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Section 6 Pricing The Determinants of Pricing Gillette Commands a Price Premium Synonyms for Price Rent Tuition Fee Fare Rate Toll Premium Honorarium Special assessment Bribe Dues Salary Commission Wage Tax Market and Demand Factors Affecting Pricing Decisions Pricing in Different Types of Markets Pure Competition Many Buyers and Sellers Who Have Little Effect on the Price Monopolistic Competition Many Buyers and Sellers Who Trade Over a Range of Prices Pure Monopoly Single Seller Oligopolistic Competition Few Sellers Who Are Sensitive to Each Other’s Pricing/ Marketing Strategies CHPT: 14-5 The Components of Total Cost Used in Determining Pricing Fixed Costs (Overhead) Variable Costs Costs that don’t vary with sales or production levels. Costs that do vary directly with the level of production. Rent on the Arena Transportation Salaries Raw materials Packaging Materials Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production The Three C’s Model for Price Setting Low Price No possible profit at this price Costs Competitors’ prices and prices of substitutes Customers’ High Price assessment No possible of unique demand at product this price features Elastic Demand Small change in price causes a significant change in quantity demanded Ferrari Inelastic Demand Change in price leads to little affect or change on quantity demanded Gasoline, Milk Objectives in Setting Price Increase profits Attract new customers Maintain current customers Increase profit per customer Introduce new product Generate cash Improve Return On Investment Attract New Customers Introductory coupons / discounts Trial offers provide incentive maintain reference price increase familiarity reduce risk Problem perceived as unfair Pricing Common Mistakes Number one problem facing marketing executives Too cost oriented Not revised enough to reflect changes in market Do not take entire marketing mix into account Not varied enough for different products, different market segments, different purchase occasions Price Cues “Left to right” pricing ($299 vs. $300) Odd number discount perceptions Even number value perceptions Ending prices with 0 or 5 “Sale” written next to price When to Use Price Cues Customers purchase item infrequently Customers are new Product designs vary over time Prices vary seasonally Quality or sizes vary across stores Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Pricing strategies change as the product passes through its life cycle •PREMIUM STRATEGY • Producing a high-quality product and charging the highest price •ECONOMY STRATEGY •Producing a lower quality product but charging a low price Rolex vs Timex watches • GOOD VALUE STRATEGY • “We have high quality, but at a lower price” •OVERCHARGING STRATEGY •Company overprices its product in relation to its quality •GM uses combination of strategies, offering various automobiles Hummer – Cadillac - Pontiac Marriott – Courtyard Marriott – Residence Inn Pricing Strategies for New Products P/Q Higher Price Lower Price Higher Quality Premium Strategy Good Value Strategy Lower Quality Overcharging Strategy Economy Strategy “Penetration” is a market share maximization strategy Penetration Pricing •Setting a low initial price •Attract large number of buyers •Win large market share •Low price serves as barrier to entry for competitors “Skimming” is a profit maximization strategy Market Skimming – •Setting initial high prices for a short time before lowering prices to more competitive levels •Ex: iPhone, new albums, movies •As sales slow or competitors introduce similar products, price is lowered •Follow-the-leader pricing strategy •uses a particular competition as a model •Variable pricing strategy •offer price concessions to certain customer •Flexible pricing strategy •take into consideration special market conditions •What the traffic will bear •only used when there is little or no competition Pricing Strategies Differential Pricing Strategies Discriminatory pricing • Selling same product/service to different buyers at different price • Movies tickets sold to children/over 65 for discount • Priceline.com Second-market discounting • Students get in free at Vanderbilt football games • Golf courses weekend versus weekday pricing When you name your price, the seller has already told Priceline what minimum price he is willing to accept. The difference from traditional retailing is that you, the buyer, don't know what that price is. That's a breakthrough, all right. For sellers. Priceline offers them a clever way to charge different prices to different customers, based on their willingness to pay. Psychological Pricing Prestige Pricing Price is based on consumer’s emotion and image rather than economy $999.99 Setting an artificially high price to provide a distinct image Reference Pricing Lesser know brands featured next to name brands to reflect value VS Product Line Pricing Setting price steps between items in the same product line Each product offers more features John Deere tractors 1200.00 – 5000.00 Armani Sports Coats 250 – 500 – 850 Prices should consider Differences between products, customer evaluations of features, and benefits & competitors prices Psychological Pricing Odd-Even Pricing $9.95 vs $10.00 Traditional Pricing Keep prices close to historical costs Optional Product Pricing Pricing optional or accessory products sold with the main product Which products to include in base price, and which to offer as options – power windows, cruise control, radio with CD player, DVD player Car By-product Pricing Pricing low-value by-products to get rid them, or to reduce the price of the main product Chicken processors sell feathers to mattress and pillow makers Lumber mills sell bark and sawdust as decorative mulch for home and commercial landscaping Allows producer to reduce main product price and become more competitive Captive Product Pricing Pricing products that must be used with main product Razor blades used with special handle Camera film that is camera specific Computer software Main products are priced low Set high markup on captive product Two-part Pricing The price of the service is broken into a fixed fee and a variable usage fee Telephone charges monthly rate – fixed fee Charges for calls beyond certain amount of minutes – variable usage fee Fixed amount must be low enough to induce usage of service Profit is made on variable fees Product Bundle Pricing Combining several products and offering the combination at a price below that of buying the products individually Theatres & sports teams selling season tickets Hotel packages that include room, meals, and entertainment Restaurants offer complete meals rather than individual items from a la carte menu Promotes sale of products that might not purchased otherwise Bundling at Disney World Products: Each Park Entrance “Hopper” Option Where is the 1 day hopper? (These are the 2005 prices) Overcharging Pricing Cost is more than it is really worth. Marketing Debate Is the right price a fair price? Take a position: 1. Prices should reflect the value that consumers are willing to pay. or 2. Prices should primarily just reflect the cost involved in making a product. Marketing Discussion Think of all the pricing methods described in this lecture. As a consumer, which pricing methods have you personally experienced? Which pricing method do you personally prefer to deal with?
