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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. 10-3 Copyright © 2007 Pearson Education Canada Pricing Best Practices • • • • • Develop a 1 percent pricing mentality. Consistently deliver more value. Price strategically, not opportunistically. Know your competition. Make pricing a process . 10-4 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. 10-5 Copyright © 2007 Pearson Education Canada Pricing Decision Factors External Factors Internal Factors • • • • • • Marketing objectives. Marketing mix. Costs. Organization style. Target market. Positioning objectives. 10-6 • • • • • • • 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. 10-7 Copyright © 2007 Pearson Education Canada 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. 10-8 Copyright © 2007 Pearson Education Canada 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. 10-9 Copyright © 2007 Pearson Education Canada 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. 10-10 Copyright © 2007 Pearson Education Canada Pricing Decision External Factors • The market and demand: – Costs set the lower limit of prices. – The market and demand set the upper limit. 10-11 Copyright © 2007 Pearson Education Canada Pricing in Different Markets • Pure competition. – • Monopolistic competition. – • Many buyers and sellers who trade over a range of prices Oligopolistic competition. – • 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. • • 10-13 Inelastic – minimal change in demand as price increases. Elastic – significant drop in demand as price increases. Copyright © 2007 Pearson Education Canada Price Setting Considerations • Product costs. – Price floor – no profits below this price. • • Competitors’ prices and other internal and external factors. Consumer perceptions of value. – Price ceiling – no demand above this price. 10-14 Copyright © 2007 Pearson Education Canada 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 Copyright © 2007 Pearson Education Canada 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 Copyright © 2007 Pearson Education Canada 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? 10-17 Copyright © 2007 Pearson Education Canada 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 Copyright © 2007 Pearson Education Canada 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 Copyright © 2007 Pearson Education Canada 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. 10-20 Copyright © 2007 Pearson Education Canada 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. 10-21 Copyright © 2007 Pearson Education Canada 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). 10-22 Copyright © 2007 Pearson Education Canada 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). 10-23 Copyright © 2007 Pearson Education Canada Price-Adjustment Strategies • • • • • • Discount and allowance pricing. Segmented pricing. Psychological pricing. Promotional pricing. Geographical pricing. International pricing. 10-24 Copyright © 2007 Pearson Education Canada Discounts and Allowances • Discounts – a straight reduction based on: – – – – Cash. Quantity. Function. Season. • Allowances – promotional money paid by manufacturer to retailer. 10-25 Copyright © 2007 Pearson Education Canada Segmented Pricing • Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. – – – – 10-26 Customer-segment. Product-form. Location pricing. Time pricing. Copyright © 2007 Pearson Education Canada 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. 10-27 Copyright © 2007 Pearson Education Canada Promotional Pricing • Promotional pricing approaches. – Loss leaders. – Special event pricing. – Low-interest financing. – Longer warranties. – Free maintenance. – Discounts. – Cash rebates. 10-28 Copyright © 2007 Pearson Education Canada Geographical Pricing • • • • • FOB-origin pricing. Uniform-delivered pricing. Zone pricing. Basing-point pricing. Freight-absorption pricing. 10-29 Copyright © 2007 Pearson Education Canada 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 Copyright © 2007 Pearson Education Canada 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). 10-32 Copyright © 2007 Pearson Education Canada 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