Download I. Overview of Pricing Price

No way this plays in the USA!
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Chapter 11
Price the Product
Chapter Topics
1.
2.
3.
4.
5.
6.
7.
8.
Overview of Pricing
Pricing Objectives
Setting Prices based upon Market Structure
Price Elasticity
Pricing Strategies
Price Quotations
Online Pricing
The Relationship Between Price, Profit, and
Costs
9. Ethical Issues in Pricing
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Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall
I. Overview of Pricing
 Price:
The assignment of value, or the
amount the consumer must exchange
to receive the offering
– Includes money, goods, services, favors,
votes, or anything else that has value to the
other party
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Overview of Pricing
 Prices  sales  revenues  profits
 The only revenue generating
component of the 4 P’s
 Price and Perceived Value are
interconnected concepts
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II. PRICING OBJECTIVES
1. Profitability Objectives - For-profit firms
must set prices with profitability in mind:
– Target-Return Objectives: Achieving a
specified return on sales (ex: 10% ROS)
– Profit Maximization – The price at which the
company can make the most money from
sales of the product
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2. Volume Objectives
 Sales maximization: A minimum profit
level is set and firms seek to maximize
sales
 Market-share objectives: the goal set
for controlling a portion of the market
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3. Meeting Competition Objectives - Seek
to meet/beat the competitors’ price/value
equation
– Value Pricing: Pricing strategy that
emphasizes the benefits derived from a product
in comparison to the price and quality levels of
competing offerings
Q. Can you think of some examples of
products/services that use this pricing
strategy?
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4. Prestige Objectives:
Prices are set at a
relatively high level in
order to develop and
maintain an image of
quality and
exclusiveness that
appeals to statusconscious consumers
Q. Can you think of
some other
examples?
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Figure 11.2
Demand Curves for Normal and
Prestige Products
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Pizza Hut, what would you say
about their pricing objectives?
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III. Setting prices in the 4 Market Structures
Pure
Competition
Monopolistic
Competition
Oligopoly
Monopoly
Number of competitors
Many
Few to many
Few
No direct competitors
Ease of entry into
industry by new firms
Easy
Medium
Difficult
Regulated by
government
Similarity of goods or
services offered by
competing firms
Similar
Different
Can be either
similar or
different
No directly competing
goods or service
None
Some
Some
Considerable
Peach Farmer
Gap store
Texaco
Comcast Cable
Characteristics
Control over prices by
individual firms
Examples
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IV. Elasticity In Pricing Strategy
Elasticity -- measure of the responsiveness of
purchasers and suppliers to changes in
price
– When a price % change drives an even larger
% change in supply or demand, then it is
considered elastic
Elastic Demand example: A 5% national
increase in price of a Disney Cruise results
in a 10% decline in sales
Inelastic Demand example: A 10% increase in
the price of Texaco gasoline results in only a
1% decline in sales
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Figure 11.4
Price Elasticity of Demand, Part A
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Figure 11.4
Price Elasticity of Demand, Part B
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Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall
Demand Elasticity
In General…
Products are more elastic when they…
Cost a lot
Are luxuries
Are easily substituted for
Products are more inelastic when they…
Cost less
Are necessities
Are not easily substituted for
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Demand Elasticity
Q. Can you name some products that
would have highly elastic demand?
Highly inelastic demand?
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V. Product Pricing Strategies
1. Skimming Pricing: involves the use of a high
price relative to competitive offerings
– AKA “market-plus” pricing
– Often used by marketers of high-end products to
build exclusiveness and status
– Also by firms introducing a distinctive good with
little or no competition
Advantages: recover R&D costs, maximize revenues
before competition arrives, allows firms to control
demand
Disadvantage: attracts competition, may curtail
commanding market share, may cheese off
customers
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2. Penetration Pricing: when a new product
offers a relatively low entry price as
compared with competitive offerings
– AKA “market-minus” pricing
– Based on the theory that this initial low price
will move the product from unknown to brand
recognition or even brand preference stage
– Designed to generate many trial purchases
Q. Can you think of some products/services
that use a penetration pricing strategy?
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3. Everyday Low
Pricing (EDLP):
Pricing strategy of
continuously
offering low prices
rather than relying
on such short term
price cuts as
cents-off coupons,
rebates, and
special sales
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4. Competitive Pricing Strategy: reduces
emphasis on price as a competitive
variable by matching the pricing of
competitors
– Since pricing is the easiest marketing mix
element to match, companies decide to
compete by focusing their marketing efforts
on the product, distribution and promotion
elements of the marketing mix
– Primary strategy used by 2/3 of all firms
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5. Psychological pricing : pricing policy
based on the belief that certain prices or
price ranges make a good or service more
appealing than others to buyers
 Prestige pricing – similar to skimming, though
multiple competitors might use it
 Odd pricing - pricing policy based on the belief that
a price ending with and odd number just below a
round number is more appealing (ex: $1995)
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6. Flexible Pricing: pricing policy that permits variable
prices for goods and services
–
Ex: Car dealerships
7. Product-line pricing: practice of marketing different
lines of merchandise at a limited number of prices
–
Ex: Airlines offer different prices for first class,
business, and coach fares
8. Promotional pricing: pricing policy in which a lower
than normal price is used as a temporary ingredient in the
marketing strategy
–
Ex: “Buy one, get one free”
9. Loss leader: product offered to consumers at less than
cost to attract them to stores in the hope that they will buy
other merchandise at regular prices
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VI. Price Quotations
List price - Established price normally quoted
to potential buyers
Market price - Price that an intermediary or
final consumer pays for a product after
subtracting any discounts, rebates, or
allowances from the list price
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Price Quotations – Reductions from List Price
1. Cash discount: price reduction offered to a
consumer, industrial user, or marketing intermediary
in return for prompt payment of a bill
Ex: 2/10 net 30
2. Trade Discount: payment to a channel member or
buyer for performing marketing functions; also
known as a functional discount
Ex: 45% Discount on a $40 list price shirt  retailer
pays manufacturer $22 for the shirt.
3. Quantity Discount – price reductions granted for
large volume purchases.
– Are legal when applied to all customers
Ex: 20% off on all purchases > 1000 units
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4. Trade-in allowance: credit allowance
given for a used item when a new item
is purchased
5. Rebate - refund for a portion of the
purchase price, usually granted by the
product’s manufacturer
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VII. Online Pricing
 Traditional marketing strategies – like rebates,
only on-line
 Look out for Cannibalization – CLICK taking sales
away from BRICK operations
 Shopping Bots - Search engines which act as
comparison shopping agents (ex: Tripadvisor)
 Negotiated Prices Online - Buyers and sellers
can communicate and negotiate prices online
(eBay, Priceline.com, etc.)
 Prices can be changed instantly and for no cost
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VIII. The Relationship between
price, profit, and costs
 Variable costs:
Costs of production that are tied to and vary
depending on the number of units produced
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The Relationship between price,
profit, and costs
 Fixed costs:
Costs of production that don’t change with
the number of units produced
– Rent, cost of owning/maintaining factory, utilities,
equipment, fixed salaries of a firm’s executives
– Average fixed cost per unit will decrease as the
number of units produced increases
 Total costs:
Total of fixed costs and variable costs for a
set number of units produced
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Figure 11.9: Target Costing Using a Jeans Example
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Legal and Ethical
Considerations in Pricing
Deceptive pricing practices
– Going-out-of-business sale
– Bait-and-switch
– Loss-leader pricing
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Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall
Legal and Ethical
Considerations in Pricing
 Price fixing:
Two or more companies conspire to
keep prices at a certain level
– Horizontal price fixing
– Vertical price fixing
 Predatory pricing:
Firm sets a very low price for purpose
of driving competitors out of business
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Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall