Pricing Strategy cont. – Generalizations about analyzing consumerproduct relationships in terms of consumer costs • One important outcome is an estimate of how sensitive the target market is to money costs • Price elasticity 18-25 Pricing Strategy cont. • Competing on marketing mix variables other than money costs is often a more defensible and more profitable strategy • What do consumers receive from purchasing a product in-store vs. online? • Analyze the environment situation – Elements should be considered early in the process of formulating any part of marketing strategy 18-26 Pricing Strategy cont. – Elements should be monitored continually – A number of factors should be considered when setting or changing prices • Determine the role of price in marketing strategy – Is the dollar price to be a key aspect of positioning the product, or is it to play a different role? 18-27 Pricing Strategy cont. – In many situations, dollar price may not play a particularly important positioning role other than in terms of pricing competitively • Estimate relevant production and marketing costs – Provides a useful benchmark for making pricing decisions 18-28 Pricing Strategy cont. • Set pricing objectives – Should be derived from overall marketing objective, which in turn should be derived from corporate objectives • Develop pricing strategy and set prices – A thorough analysis in preceding stages should provide necessary information 18-29 Pricing Strategy cont. – In some cases, prices may be developed with a long-run strategy in mind – Penetration pricing – Skimming pricing – Most price changes occur as a result of changes in consumers, the environment, competition, costs, strategies, and objectives 18-30 Summary • Presented an overview of pricing decisions and consumer behavior • Focused on developing a conceptual framework for considering pricing decisions that included four types of consumer costs • Affect and cognitions, behaviors, and environmental factors relative to price were discussed 18-31 Summary cont. • Cognitive factors examined included price perceptions and attitudes, and the behaviors described included funds access and transactions • Learned how the environment focused on price information • Described a pricing strategy model for use in pricing new products or for making pricechange decisions 18-32