Download Figure 13.3 13-14 Marketing: Real People, Real Decisions

Marketing: Real People, Real Decisions
Pricing Methods
Chapter 13
Lecture Slides
Solomon, Stuart,
Carson, & Smith
Your name here
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Date
Marketing: Real People, Real Decisions
Chapter Learning Objectives
When you have completed your study of this chapter,
you should be able to:
• Understand key pricing strategies.
• Explain pricing tactics for individual
and multiple products.
• Describe the psychological aspects of
pricing.
• Understand some of the legal and
ethical considerations in pricing.
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Marketing: Real People, Real Decisions
Introduction to the Topic
• This chapter picks up from where the previous discussion on pricing
left off, namely, the need to determine what pricing strategy would be
the most effective way for the organization to achieve its objectives.
• Companies have a choice of pricing
strategies:
– Based on costs
– Based on demand
– Based on the competition
– Strategies for new products
• It might help to remember that to be
effective, any choice of pricing strategy
must take into account the customer’s
willingness to pay and the concept of
Figure 13.1
perceived value.
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Marketing: Real People, Real Decisions
Pricing Strategies
• Cost-plus pricing: a method of setting prices in which the seller
totals all the costs for the product and then adds the desired profit per
unit.
• Companies may add a fixed percentage to
their costs using a markup, or they may
calculate prices based on a desired gross
margin.
• Example of markup on cost: marking up
a $1 item by 33% yields a gross profit
margin of 25%.
• Example of markup on selling price:
desiring a 35% gross margin on a $1
product, the calculation would be $1
divided by (1-.35), equals a selling price
of $1.54.
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Figure 13.1
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Marketing: Real People, Real Decisions
Pricing Strategies (continued)
• Price-floor pricing: a method for calculating price in which, to
maintain full plant operating capacity, a portion of a firm’s output may
be sold at a price that covers only marginal costs of production.
• This would be only a temporary measure
to ensure operating at capacity, as it does
not provide for the covering of fixed
expenses, which need to be paid
eventually or the company goes broke.
• Cost-based pricing strategies are easy to
use and apply, but they bear little relation
to the customer’s willingness to pay or
the competitive environment for the
company’s products.
• For that, we need to look at demandbased pricing strategies.
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Figure 13.1
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Marketing: Real People, Real Decisions
Pricing Strategies (continued)
• Demand-based pricing: a price-setting method based on
estimates of demand at different prices. This requires finding out what
the customer is willing to pay, which can be difficult.
• Companies would conduct marketing
research such as test markets to determine
the product’s elasticity of demand.
• Demand-backward pricing:
pricing strategy that starts with what
customers are willing to pay, followed up
with cost management strategies to hold
costs to a satisfactory level.
• This is the marketing concept in action,
but it can be difficult to implement unless
the customer’s willingness to pay is fairly
close to the company’s costs.
Figure 13.1
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Marketing: Real People, Real Decisions
Pricing Strategies (continued)
• Chain-markup pricing: a pricing strategy that extends demandbackward pricing from the ultimate consumer all the way back through
the channel of distribution to the manufacturer.
• This strategy depends on all of the
distribution channel members being able
to cooperate with each other to perform
all of the functions necessary to get the
product to the consumer, while still
making a satisfactory profit.
• Variable pricing: a flexible pricing
strategy that reflects what individual
customers are willing to pay. Also known
as custom pricing.
• Commonly used in business-to-business
selling, and high-ticket items.
©Copyright 2003 Pearson Education Canada Inc.
Figure 13.1
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Marketing: Real People, Real Decisions
Pricing Strategies (continued)
• Price leader: the firm that sets price first in an industry; other major
firms in the industry follow the leader by staying in line.
• At one time, General Motors had the power
(and market share) to use this strategy, but
this is no longer the case.
• This situation comes perilously close to
price fixing, which is an illegal practice.
Under the Competition Act, competitors
must not collude or conspire to fix prices.
• Zellers was the price leader in Canadian
retailing until Wal-Mart showed up, which
required a relatively quick change in
strategy to move up-market using brand
name merchandise in a more narrow range.
Figure 13.1
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Marketing: Real People, Real Decisions
Pricing Strategies (continued)
• Value pricing or every day low pricing (EDLP): a pricing
strategy in which a firm sets prices that provide ultimate value to
customers.
• This is the pricing strategy used (rather
successfully) by Wal-Mart, who boast
that they do not have promotional “sales”,
but rather, have good prices every day.
• The success of EDLP is based on:
– Wal-Mart’s huge buying power and
use of this power to negotiate with
suppliers for better prices.
– Today’s time-pressed consumer who
is more interested in getting good
value at one place than having to
shop around for it.
Figure 13.1
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Marketing: Real People, Real Decisions
Pricing Strategies for New Products
• Skimming price: a very high, premium price that a firm charges for
its new, highly desirable product. This price is periodically lowered to
“skim” off the profits from each successive group of buyers as the new
product is adopted.
• This strategy works well for specialty goods such as electronics.
• Penetration pricing: a
pricing strategy in which a firm
introduces a new product at a
very low price to encourage
more customers to purchase it.
• Trial pricing: pricing a new
product low for limited period of
time to lower the risk for a
customer.
Figure 9.5
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Marketing: Real People, Real Decisions
Developing Pricing Tactics
• Two-part pricing: selling a product or service using two
different types of payments, such as an initial fee and then ongoing
charges.
• Cellular telephone plans and golf clubs
use this type of pricing.
• Payment pricing: a pricing tactic that
breaks up the total purchase price into
smaller payments to make it appear more
affordable to consumers.
• Leases of new vehicles and other high
ticket items are sold in this way.
• Price bundling: selling two or more
goods or services as a single package for
one price.
Figure 13.3
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Marketing: Real People, Real Decisions
Developing Pricing Tactics (continued)
• Captive pricing: a pricing tactic for two items that must be used
together; one item is priced very low and the firm makes its profit on
another, high-margin item essential to the operation of the first item.
• F.O.B. origin pricing: a pricing
tactic in which the cost of transporting
the product from the factory to the
customer’s location is the responsibility
of the customer.
• F.O.B. delivered pricing: A
pricing tactic in which the cost of
loading and transporting the product to
the customer is included in the selling
price, paid by the manufacturer.
Figure 13.3
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Marketing: Real People, Real Decisions
Developing Pricing Tactics (continued)
• Zone pricing: a pricing tactic in which customers in different
geographic zones pay different transportation rates.
• Uniform delivered pricing: a
pricing tactic in which a firm adds a
standard shipping charge to the price for
all customers regardless of location.
• Freight absorption pricing: a
pricing tactic in which the seller absorbs
the total cost of transportation.
• List price: the price the end customer
is expected to pay as determined by the
manufacturer. Can also be known as
manufacturer’s suggested retail price, or
MSRP. Dealers may sell for less!
Figure 13.3
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Marketing: Real People, Real Decisions
Developing Pricing Tactics (continued)
• Trade or functional discounts: discounts off list price of
products to members of the channel of distribution that perform
various marketing functions.
• Quantity discounts: a pricing
tactic of charging reduced prices for
larger quantities of a product.
• Cumulative quantity discounts:
discounts based on the total quantity
bought within a specified time period.
• Non-cumulative quantity
discounts: discounts based only on
the quantity purchased in individual
orders.
Figure 13.3
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Marketing: Real People, Real Decisions
Developing Pricing Tactics (continued)
• Cash discounts: a pricing tactic in which customers are offered a
discount for paying their bills promptly.
• Canadian Tire has long offered their own
money, redeemable for merchandise as a
reward for paying cash.
• Debit cards have made this process easier
for consumers but an additional expense
for retailers.
• Seasonal discounts: offering
discounts at certain times of the year based
on demand for the product.
• Producers offer their retailers discounts for
products ordered in advance of the season,
to help smooth out their production
scheduling.
©Copyright 2003 Pearson Education Canada Inc.
Figure 13.3
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Marketing: Real People, Real Decisions
Psychological Pricing Issues
• Internal reference price: a set price or a price range in
consumers’ minds that they refer to in evaluating a product’s price.
• At one time, a cup of coffee cost 10 cents and there was such a
thing as penny candy!
• Price lining: the practice of
setting a limited number of
different specific prices, called
price points, for items in a
product line.
• This makes the purchase
decision easier for consumers.
• General Motors pioneered this
type of pricing with their five
brands of vehicles.
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Marketing: Real People, Real Decisions
Ethical and Legal Pricing Issues
• Bait and switch: an illegal marketing practice in which an
advertised price special is used as bait to get customers into the store
with the intention of switching them to a higher-priced item.
• Predatory pricing: the policy of selling products at unreasonable
low prices to drive competitors out of business.
• Loss-leader pricing: the
pricing policy of setting prices
below cost to attract customers
into a store.
• All of these tactics are difficult
to prove and require the
customer to complain first to the
appropriate authorities to
investigate.
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Marketing: Real People, Real Decisions
Ethical and Legal Pricing Issues (continued)
• Price discrimination: the illegal practice of offering the same
product of like quality and quantity to different business customers
at different prices, thus lessening competition.
• The charging of different prices to different
customers is allowed if it can be shown that
there are cost savings associated with larger
orders which are being passed on, or the prices
are given to remain competitive.
• Price maintenance: the collaboration of
two or more firms in setting prices, usually to
keep prices high.
• Bid rigging: collusion between suppliers
responding to bid requests to lessen
competition and secure higher margins.
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Marketing: Real People, Real Decisions
Famous Last Words…
• Pricing strategy is difficult
to get just right, and just
when you think you do,
everything changes!
• In the long run, nobody
wins in a price war.
• In the short run, the
customer wins!
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