Chp 4 pricing considerations


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  • Summary Overview Price is one of the four major variables a marketing manager controls. Price-level decisions are especially important because they affect both the number of sales a firm makes and how much money it earns. The Price Equation Price is the amount of money that is charged for “something” of value. Almost every business transaction in our modern economy involves an exchange of money--the Price--for something. Pricing Objectives and Policies Marketing managers must develop specific objectives and policies for Price-level decisions in each of the following areas. Flexibility . Policies should explain how flexible the company will be toward altering the price. Level over the Product Life Cycle . Strategies for dealing with price issues across the product life cycle must be developed. Use of Discounts and Allowances . Where, when, and to whom discounts and allowances are to be offered must be decided. Paying for Transportation . Transportation costs can have a big impact on price and provide the marketing manager with several choices for managing the overall price offer.
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  • Summary Overview Company-level and marketing objectives provide the guidance for setting pricing objectives. Pricing objectives should be explicitly stated because of their effect on the pricing policies adopted by the company. As illustrated on the slide, three types of pricing policies can be identified. Pricing policies also affect other aspects of the marketing mix as marketing managers use strategy planning to support the information communicated to consumers through the product’s price. Major Pricing Objectives Profit-Oriented Objectives . Two types of profit-oriented objectives are common: Target Return Objective. This sets a specific level of profit as an objective. Prices set under this objective may be linked to a specified percentage of sales or return on investment. Profit Maximization. This sets prices to seek as much profit as possible. This may be used to recoup high investment costs or simply as a matter of company policy. Sales-Oriented Objectives . Here pricing supports the objective of increasing sales, without regard to their effects on profit. A focus on sales alone, while sometimes practiced, can cause marketers to overlook the costs associated with delivering those sales. More common now is a focus on market share growth -- which forces the manager to pay attention to competitive action as well. Coupled with a long-run view of the overall market growth rate and attention to costs, this approach can lead to long-term competitive advantages. Status Quo-Oriented Objectives . For firms content with the way things are, two status quo-oriented objectives are often used: Meeting Competition. This stabilizes market prices because neither firm benefits from raising or lower prices. Nonprice Competition. Here aggressive action is taken in the other three areas of the 4Ps, staying clear of price as a competitive “battleground.”
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  • Summary Overview Discounts are reductions from list price given by a seller to buyers who either give up some marketing function or provide the function themselves. Discount Policies Quantity Discounts . These are offered to encourage customers to buy in larger amounts. When buying more, the customer pays less per unit. Cumulative quantity discounts apply to all goods purchased in a given period. Noncumulative discounts apply only to individual orders. Seasonal Discounts . These are offered to encourage buyers to buy earlier than present demand requires. Manufacturers use this policy to help shift the storing function further along in the channel and to stabilize demand, useful if producers face irregular demand or capacity constraints. Cash Discounts . These are reductions in the net (the face value of the invoice due immediately) to encourage buyers to pay quickly. Since most businesses pay on credit, cash discounts can aid both buyer and seller. Typical is the 2/10 net 30, which allows the customer to take 2% off the price if s/he pays in 10 days, with the net due within 30 days, and an additional interest charge if payment is made after 30 days. Trade Discounts . These are reductions in the list price given to channel members that perform one or more marketing functions for the producer. Sale Price . This is a temporary discount off the list price. A sale price encourages immediate buying. But as the text points out, this practice can condition both buyers and sellers to shop for sales and may erode brand loyalty. Increasingly, many firms are using the everyday low pricing model that utilizes a low list price rather than high list prices that change frequently.
  • Summary Overview Allowances are given to channel members or final consumers for doing something or accepting less of something. Allowances Advertising Allowances . These are price reductions given to firms in the channel to encourage them to advertise or otherwise promote the supplier’s products locally. Stocking Allowances . Also called slotting allowances, these are given to middlemen to get shelf space for a product. Push Money Allowances . In support of a pushing effort, manufacturers or wholesalers give money to retailers to be used as incentives for their salesclerks to aggressively push the targeted items. Trade-in Allowances . Here the customer receives a price reduction for used products when similar new products are bought. Coupons and Rebates Other reductions in price can be received by consumers using coupons and rebates: Coupons . These are printed vouchers that entitle buyers to a price reduction at checkout. Retailers accept coupons because they tend to increase sales volume at no additional promotion expense to the retailer and retailers are typically paid for the trouble of handling the coupons. Rebates . These are refunds given consumers after a purchase. These ensure that the final consumer actually receives the price reduction. Discussion Note: When the rebate is used to finance the down-payment on big ticket items like cars, their use provides more flexibility for marketing specific items.
  • Summary Overview Price policies usually lead to administered price--consistently set prices. This is more difficult with indirect distribution, but pricing policies should be set to achieve specific objectives. One of the first pricing decisions a marketing manager has to make is about price flexibility--whether the firm will use a one-price or a flexible-price policy. One-price policy A one price is more common with frequently purchased consumer package goods--or other purchases where the total expenditure is relatively small. (However, remember that many grocery stores now have some sort of “regular customer” club with special prices.) It is often used because it is more convenient and cost effective (because of lower transaction costs)--an to maintain good will with customers. Flexible-price policy A flexible price means offer the same product and quantities to different customers at different prices. In the past, it was usually a manager who decided when a customer would get a higher or lower price. Now, however, computer databases (with information about different customers) are being used to implement these decisions and it is more common (and often less costly and time consuming than it would have been before) to use a number of price variations. On the other hand, a flexible-price policy may prompt resentment by customers who do not get the lowest price. Using different prices can also cause conflict in the channel. Or authorized “grey” channel may evolve if customers buy in large quantities, say, to get a price break and then resell what they don’t need.
  • Summary Overview Retail prices sometimes vary according to the location of the buyer relative to the seller. For many industries, geographic pricing policies are an important component in the PRICE variable of the marketing mix. Geographic Pricing Policies F.O.B . F.O.B. stands for free on board. This means the seller pays to have the product loaded on a transportation vehicle at which time the title is transferred to the buyer, who pays shipping and is responsible for the product at that point (excluding any transport company insurance or liability, where applicable). This is simple for the seller but may limit the effective range of the market. Zone Pricing . This applies an average freight charge to all customers in the same specified geographic area. This simplifies customer billing and helps buyers know in advance of the purchase what the delivery charge will be. Uniform Delivered Pricing . This charges the same delivery price to all buyers. In effect, all buyers are in the same “zone.” This helps open markets in large areas. Discussion Note: In the mail-order software business, uniform delivered is used as a competitive tool. To increase sales volume, many companies charge a standard price. In some instances, the price charged requires subsidizing by the company to cover actual shipping costs. At this point, uniform delivered becomes freight absorption pricing. Freight Absorption Pricing . Here the company pays the cost of shipping without changing the price -- effectively a price reduction for the customer -- to get the sale. Discussion Note: NordicTrack exercise equipment makes regular use of this policy to increase volume. For callers on the 800 line, it makes sense to negotiate the best price first and then ask for free shipping, especially if you refer to the fact that someone else in your area got the same deal.
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  • Summary Overview In administering prices over the product life cycle, marketing managers must set price level policies. They must consider where the product life cycle is--and how fast it’s moving. And they must decide if their prices should be above, below, or somewhere in between relative to the market. Price policies have strategy implications that must be supported with appropriate resources. Price Level Policies Skimming Price Policy . This policy tries to sell the top of the market at a high price before aiming at more price-sensitive customers. When well-executed, price changes will be implemented when each price-linked segment is nearly exhausted. The new price, and new features, should attract a new target market and help maximize profits over the course of the product’s life cycle.
  • Summary Overview In administering prices over the product life cycle, marketing managers must set price level policies. They must consider where the product life cycle is--and how fast it’s moving. And they must decide if their prices should be above, below, or somewhere in between relative to the market. Price policies have strategy implications that must be supported with appropriate resources. Price Level Policies, continued. Penetration Pricing Policy . This tries to sell the whole market, not just the top, at one low price. When the elite market is small and/or the overall market is very elastic, this policy can be more effective than skimming. Moreover, a penetration policy typically aims at setting a price low enough to discourage competition. If successful, large volume may help producers lower costs further, leading to still lower prices. Competitors usually don’t want to enter markets against high-volume, high-market share low-cost leaders. Other Price Level Policies . Marketing managers have several other options in setting price levels: Introductory Price Dealing. This uses a temporary low price to attract customers to new product launches or new versions of products. Meeting Competition. Most companies face competition sooner or later and price level policies may have to serve competitive matching strategies. Channel Considerations. When selling to members of a channel of distribution, prices must allow for the middlemen to make a profit. Cost of Money. As more firms compete internationally, exchange rates exert an influence over price level policies. Value Pricing. More consumers are demanding high value on each dollar they pay -- not necessarily the lowest price but the best need-satisfaction for a given price. Value pricing is covered in greater detail on a subsequent slide.
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  • Summary Overview Many of the traditional views of pricing emphasize the perspective of the marketing manager. Value pricing means setting a fair price level for a marketing mix that really gives the target market superior customer value. The value pricing concept is important to marketing managers for a number of reasons: The Value Pricing Concept Focus on Customer Requirements . Value pricing isn’t about either cheap, bare-bones prices or expensive prestige pricing. Rather the focus is on the customer’s requirements--and how the whole marketing mix meets those needs. Value pricers try to give the customer pleasant surprises because it increases value and builds customer loyalty. Target Market and Competition . Value pricers define both the target market and the competition. For example, people who want low prices may choose between Wal-Mart or Target for clothes, but people who want exceptional personal service may be willing to pay extra for that value at Nordstrom’s. Value-Pricing Fits with Strategy Planning . Because value-pricing expands the definition of price beyond money and links it with customer-oriented value desired and received, marketing managers have a more sophisticated tool.
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  • Chp 4 pricing considerations

    2. 2. Part 1 of 2 Pricing Decisions
    3. 3. Strategic Planning for Price Pricing objectives Target Market Price Promotion Place Product Geographic terms— who pays transportation and how Discounts and allowances— to whom and when Price levels over product life cycle Price flexibility
    4. 4. The Nature of Price <ul><li>The value exchanged for products in a marketing exchange </li></ul>Definition of Price Price is the amount of money charged for a product or service, or the sum of all the values that customers give in order to gain benefits of having or using a product or service. (Armstrong and Kotler, 2007)
    5. 5. Terms Used To Describe Price <ul><li>Tuition </li></ul><ul><li>Premium </li></ul><ul><li>Fine </li></ul><ul><li>Fee </li></ul><ul><li>Fare </li></ul><ul><li>Toll </li></ul><ul><li>Rent </li></ul><ul><li>Commission </li></ul><ul><li>Dues </li></ul><ul><li>Deposit </li></ul><ul><li>Tips </li></ul><ul><li>Interest </li></ul><ul><li>Taxes </li></ul>
    6. 6. The Importance of Price to Marketers <ul><li>Profit = Total Revenue – Total Costs </li></ul><ul><li>Profits = (Price x Quantity Sold) – Total Costs </li></ul>
    7. 7. Price and Nonprice Competition <ul><li>Price Competition </li></ul><ul><ul><li>Emphasizes price as an issue and matches or beats competitors’ price </li></ul></ul><ul><ul><li>To compete effectively- firm should be the low-cost seller </li></ul></ul><ul><ul><li>Standardized products </li></ul></ul><ul><ul><li>Frequent price changes </li></ul></ul><ul><ul><li>Provides flexibility </li></ul></ul>
    8. 8. Nonprice Competition <ul><li>Emphasizes distinctive product: </li></ul><ul><ul><li>Features </li></ul></ul><ul><ul><li>Quality </li></ul></ul><ul><ul><li>Promotion </li></ul></ul><ul><ul><li>Packaging </li></ul></ul><ul><ul><li>Other </li></ul></ul><ul><li>Distinction must be effective </li></ul>
    9. 9. Analysis Of Demand <ul><li>Demand Curve </li></ul><ul><li>Demand Fluctuations </li></ul><ul><li>Assessing Price Elasticity </li></ul>
    10. 10. Demand Curve <ul><li>A graph of the quantity expected to be sold at various prices if other factors remain constant </li></ul>
    11. 11. Demand Curve, Price-Quantity Relationship and Increase in Demand
    12. 12. Demand Curve, Relationship Between Price and Quantity for Prestige Products
    13. 13. Sample Demand Curve Slide 12-1 Figure 12.1 10 20 30 40 50 60 10,000 20,000 30,000 40,000 50,000 Price per Unit Quantity Demanded in Units
    14. 14. Demand Fluctuations <ul><li>Changes in buyers’ needs </li></ul><ul><li>Variations in effectiveness of other marketing mix variables </li></ul><ul><li>Presence of substitutes </li></ul><ul><li>Environment factors </li></ul>
    15. 15. Elasticity Of Demand
    16. 16. Price/Demand Elasticity <ul><li>Elastic- change in price causes opposite change in total revenue </li></ul><ul><ul><li>Price  = Total Revenue  </li></ul></ul><ul><ul><li>Price  = Total Revenue  </li></ul></ul><ul><li>Inelastic- change in price causes same change in total revenue </li></ul><ul><ul><li>Price  = Total Revenue  </li></ul></ul><ul><ul><li>Price  = Total Revenue  </li></ul></ul>
    17. 17. Price Elasticity Of Demand Price Elasticity of Demand = (% Change In Quantity Demanded) % Change in Price
    18. 18. Demand, Cost, and Profit Relationships <ul><li>Marginal Analysis </li></ul><ul><ul><li>Fixed costs </li></ul></ul><ul><ul><li>Average fixed cost </li></ul></ul><ul><ul><li>Variable costs </li></ul></ul><ul><ul><li>Average variable cost </li></ul></ul><ul><ul><li>Total cost </li></ul></ul><ul><ul><li>Average total cost </li></ul></ul><ul><ul><li>Marginal cost (MC) </li></ul></ul><ul><ul><li>Marginal revenue (MR) </li></ul></ul>
    19. 19. Costs And Their Relationships
    20. 20. Pricing Based on Cost Slide 12-6 Markup pricing a pricing approach that adds a percentage to the producer’s cost in order to arrive at a selling price. Rate of return pricing a pricing approach that involves total costs and then adding a desired rate of return to them to determine the selling price. Breakeven analysis a technique for determining the sales volume needed to cover all costs at a specific rate.
    21. 21. Typical Marginal Costs And Average Total Cost Relationship
    22. 22. Typical Marginal Revenue And Average Revenue Relationship
    23. 23. Combining Marginal Cost And Marginal Revenue Concepts For Optimal Profit
    24. 24. Marginal Analysis Relationships Dollars Profit Quantity Produced and Sold Dollars Quantity Produced and Sold Total Cost Total Revenue Marginal Cost Marginal Revenue
    25. 25. Demand, Cost, and Profit Relationships <ul><li>Break-Even Analysis </li></ul><ul><ul><li>Break-even point – point at which the costs of producing a product equal the revenue made from selling the product </li></ul></ul>
    26. 26. Determining The Break-Even Point
    27. 27. Breakeven Analysis Slide 12-7 Figure 12.5 Dollars Quantity Produced and Sold Total Cost Breakeven Point Total Revenue Loss Profit
    28. 28. Breakeven Point Breakeven Point = Fixed Costs Per-Unit Contribution to Fixed Costs (Price – Variable Costs)
    29. 29. Factors That Affect Pricing Decisions
    30. 30. Pricing Objectives Dollar or Unit Sales Growth Growth in Market Share Target Return Maximize Profits Meeting Competition Nonprice Competition Pricing Objectives Sales Oriented Profit Oriented Status Quo Oriented
    31. 31. Organizational And Marketing Objectives <ul><li>Set prices consistent with organization’s goals and mission </li></ul><ul><li>Pricing decisions should be compatible with firm’s marketing objectives </li></ul>
    32. 32. Costs <ul><li>Why price below cost? </li></ul><ul><ul><li>Match competition </li></ul></ul><ul><ul><li>Generate cash flow </li></ul></ul><ul><ul><li>Increase market share </li></ul></ul><ul><li>Focus on cost reduction </li></ul><ul><li>Costs shared with others in product line </li></ul>
    33. 33. Pricing Decisions Influence Other Mix Variables <ul><li>Demand </li></ul><ul><li>Distribution </li></ul><ul><ul><li>Intensive </li></ul></ul><ul><ul><li>Selective </li></ul></ul><ul><ul><li>Exclusive </li></ul></ul><ul><li>Promotion </li></ul><ul><ul><li>Premium = little advertising, personal selling </li></ul></ul><ul><ul><li>Complex = potential buyer confusion </li></ul></ul>
    34. 34. Channel Member Expectations <ul><li>Profit </li></ul><ul><li>Competing product </li></ul><ul><li>Time/resources required </li></ul><ul><li>Discounts </li></ul><ul><li>Support activities- associated costs </li></ul>
    35. 35. Reference Prices <ul><li>Internal- developed in buyer’s mind through experience with product </li></ul><ul><li>External- comparison price provided by others </li></ul>
    36. 36. Context Of Price- Buyers Characterized <ul><li>Value-conscious - concerned about price and quality </li></ul><ul><li>Price-conscious - want to pay low prices </li></ul><ul><li>Prestige-sensitive - purchase products that signify prominence and status </li></ul>
    37. 37. Competition <ul><li>Monopoly </li></ul><ul><ul><li>Whatever market will bear </li></ul></ul><ul><ul><li>Government regulation </li></ul></ul><ul><li>Oligopoly </li></ul><ul><ul><li>Barriers to entry </li></ul></ul><ul><ul><li>Little advantage in price cuts </li></ul></ul><ul><li>Monopolistic Competition </li></ul><ul><ul><li>Distinguishable product </li></ul></ul><ul><ul><li>Usually nonprice competition </li></ul></ul><ul><li>Perfect competition </li></ul><ul><ul><li>All products the same </li></ul></ul><ul><ul><li>No flexibility in pricing </li></ul></ul>
    38. 38. Pricing Based on Competition Slide 12-8 Pricing Below Competition pricing to gain market share and attract cost-conscious buyers. Especially useful to companies with low cost positions. Matching Competition pricing at competitor’s levels with the intent of distinguishing the product in other ways. Common in oligopolies. Pricing Above Competition pricing for products that offer greater value, quality, convenience or prestige. Sealed-Bid Pricing pricing in which the buyer asks potential sellers to submit sealed bids containing the seller’s pricing and availabilities.
    39. 39. Discount Pricing Trade Quantity Seasonal Discount Pricing Sale Cash
    40. 40. Business-To-Business Price Discounting
    41. 41. Trade (Functional) Discount <ul><li>A reduction off the list price by a producer to an intermediary for performing certain functions </li></ul>
    42. 42. Quantity Discount <ul><li>Deduction from list price that reflect(s) the economies of purchasing in large quantities </li></ul>
    43. 43. Cumulative Discount <ul><li>A quantity discount aggregated over a stated time period </li></ul>
    44. 44. Noncumulative Discounts <ul><li>A one-time price reduction based on the number of units purchased, the dollar value of the order, or the product mix purchased </li></ul>
    45. 45. Cash Discount <ul><li>A price reduction given to buyer for prompt payment or cash payment </li></ul>
    46. 46. Seasonal Discount <ul><li>A price reduction to buyers that purchase goods or services out of season </li></ul>
    47. 47. Allowance <ul><li>A concession in price to achieve a desired goal </li></ul>
    48. 48. Allowances Common Kinds of Allowances Advertising Allowance Push Money Allowance Trade-In Allowance Stocking Allowance
    49. 49. Price Flexibility Policies <ul><li>One-price policy </li></ul><ul><ul><li>The same price to all customers who purchase products under essentially the same conditions and quantities </li></ul></ul><ul><ul><ul><li>Exchange rate changes may make this difficult in international markets </li></ul></ul></ul><ul><li>Flexible pricing (e.g., in channels, business markets, expensive consumer shopping products) </li></ul><ul><ul><li>Issues: </li></ul></ul><ul><ul><ul><li>Use is increasing because of impact of information technology, customer databases, scanners, etc. </li></ul></ul></ul><ul><ul><ul><li>Selling costs may be higher if prices are negotiated </li></ul></ul></ul><ul><ul><ul><li>“ Signals” to competitors </li></ul></ul></ul><ul><ul><ul><li>Customer dissatisfaction may be a problem </li></ul></ul></ul><ul><ul><ul><li>“ Gray channels” and cross-shipping </li></ul></ul></ul>17-4
    50. 50. Geographic Pricing Policies Common Geographic Pricing Policies F.O.B. Uniform Delivered Freight Absorption Zone
    51. 51. Geographic Pricing <ul><li>F.O.B. </li></ul><ul><ul><li>Factory </li></ul></ul><ul><ul><li>Destination </li></ul></ul><ul><li>Uniform geographic (Postage-Stamp) </li></ul><ul><li>Zone </li></ul><ul><li>Base-point </li></ul><ul><li>Freight Absorption </li></ul>
    52. 52. Geographic Pricing Slide 13-7 Geographic Pricing Pricing a good or service according to where it is delivered. FOB Origin Pricing Seller’s price is for the goods at point of shipment, where title passes from buyer to seller. Uniform Delivered Pricing Seller’s price includes shipping; title passes where buyer receives the goods. Single-zone Pricing Pricing in which all buyers pay the same price, including delivery. Multiple-zone pricing Pricing in which buyers in different zones pay different delivery prices. FOB with freight allowed Pricing in which the seller allows the buyer to deduct shipping costs from the quoted price of the product. Basing point pricing Pricing in which the seller charges the quoted price plus the cost of delivering from a basing point where the product is made.
    53. 53. <ul><li>• What is the location of potential buyers? </li></ul><ul><li>• Are they organizational buyers or consumers? </li></ul><ul><li>• What is the consumption rate of potential buyers? </li></ul><ul><li>• What is the financial condition of potential buyers? </li></ul>• How many potential buyers are in the market? Demographic Pricing Factors Slide 12-2
    54. 54. <ul><li>• Will potential buyers be favorably attracted by odd pricing such as 99 cents instead of $1, or $177 instead of $180? </li></ul><ul><li>• Will potential buyers perceive the price to be too high relative to what the product offers? </li></ul><ul><li>• Are potential buyers concerned enough with prestige to pay more for the product? </li></ul><ul><li>• How much will potential buyers be willing to pay for the product? </li></ul>• Will potential buyers use price as an indicator of the product’s quality? Psychological Pricing Factors Slide 12-3
    55. 55. Psychological Pricing Slide 13-6 Table 13.3 Table 13.3 missing TYPE DESCRIPTION EXAMPLE Product Pricing Technique Prestige Pricing Definition Example Setting a high price to convey an image of high quality or exclusivity Odd-even pricing Bundle pricing Setting prices a few dollars or cents below a round number Offering several products as a package at a single price The Porsche 911 turbo coupe has a base price of $105,000. Office Depot advertises a GE cellular phone for $39.99. A hotel quotes a rate for an over-night stay that includes breakfast the next morning.
    56. 56. Price Level Policies “ Skim the cream” pricing involves selling at a high price to those who are willing to pay before aiming at more price-sensitive consumers. Price Quantity Initial skimming price Second price Final price Skimming Pricing Sell at high price before reducing to next price level and repeat
    57. 57. Price Level Policies a Price Quantity Penetration Pricing Whole market price Penetration pricing involves selling the whole market at one low price.
    58. 58. Penetration Pricing vs. Price Skimming Time $ New Product Pricing Strategies Price Skimming Penetration Pricing
    59. 59. Pricing Based on Customer Value Slide 12-9 Dominant Backward Pricing a pricing approach that involves setting a price by starting with the estimated price customers will pay and working backwards with retail and wholesale margins. Value Pricing a pricing approach that involves setting prices so that the exchange value is higher than the value of competing exchanges.
    60. 60. Value Pricing Fits with Strategy Planning Target Market and Competition Focus on Customer Requirements ???? ???? ???? ???? ???? $
    61. 61. Basic Value Positions Slide 13-1 Table 13.1 Price Level High relative to product class Value Position High value because of quality and prestige. Examples Nike athletic shoes (such as Air Jordans); dental work by a widely respected specialist. Keds tennis shoes; dental work by the neighborhood family dentist. High value because of good quality at a reasonable price. High value because of acceptable quality at a low price. Around average for product class Low relative to product class Generic or private-label shoes at a drugstore or discount store; dental work by students being trained at a university clinic.
    62. 62. Part 2 of 2 Setting Prices
    63. 63. Development of Pricing Objectives <ul><li>Pricing objectives – goals that describe what a firm wants to achieve through pricing </li></ul>
    64. 64. Slide 13-2 Figure 13.2 Evaluate Customer Response and other Pricing Constraints Set Pricing Objectives Analyze Profit Potential Set Initial Price Make Price Adjustments as Needed The Pricing Process
    65. 65. Stages For Establishing Prices
    66. 66. Pricing Objectives And Typical Actions To Achieve Them
    67. 67. Pricing Objectives <ul><li>Survival </li></ul><ul><li>Profit </li></ul><ul><li>Return on Investment (ROI) </li></ul><ul><li>Market Share </li></ul><ul><li>Cash Flow </li></ul><ul><li>Status Quo </li></ul><ul><li>Product Quality </li></ul>
    68. 68. High-quality products are usually priced to reflect the quality level  © 2005 BMW of North America, LLC, used with permission. The BMW name and logo are registered trademarks.
    69. 69. Assessment of the Target Market’s Evaluation of Price <ul><li>Price depends on: </li></ul><ul><ul><li>Type of product </li></ul></ul><ul><ul><li>Type of target market </li></ul></ul><ul><ul><li>Purchase situation (e.g: price of concessions at movies) </li></ul></ul>
    70. 70. Evaluation of Competitors’ Prices <ul><li>Regular function of marketing research </li></ul><ul><li>Importance of customer view of pricing and marketing mix variables </li></ul><ul><ul><li>Pricing above competition – creates an exclusive image </li></ul></ul><ul><ul><li>Pricing below competition – gains market share </li></ul></ul>
    71. 71. Some prices are set higher than the competition to create an exclusive image  FIJI ® and all other trademarks, copyrights and intellectual property used herein are the property of FIJI Water Company LLC or its affiliates.&quot; Used by permission
    72. 72. Selection of a Basis of Pricing <ul><li>Cost </li></ul><ul><li>Demand </li></ul><ul><li>Competition </li></ul>
    73. 73. Cost Based Pricing <ul><li>Cost-based pricing – a dollar amount to the cost of the product </li></ul><ul><li>Cost-plus pricing – adding a specified dollar amount to the seller’s costs </li></ul><ul><li>Markup – Adding to the cost of the product a predetermined percentage of that cost </li></ul>
    74. 74. Markup as % of Cost = Markup Cost = 15 45 = 33.3 % Markup as % of Selling Price = Markup Selling Price = 15 60 = 25.0 %
    75. 75. Demand-Based Pricing <ul><li>Customers pay a higher price when demand for the product is strong and a lower price when demand is weak </li></ul>
    76. 76. Non-Price Factors Affecting Demand <ul><li>Product </li></ul><ul><ul><li>Quality </li></ul></ul><ul><ul><li>Range </li></ul></ul><ul><ul><li>Nature- essential/luxury </li></ul></ul><ul><ul><li>Substitutes </li></ul></ul><ul><li>Support </li></ul><ul><ul><li>Service at point of sale & after </li></ul></ul><ul><ul><li>Advertising/promotion </li></ul></ul><ul><ul><li>Distribution Methods </li></ul></ul><ul><li>Market </li></ul><ul><ul><li>Degree of competition </li></ul></ul><ul><ul><li>Competitor action/reaction </li></ul></ul><ul><ul><li>General economic conditions </li></ul></ul> “ Demand based pricing”, N. Coulthurst, 4/3/02 ,
    77. 77. Point-of-sale service affects demand  Reprinted with permission of Lowe's Companies
    78. 78. Competition-Based Pricing <ul><li>Pricing influenced primarily by competitors’ prices </li></ul><ul><ul><li>method increases when: </li></ul></ul><ul><ul><ul><li>competing products are homogeneous </li></ul></ul></ul><ul><ul><ul><li>organization is serving markets in which price is a key consideration </li></ul></ul></ul> 
    79. 79. Selection of a Pricing Strategy <ul><li>Differential Pricing – different prices to different buyers for the same product </li></ul><ul><li>New-Product Pricing </li></ul><ul><li>Product-Line Pricing – establishing prices of multiple products within a product line </li></ul><ul><li>Psychological Pricing – influence customer perception to make a product’s price attractive </li></ul><ul><li>Professional Pricing – fees set by experienced people in particular field </li></ul><ul><li>Promotional Pricing </li></ul>
    80. 80. Common Pricing Strategies
    81. 81. Differential Pricing Techniques <ul><li>Negotiated – final price established through buyer/seller bargaining </li></ul><ul><li>Secondary-market – one price for primary target market and different price for another </li></ul><ul><li>Periodic discounting – systematic temporary price reduction </li></ul><ul><li>Random discounting – unsystematic temporary price reduction </li></ul>
    82. 82. Steps In Developing New Product Pricing <ul><li>Develop Marketing Strategy </li></ul><ul><li>Make Marketing Mix Decisions </li></ul><ul><li>Estimate Demand Curve </li></ul><ul><li>Calculate Cost </li></ul><ul><li>Understand Environmental Factors </li></ul><ul><li>Set Pricing Objectives </li></ul><ul><li>Determine Pricing </li></ul> NetMBA, “Pricing Strategy”, 2005,
    83. 83. New-Product Pricing <ul><li>Price skimming – charging the highest possible price that buyers who most desire the product will pay </li></ul><ul><li>Penetration pricing – prices set below competing brands to penetrate market and gain market share quickly </li></ul>
    84. 84. Product-Line Pricing Strategies <ul><li>Captive – basic product in a product line low while related items higher </li></ul><ul><li>Premium – pricing highest-quality product higher than other models </li></ul><ul><li>Bait – low pricing on one item in line with intention of selling higher-priced item in the line </li></ul><ul><li>Price Lining – limited number of prices for selected lines of merchandise </li></ul>
    85. 85. For Premium Pricing, Engage The Emotions <ul><li>Taking Care of Me - overstressed people want to pamper selves </li></ul><ul><li>Connect with Friends & Family - serious money to nurture family, romantic getaways, cosmetic surgery, etc. </li></ul><ul><li>Questing - consumers appreciate adventure </li></ul><ul><li>Individual Style - personal taste, differentiate self from others </li></ul> iBizResources, “For Premium Pricing, engage the Emotions”, 2006,
    86. 86. Psychological Pricing Techniques <ul><li>Reference pricing – moderate pricing positioned next to a more expensive brand </li></ul><ul><li>Bundles pricing – packaging multiple products to be sold at a single price </li></ul><ul><li>Multiple-unit pricing – packaging together two or more identical products to be sold at a single price </li></ul><ul><li>Everyday low prices (EDLP) – pricing products low on a consistent basis </li></ul>
    87. 87. More Psychological Pricing Techniques <ul><li>Odd-even pricing – ending the price with a certain number to influences buyers’ perceptions </li></ul><ul><li>Customary pricing – on the basis of tradition </li></ul><ul><li>Prestige pricing – setting prices at a high level to convey prestige </li></ul>
    88. 88. Consumers associate higher prices with higher quality  Reprinted with permission of Mannington Mills, Inc.
    89. 89. Concept of Professional Pricing <ul><li>Professional pricing carries the idea that professional have an ethical responsibility not to overcharge customers </li></ul>
    90. 90. Types Of Promotional Pricing <ul><li>Price Leader- firm prices a few products below the usual markup, near cost, or below cost </li></ul><ul><li>Special-Event- advertised sales or price-cutting linked to a holiday, a season, or an event </li></ul><ul><li>Comparison Discounting- price is set at a specific level and simultaneously compares it with a high price </li></ul>
    91. 91. Special events are often seasonal and employ special-event pricing  Reprinted with permission of Montage, Inc.
    92. 92. Determination of Price: Pricing Strategy <ul><li>Yields a certain price- may need refining </li></ul><ul><li>Helps in setting final price </li></ul><ul><li>In absence of government price controls, remains flexible and convenient to adjust the marketing mix </li></ul>
    93. 93. Adjusting Prices Slide 13-5a Table 13.2 Discount Quantity discount Definition Example Reduction in the price per unit for purchasing a larger quantity Price reduction offered during times of slow demand Percentage reduction from list price offered to resellers A catalog for Gardener’s Supply Company offers 1 cedar planter for $32.95 and 2 or more for $30.00 each. A ski resort offers lower prices during the summer. Seasonal discount Trade discount Cash discount A publisher sells books to a chain of stores for a fraction of the retail price. Incentive for buyers to pay quickly or a lower price for payment of cash An organization receives an invoice that reads, “2/10 net 30.”
    94. 94. Adjusting Prices Slide 13-5b Table 13.2 Discount Trade-in allowance Definition Example Discount for providing a product along with monetary payment Price reduction in exchange for the reseller performing certain promotional activities A car dealer offers $1,000 off the list price in exchange for a buyer trading in her used car. A frozen-pizza maker gives a price break to a supermarket that promises to feature the product in its advertising. Promotional allowance
    95. 95. Adjusting Prices Slide 13-5c Table 13.2 Product Discount Promotional discount Definition Example Short-term discount to stimulate sales or convince buyers to try a product Setting prices near or below cost in order to attract customers to a store A Jiffy Lube franchise passes out flyers offering $5 off on an oil change; the discount is good for 30 days. A supermarket features bananas at 20 cents a pound and Pampers diapers at 50 percent off; the price is below cost, but the store expects buyers to purchase additional items selling at a profit. Loss leader pricing
    96. 96. Laws Limiting Pricing Practices Slide 12-10 Table 12.3 Law Price Fixing Resale Price Maintenance Deceptive Pricing Practices Price discrimination that lessens or damages competition; discrimination in the use of promotional pricing Dumping Pricing Practices Laws of most countries Sherman Antitrust Act Consumer Goods Pricing Act Federal Trade Commission Act Robinson-Patman Act
    97. 97. Pricing Product Lines Slide 13-4 Price Lining Uniform Pricing all books $40.00 all CD’s $15.95 all Cassettes $9.95 $1.00 $1.00 $1.00
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