Download What is Marketing?

Marketing: An Introduction
Second Canadian Edition
Armstrong, Kotler, Cunningham, Mitchell and Buchwitz
Chapter Ten
Pricing Considerations and
Strategies
10-1
Copyright © 2007 Pearson Education Canada
Looking Ahead
• 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.
10-2
Copyright © 2007 Pearson Education Canada
What is a Price?
• Narrow definition.
– price is the amount of money charged for a
product or service.
• Broad definition.
– 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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Pricing Best Practices
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Develop a 1 percent pricing mentality.
Consistently deliver more value.
Price strategically, not opportunistically.
Know your competition.
Make pricing a process .
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Copyright © 2007 Pearson Education Canada
Dynamic Pricing
• The practice of charging different prices
depending on individual customers and
situations.
• Internet and web-purchasing provides
the technological capability for dynamic
pricing
• Sites like eBay even add the ability to
negotiate price to dynamic pricing
practices.
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Pricing Decision Factors
External Factors
Internal Factors
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Marketing objectives.
Marketing mix.
Costs.
Organization style.
Target market.
Positioning
objectives.
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Nature of the market.
Demand
Competitor.
Economic state.
Reseller needs.
Government actions.
Social concerns.
Copyright © 2007 Pearson Education Canada
Pricing Decision Internal Factors
• 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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Pricing Decision Internal Factors
• 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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Pricing Decision Internal Factors
• 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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Pricing Decision Internal Factors
• 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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Pricing Decision External Factors
• 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 Markets
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Pure competition.
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Monopolistic competition.
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Many buyers and sellers who trade over a range
of prices
Oligopolistic competition.
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Many buyers and sellers where each has little
effect on the going market price
Few sellers and sensitive to each other’s
pricing/marketing strategies
Pure monopoly.
–
Market consists of a single seller
10-12
Copyright © 2007 Pearson Education Canada
Demand and Elasticity
•
Demand.
– The relationship between price changes
and the number of units sold.
•
Elasticity.
– A way of measuring how sensitive the
market is to price changes.
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Inelastic – minimal change in demand
as price increases.
Elastic – significant drop in demand as price
increases.
Copyright © 2007 Pearson Education Canada
Price Setting Considerations
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Product costs.
– Price floor – no profits below this price.
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Competitors’ prices and other internal
and external factors.
Consumer perceptions of value.
– Price ceiling – no demand above this
price.
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General Pricing Approaches
• Cost-based approach.
– Cost-plus pricing.
– Break-even analysis.
– Target profit pricing.
• Value-based approach.
– Consumer perceptions of value.
• Competition-based approach.
– What competitors are charging.
10-15
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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.
10-16
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Value-Based Pricing
• Uses buyers’ perceptions of value, not
the seller’s cost, as the key to pricing.
• A less expensive piano might play well,
but would it take you places you’ve
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.
10-18
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Pricing New Products
• Skimming pricing.
– High price to reap maximum profit from early
adopter segments.
– Can encourage competition.
– Products must be unique and hard to copy.
• Penetration pricing.
– Low price to gain maximum market share.
– May discourage competition.
– Used when the product is easily copied.
10-19
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Product Mix Pricing Strategies
• Product line -- pricing levels to deliver value
to different segments.
• Optional products – separate options
available for the main product.
• Captive products – needed to make main
product usable.
• By-products – created from the
manufacture of the main product.
• Product bundles – combinations.
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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/Captive Product Pricing
• Optional-product.
– Pricing optional or accessory products sold
with the main product (e.g., ice maker with
the refrigerator).
• 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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Pricing Strategies
• Captive-product.
– Pricing products that must be used with the
main product (e.g., replacement cartridges
for Gillette razors).
• By-product pricing.
– Setting a price for by-products in order to
make the main product’s price more
competitive (e.g., sawdust and buttermilk).
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Price-Adjustment Strategies
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Discount and allowance pricing.
Segmented pricing.
Psychological pricing.
Promotional pricing.
Geographical pricing.
International pricing.
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Discounts and Allowances
• Discounts – a straight reduction based
on:
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Cash.
Quantity.
Function.
Season.
• Allowances – promotional money paid
by manufacturer to retailer.
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Segmented Pricing
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Selling a product or service at two or
more prices, where the difference in
prices is not based on differences in
costs.
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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 higherpriced products as having higher quality.
• Consumers use price less when they
can judge quality of a product.
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Promotional Pricing
• Promotional pricing approaches.
– Loss leaders.
– Special event pricing.
– Low-interest financing.
– Longer warranties.
– Free maintenance.
– Discounts.
– Cash rebates.
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Copyright © 2007 Pearson Education Canada
Geographical Pricing
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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.
– Internet.
10-30
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Initiating Price Changes
• Price Cuts
– Excess capacity.
– Falling market
share.
– Dominate market
through lower
costs.
10-31
• Price Increases
– Cost inflation.
– Over-demand.
Cannot supply all
customers’ needs.
Copyright © 2007 Pearson Education Canada
Responding to Competitor
Price Changes
• When a competitor lowers prices:
– Reduce price to match the competitors’ price.
– Maintain price but increase the perceived value
of the offer.
– Improve quality and raise price.
– Hold price and introduce a new brand at a
higher price.
– Hold price and introduce a new brand at a
lower price (fighting brand).
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Pricing Ethics
• Competitors.
– Price-fixing.
– Predatory pricing.
• Manufacturer and retailer.
– Retail price maintenance.
– Discriminatory pricing.
• Manufacturer/retailer and consumer.
– Deceptive pricing.
10-33
Copyright © 2007 Pearson Education Canada
Looking Back
• 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.
10-34
Copyright © 2007 Pearson Education Canada