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Chapter 11
Pricing
Copyright © 2008 Pearson Education Canada
Principles of Marketing, Seventh Canadian Edition
Learning Goals
• Identify and define the internal factors affecting a
firm’s pricing decisions
• Identify and define the external factors affecting
pricing decisions, including the impact of consumer
perceptions of price and value
• Contrast the two general approaches to setting
prices
• Discuss how companies adjust their prices to take
into account different types of customers and
situations
• Discuss the key issues related to initiating and
responding to price changes
Copyright © 2008 Pearson Education Canada
11-2
Principles of Marketing, Seventh Canadian Edition
Case Study
priceline.com
• Launched in 1998 as a new
service to empower consumers
to name their own prices.
• The idea caught on and
Priceline has become the
leading name-your-own-price
Internet service
• Deals primarily in time
sensitive travel-related
products
• The concept has real appeal to
consumers
• If you get it is like “I won!”
Copyright © 2008 Pearson Education Canada
• Buys unsold rooms, seats or
vacation packages at heavily
discounted rates
• Uneven success in growing
beyond travel services
• Selling products and services
that aren’t time sensitive is
difficult.
• Priceline has hundreds or
thousands of happy repeat
customers. However not all
customers are thrilled with
their online experience.
11-3
Principles of Marketing, Seventh Canadian Edition
Learning Goals
• Identify and define the internal factors affecting a
firm’s pricing decisions
• Identify and define the external factors affecting
pricing decisions, including the impact of consumer
perceptions of price and value
• Contrast the two general approaches to setting
prices
• Discuss how companies adjust their prices to take
into account different types of customers and
situations
• Discuss the key issues related to initiating and
responding to price changes
Copyright © 2008 Pearson Education Canada
11-4
Principles of Marketing, Seventh Canadian Edition
What Is Price?
• The amount of money charged for a
product or service, or the sum of the
values that consumers exchange for the
benefits of having or using the product or
service.
Copyright © 2008 Pearson Education Canada
11-5
Principles of Marketing, Seventh Canadian Edition
Price Has Many Names
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•
•
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•
•
•
Rent
Fee, Fare
Rate
Commission
Assessment
Tuition
Toll
Copyright © 2008 Pearson Education Canada
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11-6
Premium
Retainer
Bribe
Salary
Wage
Interest
Tax
Principles of Marketing, Seventh Canadian Edition
Today’s New Pricing Environment
• Dynamic Pricing, charging different prices
depending on individual customers and
situations
• Dynamic pricing on the Web allows SELLERS to:
– Monitor customer behavior and tailor offers.
– Change prices on the fly to adjust for changes in
demand or costs.
– Aid consumers with price comparisons.
– Negotiate prices in online auctions and exchanges.
Copyright © 2008 Pearson Education Canada
11-7
Principles of Marketing, Seventh Canadian Edition
Pricing: An Important but
Difficult Decision
• Price and the Marketing Mix
– Only element to produce revenues
– Most flexible element
– Can be changed quickly
• Common Pricing Mistakes
– Reducing prices too quickly to get sales
– Pricing based on costs, not customer value
Copyright © 2008 Pearson Education Canada
11-8
Principles of Marketing, Seventh Canadian Edition
Factors to Consider When
Setting Price
• Internal Factors
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–
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• Market positioning
influences pricing
strategy
• Other pricing
objectives:
Marketing objectives
Marketing mix strategy
Costs
Product considerations
Organizational
considerations
Copyright © 2008 Pearson Education Canada
– Survival
– Current profit
maximization
– Market share
leadership
– Product quality
leadership
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Principles of Marketing, Seventh Canadian Edition
Factors to Consider When
Setting Price
• Internal Factors
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• Pricing must be carefully
coordinated with the
other marketing mix
elements
• Target costing is often
used to support product
positioning strategies
based on price
• Non-price positioning
can also be used
Marketing objectives
Marketing mix strategy
Costs
Product considerations
Organizational considerations
Copyright © 2008 Pearson Education Canada
11-10
Principles of Marketing, Seventh Canadian Edition
Discussion Question
• You are the marketer
of a new high-end
coffee maker. What
should you consider
when planning your:
1.
2.
3.
4.
Price
Product
Place
Promotion
Copyright © 2008 Pearson Education Canada
11-11
Principles of Marketing, Seventh Canadian Edition
Factors to Consider When
Setting Price
• Internal Factors
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• Costs set the floor, or
lowest amount that
should be charged
• Ideally, prices charged
cover all costs and leave
something left over for
profit
• Types of costs:
Marketing objectives
Marketing mix strategy
Costs
Product considerations
Organizational considerations
– Variable
– Fixed
– Total costs
• How costs vary at
different production
levels will influence price
setting
Copyright © 2008 Pearson Education Canada
11-12
Principles of Marketing, Seventh Canadian Edition
Factors to Consider When
Setting Price
• Internal Factors
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• Market skimming pricing
Marketing objectives
Marketing mix strategy
Costs
Product considerations
Organizational considerations
– Used when the product is
new technology, and not
easily copied
• Market penetration
pricing
– Used when there are
advantages to be gained by
large volumes early in the
life cycle
• Product line pricing
– Setting the price steps
between products in a line
Copyright © 2008 Pearson Education Canada
11-13
Principles of Marketing, Seventh Canadian Edition
Factors to Consider When
Setting Price
• Internal Factors
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• Who sets the price?
Marketing objectives
Marketing mix strategy
Costs
Product considerations
Organizational
considerations
Copyright © 2008 Pearson Education Canada
– Small companies:
CEO or top
management
– Large companies:
Divisional or product
line managers
• Price negotiation is
common in industrial
settings where pricing
departments may be
created
11-14
Principles of Marketing, Seventh Canadian Edition
Learning Goals
• Identify and define the internal factors affecting
a firm’s pricing decisions
• Identify and define the external factors affecting
pricing decisions, including the impact of
consumer perceptions of price and value
• Contrast the two general approaches to setting
prices
• Discuss how companies adjust their prices to
take into account different types of customers
and situations
• Discuss the key issues related to initiating and
responding to price changes
Copyright © 2008 Pearson Education Canada
11-15
Principles of Marketing, Seventh Canadian Edition
Factors to Consider When
Setting Price
• External Factors
• Types of markets
– Nature of market and demand
– Competitors’ costs, prices,
and offers
– Other environmental elements
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Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
• Consumer perceptions of
price and value
• Price-demand
relationship
– Demand curve
– Price elasticity of demand
Copyright © 2008 Pearson Education Canada
11-16
Principles of Marketing, Seventh Canadian Edition
Factors to Consider When
Setting Price
• External Factors
• Consider competitors’ costs,
prices, and possible reactions
when developing a pricing
strategy
• Pricing strategy influences the
nature of competition
– Nature of market and demand
– Competitors’ costs, prices, and
offers
– Other environmental elements
– Low-price low-margin
strategies inhibit competition
– High-price high-margin
strategies attract competition
• Benchmarking costs against
the competition is
recommended
Copyright © 2008 Pearson Education Canada
11-17
Principles of Marketing, Seventh Canadian Edition
Factors to Consider When
Setting Price
• External Factors
• Economic conditions
– Nature of market and demand
– Competitors’ costs, prices,
and offers
– Other environmental elements
Copyright © 2008 Pearson Education Canada
– Affect production costs
– Affect buyer perceptions of
price and value
• Reseller reactions to
prices must be considered
• Government may restrict
or limit pricing options
• Social considerations may
be taken into account
11-18
Principles of Marketing, Seventh Canadian Edition
Learning Goals
• Identify and define the internal factors affecting
a firm’s pricing decisions
• Identify and define the external factors affecting
pricing decisions, including the impact of
consumer perceptions of price and value
• Contrast the two general approaches to setting
prices
• Discuss how companies adjust their prices to
take into account different types of customers
and situations
• Discuss the key issues related to initiating and
responding to price changes
Copyright © 2008 Pearson Education Canada
11-19
Principles of Marketing, Seventh Canadian Edition
General Pricing Approaches
• Cost-Based Pricing: Cost-Plus Pricing
– Adding a standard markup to cost
– Ignores demand and competition
– Popular pricing technique because:
• It simplifies the pricing process
• Price competition may be minimized
• It is perceived as more fair to both buyers and
sellers
Copyright © 2008 Pearson Education Canada
11-20
Principles of Marketing, Seventh Canadian Edition
General Pricing Approaches
Cost-Based Pricing Example
- Variable costs: $20
- Expected sales: 100,000 units
- Fixed costs: $ 500,000
- Desired Sales Markup: 20%
Variable Cost + Fixed Costs/Unit Sales = Unit Cost
$20 + $500,000/100,000 = $25 per unit
Unit Cost/(1 – Desired Return on Sales) = Markup Price
$25 / (1 - .20) = $31.25
Copyright © 2008 Pearson Education Canada
11-21
Principles of Marketing, Seventh Canadian Edition
General Pricing Approaches
• Cost-Based Pricing: Break-Even Analysis
and Target Profit Pricing
– Break-even charts show total cost and total
revenues at different levels of unit volume.
– The intersection of the total revenue and total
cost curves is the break-even point.
– Companies wishing to make a profit must
exceed the break-even unit volume.
Copyright © 2008 Pearson Education Canada
11-22
Principles of Marketing, Seventh Canadian Edition
General Pricing Approaches
• Break-Even Analysis and Target Profit Pricing
Copyright © 2008 Pearson Education Canada
11-23
Principles of Marketing, Seventh Canadian Edition
General Pricing Approaches
• Value-Based Pricing:
– Uses buyers’ perceptions of value rather than
seller’s costs to set price.
– Measuring perceived value can be difficult.
– Consumer attitudes toward price and quality
have shifted during the last decade.
– Value pricing at the retail level
• Everyday low pricing (EDLP) vs. high-low pricing
Copyright © 2008 Pearson Education Canada
11-24
Principles of Marketing, Seventh Canadian Edition
Learning Goals
• Identify and define the internal factors affecting
a firm’s pricing decisions
• Identify and define the external factors affecting
pricing decisions, including the impact of
consumer perceptions of price and value
• Contrast the two general approaches to setting
prices
• Discuss how companies adjust their prices to
take into account different types of customers
and situations
• Discuss the key issues related to initiating and
responding to price changes
Copyright © 2008 Pearson Education Canada
11-25
Principles of Marketing, Seventh Canadian Edition
Price Adjustment Strategies
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Discount / allowance
Segmented
Psychological
Promotional
Geographical
International
• Types of discounts
– Cash discount
– Quantity discount
– Functional (trade)
discount
– Seasonal discount
• Allowances
– Trade-in allowances
– Promotional
allowances
Copyright © 2008 Pearson Education Canada
11-26
Principles of Marketing, Seventh Canadian Edition
Price Adjustment Strategies
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Discount / allowance
Segmented
Psychological
Promotional
Geographical
International
Copyright © 2008 Pearson Education Canada
• Types of segmented
pricing strategies:
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Customer-segment
Product-form pricing
Location pricing
Time pricing
• Also called revenue or
yield management
• Certain conditions must
exist for segmented
pricing to be effective
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Principles of Marketing, Seventh Canadian Edition
Price Adjustment Strategies
• Conditions Necessary for Segmented
Pricing Effectiveness
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Market must be segmentable
Segments must show different demand
Pricing must be legal
Costs of segmentation cannot exceed revenues
earned
– Segmented pricing must reflect real
differences in customers’ perceived value
Copyright © 2008 Pearson Education Canada
11-28
Principles of Marketing, Seventh Canadian Edition
Price Adjustment Strategies
•
•
•
•
•
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Discount / allowance
Segmented
Psychological
Promotional
Geographical
International
Copyright © 2008 Pearson Education Canada
• The price is used to say
something about the
product.
– Price-quality relationship
– Reference prices
– Differences as small as five
cents can be important
– Numeric digits may have
symbolic and visual
qualities that
psychologically influence
the buyer
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Principles of Marketing, Seventh Canadian Edition
Price Adjustment Strategies
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Discount / allowance
Segmented
Psychological
Promotional
Geographical
International
• Temporarily pricing
products below the list
price or even below cost
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Loss leaders
Special-event pricing
Cash rebates
Low-interest financing,
longer warranties, free
maintenance
• Promotional pricing can
have adverse effects
Copyright © 2008 Pearson Education Canada
11-30
Principles of Marketing, Seventh Canadian Edition
Price Adjustment
Strategies
• Promotional Pricing Problems
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Easily copied by competitors
Creates deal-prone consumers
May erode brand’s value
Not a legitimate substitute for effective
strategic planning
– Frequent use leads to industry price wars
which benefit few firms
Copyright © 2008 Pearson Education Canada
11-31
Principles of Marketing, Seventh Canadian Edition
Price Adjustment Strategies
•
•
•
•
•
•
Discount / allowance
Segmented
Psychological
Promotional
Geographical
International
Copyright © 2008 Pearson Education Canada
• Types of geographic
pricing strategies:
– FOB-origin pricing
– Uniform-delivered
pricing
– Zone pricing
– Basing-point pricing
– Freight-absorption
pricing
11-32
Principles of Marketing, Seventh Canadian Edition
Price Adjustment Strategies
•
•
•
•
•
•
Discount / allowance
Segmented
Psychological
Promotional
Geographical
International
Copyright © 2008 Pearson Education Canada
• Prices charged in a
specific country
depend on many
factors
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Economic conditions
Competitive situation
Laws / regulations
Distribution system
Consumer perceptions
Corporate marketing
objectives
– Cost considerations
11-33
Principles of Marketing, Seventh Canadian Edition
Learning Goals
• Identify and define the internal factors affecting
a firm’s pricing decisions
• Identify and define the external factors affecting
pricing decisions, including the impact of
consumer perceptions of price and value
• Contrast the two general approaches to setting
prices
• Discuss how companies adjust their prices to
take into account different types of customers
and situations
• Discuss the key issues related to initiating and
responding to price changes
Copyright © 2008 Pearson Education Canada
11-34
Principles of Marketing, Seventh Canadian Edition
Price Changes
• Initiate price cuts when a
firm:
– Has excess capacity
– Faces falling market
share due to price
competition
– Desires to be a market
share leader
Copyright © 2008 Pearson Education Canada
• Initiate price increases
when a firm
– can increase profit
– faces cost inflation
– faces greater demand
than can be supplied
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Principles of Marketing, Seventh Canadian Edition
Price Changes
• Alternatives to Increasing Price
– Explore more cost effective production or
distribution
– Reduce product size
– Remove features
– Unbundle the product
Copyright © 2008 Pearson Education Canada
11-36
Principles of Marketing, Seventh Canadian Edition
Price Changes
• Buyer reactions to price changes must be
considered.
• Competitors are more likely to react to
price changes under certain conditions.
– Number of firms is small
– Product is uniform
– Buyers are well informed
Copyright © 2008 Pearson Education Canada
11-37
Principles of Marketing, Seventh Canadian Edition
Responding to Competitors’
Price Changes
• Responding to competitors’ price changes
– Evaluate the competitors’ reason for the price
change
– Evaluate marketplace response to the price
change
– Considers own product’s strategy
Copyright © 2008 Pearson Education Canada
11-38
Principles of Marketing, Seventh Canadian Edition
Public Policy and Pricing
• Price-fixing
– Competitors cannot work with each other to
set prices
• Price discrimination
– Customers must be offered proportionally
equal discounts when used
• Deceptive pricing
– Cannot mislead customers as to value
received.
Copyright © 2008 Pearson Education Canada
11-39
Principles of Marketing, Seventh Canadian Edition
Ethical Issues in Pricing
• Compliance with the law is the minimum
standard when judging whether pricing
practices are ethical
• Can consumers understand prices and
compare them?
• Consumers are unaware they can
negotiate some prices
• Ability to negotiate prices
Copyright © 2008 Pearson Education Canada
11-40
Principles of Marketing, Seventh Canadian Edition
Learning Goals
• Identify and define the internal factors affecting
a firm’s pricing decisions
• Identify and define the external factors affecting
pricing decisions, including the impact of
consumer perceptions of price and value
• Contrast the two general approaches to setting
prices
• Discuss how companies adjust their prices to
take into account different types of customers
and situations
• Discuss the key issues related to initiating and
responding to price changes
Copyright © 2008 Pearson Education Canada
11-41
Principles of Marketing, Seventh Canadian Edition