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  2. 2. The Role of Pricing in Marketing Strategy (1 of 2) <ul><li>The Seller’s Perspective on Pricing </li></ul><ul><li>Four key issues: </li></ul><ul><ul><li>(1) Costs </li></ul></ul><ul><ul><li>(2) Demand </li></ul></ul><ul><ul><li>(3) Customer value </li></ul></ul><ul><ul><li>(4) Competitors’ prices </li></ul></ul><ul><li>The Buyer’s Perspective on Pricing </li></ul><ul><ul><li>Two key issues: </li></ul></ul><ul><ul><ul><li>(1) Perceived value </li></ul></ul></ul><ul><ul><ul><li>(2) Price sensitivity </li></ul></ul></ul>
  3. 3. The Role of Pricing in Marketing Strategy (2 of 2) <ul><li>A Shift in the Balance of Power </li></ul><ul><ul><li>Buyer’s market </li></ul></ul><ul><ul><ul><li>Large number of sellers in the market </li></ul></ul></ul><ul><ul><ul><li>Many substitutes for the product </li></ul></ul></ul><ul><ul><ul><li>Economy is weak </li></ul></ul></ul><ul><ul><li>Seller’s market </li></ul></ul><ul><ul><ul><li>Products are in short supply </li></ul></ul></ul><ul><ul><ul><li>High demand </li></ul></ul></ul><ul><ul><ul><li>Economy is strong </li></ul></ul></ul><ul><li>The Relationship Between Price and Revenue </li></ul><ul><ul><li>Myth #1: When business is good, a price cut will increase market share. </li></ul></ul><ul><ul><li>Myth #2: When business is bad, a price cut will </li></ul></ul><ul><ul><li>stimulate sales. </li></ul></ul>
  4. 4. Major Determinants of Pricing Strategy <ul><li>Pricing Objectives </li></ul><ul><li>Supply and Demand </li></ul><ul><li>The Firm’s Cost Structure </li></ul><ul><li>Competition and Industry Structure </li></ul><ul><ul><li>Four basic competitive market structures: </li></ul></ul><ul><ul><ul><li>Pure Competition </li></ul></ul></ul><ul><ul><ul><li>Monopolistic Competition </li></ul></ul></ul><ul><ul><ul><li>Oligopoly </li></ul></ul></ul><ul><ul><ul><li>Monopoly </li></ul></ul></ul><ul><li>Stage of the Product Life Cycle </li></ul><ul><li>Other Elements of the Marketing Mix </li></ul>
  5. 5. Regulated Utilities as Monopolies
  6. 6. Description of Common Pricing Objectives Exhibit 8.1
  7. 7. Pricing Strategy Over the Product Life Cycle Exhibit 8.2
  8. 8. Price Elasticity of Demand (1 of 2) <ul><li>Formula for calculating price elasticity: </li></ul><ul><li>Situations That Increase Price Sensitivity </li></ul><ul><ul><li>Availability of product substitutes </li></ul></ul><ul><ul><li>Higher total expenditure </li></ul></ul><ul><ul><li>Noticeable differences </li></ul></ul><ul><ul><li>Easy price comparison </li></ul></ul>
  9. 9. Price Elasticity of Demand Exhibit 8.3
  10. 10. Price Elasticity of Demand (2 of 2) <ul><li>Situations That Decrease Price Sensitivity </li></ul><ul><ul><li>Real or perceived necessities </li></ul></ul><ul><ul><li>Lack of product substitutes </li></ul></ul><ul><ul><li>Complementary products </li></ul></ul><ul><ul><li>Product differentiation </li></ul></ul><ul><ul><li>Perceived product benefits </li></ul></ul><ul><ul><li>Situational influences </li></ul></ul><ul><li>Price Elasticity and Yield Management </li></ul><ul><ul><li>Allows simultaneous control of capacity and demand </li></ul></ul><ul><ul><ul><li>Control capacity by limiting available capacity at certain price points </li></ul></ul></ul><ul><ul><ul><li>Control demand through price changes and overbooking capacity </li></ul></ul></ul>
  11. 11. Yield Management for a Hypothetical Model Exhibit 8.4
  12. 12. <ul><li>Discuss the variety of situational factors that could come into play and impact elasticity in the purchase of each of the following products: a) sporting event or concert tickets, b) staple goods such as milk, eggs, or bread, c) an electric razor, d) eye surgery to improve vision. </li></ul>Discussion Question
  13. 13. Pricing Strategies (1 of 2) <ul><li>Base Pricing Strategies </li></ul><ul><ul><li>Price Skimming </li></ul></ul><ul><ul><li>Penetration Pricing </li></ul></ul><ul><ul><li>Prestige Pricing </li></ul></ul><ul><ul><li>Value-Based Pricing (EDLP) </li></ul></ul><ul><ul><li>Competitive Matching </li></ul></ul><ul><ul><li>Non-Price Strategies </li></ul></ul><ul><li>Adjusting Prices in Consumer Markets </li></ul><ul><ul><li>Promotional Discounting </li></ul></ul><ul><ul><li>Reference Pricing </li></ul></ul><ul><ul><li>Odd-Even Pricing </li></ul></ul><ul><ul><li>Price Bundling </li></ul></ul>
  14. 14. <ul><li>Chrysler’s price skimming strategy for the Pacifica model has not been successful in attracting customers. Why do you think the $40,000 price tag has not been successful for the Pacifica? What do you think Chrysler should do in rethinking its pricing strategy for this model? </li></ul>Marketing Strategy in Action
  15. 15. Price Bundling
  16. 16. Pricing Strategies (2 of 2) <ul><li>Adjusting Prices in Business Markets </li></ul><ul><ul><li>Pricing techniques unique to business markets: </li></ul></ul><ul><ul><ul><li>Trade discounts </li></ul></ul></ul><ul><ul><ul><li>Discounts and allowances </li></ul></ul></ul><ul><ul><ul><li>Geographic pricing </li></ul></ul></ul><ul><ul><ul><li>Transfer pricing </li></ul></ul></ul><ul><ul><ul><li>Barter and countertrade </li></ul></ul></ul><ul><ul><li>Price discrimination </li></ul></ul>
  17. 17. Fixed vs. Negotiated Pricing <ul><li>Three pricing levels in a negotiated price situation: </li></ul><ul><ul><li>(1) Opening position </li></ul></ul><ul><ul><li>(2) Aspiration price </li></ul></ul><ul><ul><li>(3) Limit </li></ul></ul><ul><li>Guidelines for making concessions: </li></ul><ul><ul><li>Avoid being the first side to make a concession </li></ul></ul><ul><ul><li>Start with modest concessions and make them smaller as you proceed </li></ul></ul><ul><ul><li>Avoid making concessions early in the negotiation </li></ul></ul><ul><ul><li>Do not give up anything without something in return </li></ul></ul>
  18. 18. <ul><li>If you were trying to sell your used car through the newspaper, what factors would determine how you might set your opening position, your aspiration price, and your limit during the negotiation process? </li></ul>Discussion Question
  19. 19. Major Online Auction Strategies Exhibit 8.5
  20. 20. Legal and Ethical Issues in Pricing <ul><li>Price Discrimination </li></ul><ul><li>Price Fixing </li></ul><ul><li>Predatory Pricing </li></ul><ul><li>Deceptive Pricing </li></ul>
  21. 21. <ul><li>One of the key decisions that managers often make is to change prices that have been set inappropriately. What issues should be considered in deciding whether it is the price that is wrong, or whether the problem lies in another element of the marketing mix? </li></ul>Discussion Question
  22. 22. Role of Pricing <ul><li>Segments markets </li></ul><ul><li>Defines products </li></ul><ul><li>Creates customer incentives </li></ul><ul><li>Sends signals to competitors </li></ul><ul><li>Determines success or failure </li></ul>
  23. 23. <ul><li>To enter crowded field, use penetration strategy: </li></ul><ul><ul><li>E.g. Sears Discover card with its low price no membership fee </li></ul></ul>
  24. 24. How to Set Price <ul><li>Establish marketing objectives </li></ul><ul><ul><li>Survival, maximum current profit, maximum current revenue, maximum sales growth, maximum market skimming or product-quality leadership </li></ul></ul><ul><li>Determine the elasticity of demand </li></ul><ul><ul><li>More inelastic the demand, the higher the company can set the price </li></ul></ul>
  25. 25. How to Set Price <ul><li>1. Establish marketing objectives </li></ul><ul><li>Determine the elasticity of demand </li></ul><ul><li>Estimate the costs depending on production level, marketing strategies, etc. </li></ul><ul><li>Examine competitors’ prices as basis for positioning it own price </li></ul><ul><li>Select pricing method </li></ul><ul><ul><li>Markup </li></ul></ul><ul><ul><li>Target return </li></ul></ul><ul><ul><li>Perceived-value </li></ul></ul><ul><ul><li>Value </li></ul></ul><ul><ul><li>Going-rate </li></ul></ul><ul><ul><li>Sealed-bid </li></ul></ul><ul><li>6. Determine final price </li></ul>
  26. 26. Setting Final Price <ul><li>Conforms to company pricing policies </li></ul><ul><li>OK with distributors and dealers </li></ul><ul><li>In sync with sales force, competitors, suppliers, and government </li></ul>
  27. 27. Adapting the Price (To various conditions in Marketplace) <ul><li>Geographical Conditions </li></ul><ul><li>Price Discounts & Allowances </li></ul><ul><ul><li>Cash discounts, quantity discounts, trade discounts, seasonal discounts, allowances, trade-ins </li></ul></ul><ul><li>Promotional Pricing </li></ul><ul><ul><li>Loss-leader - to stimulate traffic </li></ul></ul><ul><ul><li>Special event pricing – to draw customers </li></ul></ul><ul><ul><li>Cash rebates – to encourage purchase within a specified time period </li></ul></ul><ul><ul><li>Low-interest financing – to facilitate purchase </li></ul></ul><ul><ul><li>Longer payment terms – for lower monthly payments </li></ul></ul><ul><ul><li>Warranties and service contracts – added value </li></ul></ul><ul><ul><li>Psychological discounting – set an artificially high initial price </li></ul></ul>
  28. 28. Adapting the Price <ul><li>Discriminatory Pricing </li></ul><ul><ul><li>Product-line pricing </li></ul></ul><ul><ul><li>Optional feature pricing </li></ul></ul><ul><ul><li>Captive product pricing – main products that require ancillary products </li></ul></ul><ul><ul><li>Two-part pricing – fixed fee plus variable fee based on usage </li></ul></ul>
  29. 29. Adapting the Price <ul><li>Discriminatory Pricing </li></ul><ul><ul><li>Customer segment pricing – different prices for different groups </li></ul></ul><ul><ul><li>Product-form pricing – different versions priced differently </li></ul></ul><ul><ul><li>Image pricing </li></ul></ul><ul><ul><li>Location pricing- same product priced differently at different locations </li></ul></ul><ul><ul><li>Time Pricing – same product priced differently at different locations </li></ul></ul>
  30. 30. Pricing Decisions Summary <ul><li>Consider Costs – break-even analysis </li></ul><ul><li>Demand - elasticity </li></ul><ul><li>Competition </li></ul>
  31. 31. Pricing Objectives <ul><li>Survival – short term used to combat overcapacity, intense competition or changing consumer wants </li></ul><ul><li>Maximum current profit – set prices to obtain highest profit, cash flow or return on investment given demand and costs; may encounter competitive or legal reaction </li></ul><ul><li>Maximum market share (market penetration) = higher sales volume will lead to lower unit costs </li></ul><ul><ul><li>Market highly price sensitive </li></ul></ul><ul><ul><li>Production & distribution costs fall with accumulated production experience </li></ul></ul><ul><ul><li>Low price discourages competition </li></ul></ul>
  32. 32. Pricing Objectives <ul><li>Maximum market skimming –set prices high to skim the market </li></ul><ul><ul><li>Sufficient number of buyers have a high current demand </li></ul></ul><ul><ul><li>Unit costs of producing a small volume are not so high that they cancel advantage charging what traffic will bear </li></ul></ul><ul><ul><li>High initial price does not attract more competitors to the market </li></ul></ul><ul><ul><li>High price communicates image of a superior product </li></ul></ul><ul><li>Product-quality leadership – Offer top quality, innovation at premium prices </li></ul>
  33. 33. Price less elastic or inelastic if… <ul><li>There are few or no substitutes or competitors </li></ul><ul><li>Buyers do not readily notice the higher price </li></ul><ul><li>Buyers are slow to change their buying habits & search for lower prices </li></ul><ul><li>Buyers think the higher prices are justifies by quality differences </li></ul>
  34. 34. Will price discrimination work? <ul><li>Market segmentable with different intensities of demand? </li></ul><ul><li>Can members in lower price segment resell product to higher price segment? </li></ul><ul><li>Can competitors undersell firm in the higher-price segment? </li></ul><ul><li>Does the cost of segment the market exceed the extra revenue derived from price discrimination??? </li></ul><ul><li>Does the practice breed customer resentment? </li></ul><ul><li>Is form of price discrimination legal (selling below cost)?? </li></ul>