Download Price Adjustment Strategies

10 AND 11
PRINCIPLES OF
MARKETING
Pricing Products:
Understanding and Capturing Customer Value
Pricing Products:
Pricing Strategies
Learning Objectives
After studying this chapter, you should be able to:
1.
Answer the question “What is price?” and discuss the
importance of pricing in today’s fast-changing environment
2.
Discuss the importance of understanding customer value
perceptions when setting prices
3.
Discuss the importance of company and product costs in
setting prices
4.
Identify and define the other important internal and
external factors affecting a firm’s pricing decisions
10-2
What Is Price?
Price is the amount of money charged for a
product or service. It is the sum of all the
values that consumers give up in order to
gain the benefits of having or using a
product or service.
Price is the only element in the marketing mix
that produces revenue; all other elements
represent costs
10-4
Factors to Consider When Setting Prices
Customer Perception of Value
Value-based pricing uses the buyers’
perceptions of value, not the seller’s cost,
as the key to pricing. Price is considered
before the marketing program is set.
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Value-based pricing is customer driven
Cost-based pricing is product driven
10-6
Factors to Consider When Setting Prices
Customer Perception of Value
Value-based pricing
• Good-value pricing
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Offers the right combination of quality and
good service to fair price
Value-added pricing
Existing brands are being redesigned to
offer more quality for a given price or the
same quality for less price
10-7
Factors to Consider When Setting Prices
Customer Perception of Value (Good-Value
Pricing)
Everyday low pricing (EDLP) involves charging a
constant everyday low price with few or no
temporary price discounts
High-low pricing involves charging higher prices on an
everyday basis but running frequent promotion to
lower prices temporarily on selected items
10-9
Factors to Consider When Setting Prices
Customer Perception of Value (Value-Added
Pricing)
Value-added pricing attaches value-added features
and services to differentiate offers, support higher
prices, and build pricing power
Pricing power is the ability to escape price
competition and to justify higher prices and margins
without losing market share
10-10
Factors to Consider When Setting Prices
Company and Product Costs
Cost-based pricing involves setting prices
based on the costs for producing,
distributing, and selling the product plus a
fair rate of return for its effort and risk
10-11
Factors to Consider When Setting Prices
Company and Product Costs
Types of costs
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Fixed costs
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Rent, salaries etc
Variable costs
Raw materials, packaging etc
Total costs
TC = TFC + TVC
10-12
Factors to Consider When Setting Prices
Company and Product Costs – (2) Cost-Based
Pricing
Cost-based pricing adds a standard markup
to the cost of the product
markup price= unit cost
(1 - desired rate of return)
10-18
Factors to Consider When Setting Prices
Other Internal and External Considerations
Affecting Price Decisions
Customer perceptions of value set the upper
limit for prices, and costs set the lower limit
Companies must consider internal and
external factors when setting prices
10-21
Factors to Consider When Setting Prices
Other Internal and External Considerations
Affecting Price Decisions
Internal factors
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Marketing strategies
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Organization
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Who should set the price and who can influence
Objectives
Survival, profit maximization, customer retention etc
Marketing mix
4 P’s (Product, Place, Promotion and Price)
External factors
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Market demand
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Competitor’s strategies and prices
10-22
Factors to Consider When Setting Prices
Other Internal and External Considerations
Affecting Price Decisions
Types of markets
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Pure competition
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Monopolistic competition
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Oligopolistic competition
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Pure monopoly
10-28
Factors to Consider When Setting Prices
Other Internal and External Considerations
Affecting Price Decisions
Pure competition is a market with many buyers and
sellers trading uniform commodities where no
single buyer or seller has much effect on market
price
Monopolistic competition is a market with many
buyers and sellers who trade over a range of
prices rather than a single market price with
differentiated offers.
10-29
Factors to Consider When Setting Prices
Other Internal and External Considerations
Affecting Price Decisions
Oligopolistic competition is a market with few sellers
because it is difficult for sellers to enter who are
highly sensitive to each other’s pricing and
marketing strategies
Pure monopoly is a market with only one seller. In a
regulated monopoly, the government permits a
price that will yield a fair return. In a non-regulated
monopoly, companies are free to set a market
price.
10-30
Factors to Consider When Setting Prices
Other Internal and External Considerations
Affecting Price Decisions
The demand curve shows the number of units the
market will buy in a given period at different prices
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Normally, demand and price are inversely related
Higher price = lower demand
For prestige (luxury) goods, higher price can equal
higher demand when consumers perceive higher
prices as higher quality
10-31
Factors to Consider When Setting Prices
Other Internal and External Considerations
Affecting Price Decisions
Price elasticity of demand illustrates the
response of demand to a change in price
Inelastic demand occurs when demand hardly
changes when there is a small change in price
Elastic demand occurs when demand changes
greatly for a small change in price
10-32
Factors to Consider When Setting Prices
Other Internal and External Considerations
Affecting Price Decisions
Factors affecting price elasticity of demand
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Unique product
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Quality
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Prestige
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Substitute products
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Cost relative to income
10-33
Factors to Consider When Setting Prices
Other Internal and External Considerations
Affecting Price Decisions
Competition strategies and prices
Factors to consider
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Comparison of offering in terms of customer value
Strength of competitors
Competition pricing strategies
Customer price sensitivity
10-34
Factors to Consider When Setting Prices
Other Internal and External Considerations
Affecting Price Decisions
Other external factors
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Economic conditions
Resellers’ response to price
Government
Social concerns
10-35
TWO BROAD NEW-PRODUCT PRICING
STRATEGIES

Market skimming pricing
Setting a high price for a new product
to skim maximum revenues layer by
layer from the segments willing to pay
the high price.
Sony introduced HDTV, Blu-Ray Disc
Player

Market penetration pricing
Setting a low price for a new product
in order to attract a large number of
buyers and a large market share.
Maybelline High Definition Mascara
Product Mix Pricing Strategies
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Product line pricing
Optional-product pricing
Captive- product pricing
By-product pricing
Product bundle pricing
1. Product Line Pricing
Setting prices for a closely related set of
products or for a product line.
Different elements of the product line can be
used to appeal to different segments of the
market.
The product can differ in small ways, such as
features or complementary
Example, Coke, Diet Coke, Cherry Coke, and
Vanilla Coke, the prices are quite similar
2. Optional-Product Pricing
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Offering to sell optional or accessory
products along with their main product.
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Example, I-Pod buyers may choose
extra accessories such as travel
chargers, external transmitters, speakers
and armbands.
3. Captive-Product Pricing
• Applies to products that are used together
when one of the product fills a sustainable
need.
• Example, Gillette prices razors rather
modestly but makes huge margins on the
blades.
4. By-Product Pricing
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Manufacturers will seek a
market for its by-products
and should accept any
price that covers more
that the cost or storing
and delivering them.
Meat processes,
petroleum, agriculture
products, chemicals etc
Example, zoo sells
manure to farmers
5. Price Bundling (Product Bundle Pricing)
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Takes a set of products, offers them to
customers in a package, usually price the
package lower than sum of the individual
components.
Often consisting of models that slow sellers,
specially priced to eliminate inventory
But, some of the bundle can be prices higher
than the sum of the product, example, McDHappy Meals
Nevertheless, you as a product manager shall
seek ways to unbundled the product package
to allow customers to choose what they want
to pay for
Price Adjustment Strategies
Discount and allowance pricing
 Segmented pricing
 Psychological pricing
 Promotional pricing
 Geographical pricing
 International pricing
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Price Adjustment Strategies
Pricing Strategies
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Discounts
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Cash discount for paying promptly
Quantity discount for buying in large volume
Functional (trade) discount for selling, storing,
distribution, and record keeping
Allowances
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Trade in allowance for turning in an old item
when buying a new one
Promotional allowance to reward dealers for
participating in advertising or sales support
programs
11-14
Price Adjustment Strategies
Pricing Strategies
Discount and allowance pricing reduces
prices to reward customer responses such
as paying early or promoting the product
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Discounts
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Allowances
11-13
Price Adjustment Strategies
Pricing Strategies
Segmented pricing is used when a
company sells a product at two or more
prices even though the difference is not
based on cost
Customer segment pricing
Product form segment pricing
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Different versions of the product are priced
differently
Location pricing
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Charge different price for different location
11-16
Price Adjustment Strategies
Pricing Strategies
Psychological pricing occurs when sellers consider
the psychology of prices and not simply the economics,
the price is used to say something about the product.
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Reference prices are prices that buyers carry in their
minds and refer to when looking at a given product
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Noting current prices
Remembering past prices
Assessing the buying situations
11-20
Price Adjustment Strategies
Pricing Strategies
Promotional pricing is when prices are
temporarily priced below list price or cost to
increase demand.
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Loss leaders
Special event pricing
Cash rebates
Low interest financing
Longer warrantees
Free maintenance
11-21
Price Adjustment Strategies
Pricing Strategies
Risks of promotional pricing
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Used too frequently, and copies by
competitors can create “deal-prone”
customers who will wait for promotions and
avoid buying at regular price
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Creates price wars
11-23
Price Adjustment Strategies
Pricing Strategies
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Geographical pricing is used for customers in
different parts of the country or the world
FOB (Free-On-Board) pricing
Uniformed delivery pricing
Zone pricing
Basing point pricing
Freight absorption pricing
11-24
Price Adjustment Strategies
Pricing Strategies
Dynamic pricing
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when prices are adjusted continually to meet the
characteristics and needs of the individual customer
and situations
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International pricing
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prices are set in a specific country based on countryspecific factors
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Economic conditions
Competitive conditions
Laws and regulations
Infrastructure
Company marketing objective
11-28
Price Changes
Initiating Pricing Changes
Price cuts is a reduction in price
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Excess capacity
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Increase market share
Price increases is an increase in selling price
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Cost inflation
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Increased demand and lack of supply
11-32
Price Changes
Buyer Reactions to Pricing Changes
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Price cuts
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New models will be available
Models are not selling well
Quality issues
Price increases
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Product is “hot”
Company greed
11-33
Price Changes
Responding to Price Changes
Questions
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Why did the competitor change the price?
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Is the price cut permanent or temporary?
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What is the effect on market share and
profits?
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Will competitors respond?
11-34
Price Changes
Responding to Price Changes
Solutions
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Reduce price to match competition
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Maintain price but raise the perceived value
through communications
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Improve quality and increase price
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Launch a lower-price “fighting brand”
11-35
Public Policy and Pricing
Pricing Within Channel Levels
Price fixing: Sellers must set prices without talking to
competitors
Predatory pricing is prohibited.
Selling below cost with the intention of punishing a
competitor or gaining higher long-term profits by
putting competitors out of business
11-36
Public Policy and Pricing
Pricing Across Channel Levels
Robinson Patman Act prevents unfair price
discrimination by ensuring that sellers offer the same
price terms to customers at a given level of trade
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Price discrimination is allowed:
If the seller can prove that costs differ when selling to different
retailers
If the seller manufactures different qualities of the same product
for different retailers
11-37
Public Policy and Pricing
Pricing Across Channel Levels
Retail (resale) price maintenance is when a
manufacturer requires a dealer to charge a specific
retail price for its products.
Deceptive pricing occurs when a seller states prices
or price savings that mislead consumers or are not
actually available to consumers
Both are prohibited under the LAW!
11-39
Public Policy and Pricing
Pricing Across Channel Levels
Deceptive pricing occurs when a seller states prices
or price savings that mislead consumers or are not
actually available to consumers
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Scanner fraud failure of the seller to enter current
or sale prices into the computer system
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Price confusion results when firms employ pricing
methods that make it difficult for consumers to
understand what price they are really paying
11-39