Download Lessons from Chapter 8

Lessons from Chapter 8
Pricing:

is a key factor in producing revenue for a firm.

is the easiest of all marketing variables to change.
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is an important consideration in competitive intelligence.
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is considered to be the only real means of differentiation in mature markets plagued by
commoditization.
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is among the most complex decisions to be made in developing a marketing plan.
With respect to pricing, sellers:

tend to inflate prices because they want to receive as much as possible in an exchange.

must consider four key issues in pricing strategy: (1) costs, (2) demand, (3) customer
value, and (4) competitors' prices.

have increased power over buyers when certain products are in short supply, in high
demand, or during good economic times.
With respect to pricing, buyers:

often see prices as being lower than market reality dictates.
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must consider two key issues: (1) perceived value and (2) price sensitivity.

consider value to be the ratio of benefits to costs, expressed colloquially as “more bang
for the buck.”

have increased power over sellers when there are a large number of sellers in the market,
when the economy is weak, when product information is easy to obtain, or when price
comparisons between competing firms or products are easy to make.
In terms of pricing strategy, cutting prices:

can be a viable means of increasing sales, moving excess inventory, or generating shortterm cash flow.

is usually based on two general pricing myths: (1) when business is good, a price cut will
capture greater market share, and (2) when business is bad, a price cut will stimulate
sales.

can be a risky proposition for most firms because any price cut must be offset by an
increase in sales volume to maintain the same level of gross margin.

is not always the best strategy. Instead, firms are often better off if they can find ways to
build value into the product and justify the current, or a higher, price.
The key issues in pricing strategy include:

the firm's pricing objectives.
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the nature of supply and demand in the industry or market.
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the firm's cost structure.
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the nature of competition and the structure of the industry.
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the stage of the product life cycle.
The firm’s cost structure:

is typically associated with pricing through the use of breakeven analysis or cost-plus
pricing.

should not be the driving force behind pricing strategy because different firms have
different cost structures.

should be used to establish a floor below which prices cannot be set for an extended
period of time.
Pricing strategy in services:

is critical because price may be the only cue to quality that is available in advance of the
purchase experience.


becomes more important—and more difficult—when:
•
service quality is hard to detect prior to purchase
•
the costs associated with providing the service are difficult to determine
•
customers are unfamiliar with the service process
•
brand names are not well established
•
the customer can perform the service themselves
•
the service has poorly defined units of consumption
•
advertising within a service category is limited
•
the total price of the service experience is difficult to state beforehand
is often based on yield management systems that allow a firm to simultaneously control
capacity and demand in order to maximize revenue and capacity utilization.
Yield management:

involves knowing when and where to raise prices to increase revenue, or to lower prices
to increase sales volume.

is implemented by limiting the available capacity at certain price points, controlling
demand through price changes over time, and by overbooking capacity.

is common in services characterized by high fixed costs and low variable costs, such as
airlines, hotels, rental cars, cruises, transportation firms, and hospitals.

allows a firm to offer the same basic product to different market segments at different
prices.
Price elasticity of demand:

refers to customers' responsiveness or sensitivity to changes in price.

can be inelastic, in which the quantity demanded does not respond to price changes.

can be elastic, in which the quantity demanded is sensitive to price changes.

can be unitary, in which the changes in price and demand offset, keeping total revenue
the same.

is not uniform over time and place because demand is not uniform over time and place.
Situations that increase price sensitivity include when:

substitute products are widely available.

the total expenditure is high.
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changes in price are noticeable to customers.
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price comparison among competing products is easy.
Situations that decrease price sensitivity include when:
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substitute products are not available
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products are highly differentiated from the competition.
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customers perceive products as being necessities.
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the prices of complementary products go down.
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customers believe that the product is just worth the price.
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customers are in certain situations associated with time pressures or purchase risk.
Major base pricing strategies include:

market introduction pricing – the use of price skimming or penetration pricing when
products are first launched into the market

prestige pricing – intentionally setting prices at the top end of all competing products in
order to promote an image of exclusivity and superior quality.
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value-based pricing or everyday low pricing (EDLP) – setting reasonably low prices, but
still offering high quality products and adequate customer services.

competitive matching – charging what is considered to be the "going rate" for the
industry.
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non-price strategies – building a marketing program around factors other than price.
Strategies for adjusting or fine-tuning prices in consumer markets include:

promotional discounting – putting products on sale.

reference pricing – comparing the actual selling price to an internal or external reference
price.
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odd-even pricing – setting prices in odd numbers, rather than in whole, round numbers.
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price bundling – bringing together two or more complementary products for a single
price.
Strategies for adjusting or fine-tuning prices in business markets include:

trade discounts – reducing prices for certain intermediaries in the supply chain based on
the functions that the intermediary performs.

discounts and allowances – giving buyers price breaks, including discounts for cash,
quantity or bulk discounts, seasonal discounts, or trade allowances for participation in
advertising or sales support programs.

geographic pricing – quoting prices based on transportation costs or the distance between
the seller and the buyer.

transfer pricing – pricing that occurs when one unit in an organization sells products to
another unit.
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barter and countertrade – making full or partial payments in goods, services, or buying
agreements rather than in cash.

price discrimination—charging different prices to different customers.
Dynamic pricing:

has started to replace fixed pricing in many different product categories.

has been growing in importance and popularity due to the growth of online auction firms.
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involves three distinct pricing levels: (1) the opening position, (2) the aspiration price,
and (3) the price limit.

can be a long and frustrating process, but is the most logical and systematic way for two
parties who do not initially agree to reach an agreement.
Major legal and ethical issues in pricing include:

price discrimination – occurs when firms charge different prices to different customers.
The practice is illegal unless the price differential has its basis in the actual cost
differences in selling products to one customer relative to another.

price fixing – occurs when two or more competitors collaborate to set prices at an
artificial level.
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predatory pricing – occurs when a firm sets prices for a product below the firm's variable
cost with the intent of driving competition out of business or out of a specific market.

deceptive pricing – occurs when firms intentionally mislead customers with price
promotions.