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Transcript
CHAPTER 9 Pricing: Understanding and Capturing Customer Value Roadmap: Previewing the Concepts Discuss the importance of understanding customer value perceptions and company costs when setting prices. Identify and define the other important internal and external factors affecting a firm’s pricing decisions. 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 key issues related to initiating and responding to price changes. Copyright 2007, Prentice-Hall Inc. 9-2 TOYS ‘R’ US – Pricing for Success The Past 1970s: Toys ‘R’ Us emerges as a toy retailing category killer, offering greater product selection and lower prices than its small store competition. Explosive growth occurs. Late 1990s: Wal-Mart uses toys as a loss leader, pricing lower than Toys ‘R’ Us and becomes the largest toy retailer. Copyright 2007, Prentice-Hall Inc. The Present Toys ‘R’ Us tries price matching and fails miserably, losing sales, profit, and market share. New ownership closes stores, cut costs, and steps away from the price war. Efforts focus on top-selling, higher margin, or exclusive items; store atmosphere; shopper experiences; and customer service. 9-3 What Is a Price? Narrowly, price is the amount of money charged for a product or service. Broadly, price is the sum of all the values that consumers exchange for the benefits of having or using the product or service. Copyright 2007, Prentice-Hall Inc. 9-4 Figure 9-1 Factors Affecting Pricing Decisions Copyright 2007, Prentice-Hall Inc. 9-5 Customer Value Perceptions Effective, customer-oriented pricing involves understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value. Copyright 2007, Prentice-Hall Inc. 9-6 Figure 9-2 Value-Based Pricing Vs. Cost-Based Pricing Copyright 2007, Prentice-Hall Inc. 9-7 Good-Value Pricing and Value-Added Pricing Good-Value Pricing: – Offering just the right combination of quality and good service at a fair price. Value-Added Pricing: – Attaching value-added features and services to differentiate a marketing and offer and support higher prices, rather than cutting prices to match competitors. Copyright 2007, Prentice-Hall Inc. 9-8 Marketing in Action Value-Added Pricing Caterpillar offers dealers a wide range of value-added services, including training, investment advice, and guaranteed parts delivery. These services justify charging a higher price. Copyright 2007, Prentice-Hall Inc. 9-9 Internal Factors Affecting Pricing Decisions Company and Product Costs: – Fixed Costs: Costs that do not vary with production or sales level. – Variable Costs: Costs that vary directly with the level of production. Copyright 2007, Prentice-Hall Inc. 9-10 Cost-Based Pricing Methods Cost-plus pricing – Adding a standard markup to the cost of the product. Break-even pricing Target-profit pricing Copyright 2007, Prentice-Hall Inc. 9-11 Figure 9-3 Break-Even Chart for Determining Price Copyright 2007, Prentice-Hall Inc. 9-12 Internal Factors Affecting Pricing Decisions Marketing Objectives: – Company must decide on its strategy for the product. – General pricing objectives: Survival Current profit maximization Market share leadership Product quality leadership Copyright 2007, Prentice-Hall Inc. 9-13 Marketing in Action Product Quality Leadership Buenaventura Medical Group’s mission and advertising reflect its commitment to product quality leadership in health care. No mention is made of price . . . Except for the statement that “most HMO and PPO plans are accepted.” Copyright 2007, Prentice-Hall Inc. 9-14 Internal Factors Affecting Pricing Decisions Marketing Mix Strategy: – Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective marketing program. – Target costing: Pricing starts with an ideal selling price, then targets costs that will ensure that the price is met. Copyright 2007, Prentice-Hall Inc. 9-15 Internal Factors Affecting Pricing Decisions Organizational Considerations: – Must decide who within the organization should set prices. – This will vary depending on the size and type of company. Small organizations Large organizations Industrial firms Service providers Copyright 2007, Prentice-Hall Inc. 9-16 External Factors Affecting Pricing Decisions The Market and Demand: – Costs set the lower limit of prices while the market & demand set the upper limit. – Pricing in different types of markets: Pure competition Monopolistic competition Oligopolistic competition Pure monopoly – Analyzing the price-demand relationship. – The price elasticity of demand. Copyright 2007, Prentice-Hall Inc. 9-17 External Factors Affecting Pricing Decisions Types of Markets: – Pure Competition: many buyers and sellers of a uniform commodity at a uniform price. – Monopolistic Competition: many buyers and sellers of differentiated products, at different prices. – Oligopolistic Competition: a few sellers who are highly sensitive of each other’s prices. Goods may be uniform or nonuniform. – Pure Monopoly: a single government, private regulated, or private nonregulated seller. Copyright 2007, Prentice-Hall Inc. 9-18 Let’s Talk! What type of market best describes the cable TV industry? comcast.com Copyright 2007, Prentice-Hall Inc. 9-19 Figure 9-4 The Demand Curve Copyright 2007, Prentice-Hall Inc. 9-20 External Factors Affecting Pricing Decisions Competitive Issues Affecting Price – What are our competitor’s costs, prices, and market offerings? – Will our pricing attract, restrict, or drive out competitors? – How does our market offering compare to the competition in terms of customer value? – How strong are current competitors and what is their pricing strategy? – How does competition influence price sensitivity? Other External Factors Copyright 2007, Prentice-Hall Inc. 9-21 New-Product Pricing Strategies Market Skimming: – Set a high price for a new product so as to “skim” revenues layer by layer from the market. – Company makes fewer, but more profitable sales. Copyright 2007, Prentice-Hall Inc. When to Use: – Product’s quality and image must support its higher price. – Costs of low volume cannot be so high they cancel the advantage of charging more. – Competitors should not be able to enter market easily and undercut the price. 9-22 New-Product Pricing Strategies Market Penetration: – Set a low initial price in order for the brand to “penetrate” the market quickly and deeply. – Can attract a large number of buyers quickly and win a large market share. Copyright 2007, Prentice-Hall Inc. When to Use: – Market is highly price sensitive so a low price produces more growth. – Costs must fall as sales volume increases. – Need to keep competition out or effects are only temporary. 9-23 Let’s Talk! What type of pricing strategy is normally used when a new prescription drug is introduced in the U.S.? Why? Copyright 2007, Prentice-Hall Inc. 9-24 Product Mix Pricing Strategies Product line pricing Optional-product pricing Captive-product pricing By-product pricing Product bundle pricing Copyright 2007, Prentice-Hall Inc. 9-25 Product Line Pricing Sets price steps between various items in a product line based on: – Cost differences between products – Customer evaluations of different features – Competitors’ prices Copyright 2007, Prentice-Hall Inc. Product Line Pricing: Gramophone sells a line of high-end sound systems ranging in price from $5,000 to $120,000. 9-26 Optional- and Captive-Product Pricing Optional-Product – Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator). Video Snippet Song Airline uses optional-product pricing to create highly successful and profitable revenue streams. Captive-Product – Pricing products that must be used with the main product (e.g., replacement cartridges for Gillette razors). Copyright 2007, Prentice-Hall Inc. 9-27 By-Product and Product Bundle Pricing Strategies By-Product Pricing – Pricing low-value by-products to get rid of them (e.g., animal manure from zoo). Product Bundle Pricing – Pricing bundles of products sold together (software, monitor, PC, and printer). Copyright 2007, Prentice-Hall Inc. 9-28 Marketing in Action Product-Bundle Pricing Travelers who book flight, hotel, and car together can save on average $189.00 from Expedia.com Copyright 2007, Prentice-Hall Inc. 9-29 Price Adjustment Strategies Discount and allowance pricing Segmented pricing Psychological pricing Promotional pricing Geographical pricing Dynamic pricing International pricing Copyright 2007, Prentice-Hall Inc. 9-30 Discounts and Allowances Discounts – – – – Cash Quantity Functional Seasonal Allowances – Trade-in – Promotional Copyright 2007, Prentice-Hall Inc. Christmas cards purchased out of season, such as in March or July, are often sold at a discount. 9-31 Segmented Pricing Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. Types: 1. Customer-segment 2. Product-form 3. Location pricing 4. Time pricing Copyright 2007, Prentice-Hall Inc. Pricing at Walt Disney World Resorts varies by the time of year. 9-32 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 the quality of a product by examining it or recalling experiences. Copyright 2007, Prentice-Hall Inc. 9-33 Promotional Pricing Techniques Cash Rebates Special-Event Pricing Loss Leaders Low-Interest Financing Longer Warranties Free Maintenance Copyright 2007, Prentice-Hall Inc. 9-34 Marketing in Action Promotional Pricing Companies offer promotional pricing to create excitement and a sense of urgency. Copyright 2007, Prentice-Hall Inc. 9-35 Geographical Pricing FOB-origin pricing Uniform-delivered pricing Zone pricing Basing-point pricing Freight-absorption pricing Copyright 2007, Prentice-Hall Inc. 9-36 Dynamic Pricing Adjusting prices continually to meet the characteristics and needs of individual customers and situations. Copyright 2007, Prentice-Hall Inc. 9-37 Marketing in Action Dynamic Pricing Buyers benefit from dynamic pricing. Shopping sites on the Web that offer comparison services help buyers track price changes as they occur. http://shopper.cnet.com/ Copyright 2007, Prentice-Hall Inc. 9-38 International Pricing Price depends on many factors, including: – Economic conditions – Competitive situations – Laws and regulations – Development of the wholesaling and retailing system – Consumer perceptions and preferences – Costs Copyright 2007, Prentice-Hall Inc. 9-39 Initiating Price Changes Price Cuts: – Excess capacity – Falling market share – Dominate market through lower costs Price Increases: – Cost inflation – Overdemand Copyright 2007, Prentice-Hall Inc. 9-40 Let’s Talk! How would consumers likely react if Joy suddenly cut its price in half? Explain. Can you think of any products or services where a drop in price might decrease demand for the item? Explain. Copyright 2007, Prentice-Hall Inc. 9-41 Figure 9-5 Assessing and Responding to Competitor Price Changes Copyright 2007, Prentice-Hall Inc. 9-42 Figure 9-6 Public Policy Issues in Pricing Copyright 2007, Prentice-Hall Inc. 9-43 Rest Area: Reviewing the Concepts Discuss the importance of understanding customer value perceptions and company costs when setting prices. Identify and define the other important internal and external factors affecting a firm’s pricing decisions. 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 key issues related to initiating and responding to price changes. Copyright 2007, Prentice-Hall Inc. 9-44