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9
Pricing Considerations and
Strategies
ROAD MAP: Previewing the Concepts
• Identify and explain the external and internal
•
•
•
•
•
factors affecting a firm's pricing decisions.
Contrast the three general approaches to setting
prices.
Describe the major strategies for pricing imitative
and new products.
Explain how companies find a set of prices that
maximizes the profits from the total product mix.
Discuss how 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.
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What is a Price?
• Narrowly, price is the amount of money
charged for a product or service.
• Broadly, price is the sum of all the values
that consumers exchange for the benefits
of having or using the product or service.
• Dynamic Pricing: charging different prices
depending on individual customers and
situations.
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Dynamic Pricing
The Internet is ushering in a new era of fluid pricing. PriceSCAN.com is an
independent site that provides product comparisons and guides, and searches
all merchant sites for the best prices.
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Factors Affecting Pricing
Decisions
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Internal Factors Affecting Pricing
Decisions
• Marketing Objectives:
– Company must decide on its strategy for the
product.
– General Objectives:
• Survival, current profit maximization, market share
leadership, and product quality leadership.
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Product Quality Leadership
Four Seasons starts
with very highquality service—”we
await you with the
perfect sanctuary.”
It then charges a
price to match.
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Internal Factors Affecting Pricing
Decisions
• Marketing Mix Strategy:
– Price decisions must be coordinated with
product design, distribution, and promotion
decisions to form a consistent and effective
marketing program.
– Target costing:
• Pricing that starts with an ideal selling price, then
targets costs that will ensure that the price is met.
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Internal Factors Affecting Pricing
Decisions
• Costs:
– Fixed Costs:
• Costs that do not vary with production or sales
level.
– Variable Costs:
• Costs that vary directly with the level of
production.
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Internal Factors Affecting Pricing
Decisions
• Organizational Considerations:
– Must decide who within the organization
should set prices.
– This will vary depending on the size and type
of company.
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External Factors Affecting
Pricing Decisions
• The Market and Demand:
– Costs set the lower limit of prices.
– The market and demand set the upper limit.
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Pricing in Different Types of
Markets
Pure Competition:
Many buyers and sellers
where each has little effect
on the going market price
Monopolistic Competition:
Many buyers and sellers
who trade over a
range of prices
Oligopolistic Competition:
Few sellers who are
sensitive to each other’s
pricing/marketing strategies
Pure Monopoly:
Market consists of a
single seller
9-12
Demand Curve
A curve that
shows the number
of units the
market will buy in
a given time
period, at
different prices
that might be
charged.
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Upward Sloping Demand Curve
Gibson was surprised to learn that its high-quality instruments did
not sell as well at lower prices.
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Major Considerations in Setting
Price
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Cost-Plus Pricing
• Adding a standard markup to the cost of
the product.
• Popular because:
– Sellers more certain about cost than demand
– Simplifies pricing
– When all sellers use, prices are similar and
competition is minimized
– Some feel it is more fair to both buyers and
sellers
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Break-Even Chart
9-17
Value-Based Pricing
• Uses buyers’ perceptions of value, not the
seller’s cost, as the key to pricing.
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Perceived Value
A less expensive
piano might play
well, but would it
take you places
your have never
been before?
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Competition-Based Pricing
• Going-Rate Pricing:
– Firm bases its price largely on competitors’
prices, with less attention paid to its own
costs or to demand.
• Sealed-Bid Pricing:
– Firm bases its price on how it thinks
competitors will price rather than on its own
costs or on demand.
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New-Product Pricing Strategies
Market-Skimming
 Set a high price for a
new product to “skim”
revenues layer by layer
from the market.
 Company makes fewer,
but more profitable
sales.
• When to use:
– Product’s quality and image
must support its higher
price.
– Costs of smaller volume
cannot be so high they
cancel the advantage of
charging more.
– Competitors should not be
able to enter market easily
and undercut the high
price.
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New-Product Pricing Strategies
Market Penetration
 Set a low initial price in
order to “penetrate” the
market quickly and
deeply.
 Can attract a large
number of buyers
quickly and win a large
market share.
• When to use:
– Market must be highly
price sensitive so a low
price produces more
market growth.
– Production and distribution
costs must fall as sales
volume increases.
– Must keep out competition
and maintain low price or
effects are only temporary.
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Discussion Question
• What type of pricing strategy is used
when new drugs are released by
pharmaceutical companies?
• Why?
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Product Line Pricing
• Involves setting price steps between
various products in a product line based
on:
– Cost differences between products
– Customer evaluations of different features
– Competitors’ prices
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Optional- and Captive-Product
Pricing
• Optional-Product
– Pricing optional or accessory products sold
with the main product (e.g., ice maker with
the refrigerator).
• Captive-Product
– Pricing products that must be used with the
main product (e.g., replacement cartridges for
Gillette razors).
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Pricing Strategies
By-Product Pricing:
Setting a price for by-products in order to make the main
product’s price more competitive (e.g., sawdust and
Zoo Doo)
Product Bundle Pricing:
Combining several products and offering the bundle
at a reduced price (e.g., computer with software and
Internet access).
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Product Bundle Pricing
CityPASS bundles tickets to many attractions at a low combined price.
9-27
Discounts and Allowances
Discounts
Allowances
Cash
Trade-In
Quantity
Promotional
Functional
Seasonal
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Segmented Pricing
• Selling a product or service at two or
more prices, where the difference in
prices is not based on differences in
costs.
• Types:
1.
2.
3.
4.
Customer-segment
Product-form
Location pricing
Time pricing
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Psychological Pricing
• Considers the psychology of
•
•
prices and not simply the
economics.
Consumers usually perceive
higher-priced products as
having higher quality.
Consumers use price less
when they can judge quality
of a product.
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Promotional Pricing
Temporarily pricing products below list price and
sometimes even below cost to create buying excitement
and urgency.
Approaches:
Loss Leaders
Low-Interest Financing
Special-Event Pricing
Longer Warranties
Cash Rebates
Free Maintenance
Discounts
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Promotional Pricing
Companies offer promotional prices to create buying excitement and urgency.
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Geographical Pricing
• FOB-origin pricing
• Uniform-delivered
•
•
•
pricing
Zone pricing
Basing-point pricing
Freight-absorption
pricing
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International Pricing
• Price depends on
many factors,
including:
–
–
–
–
Economic conditions
Competitive situations
Laws and regulations
Development of the
wholesaling and
retailing system
– Costs
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International Pricing
Companies must decide what prices to charge in different countries.
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Initiating Price Changes
Price Cuts
Price Increases
Excess Capacity
Cost Inflation
Falling Market
Share
Overdemand:
Cannot Supply
All Customers’
Needs
Dominate Market
Through Lower
Costs
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Interactive Student
Assignment
• Choose a partner and consider the
following.
– What would you think if Mercedes suddenly
lowered its prices on its cars?
– What would you think if Mercedes suddenly
raised its prices on its cars?
– Why?
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Buyers’ Reactions to Price
Changes
What would you
think if the price
of Joy was
suddenly cut in
half?
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Assessing and Responding to
Competitor Price Changes
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Public Policy and Pricing
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Rest Stop: Reviewing the Concepts
1. Identify and define the external and internal factors
2.
3.
4.
5.
6.
affecting a firm's pricing decisions.
Contrast the three general approaches to setting
prices.
Describe the major strategies for pricing imitative
and new products.
Explain how companies find a set of prices that
maximizes the profits from the total product mix.
Discuss how 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.
9-41