Download 7 - Week Seven

Week Seven
Pricing Concepts
and Strategies
for Establishing
Value
Ajax Persaud
Dhruv Grewal
Copyright © 2012 McGraw-Hill Ryerson Limited
Shirley Lichti
Michael Levy
Chapter Objectives
LEARNING OBJECTIVES
LO1 Explain what price is and its importance in
establishing value in marketing
LO2 Illustrate how the 5Cs – company objectives,
customers, costs, competition, and channel
members – influence pricing decisions
LO3 Describe various pricing strategies and tactics
and their use in marketing (e.g. cost-based pricing,
competition-based pricing, value-based pricing, psychological
pricing, new product pricing, and pricing tactics targeted to
consumers and channel members)
LO4 Summarize the legal and ethical issues
involved in pricing
10-2
Chapter Objectives
10-3
LO1
Price is a Signal



Prices can be both
too high and too low
Price too low may
signal poor quality
Price set too high
might signal low value
10-4
LO1
Role of Price in the Marketing Mix
Price is usually ranked as
one of the most important
factors in purchase
decisions
Price is the only element in
the marketing mix that
generates revenue
10-5
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
10-6
LO2
The 5 Cs of Pricing
10-7
LO2
1st C: Company Objectives
• Profit Orientation
Maximize profits
Target return pricing
Target profit pricing
• Sales Orientation
• Competitor Orientation
• Customer Orientation
10-8
LO2
2nd C: Customers
Price elasticity of demand
 Elastic (price sensitive)
 Inelastic (price insensitive)
 Consumers less sensitive
to price increases for
necessities
10-9
LO2
Demand Curves
Knowing demand
curve enables to
see relationship
between price and
demand
10-10
LO2
Elasticity
Affected by
• Cross-price elasticity
• Substitution effect
• Income effect
10-11
LO2
Factors Influencing Price Elasticity of
Demand: Substitution & Income Effects




Meet 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
10-12
LO2
Factors Influencing Price Elasticity of
Demand: Cross-Price Elasticity Effect



Meet 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
10-13
LO2
3rd C: Costs

Variable Costs
Vary with production volume

Fixed Costs
Unaffected by production
volume

Total Cost
Sum of variable and fixed costs
10-14
LO2
Break Even Analysis
and Decision Making
10-15
LO2
Break Even Analysis
Total Variable Cost = Variable Cost per unit X Quantity
Total Cost = Fixed Cost + Total Variable Cost
Total Revenue = Price X Quantity
Break-Even Point (units)
=
Fixed Costs
Contribution per unit
10-16
LO2
4th C: Competition
Subway Commercial
10-17
LO2
Ethical Dilemma 11.1
White Label ABM Fees



35,000 non-bank machines
handling about 135 million
transactions a year
Surcharges vary between
$1.50 and $6.15
Canadians charged over
$420 million last year to
access their own money
10-18
LO2
5th C: Channel Members


Manufacturers,
wholesalers and retailers
can have different
perspectives on pricing
strategies
Manufactures must
protect against grey
market transactions
10-19
Other Influences on Pricing
The Internet
•
•
Increased price sensitivity
Growth of online auctions
Economic Factors
Local
economic
conditions
Increasing
disposable
income
Economic factors
Increasing
globalization
Increasing
status
consciousness
Crossshopping
10-20
LO3
Pricing Strategies
10-21
Pricing Strategies:
1. Cost-Based Methods



LO3
Cost-base pricing
methods start with cost
All costs calculated on a
per unit basis
Assumes costs don’t vary
for different levels of
production
10-22
LO3
Pricing Strategies:
2. Competitor-Based Methods
Set prices to signal
information of how
product compares with
competitors
Premium pricing
10-23
LO3
Pricing Strategies:
3. Value-Based Methods
Setting prices that
focus on the overall
value of the product
Consumer perceptions
10-24
LO3
New Product Pricing Strategies
Market Penetration
Pricing
Price skimming
10-25
LO3
Psychological Factors Affecting
Pricing Strategies
Reference
Pricing
Pricequantity
relationship
Psychological
pricing
strategies
Everyday
low pricing
(EDLP)
Odd prices
10-26
LO3
Reference Prices
Internal
reference
price
External
reference
price
10-27
LO3
Reference Pricing
• How do consumers
use reference pricing
when shopping for
cars?
• How does this ad
help the consumer?
10-28
Test Your Knowledge
Which of the following would NOT be associated with an internal
reference price?
A)
The last price a consumer paid for an item
B)
What a consumer expects to pay for an item
C)
Consumer price perception regarding an item
D)
The overall cost of ownership of an item
10-29
LO3
Everyday Low Pricing
Everyday low pricing
(EDLP)
High/low pricing
versus
• Value is created in different ways
• EDLP saves search costs of finding lowest overall prices
• High/low provides the thrill of the chase for the lowest price
10-30
LO3
Groupon
How do you
move from EDLP
to higher prices?
Payless Website
10-31
LO3
Odd Prices



Odd prices may be so
traditional that sellers are
afraid to round them off
May suggest a good deal
May suggest low quality
10-32
LO3
The Price-Quality Relationship
• Most inexperienced
consumers use price as an
indicator of quality
• Price becomes crucial when
consumers have little
knowledge about certain
products/brands
Wine ranges in price from under $5 a bottle to over
$100K a bottle. How do you know which to choose?
10-33
LO3
Pricing Tactics
Pricing strategy
Long term
vs.
Pricing tactics
Short term
10-34
LO3
Business to Business Pricing Tactics
and Discounts
Seasonal
Discounts
Cash Discounts
Quantity
discounts
Allowances
Uniform
delivered vs.
geographic
pricing
10-35
LO3
Seasonal Discounts
Designed to spur buyers into purchasing merchandise early
10-36
LO3
Cash Discounts



Reduced invoice cost if
buyer pays prior to the
end of the discount period
Encourages buyers to
pay before the discount
period ends
Seller benefits either way
10-37
LO3
Allowances



Lowers the final cost in
return for specific
behaviour
Advertising allowance
Listing allowance
10-38
LO3
Quantity Discounts
Cumulative
quantity
discount
Noncumulative
quantity
discount
10-39
LO3
Uniform Delivered vs.
Geographic Pricing
Addresses the impact of shipping, which is
often a major cost for manufacturers
10-40
LO3
Consumer Pricing Tactics
Price
lining
Price
bundling
Leader
pricing
10-41
LO3
Price Lining


Marketers establish a price floor and a price
ceiling and set prices in between
Allows for easy comparison
10-42
LO3
Price Bundling




Encourage sales of slow
moving items
Encourage stock up
Encourage trial of new
brand
Incentive to purchase
10-43
LO3
Leader Pricing
Enticing consumers
into the store with the
popular aggressively
priced item and
hoping they will pick
up other items while
shopping
10-44
LO3
Consumer Price Reductions
Markdowns
Coupons
and rebates
Quantity
discounts for
consumers
Seasonal
discounts
10-45
LO3
Markdowns



An integral component of
high/low pricing strategy
Enable retailers to get rid of
slow moving or obsolete
merchandise
Used to generate store traffic.
10-46
LO3
Quantity Discounts for Consumers


Size discount
The more you buy the cheaper the unit cost
10-47
LO3
Seasonal Discounts
©
Encourage consumers to use services or
purchase products year round
10-48
LO3
Coupons and Rebates

Coupons
–

Retailer handles
Rebate
–
Manufacturer issues
10-49
Test Your Knowledge
The redemption rate on coupons averages _____________.
A)
less than 2 percent
B)
5 percent to 10 percent
C)
20 percent to 30 percent
D)
over 30 percent
10-50
LO4
Legal and Ethical Aspects of Pricing
Deceptive
Pricing
Predatory
Pricing
Price
Discrimination
Price Fixing
10-51