Student Report, Feb. 17, 2012

2. • Rent • Wages
• Interest • Bribe
• Rate • Fare
• Professional • Premium
Fee • Retainer
• Commission • Toll
• Tuition • Tax
• Salary • Assessment

3. 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.

4. •Price and the Marketing Mix:
Only element to produce revenues
Most flexible element
•Price Competition
•Common Pricing Mistakes

5. Factors Affecting Price Decisions

6. Factors to Consider When Setting
Internal Factors
Price
1. Marketing objectives
•Market positioning influences strategy
•Other pricing objectives:
Survival
Current profit maximization
Market share leadership
Product quality leadership
•Not-for-profit objectives:
Partial or full cost recovery
Social pricing

7. Factors to Consider When Setting
Price
Internal Factors
2. Marketing mix strategies
•Pricing must be carefully coordinated with
the other marketing mix elements
•Target costing is often used to support
product positioning strategies based on
price
•Nonprice positioning can also be used

8. Factors to Consider When Setting
Price
Internal Factors
3. Costs
•Types of costs:
Variable
Fixed
Total costs

9. Factors to Consider When Setting
Price
Internal Factors
4. Organizational considerations
•Who sets the price?
Small companies: CEO or top
management
Large companies: Divisional or product
line managers
•Price negotiation is common in industrial
settings
•Some industries have pricing departments

10. Factors to Consider When Setting
Price
External Factors
1. Nature of market and demand
•Types of markets
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
•Consumer perceptions of price and value
•Price-demand relationship
Demand curve
Price elasticity of demand

11. Factors to Consider When Setting
rice
External Factors
2. Competitors’ costs, prices, and offers
•Consider competitors’ costs, prices, and
possible reactions when developing a pricing
strategy
•Benchmarking costs against the competition
is recommended

12. Factors to Consider When Setting
Price
External Factors
3. Other environmental elements
•Economic conditions
Affect production costs
Affect buyer perceptions of price and value
•Reseller reactions to prices must be considered
•Government may limit or restrict pricing options
•Social considerations may be taken into account

13. Price Adjustment
Strategies

14. GENERAL PRICING
APPROACHES

15. Major Considerations in Setting Prices
Competitor’s prices Consumer’s
Product perceptions
and other internal
Costs of value
and external factors

16. General Pricing Approaches
1) Cost-based Approach
1) Cost-plus Pricing
2) Break-even Analysis or Target Profit
Pricing
2) Buyer-based Approach
1) Value-based Pricing
3) Competition-based Approach
1) Going-rate Pricing
2) Sealed-bid Pricing

17. General Pricing Approaches
1) Cost-based Approach
1) Cost-plus Pricing
2) Break-even Analysis or Target Profit
Pricing
2) Buyer-based Approach
1) Value-based Pricing
3) Competition-based Approach
1) Going-rate Pricing
2) Sealed-bid Pricing

18. The Cost-Based Approach:
Cost-Plus Pricing
 Adding standard mark-up to costs
 Process:
 Estimating the per unit cost of
production
 Capital(K): land, building, equipment = FC
 Labor(L): worker’s wages = VC
 Adding a mark-up
 Desired profit per item
 Sales price = COP + mark-up

19. The Cost-Based Approach:
Cost-Plus Pricing
 Customers are price sensitive
 Popular pricing technique because:
 It simplifies the pricing process.
 Buyers are more certain to costs.
 Price competition may be minimized.
 It is perceived as more fair to both buyers and
sellers.

20. How costs affect gasoline prices
Distribution &
$0.278 10%
Marketing
Refining Costs
$0.1946 7%
& Profits
Federal &
$0.3892 14%
2010 State Taxes
Average
Retail Price:
$2.78
$1.8904 68% Crude Oil

21. The Cost-Based Approach:
Cost-Plus Pricing
Does using standard mark-ups to set
prices make sense?

22. General Pricing Approaches
1) Cost-based Approach
1) Cost-plus Pricing
2) Break-even Analysis or Target Profit
Pricing
2) Buyer-based Approach
1) Value-based Pricing
3) Competition-based Approach
1) Going-rate Pricing
2) Sealed-bid Pricing

23. Cost-Based Approach: Break-even
Analysis and Target Profit Pricing
 Firm tries to determine the price at
which it will break even or make the
target profit it is seeking.
 Companies wishing to make profit must
exceed the break-even unit volume.

24. The Cost-Based Approach
 What is ignored:
 Brand / Image / Market Position
 Price-Demand Relationship
 Customer-perceived Value
 Problems:
 Sub-optimal profits
 Difficult to allocate cost

25. General Pricing Approaches
1) Cost-based Approach
1) Cost-plus Pricing
2) Break-even Analysis or Target Profit
Pricing
2) Buyer-based Approach
1) Value-based Pricing
3) Competition-based Approach
1) Going-rate Pricing
2) Sealed-bid Pricing

26. Buyer-Based Approach:
Value-Based Pricing
 Basing prices on product’s perceived
value
 Buyer’s perceptions of value is the key to
pricing.
 Price is considered along with the other
marketing mix variables before the
marketing program is set.

28. General Pricing Approaches
Value-based
Cost-based Pricing
Pricing
 Easiest pricing method  Requires research
 Sub-optimal profits  Optimal profits
 Considered fair  Can be considered
 Difficult to allocate fixed unfair
costs  Complicated to
administer

29. Buyer-Based Approach:
Value-Based Pricing
 Measuring perceived value:
 Asking customers
 Conducting experiments
 Situations:
 Overpriced = products sell poorly
 Underpriced = sell very well, less revenue
* Consumer’s attitudes toward price and quality have
shifted during the last decade.

30. Buyer-Based Approach:
Value-Based Pricing

31. Buyer-Based Approach:
Value-Based Pricing
Jack Welch,
Former CEO of GE
“The value decade is
upon us. If you can’t
sell a top quality
product at the world’s
best price, you’re
going to be out of the
game…. The best
way to hold your
customers is to
constantly figure out
how to give them
more or less.”

32. Buyer-Based Approach:
Value-Based Pricing
 Value-pricing strategies – offering just
the right combination of quality and
good service at a fair price
 Value pricing has involved redesigning
existing brands in order to offer more
quality for the given price or the same
quality for less.

33. Buyer-Based Approach:
Value-Based Pricing

34. Buyer-Based Approach:
Value-Based Pricing
 In business-to-business marketing
situations, the pricing challenge is to find
ways to maintain the company’s pricing
power.
 Many companies adopt value-added
strategies.

35. Buyer-Based Approach:
Value-Based Pricing
 Value Pricing at the Retail Level
 Everyday Low Pricing (EDLP)
 Charging a constant, everyday low price
with few or no temporary price discounts
 High-Low Pricing
 Charging higher prices on an everyday
basis but running frequent promotions to
lower prices temporarily on selected
items below EDLP level

36. Buyer-Based Approach:
Value-Based Pricing
 Why adopt Everyday Low Pricing?
 Constant sales and promotions are costly
and have eroded consumer confidence in
the credibility of everyday shelf prices.
 Consumers have less time and patience
for such time-honored traditions as
watching for supermarket specials and
clipping options.

37. Buyer-Based Approach:
Value-Based Pricing
 To EDLP, to Hi-Lo or not to?
 What type of market are you in?
 Are your customers price sensitive?
 Do you have a cost advantage?
 Who are your customers? Are your price
sensitive customers willing to invest in
searching for the lowest price (i.e., read
weekly circulars)?

38. Everyday Low Prices (EDLP)

39. Everyday Low Prices (EDLP)

40. High-Low (Hi-Lo) Pricing

41. General Pricing Approaches
1) Cost-based Approach
1) Cost-plus Pricing
2) Break-even Analysis or Target Profit
Pricing
2) Buyer-based Approach
1) Value-based Pricing
3) Competition-based Approach
1) Going-rate Pricing
2) Sealed-bid Pricing

42. Competition-Based Approach:
Going-rate Pricing
 A firm bases its price largely on
competitor’s prices, with less attention
paid to its own costs or to demand.
 May price at the same level, above, or
below competition.

43. Competition-Based Approach:
Going-rate Pricing

44. Competition-Based Approach:
Going-rate Pricing
 Why is it quite popular?
 Represents the collective wisdom of the
industry concerning the price that will
yield a fair return.
 Holding on to the going price will prevent
harmful price wars.

45. General Pricing Approaches
1) Cost-based Approach
1) Cost-plus Pricing
2) Break-even Analysis or Target Profit
Pricing
2) Buyer-based Approach
1) Value-based Pricing
3) Competition-based Approach
1) Going-rate Pricing
2) Sealed-bid Pricing

46. Competition-Based Approach:
Sealed-bid Pricing
 A firm bases its price on how it thinks
competitors will price rather that on its
own costs or on the demand.
 Firms bid for jobs.
 The firm wants to win the contract.

48. MARKET SKIMMING
PRICING
AND
MARKET PENETRATION
PRICING

49. Market Skimming Pricing
Setting a high price for
a new product to skim
maximum revenues
layer by layer from the
segments willing to
pay the high price; the
company makes fewer
but more profitable
sales.

50. Conditions that favor Market
Skimming Pricing
•The product’s quality and image must support its
higher price, and image must support its higher
price, and enough buyers must want the product at
the price.
•The cost of producing a smaller volume cannot be
so high that they cancel the advantage of charging
more.
•Competitors should not be able to enter the market
easily and undercut the high price.

51. Market Penetration Pricing
Setting a low
price for a new
product in order
to attract a large
number of
buyers and a
large market
share.

52. Conditions that favor Market
Penetration Pricing
• The market must be price sensitive so that a low
price produces more market growth.
• Production and distribution cost must fall as sales
volume increases.
• The low price must help keep out the competition,
and the penetration pricer must maintain its low-price
position.

53. Product Mix
Pricing
Strategies

54. Product Mix
Pricing Strategies
Product Line Pricing
 Setting price steps between product
line items.
 Price points

55. Product Mix
Pricing Strategies
Optional-Product Pricing
 Pricing optional or
accessory products sold
with the main product

56. Product Mix
Pricing Strategies
Captive-Product Pricing
 Pricing products that must be
used with the main product
 High margins are often
set for supplies
 Services: two-part pricing
strategy
 Fixed fee plus a
variable usage rate

57. Product Mix
Pricing Strategies
By-Product Pricing
 Pricing of low-value
by-products to get rid of
them

58. Product Mix
Pricing Strategies
Product Bundle Pricing
 Pricing bundles of
products sold together
 Common in fast food
industry

60. Price Adjustment
Strategies

61. Price Adjustment Strategies
Strategies  Types of discounts
 Cash discount
 Quantity discount
 Discount / allowance  Functional (trade) discount
 Segmented  Seasonal discount
 Psychological  Allowances
 Promotional  Trade-in allowances
 Promotional allowances
 Geographical
 Dynamic
 International

62. Price Adjustment Strategies
Strategies  Types of segmented pricing
strategies:
 Customer-segment
 Discount / allowance  Product-form pricing
 Location pricing
 Segmented
 Time pricing
 Psychological  Also called revenue or yield
 Promotional management
 Geographical  Certain conditions must exist
for segmented pricing to be
 Dynamic effective
 International

63. Price Adjustment Strategies
 Conditions Necessary for
Segmented Pricing Effectiveness
 Market must be segmentable
 Segments must show different demand
 Pricing must be legal
 Costs of segmentation can not exceed revenues
earned
 Segmented pricing must reflect real differences in
customers’ perceived value

64. Price Adjustment Strategies
Strategies  The price is used to say
something about the product.
 Reference prices
 Discount / allowance  Numeric digits may have
symbolic and visual qualities
 Segmented that psychologically influence
 Psychological the buyer
 Promotional
 Geographical
 Dynamic
 International

65. Price Adjustment Strategies
Strategies  Temporarily pricing products
below the list price or even
below cost
 Discount / allowance  Loss leaders
 Special-event pricing
 Segmented
 Cash rebates
 Psychological  Low-interest financing, longer
warranties, free maintenance
 Promotional
 Promotional pricing can have
 Geographical adverse effects
 Dynamic
 International

66. Price Adjustment Strategies
 Promotional Pricing Problems
 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

67. Price Adjustment Strategies
Strategies  Types of geographic
pricing strategies:
 FOB-origin pricing
 Discount / allowance
 Uniform-delivered pricing
 Segmented  Zone pricing
 Psychological  Basing-point pricing
 Promotional  Freight-absorption pricing
 Geographical
 Dynamic
 International

68. Price Adjustment Strategies
Strategies
 Discount / allowance Adjusting prices
 Segmented continually to meet the
characteristics and
 Psychological needs of individual
 Promotional customers and
situations
 Geographical
 Dynamic
 International

69. Price Adjustment Strategies
Strategies  Prices charged in a specific
country depend on many
factors
 Discount / allowance  Economic conditions
 Competitive situation
 Segmented
 Laws / regulations
 Psychological  Distribution system
 Promotional  Consumer perceptions
 Corporate marketing
 Geographical objectives
 Dynamic  Cost considerations
 International

70. Price change

71. Price changes
INITIATING PRICE CUTS
INITIATING PRICE INCREASE
BUYERS REACTION
COMPETITORS REACTION

72. Price Cuts
Why?
Excess capacity
Falling market share
Drive to dominate the
market share through lower
cost

73. Price Increases
Why?
Cost inflation
Over demand:
Company cannot supply
all customer needs

74. Some techniques in initiating price
increase
 Making low visibility price moves
(dropping discounts, increasing minimum
order size, curtailing production of low
margin products )
 Unbundling
(removing features, packaging, or services
and separately pricing elements that
where formerly part of the offer)

75. Buyers reaction to
price cuts
POSITIVE: they think they got a better deal
on the product.
NEGATIVE: consumers assume low quality,
new model coming, company is having a
financial trouble, price will decline further.

76. Buyers reaction to
price cuts
POSITIVE: the item is “hot” good value, high
quality, and exclusive.
NEGATIVE: company is just being greedy,
consumer perceived the company as a
price gouger.

77. Competitors Reaction
Competitors are likely to react when:
No. of firm is small
Homogenous product
Buyers are highly informed

78. Responding to price changes
Questions
Why did the competitor change the price?
Price change- temporary or permanent?
What will happen to market share?
Profit? If do not respond?
Other companies will respond too?
What are competitors and other firms
responses to each possible reaction
likely to be?

79. Assessing and responding to competitor's price
changes

80. Four Possible Responses
Reduce price
Raise perceive value
Improve quality and increase
price
Launch a low price ”fighting
brand”

81. PUBLIC POLICY
AND PRICING

82. PRICING WITHIN CHANNEL
LEVELS
 PRICE-FIXING
PRICE COLLUSION
 PREDATORY PRICING

83. PRICING ACROSS CHANNEL
LEVELS
 PRICE DISCRIMINATION
 RETAIL PRICE MAINTENANCE
 DECEPTIVE PRICING

84. “Treating customers fairly and making
certain that they fully understand
prices and pricing terms is an
important part of building strong and
lasting customer relationships.”