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PRICE of the 4P

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Pricing Concepts, Strategies and Outcomes

Pricing Concepts, Strategies and Outcomes

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  • 1. PRICING AD 644 PRESENTATION By Ezgi Merdin ezgimerdin@hotmail.com
  • 2. Significance of Price and Pricing • It is one of the marketing mix variables • It is a paramount decision to be made managerially • In the literature, it is of interdisciplinary nature Economics Psychology Political Economy Marketing... • Not conventional pricing but “strategic pricing” is 2 needed to react to and manage market AD conditions.Merdin 644 - Pricing - Ezgi
  • 3. Pricing in the Big Picture • Objectives • Resources & Capabilities • Competition Environment • Public Policy... FIRM & ENVIRONMENT 3 AD 644 - Pricing - Ezgi Merdin PRICING • Pricing Strategies • Position – Related Decisions • Consumer Related Outcomes • Social Welfare • Competitive Position OUTCOMES
  • 4. Pricing in the Big Picture Lichtenstein et al. 1993 Price Perceptions & Consumer Shopping Beh. • Objectives • Resources & Capabilities • Competition Environment • Public Policy... Guiltinan & Gundlach 1996 Aggressive and Predatory Pricing Tellis 1986 PRICING Pricing Strategie • Pricing Strategies s FIRM & ENVIRONMENT • Position – Related Decisions Lichtenstein et al. 1993 • Consumer Related Outcomes • Social Welfare • Competitive Position OUTCOMES Mulhern & Leone Wilcox et al. 1991 1987 Sivakumar & Raj Implicit Price Price Quantity 1997, Quality Tier Bundling Discounts Competition Evans & Beltramini 1987, Consumer Negotiated Pricing 4 AD 644 - Pricing - Ezgi Merdin
  • 5. Pricing in the Big Picture • Objectives • Resources & Capabilities • Competition Environment • Public Policy... Reservation Price Reference Price Price Sensitivity Elasticity of Demand Penetration Pricing Skim Pricing Loss Leadership Experience Curve Pricing FIRM & ENVIRONMENT Target Costing 5 AD 644 - Pricing - Ezgi Merdin
  • 6. Pricing in the Big Picture  Cost – Plus vs. Value Pricing Differential Pricing – Discounting, Price Quantity Discounts, Price Discrimination Competitive Pricing – Price Signaling, Geographic Pricing  Product Line Pricing – Bundling, Premium Pricing, Image Pricing Aggressive and Predatory Pricing Negotiated Pricing AD 644 Pricing - Ezgi Merdin 6 Finance -and Breakeven Analysis • Pricing Strategies • Position – Related Decisions PRICING
  • 7. Pricing in the Big Picture Brand Loyalty Brand Choice Complementary Effect Substitution Effect Price Recall Price Cuts and Increases Consumer Behavior Consumer Welfare Price Perception 7 AD 644 - Pricing - Ezgi Merdin • Consumer Related Outcomes • Social Welfare • Competitive Position OUTCOMES
  • 8. Reference Price 8 What the buyer considers reasonable or fair price for a product / service.  Ofir & Winer Any standard of comparison against which an observed price is compared. External reference prices may come from “regular retail price” announced and internal reference prices are mental references. It has a significant impact on brand choice.  Nagle & Hogan (2006) Buyers’ reference prices can be raised by announcing price compared to a previous higher price or competitors’ higher price.  Kotler & Keller (2009) Unpleasant surprises (when perceived price is lower than stated price) has a greater impact on likelihood of buying than pleasant AD surprises. Clever framing of the price is recommended. 644 - Pricing - Ezgi Merdin
  • 9. Reference Price  Biswas & Blair, 1991 Reference price advertisements’ effects on consumer price perceptions and shopping intentions 9 AD 644 - Pricing - Ezgi Merdin
  • 10. Reservation Price  Tellis 1986 Consumers with low reservation price form the price sensitive segment and they don’t need the product urgently enough to pay high price.  periodic discounting, penetration or experience curve pricing  Ofir & Winer 10 An inverted U-shaped price acceptability curve has been hypothesized. The lower and upper thresholds represent the last acceptable prices. Below lower threshold, prices signal suspect product quality. Above upper threshold, prices are perceieved too expensive and unworthy. Upper threshold is also named reservation price by economists. Low income consumers have only the upper threshold (reservation price) so not obeying the U-shape while high income segment have both. Between the AD 644 - Pricing - Ezgi Merdin threshold, the prices are called “acceptable”.
  • 11. Reservation Price  Winer (1986) A reservation-price model for optimal pricing of multiattribute products in conjoint analysis Where they present a procedure to dteremine the optimal price by dat from conjoint analysis gathered from individual reservation prices and their mean. -- Auctions  R Engelbrecht-Wiggans - Management Science, 1987. On optimal reservation prices in auctions  D Levin, JL Smith - The Economic Journal, 1996 - Optimal reservation prices in auctions 11 AD 644 - Pricing - Ezgi Merdin
  • 12. Other Demand & Consumer Characteristics Lichtenstein et al. (1993) - value consciousness (a concern for price paid relative to quality received) - price consciousness (degree of focusing exclusively on paying low prices) - coupon proneness (propensity to respond to a purchase offer with coupon) - sale proneness ( “ “ “ “ with sale) - price mavenism (opinion leadership on price) - price – quality schema (belief that price cue is related positively to the quality) - prestige sensitivity (feelings of prominence and status that higher prices signal to others) 12 AD 644 - Pricing - Ezgi Merdin
  • 13. Other Demand & Consumer Characteristics  Tellis, G. 1988 Journal of Marketing Research; Nov ; 25, 4; “The Price Elasticity of Selective Demand: A Meta-Analysis of Econometric Models of Sales” 367 price elasticities from 220 different brands / markets. The results indicate that price elasticity is significantl negative and eight times larger than advertising elasticity. Elasticity also siginificantly differs over brand life cycle, product categories, estimation methods and countries. 13 AD 644 - Pricing - Ezgi Merdin
  • 14. Other Demand & Consumer Characteristics  Tellis, G. 1988 14 AD 644 - Pricing - Ezgi Merdin
  • 15. Pricing Strategies  Tellis (1986) Taxonomy His aim was to unify pricing strategies under a reasonable taxonomy. Two dimensions he determined were: Shared economies (differential – competitive – product line pricing) And each shared economy further classified by looking at: Consumer Characteristics (search costs – reservation price – transaction costs) His taxonomy is limited due to other variables being assumed constant and lack of consideration of the legal environment. 15 AD 644 - Pricing - Ezgi Merdin
  • 16. 16 AD 644 - Pricing - Ezgi Merdin
  • 17. A. Differential Pricing Same brand being sold at different prices. A1: Second Market Discounting In a new market, due to transaction costs, a different price can be set. The increase is to cover the increased FC and VC due to new market entrance. Nagle & Hogan (2006) call it segmenting by purchase location. “After dollar depreciation, many American electronics companies maintaind high prices in Europe and Asia than in America. Industrial manufacturers must charge less to the bargainconscious Chinese than to wealthy sheiks of Middle East.” 17 AD 644 - Pricing - Ezgi Merdin
  • 18. A. Differential Pricing Same brand being sold at different prices. A2: Periodic Discounting The aim is to exploit consumer heterogeneity of demand in time. Best examples are fashion stores discounts, travel tour fees or happy hour practice of restaurants. Nagle & Hogan (2006) call it segmenting by time of puchase. Following the logic of priority pricing, new products in a retail stpred are offered at full price or sometimes with premium surcharges. Over time buyers discount the product’s value, prices are reduced in successive rounds. This differentiates between unfamiliar buyers and regular buyers. 18 AD 644 - Pricing - Ezgi Merdin
  • 19. A. Differential Pricing Same brand being sold at different prices. A3: Random Discounting Stemming from various costs consumers face (search cost, transaction cost, cost of time) random discounting is mostly employed in department stores. Criticized for unfavoring uninformed, infrequent consumers. Ex. Carrefour! Ofir & Winer state that an example of random discounting, called “high-low discount” involving frequent temporary discounts is an efficient way of getting prices perceived lower by the consumers, compared to everyday low pricing practice. 19 AD 644 - Pricing - Ezgi Merdin
  • 20. A. Differential Pricing Kotler & Keller (2009) analyze the issue of differentiated pricing with the concept of price discrimination. - 1st degree discrimination is setting different prices to each segment - 2nd degree discrimination is selling large volumes for larger prices - 3rd degree discrimnation resembles Teller’s differentiation and includes time, location etc. based differences. 20 In the same subject, Wilcox et al. (1987) wrote an article on 2nd degree discrimination, namely on Price-Quantity Discounts. Classifying this strategy into four (per-unit pricing and package pricing, with their interval versions), they argue that under some AD conditions Ezgi Merdin 644 - Pricing - buyers are getting in bulk in order to lower cost per unit and move towards windowless schedules in time with the
  • 21. A. Differential Pricing  Cox, J. 2001. Can differential prices be fair? The journal of product & brand management. Vol.10;5. Setting different prices does not automatically evoke unfavorableness but when not controlled for distributive and procedural justice as well as equity theory. Consumers review the process of setting differentiated price as well as their inputs and outputs to the exchange. Ex. Amazon.com setting higher prices for loyal customers through tracking. 21 AD 644 - Pricing - Ezgi Merdin
  • 22. B. Competitive Pricing Setting the price to exploit the competitive position. B1: Penetration Pricing Usually employed in the sheake-out phase or the growth phase of department stores, the price is kept just above average cost but just low enough to keep out new entrants (limit pricing). Nagle & Hogan (2006)emphasize the significance of the cost environment while handling this strategy and list three common situations that competitors cannot strongly retaliate: - When the firm has a significant cost or resource advantage - When the firm has a broader line of complementary products - When the firm is too small to affect sales of competitors 22 AD 644 - Pricing - Ezgi Merdin
  • 23. B. Competitive Pricing Setting the price to exploit the competitive position. B2: Experience Curve Pricing Strategy of setting low prices in the beginning to drive competitors out. Kotler & Keller (2009) emphasize the risks of experience-curve pricing such as the possibility of cheap image due to agressive pricing and danger of potential competitors with low cost new technology because the leader is stuck to old technology. 23 AD 644 - Pricing - Ezgi Merdin
  • 24. B. Competitive Pricing Setting the price to exploit the competitive position. B3: Price Signaling Selling also low quality products for the price of high quality, using image pricing, reference pricing and isolation effect. Nagle & Hogan (2006), defining price signaling as communicating future pricing intentions to its competitors, showed both the positive effect of aiding buyers in financial and purchasing planning and the negative side of violating antitrust laws. 24 AD 644 - Pricing - Ezgi Merdin
  • 25. B. Competitive Pricing Setting the price to exploit the competitive position. B4: Geographic Pricing The pricing strategy that seperates regions by setting different prices in order to absorb transport costs but may be illegal in some cases. Kotler & Keller (2009) list : - Countertrade - Barter - Compensation deal - Buyback arrangement - Offset 25 AD 644 - Pricing - Ezgi Merdin
  • 26. C. Product Line Pricing To exploit related brands’ mutual dependencies. C1: Price Bundling When the buyers are informed and products are perishable, mixed bundling is a better strategy than differential pricing or discounts. The products that are bundled should be nonsubstitutes with an asymmetric demand structure. Nagle & Hogan (2006) also define optional bundling, where products can be bought seperately too but when bought as a bundle their seperate costs are decreased. 26 Mulhern & Leaone (1991) implicit price bundling: price based on the multitude of price effects that are present across products without providing consumers an eplicit joint price. They recommend implicit bundling to exploit substitution effect (decreased sale of another item within line) and complementary effect (increased sale of another item in another line) instead of simply making promotion. Use complements have a very strong linkage in terms of elasticity. AD 644 - Pricing - Ezgi Merdin Ex. Nine West?
  • 27. C. Product Line Pricing To exploit related brands’ mutual dependencies. C2: Premium Pricing A strategy to exploit heterogenous demands. Ex. Premium versions of cars. 27 AD 644 - Pricing - Ezgi Merdin
  • 28. C. Product Line Pricing To exploit related brands’ mutual dependencies. C3: Image Pricing Selling an identical product within the line with a different name and for a higher price to signal quality. Kotler & Keller (2009) give the example of same perfume sold in different bottles for different prices but counts image pricing as a form of differentiated pricing, as opposed to Tellis’ taxonomy. 28 AD 644 - Pricing - Ezgi Merdin
  • 29. C. Product Line Pricing To exploit related brands’ mutual dependencies. C4: Complementary Pricing - captive pricing (body for an affordable price + accessories) - two-part pricing (fixed fee + usage fee, mobile operators) - loss leadership (usually in retail, lowest prices in a certain category to generate store traffic) ex. women’s day and mothers’ day discounts in makeup in department stores Kotler & Keller (2009) count loss leadership as a promotional pricing strategy, while agreeing to the store traffic contribution of this strategy. 29 AD 644 - Pricing - Ezgi Merdin
  • 30. Aggressive & Predatory Pricing  Guiltinan & Gundlach (1996) Aggressive Pricing: Symbolized with deep price cuts or increased advertising spending with the desire of forcing rivals out. It can be counted among the competitive pricing strategies of Tellis (1986). 30 Nagle & Hogan (2006) list four conditions for the success of aggressive pricing: - Firm enjoying substantial incremental cost adv. and experience effect - If firm’s offering is attractive only to a small share of competitor’s market - If firm can subsidize losses by selling complementary products AD 644 - Pricing - Ezgi Merdin - If market is expanding so much that profitability can still increase
  • 31. Aggressive & Predatory Pricing  Guiltinan & Gundlach (1996) Predatory Pricing: Lowering prices unreasonably to eliminate or block rivals. Includes: - economic sacrifice (when same result can also be achieved with above cost prices) - economic sense (when lower loss is preferred above vanishing or losing portfolio) - harm to competitors (forced to lower their prices) - harm to welfare (loss of nonprice benefits due to price war environment) 31 Nagle & Hogan (2006) emphasize the legal oppositions to long term aggressive pricing and prdatory response that cause attempted monopolization unless it can recoup its losses later on AD by high prices. 644 - Pricing - Ezgi Merdin
  • 32. Consumer Negotiated Pricing  Evans & Beltramini (1987) 32 AD 644 - Pricing - Ezgi Merdin
  • 33. More Pricing Strategies Kotler & Keller (2009) list more pricing strategies under the heading of price adaptation:  geographical pricing  discounts and allowances (quantity, seasonal, functional, trade-in or promotional)  promotional pricing (loss leader, special event, long payment, cash rebate etc.)  psychological discounting  price discrimination (based on customer-segment, product-form, channel, location, time)  yield pricing 33 AD 644 - Pricing - Ezgi Merdin
  • 34. Marketplace Behaviors • Consumer Related Outcomes • Social Welfare • Competitive Position OUTCOMES  Lichtenstein et al. 1993     34 low price search outside the store: seeking to pay lower prices, looking for price information generic product purchase: generally buying this line of lowest price price recall: remebering accurately, positively affected by price involvement sale and coupon responsive behavior: using the opportunity to obtain products at reduced prices by advertised sales or coupon offers AD 644 - Pricing - Ezgi Merdin
  • 35. Price Recall • Consumer Related Outcomes • Social Welfare • Competitive Position OUTCOMES  Dickson & Sawyer, 1990 In this frequently cited article, they found that more than half of the grocery shoopers couldn’t recall prices accurately due to short price information evaluation process 20% of the shoopers didn’t even have a price estimate 35 AD 644 - Pricing - Ezgi Merdin
  • 36. Brand & Category Choice • Consumer Related Outcomes • Social Welfare • Competitive Position OUTCOMES  Sivakumar & Raj 1997 In their framework, “what” to buy represents the brand choice and “whether” to buy it or not represents the category choice. Differentiated as national brands (representing high quality) versus private label brands (representing low quality) they have found out that high quality brands were favored more than low ones when price is decreased and high quality brands were less favored when price is increased. The rationale put forward to cause this is what the authors call “brand and category choice asymmetries”.  Mazumdar & Monroe 1990 Brand choice has been chosen as the dependent variable in this study, too, looking at its relation with intention to learn price information, which is a consumer related characteristic. 36 AD 644 - Pricing - Ezgi Merdin
  • 37. Price – Quality Relationship  Being an important stream of research in pricing literature, the relation of price with quality show lots of variances.  Dodds et al. 1991 The authors, including Kent Monroe, concluded that when price is the only extrinsic cue, it is positively related with quality perceptions but when these cues are more and diverse, the results become less persuasive. Price has also been founded to be related with willingness to buy, measured with a 5-item scale. 37 AD 644 - Pricing - Ezgi Merdin
  • 38. A Conceptual Model  Dodds et al. 1991 38 AD 644 - Pricing - Ezgi Merdin
  • 39. LIST OF REFERENCES  Biswas, A. and Blair, E.A. (1991), “Contextual effects of references 39 prices in retail advertisements”, Journal of. Marketing, Vol. 55, pp. 1-12  Cox, J.L. (2001) Can differential prices be fair? The Journal of Product and Brand Management; 2001; 10, 4/5; pg. 264  Dickson, P.R. and Sawyer , A.G. (1990) “The Price Knowledge and Search of Supermarket Shoppers” The Journal of Marketing, Vol. 54, No. 3 pp. 42-53  Dodds, W.B., Monroe, K. B and Grewal, D. (1991) Effects of Price, Brand, and Store Information on Buyers' Product Evaluations William B. Journal of Marketing Research, Vol. 28, No. 3, pp. 307-319  Evans, K.R. and R. F. Beltramini (1987), “A Theoretical Model of Consumer Negotiated Pricing: An Orientation Perspective,” Journal of Marketing, 51 (2), 58-73.  Guiltinan, J. P. and G. T. Gundlach (1996), "Aggressive and Predatory Pricing: A Framework for Analysis," Journal of Marketing, 60 (3), 87-102.  Kohli, R. (1991), A Reservation-Price Model for Optimal Pricing of Multiattribute Products in Conjoint Analysis , Journal of Marketing Research, 28:3 (1991:Aug.) p.347  Kotler, P. and Keller K.L. (2009) Marketing Management. Frenchs Forest, N.S.W. : Pearson Prentice Hall AD 644 - Pricing - Ezgi Merdin
  • 40. LIST OF REFERENCES        40 Lichtenstein, D. R., N. M. Ridgway, and R. G. Netemeyer (1993), "Price Perceptions and Consumer Shopping Behavior: A Field Study," Journal of Marketing Research, 30 (May), 234-245. Mulhern, F. J. and R. P. Leone (1991), "Implicit Price Bundling of Retail Products: A Multiproduct Approach to Maximizing Store Profitability," Journal of Marketing, 55 (4), 63-76. Nagle, T.T. And Hogan J.E. (2006), The Strategy and Tactics of Pricing. Pearson Education, Inc. Upper Saddle River, New Jersey. Sivakumar, K. and S. P. Raj (1997), "Quality Tier Competition: How Price Change Influences Brand Choice and Category Choice," Journal of Marketing, 61 (3), 71-84. Tellis, G. J. (1986), "Beyond the Many Faces of Price: An Integration of Pricing Strategies," Journal of Marketing, 50 (4), 146-160. Tellis, G.J (1988) The Price Elasticity of Selective Demand: A Meta-Analysis of Econometric Models of Sales Journal of Marketing Research, Vol. 25, No. 4 ,pp. 331-341 Wilcox, J.B., (1987) Price Quantity Discounts: Some Implications for Buyers and Sellers , Journal of Marketing, 51:3 p.60 AD 644 - Pricing - Ezgi Merdin
  • 41. Pricing In the Era of Internet Expectation of Frictionless Markets: in which customers are relieved from search costs by intelligent agents and trusted intermediaries, thus destructing monopolistic profits and leading to optimal allocation of resources. Smart pricing through versioning or online auctions is recommended. Versioning: is offering the information in different versions targeted at different types of customers. (temporal discrimination) Price Dispersion: which is still persistent against the efficiency claims. One reason is that brand, trust and awareness are still sources of heterogeneity (Brynjolfsson & Smith, 2000) Bundling: can be a profitable strategy when taken large number of unrelated information goods together. They create economies of aggregation. 41 AD 644 - Pricing - Ezgi Merdin
  • 42. Pricing In the Era of Internet  Journal of Interactive Marketing. Hoboken: Fall 2004. Vol. 18, Iss. 4. Special Issue on Online Pricing. Second-price auctions for Internet-based (online) transactions and quasi-endowment and opponent effects related to that are analyzed. Name-your-own-price is a pricing mechanism where the buyer instead of the seller determines the price, because the buyer makes a bid at a certain price, which the seller can either accept or reject. Authors use this to estimate individual willingness-to-pay (WTP) and frictional costs. 42 AD 644 - Pricing - Ezgi Merdin
  • 43. Pricing In the Era of Internet Price Communication in Online and Print Coupons (Suri, Swaminathan, Monroe; 2004) Since recently coupons, which are widely usd method of price promotion and reduction, have moved to digital age and sent via internet. Since there is considerable difference in consumer reactions to print v. online environments, authors investigate reactions to coupon promotions sent via these two different media. Design is 2 (online v print media) X 2 (low v high motivation to process info) X 2 (low v high coupon price). 43 AD 644 - Pricing - Ezgi Merdin
  • 44. Pricing In the Era of Internet Price Dispersion on the Internet (Pan, Ratchford, Shankar; 2004) After a detailed literature review, comparing online and offline, authors suggest that online price dispersion is expected to persist and recommends differentiation strategy to overcome head to head competition. Differentiation can be service or non-service. Providing large amounts of information is another recommendation due to information searching consumer chararcteristic. Random pricing strategy is another recommendation. Lastly, authors recommend intergration of online and offline channels to enhance reliability for multichanel retailers. 44 AD 644 - Pricing - Ezgi Merdin
  • 45. Pricing In the Era of Internet Temporal Price Dispersion: Evidence from an online consumer electronics market (Baye; Morgan; Scholten, 2004) The same question is trying to be answered by different authors: How to avoid allout price competition in online markets? The authors recommend that in order not to be systematically predicted by the rivals, the online sellers had better set “hit and run sales” and short-term promotions as a way of strategic unpredictability. It is an empirical study covering 36 of the best seling consumer electronics products sold at Shopper.com (a price comparison site) between November 1999 and May 2 001. 45 AD 644 - Pricing - Ezgi Merdin
  • 46. Pricing In the Era of Internet Price partitioning on the Internet (Xia & Monroe, 2004) Price partitioning is setting a base price and then adding various surcharges such as shipping and handling, taxes, other fees etc. It is an emprical study performing 3 experiments. As a result, authors argue that online price partitioning may enhance - Purchase intention, perceieved value, price satisfaction, And reduce - 46 Further information search intention AD 644 - Pricing - Ezgi Merdin
  • 47. Pricing In the Era of Internet Price partitioning on the Internet (Xia & Monroe, 2004) H1: Compared to sales tax, shipping and handling fee is more likely to negatively effect purchase intention. H2: When relative magnitude of a surcharge is small, % presentation enhances purchase intention compared to $ presentation. H3: Price partition’s effect on PI is U-shaped. H4: When there is only one surcharge, % presentation enhances purchase intention compared to $ presentation. H5: When total price is presented, showing the partition is beneficial. 47 AD 644 - Pricing - Ezgi Merdin
  • 48. Pricing In the Era of Internet The influence of pre- and post-purchase service on prices in the online book market (Cao & Gruca, 2004) Invesigating pre- and post-purchase service ratings by customers, the authors tried to explain the price variations. They found that e-tailers with significantly higher post-purchase service ratings charged higher prices whereas pre-purchase ratings didn’t explain the phenomenon. Empirical model estimation as the method. 48 AD 644 - Pricing - Ezgi Merdin