Pricing Considerations and Strategies

What is a Price? Narrowly , price is the amount of money charged for a product or service. Broadly , price is the sum of all the values that consumers exchange for the benefits of having or using the product or service. Dynamic Pricing : charging different prices depending on individual customers and situations.

Narrowly , price is the amount of money charged for a product or service.

Broadly , price is the sum of all the values that consumers exchange for the benefits of having or using the product or service.

Dynamic Pricing : charging different prices depending on individual customers and situations.

What is Price? Rent Fee Rate Commission Assessment Tuition Fare Toll Premium Retainer Price Has Many Names Bribe Salary Wage Interest Tax

Rent

Fee

Rate

Commission

Assessment

Tuition

Fare

Toll

Premium

Retainer

Bribe

Salary

Wage

Interest

Tax

Dynamic Pricing The Internet is ushering in a new era of fluid pricing. PriceSCAN.com is an independent site that provides product comparisons and guides, and searches all merchant sites for the best prices.

Dynamic Pricing on the Web allows SELLERS to: Charge lower prices, reap higher margins. Monitor customer behavior and tailor offers. Change prices on the fly to adjust for changes in demand or costs. Negotiate prices in online auctions and exchanges.

Dynamic Pricing on the Web allows SELLERS to:

Charge lower prices, reap higher margins.

Monitor customer behavior and tailor offers.

Change prices on the fly to adjust for changes in demand or costs.

Negotiate prices in online auctions and exchanges.

Dynamic Pricing on the Web allows BUYERS to: Get instant price comparisons from thousands of vendors. Find and negotiate lower prices. Negotiate prices in online auctions and exchanges.

Dynamic Pricing on the Web allows BUYERS to:

Get instant price comparisons from thousands of vendors.

Find and negotiate lower prices.

Negotiate prices in online auctions and exchanges.

Three Approaches to Setting Prices Figure 9.1

Factors Affecting Pricing Decisions Figure 9.2

Internal Factors Affecting Pricing Decisions Marketing Objectives : Company must decide on its strategy for the product. General Objectives: Survival, current profit maximization, market share leadership, and product quality leadership.

Marketing Objectives :

Company must decide on its strategy for the product.

General Objectives:

Survival, current profit maximization, market share leadership, and product quality leadership.

Product Quality Leadership Four Seasons starts with very high-quality service—”we await you with the perfect sanctuary.” It then charges a price to match.

Internal Factors Affecting Pricing Decisions Marketing Mix Strategy : Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective marketing program. Target costing: Pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met.

Marketing Mix Strategy :

Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective marketing program.

Target costing:

Pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met.

Internal Factors Affecting Pricing Decisions Costs : Fixed Costs : Costs that do not vary with production or sales level. Variable Costs : Costs that vary directly with the level of production.

Costs :

Fixed Costs :

Costs that do not vary with production or sales level.

Variable Costs :

Costs that vary directly with the level of production.

Internal Factors Affecting Pricing Decisions Organizational Considerations : Must decide who within the organization should set prices. This will vary depending on the size and type of company.

Organizational Considerations :

Must decide who within the organization should set prices.

This will vary depending on the size and type of company.

External Factors Affecting Pricing Decisions The Market and Demand : Costs set the lower limit of prices. The market and demand set the upper limit.

The Market and Demand :

Costs set the lower limit of prices.

The market and demand set the upper limit.

Pricing in Different Types of Markets Pure Competition: Many buyers and sellers where each has little effect on the going market price Monopolistic Competition: Many buyers and sellers who trade over a range of prices Pure Monopoly: Market consists of a single seller Oligopolistic Competition: Few sellers who are sensitive to each other’s pricing/marketing strategies

Demand Curve A curve that shows the number of units the market will buy in a given time period, at different prices that might be charged . Figure 9.3

Upward Sloping Demand Curve Gibson was surprised to learn that its high-quality instruments did not sell as well at lower prices.

Competition : External Factors Affecting Pricing Decisions Consider competitors’ costs, prices, and possible reactions when developing a pricing strategy Pricing strategy influences the nature of competition -Low-price low-margin strategies inhibit competition -High-price high-margin strategies attract competition Benchmarking costs against the competition is recommended

Competition :

Consider competitors’ costs, prices, and possible reactions when developing a pricing strategy

Pricing strategy influences the nature of competition

-Low-price low-margin strategies inhibit competition

-High-price high-margin strategies attract competition

Benchmarking costs against the competition is recommended

External Factors Affecting Pricing Decisions Other External Factors Economic conditions -Affect production costs -Affect buyer perceptions of price and value Reseller reactions to prices must be considered Government may restrict or limit pricing options Social considerations may be taken into account

Economic conditions

-Affect production costs

-Affect buyer perceptions of price and value

Reseller reactions to prices must be considered

Government may restrict or limit pricing options

Social considerations may be taken into account

Major Considerations in Setting Price Figure 9.5

Cost-Plus Pricing Adding a standard markup to the cost of the product. Popular because: Sellers more certain about cost than demand Simplifies pricing When all sellers use, prices are similar and competition is minimized Some feel it is more fair to both buyers and sellers

Adding a standard markup to the cost of the product.

Popular because:

Sellers more certain about cost than demand

Simplifies pricing

When all sellers use, prices are similar and competition is minimized

Some feel it is more fair to both buyers and sellers

Break-Even Chart for Determining Target Price Figure 9.6

Value-Based Pricing Uses buyers’ perceptions of value , not the seller’s cost, as the key to pricing. Measuring perceived value can be difficult. Consumer attitudes toward price and quality have shifted during the last decade. Introduction of less expensive versions of established brands has become common

Uses buyers’ perceptions of value , not the seller’s cost, as the key to pricing.

Measuring perceived value can be difficult.

Consumer attitudes toward price and quality have shifted during the last decade.

Introduction of less expensive versions of established brands has become common

Value pricing at the retail level Everyday low pricing (EDLP) Wal-Mart practices “everyday low prices” in order to build store traffic and increase sales volume

Cost-Based versus Value-Based Pricing Figure 9.7

Perceived Value A less expensive piano might play well, but would it take you places your have never been before?

Competition-Based Pricing Going-Rate Pricing : Firm bases its price largely on competitors’ prices, with less attention paid to its own costs or to demand. Sealed-Bid Pricing : Firm bases its price on how it thinks competitors will price rather than on its own costs or on demand.

Going-Rate Pricing :

Firm bases its price largely on competitors’ prices, with less attention paid to its own costs or to demand.

Sealed-Bid Pricing :

Firm bases its price on how it thinks competitors will price rather than on its own costs or on demand.

New-Product Pricing Strategies Market-Skimming Set a high price for a new product to “skim” revenues layer by layer from the market. Company makes fewer, but more profitable sales. When to use : Product’s quality and image must support its higher price. Costs of smaller volume cannot be so high they cancel the advantage of charging more. Competitors should not be able to enter market easily and undercut the high price.

Market-Skimming

Set a high price for a new product to “skim” revenues layer by layer from the market.

Company makes fewer, but more profitable sales.

When to use :

Product’s quality and image must support its higher price.

Costs of smaller volume cannot be so high they cancel the advantage of charging more.

Competitors should not be able to enter market easily and undercut the high price.

New-Product Pricing Strategies Market Penetration Set a low initial price in order to “penetrate” the market quickly and deeply. Can attract a large number of buyers quickly and win a large market share. When to use : Market must be highly price sensitive so a low price produces more market growth. Production and distribution costs must fall as sales volume increases. Must keep out competition and maintain low price or effects are only temporary.

Market Penetration

Set a low initial price in order to “penetrate” the market quickly and deeply.

Can attract a large number of buyers quickly and win a large market share.

When to use :

Market must be highly price sensitive so a low price produces more market growth.

Production and distribution costs must fall as sales volume increases.

Must keep out competition and maintain low price or effects are only temporary.

Figure 9.8 Skimming vs. Penetration Pricing Strategies

Figure 9.9 Comparison of Slow Skimming and Rapid Penetration Pricing Strategies

Product Line Pricing Involves setting price steps between various products in a product line based on: Cost differences between products Customer evaluations of different features Competitors’ prices

Involves setting price steps between various products in a product line based on:

Cost differences between products

Customer evaluations of different features

Competitors’ prices

Optional- and Captive-Product Pricing Optional-Product Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator). Captive-Product Pricing products that must be used with the main product (e.g., replacement cartridges for Gillette razors).

Optional-Product

Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator).

Captive-Product

Pricing products that must be used with the main product (e.g., replacement cartridges for Gillette razors).

Pricing Strategies By-Product Pricing: Setting a price for by-products in order to make the main product’s price more competitive (e.g., sawdust and Zoo Doo) Product Bundle Pricing: Combining several products and offering the bundle at a reduced price (e.g., computer with software and Internet access).

Discounts and Allowances Cash Quantity Functional Seasonal Trade-In Promotional Discounts Allowances

Segmented Pricing Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. Types: Customer-segment Product-form Location pricing Time pricing

Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs.

Types:

Customer-segment

Product-form

Location pricing

Time pricing

Psychological Pricing Considers the psychology of prices and not simply the economics. Consumers usually perceive higher-priced products as having higher quality. Consumers use price less when they can judge quality of a product.

Considers the psychology of prices and not simply the economics.

Consumers usually perceive higher-priced products as having higher quality.

Consumers use price less when they can judge quality of a product.

Promotional Pricing Special-Event Pricing Cash Rebates Low-Interest Financing Longer Warranties Free Maintenance Discounts Loss Leaders Temporarily pricing products below list price and sometimes even below cost to create buying excitement and urgency. Approaches:

Promotional Pricing Promotional pricing is used to draw traffic into stores and increase the volume of purchases

Geographical Pricing FOB-origin pricing Uniform-delivered pricing Zone pricing Basing-point pricing Freight-absorption pricing

FOB-origin pricing

Uniform-delivered pricing

Zone pricing

Basing-point pricing

Freight-absorption pricing

International Pricing Price depends on many factors, including: Economic conditions Competitive situations Laws and regulations Development of the wholesaling and retailing system Costs

Price depends on many factors, including:

Economic conditions

Competitive situations

Laws and regulations

Development of the wholesaling and retailing system

Costs

International Pricing Companies must decide what prices to charge in different countries.

Initiating Price Changes Excess Capacity Falling Market Share Dominate Market Through Lower Costs Cost Inflation Over-demand: Cannot Supply All Customers’ Needs Price Cuts Price Increases

Buyers’ Reactions to Price Changes What would you think if the price of Joy was suddenly cut in half?