11. pricing products pricing considerations and strategies


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11. pricing products pricing considerations and strategies

  1. 1. Chapter 11 Pricing Products: Pricing Considerations and Strategies 1
  2. 2. New Product Pricing Strategies (pp. 399-400) Use Under These Market Skimming Conditions: Setting a high price to  Product’s quality & image “skim” maximum support its higher price. revenues from the  Market not price sensitive. target market.  Costs of producing small volumes can’t be so high Results in fewer, but that they cancel the more profitable, sales. advantage of charging more (i.e., don’t need May reduce price later economies of scale). to attract more price  Competitors shouldn’t be sensitive markets. able to enter market easily & undercut the high price. 2
  3. 3. New Product Pricing Strategies (pp. 399-400) Use Under These Market Penetration Conditions:  Market is large & highly Setting a low price in price-sensitive so a low order to “penetrate” the price produces market market quickly and growth. deeply.  Production & distribution costs must fall as sales Attract a large number of volume increases (i.e., buyers quickly & win a economies of scale). larger market share.  Low price can effectively keep out competition & low price position can be maintained. 3
  4. 4. Product Mix Pricing Strategies (pp. 400-403)Goal – to maximize profit over the product mix: Product Line Pricing -- Involves setting price steps between various products in a product line. Based on:  Cost differences between products, or  Customer evaluations of different features, or  Competitors’ prices (e.g., lawnmowers - $259.95, $299.95, $399.95) Optional Product Pricing -- Pricing optional or accessory products sold with the main product. (e.g., car options) Captive Product Pricing -- Pricing products that must be used with the main product. (e.g., razor blades, toner cartridges) 4
  5. 5. Product Mix Pricing Strategies (pp. 400-403)Goal – to maximize profit over the product mix: By-Product Pricing -- Pricing low-value by-products to get rid of them & reduce costs. (e.g., wood chips, Zoo Doo) Product Bundle Pricing -- Combining several products and offering the bundle at a reduced price. e.g., season tickets, magazine subscription, computer with software, car option packages, Costco) 5
  6. 6. Price-Adjustment Strategies: Discount & Allowance (pp. 403-404) Adjusting the basic price to reward customers, or to provide incentives for certain responses (most are for channel members & business buyers) Cash discount Functional discount(pay early, e.g., 2/10 net 30) (price to channel members) Quantity discount Trade-in allowance (buy more from one seller) Seasonal discount Promotional allowance (buy early or out of season) (to help channel members promote product) 6
  7. 7. Example of Functional Discount (p. 404)Functional discounts represent product prices charged channel intermediaries – compensates channel members (wholesalers & retailers) for stocking & selling the product E.g., pricing a book – manufacturing cost ~$2.00  publisher’s suggested retail price $20.00 (price a consumer pays at a bookstore)  bookstore (40% discount) 12.00  wholesaler (55% discount) 9.00  distributor (65% discount) 7.00 7
  8. 8. Price-Adjustment Strategies: Segmented Pricing (p. 404) Selling products at different prices based on differences in demand, not on differences in cost Customer segment Location pricing pricingProduct form pricing Product - Form Time pricing 8
  9. 9. Price-Adjustment Strategies:Psychological Pricing (pp. 405-407) Considers the psychology of prices, not just the economics. Price is an important quality signal when customers can’t otherwise judge quality; price is used to “say something” about a product. Reference prices  Show price comparisons  Display with more/less expensive alternatives Odd-pricing, even-pricing  E.g., $49.99 versus $50.00 9
  10. 10. Price-Adjustment Strategies: Promotional Pricing (p. 408) Loss leaders Temporarily pricing products below Special-event pricing the regular price to increase short-term Cash rebates sales Low-interest financingDanger – addictive; Longer warrantiesover-reliance can damage Free merchandisebrand equity & train consumersto be “deal prone” 10
  11. 11. Discussion ConnectionsMany industries have created “deal-prone”consumers through the heavy use of promotionalpricing – e.g., fast foods, airlines, departmentstores, and others.Pick a company in one of these industries andsuggest ways that it might deal with thisproblem.How does the concept of value relate topromotional pricing? Does promotional pricingadd to or detract from customer value? 11
  12. 12. Initiating Price Changes (pp. 411-413) Price Cut Consumer Reaction: Why? • Positive; or •Excess capacity • Being replaced? • Not selling? Price Increase Consumer •Falling market • Co. in trouble? Reaction: share • Quality lower? Why? • Negative •Strategy to • Prices coming (explain, down further? •Cost inflation disguise?) dominate market through •Over-demand • Positive lower costs (“hot,” •Increase profit prestige) marginCompetitor Response:Follow? – oligopoly, perfect competitionPosition against? – monopolistic competition 12
  13. 13. Assessing & Responding to Competitor’s Price Changes (Fig. 11.1, pp. 413-414) Has competitor cut Hold current price; price? continue to monitor competitor’s price Will lower price negatively affect our Reduce pricemarket share & profits? Raise perceived Can / should effective quality action be taken? Improve quality & increase price Launch low-price “fighting brand” 13
  14. 14. Public Policy Issues: Prohibited Pricing Practices (Fig. 11.2, pp. 415-420)Manufacturer A Retailer 1 • Retail price maintenance Consumers• Price-fixing • Discriminatory • Price-fixing• Predatory pricing • Predatory pricing pricing • Deceptive pricingManufacturer B Retailer 2 • Deceptive pricing 14
  15. 15. Public Policy Issues: Prohibited Pricing Practices (pp. 415-420)Within channel levels: Price fixing – cannot talk to each other when setting prices Predatory pricing – cannot set low prices for purposes of driving competitors out of marketAcross channel levels: Retail price maintenance – manufacturer cannot dictate the price charged by retailers Discriminatory pricing – cannot charge different prices to different intermediaries (except based on actual costs) Deceptive pricing – cannot deceive consumers (e.g., through bogus reference prices, bait & switch, creating price confusion, etc.) 15
  16. 16. Review of Concept ConnectionsDescribe the major strategies for pricing newproducts.Explain how companies set prices to maximizeprofits from the total product mix.Discuss the ways companies adjust their pricesto take into account different types ofcustomers and situations.Discuss the key issues related to initiating andresponding to price changes.Identify the key prohibited pricing practices. 16