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Chapter 12:
Pricing
Management
Pride/Ferrell
Foundations of Marketing
Fourth Edition
Prepared by Milton Pressley
University of New Orleans
© 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.
Objectives
1. Understand the six major stages of the process used
to establish prices.
2. Know the issues that are related to developing
pricing objectives.
3. Understand the importance of identifying the target
market's evaluation of the price.
4. Describe how marketers analyze competitive prices.
5. Be familiar with the bases used for setting prices.
6. Explain the different types of pricing strategies.
7. Understand how a final specific price is determined.
© 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.
Figure 12.1 Marketers’ Six
Stages for Establishing Prices
© 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 Objectives
• Pricing objectives
– Describe what a firm wants to achieve
through pricing
– Form the basis of decisions about other
stages in establishing prices
– Must be explicitly stated and include a time
frame
© 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 Objectives and Typical Actions
Taken to Achieve Pricing Objectives
© 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.
Product Quality
Product quality pricing
objective: Set prices to
recover research and
development expenditures and
establish a high-quality image
Product Quality
This ad for Kellogg’s Corn
Flakes focuses on high
product quality.
© 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
• Click on the Television below and watch the
commercial. Discuss which pricing
objective you believe this commercial is
attempting to achieve.
© 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.
Assessment of the Target Market’s
Evaluation of Price
•The importance of price depends on the type of product, the
type of target market, and the purchase situation.
•Price also depends on the perception of value, which is a
combination of price and quality attributes.
© 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.
Evaluation of Competitors’ Prices
• In competitive situations, marketers must keep
prices the same as, or lower than, competitors’
prices.
• In some instances, an organization’s prices are
designed to be slightly above competitors’
prices to give its products an exclusive image,
or below competitors to generate a low-cost
image.
– Wal-Mart has “Everyday low prices”
– Starbucks has premium-priced beverages
© 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.
Selection of a Basis: Cost-Based,
Cost-Plus, and Markup Pricing
• Cost-based pricing: adding a dollar amount or percentage to the
cost of the product
• Cost-plus pricing: adding a specific dollar amount or percentage to
the seller’s cost
• Markup pricing: adding to the cost of the product a predetermined
percentage of that cost
Retailer buys tuna at 45 cents, adds 15 cents Price = 60 cents
Markup as a percentage of cost
= markup
cost
= 15
45
= 33.3 percent
Markup as a percentage of selling price = markup
selling price
= 15
60
= 25 percent
© 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.
Selection of a Basis: Demand and
Competition-Based Pricing
• Demand-based pricing
– Based on the level of demand
for the product
• Competition-based pricing
– Influenced primarily by
competitor’s prices
Demand-Based Pricing
Rental car rates are frequently
based on demand. High demand
results in higher prices. Prices are
lower when demand is low.
© 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
• Other than rental cars, what products do
you think are most often priced on a
demand basis? After you have discussed all
products, click on the @ symbol below to
see if you mentioned the product (not the
brand) that comes up on the screen.
© 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 Strategies
© 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.
Differential Pricing
• Charging different prices to different buyers
for the same quality and quantity of product
– Negotiated pricing: Establishing a final price
through bargaining
– Secondary-market pricing: Setting one price for the
primary target market and a different price for
another market
– Periodic discounting: Temporary reduction of prices
on a patterned or systematic basis
– Random discounting: Temporary reduction of
prices on an unsystematic basis
© 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.
Selection of a Pricing Strategy
Random Discounting
UPS uses random
discounting to attract
customers to its UPS
retail stores.
Customers can’t
predict when
discounts will be
available.
© 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.
New-Product Pricing
• Price skimming
– Charging the highest possible price that buyers
who most desire the product will pay
• Penetration pricing
– Setting prices below those of competing brands
to penetrate a market and gain a significant
market share quickly
© 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
• When the original iPhone was introduced,
did Apple use price skimming or penetration
pricing?
• Which of these types of pricing is currently
being used for the iPhone?
© 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.
Product-Line Pricing
• Establishing and adjusting prices of multiple
products within a product line
– Captive pricing: Pricing the basic product in a product
line low while pricing related items at a higher level
– Premium pricing: Pricing the highest-quality or most
versatile products higher than other models in the
product line
– Bait pricing: Pricing an item in the product line low with
the intention of selling a higher-priced item in the line
– Price lining: Setting a limited number of prices for
selected groups or lines of merchandise
© 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.
Product-Line Pricing
Captive Pricing
The Gillette razor is inexpensive.
To use this razor on a regular
basis, customers must by the
replacement blade cartridges. The
annual cost of the replacement
blade cartridges is significant.
Gillette is using captive 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.
Discussion Question
• Other than razors, printers and video
games, what products use captive pricing?
After you have discussed this question, click
on the @ symbol below to see if you
mentioned the product (not necessarily the
brand) that comes up on the screen.
© 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.
Psychological Pricing
• Pricing that attempts to influence a customer’s
perception of price to make a product’s price
more attractive
– Reference pricing: Pricing a product at a moderate level
and displaying it next to a more expensive model or brand
– Multiple-unit pricing: Packaging together two or more
identical products and selling them for a single price
– Odd-even pricing: Ending the price with certain numbers
to influence buyers’ perceptions of the price or product
– Customary pricing: Pricing on the basis of tradition
© 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.
Psychological Pricing
• Bundle pricing
– Packaging together two or
more complementary
products and selling them
for a single price
Bundle Pricing
Price bundling is commonly used
in the communications industry,
including phone, TV cable, and
internet services.
© 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.
Psychological Pricing
• Everyday low prices
(EDLP)
– Setting a low price for
products on a consistent
basis
Everyday Low Price
Wal-Mart is well-known
for using the Everyday
Low Prices strategy.
© 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.
Psychological Pricing
• Prestige pricing
– Setting prices at an
artificially high level to
convey prestige or a
quality image
Prestige Pricing
Organizations employ prestige
pricing to help support and
communicate a premium,
high-quality product
© 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.
Sample Prestige Product Prices
© 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.
Promotional Pricing
• Price leaders
– Product priced below the usual markup, near cost or
below cost
• Special-event pricing
– Advertised sales or price cutting linked to a holiday,
season or event
• Comparison discounting
– Setting a price at a specific level and comparing it
with 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.
Determination of a Specific Price
• A flexible and convenient way to adjust
the marketing mix
• To set the final price, it is important for
marketers to:
1. Establish pricing objectives
2. Have considerable knowledge about targetmarket customers
3. Determine demand, price elasticity, costs, and
competitive factors
© 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.
After Reviewing This Chapter
You Should:
1. Understand the six major stages of the process used
to establish prices.
2. Know the issues that are related to developing
pricing objectives.
3. Understand the importance of identifying the target
market's evaluation of the price.
4. Be able to describe how marketers analyze.
competitive prices.
5. Be familiar with the bases used for setting prices.
6. Be able to explain the different types of pricing
strategies.
7. Understand how a final specific price is determined.
© 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 Concepts
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Pricing objectives
Cost-based pricing
Markup pricing
Demand-based pricing
Competition-based pricing
Differential pricing
Negotiated pricing
Secondary-market pricing
Periodic discounting
Random discounting
Price skimming
Penetration pricing
Product-line pricing
Captive pricing
Premium pricing
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Bait pricing
Price lining
Psychological pricing
Reference pricing
Bundle pricing
Multiple-unit
Everyday low prices (EDLP)
Odd-even pricing
Customary pricing
Prestige pricing
Professional pricing
Price leaders
Special-even pricing
Comparison discounting
© 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.