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Marketing
Chapter 13
Pricing Concepts for
Establishing Value
Dhruv Grewal
Michael Levy
McGraw-Hill/Irwin
Copyright © 2008 by the McGraw-Hill Companies, Inc. All rights reserved.
13-2
Panera Bread
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Patrons spend on average
$4 more
Offers upscale food and
ambiance
Consumers willing to pay
more will choose Panera,
others will choose other
options
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Price
Benefits vs. Sacrifice
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Price is a Signal
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Prices can be both too
high and too low
Price too low may signal
poor quality
Price set too high might
signal low value
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Price’s Role in the Marketing Mix
Price is usually ranked as one of the most
important factors in purchase decisions
Price is the only marketing mix element that
generates revenue
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Test Your Knowledge
The key to successful pricing is to match the product or service
with the consumer’s _______________.
A)
income level
B)
value perceptions
C)
shopping habits
D)
brand consciousness
The 5 C’s of Pricing
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1st C: Company Objectives
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Profit Orientation
Target
return
pricing
Profit
Orientation
Target
profit
pricing
Maximizing
profits
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Sales Orientation
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Focus on increasing
sales
More concerned with
overall market share
Does not always imply
low setting low prices
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Competitor Orientation
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Competitive parity
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Status quo pricing
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Value is not part of
this pricing strategy
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Customer Orientation
Focus on customer expectations by matching prices
to customer expectations
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Test Your Knowledge
Which of the following is NOT an example of how a firm might
invoke the concept of value?
A)
Set a “no-haggle” price
B)
Set prices to match consumer expectations
C)
Change prices to meet those of the competition
D)
Offer very high-priced, “state-of-the-art” products
or services
Implementing Pricing Strategies to
Achieve Objectives
How can a consumer’s perception of value affect a
firms pricing strategy?
Case in Point: Ursinus College
Challenge
Answer
Results
College was losing applicants.
Raise tuition. A consultant had
found that the tuition was too low
compared to other schools of similar
quality and thus signaling lower
quality.
Tuition was raised by 17.6 percent
and within 4 years the size of the
freshman class had increased 35%.
2nd C: Customers
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Demand Curves and Pricing
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Demand curves
Knowing demand curve enables to
see relationship between price and
demand.
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Demand Curves
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Not all are downward sloping
Prestige product or services have upward
sloping curves.
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Price Elasticity of Demand
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Elastic (price sensitive)
Inelastic (price insensitive)
Consumers less sensitive
to price increases for
necessities
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Price Elasticity of Demand
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Entrepreneurial Marketing 13.1:
JetBlue Provides Value
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Founder David Neelam
decided to focus on
creating value
Emphasize those services
that mattered most
New model = low prices +
high customer service
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Factors Influencing Price Elasticity of
Demand
Crossprice
elasticity
Income
effect
Substitution
effect
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Test Your Knowledge
Consumers are generally less sensitive to price increases for
which of the following items?
A)
milk
B)
steak
C)
cars
D)
clothing
Substitution Effect
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Consider Pete, college
student on a budget
Old Spice Sport
Deodorant user
At the store he notices
that Old Spice is more
expensive
Pete decides to give
another brand a try and
save money
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Substitution Effect
How can a firm win market share in the highly
competitive technology arena?
Case in Point: HD DVD Players
Challenge
To win the market for this new
technology.
Answer
Toshiba introduces a $500 HD
DVD player to compete with Sony’s
Blu-ray technology DVD players
retailing for $1000 - $1800.
Results
Toshiba has undercut the market on
price and has convinced some
companies to produce HD DVD’s
rather than Blu-ray versions. The
winner is not yet determined.
Cross-Price Elasticity
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Consider Kendra, selfsupporting college student
Buys a new printer on sale
for a great price
Learns it requires special ink
cartridges* that cost more
than the printer
*complementary products
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3rd C: Costs
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Variable Costs
–
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Fixed Costs
–
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Vary with production
volume
Unaffected by
production volume
Total Cost
–
Sum of variable and
fixed costs
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Test Your Knowledge
In general, prices should not be based on cost because
consumers make purchase decisions based on their
_______________.
A)
cross-price elasticity
B)
Internet research
C)
substitution effect
D)
perceived value
Break Even Analysis and Decision
Making
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Break Even Analysis
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Break Even to Achieve Target Profit
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Test Your Knowledge
When a firm’s profits hits the break-even point, their profits are
_____________.
A)
less than expected
B)
more than expected
C)
zero
D)
undetermined
4th C: Competition
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Ethical Dilemma 13.1: Do Protectionist
Laws Hurt or Help Consumers
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Keep some companies from conducting business in a particular region
The Wright Amendment
Prohibits Southwest from flying directly from Dallas Love Field to
certain places
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5th C: Channel Members
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Manufacturers, wholesalers and
retailers can have different
perspectives on pricing strategies
Manufactures must protect against
gray market transactions
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Macro Influences on Pricing
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The Internet
Increased price sensitivity
Growth of online auctions
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Economic Factors
Local
economic
conditions
Increasing
disposable
income
Economic factors
Increasing
globalization
Crossshopping
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Increasing
status
consciousness
Economic Factors
How can a large retailer gain market share in an
environment where even status-conscious
shoppers want to shop cheap?
Case in Point: Wal-Mart Answers the
Need for Lower Priced Drugs
Challenge
Answer
Results
Stem the rising cost of
prescription drugs for consumers.
Wal-Mart announced that it had
lowered the cost on 291 generic
drugs to $4/prescription.
Initially launched in Florida, Wal-Mart
plans to expand the program
throughout the US. Target matched
the program and KMart has launched
a competing program that may in fact
be cheaper.
Chapter 13 Glossary
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Competitive parity: A firm’s strategy of setting prices that are similar
to those of major competitors.
Complementary products: Products whose demand curves are
positively related, such that they rise or fall together.
Cross-price elasticity: The percentage change in demand for product
A that occurs in response to a percentage change in price of product
B.
Cross-shopping: The pattern of buying both premium and low-priced
merchandise or patronizing both expensive, status-oriented retailers
and price-oriented retailers.
Demand curves: Shows how many units of a product or service
consumers will demand during a specific period at different prices.
Gray market: Employs irregular but not necessarily illegal methods;
generally, it legally circumvents authorized channels of distribution to
sell goods at prices lower than those intended by the manufacturer.
Income effect: Refers to the change in the quantity of a product
demanded by consumers due to a change in their income.
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Chapter 13 Glossary (continued)
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Maximizing profit: A pricing strategy that relies primarily on economic theory;
identifies the price at which profits are maximized by using a specific
mathematical model that captures all the factors required to explain and
predict sales and profits.
Prestige products or services: Those that consumers purchase for status
rather than functionality.
Status quo pricing: A competitor-oriented strategy in which a firm changes
prices only to meet those of competition.
Substitution effect: Refers to consumers’ ability to substitute other products
for the focal brand, thus increasing the price elasticity of demand for the focal
brand.
Target profit pricing: A pricing strategy implemented by firms when they have
a particular profit goal as their overriding concern; uses price to stimulate a
certain level of sales at a certain profit per unit.
Target return pricing: A pricing strategy implemented by firms less
concerned with the absolute level of profits and more interested in the rate at
which their profits are generated relative to their investments; designed to
produce a specific return on investment, usually expressed as a percentage of
sales.
© 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin