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Chp 11 principle of marketing

Philip Kotler

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Chp 11 principle of marketing

  1. 1. 1 Chapter 11 Pricing Products: Pricing Considerations and Strategies
  2. 2. 2 New Product Pricing Strategies (pp. 399-400) Market Skimming  Setting a high price to “skim” maximum revenues from the target market.  Results in fewer, but more profitable, sales.  May reduce price later to attract more price sensitive markets. Use Under These Conditions:  Product’s quality & image support its higher price.  Market not price sensitive.  Costs of producing small volumes can’t be so high that they cancel the advantage of charging more (i.e., don’t need economies of scale).  Competitors shouldn’t be able to enter market easily & undercut the high price.
  3. 3. 3 New Product Pricing Strategies (pp. 399-400) Market Penetration  Setting a low price in order to “penetrate” the market quickly and deeply.  Attract a large number of buyers quickly & win a larger market share. Use Under These Conditions:  Market is large & highly price-sensitive so a low price produces market growth.  Production & distribution costs must fall as sales volume increases (i.e., economies of scale).  Low price can effectively keep out competition & low price position can be maintained.
  4. 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)
  5. 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)
  6. 6. Price-Adjustment Strategies: Discount & Allowance (pp. 403-404) 6 Adjusting the basic price to reward customers, or to provide incentives for certain responses (most are for channel members & business buyers) Cash discount (pay early, e.g., 2/10 net 30) Functional discount (price to channel members) Quantity discount (buy more from one seller) Trade-in allowance Seasonal discount (buy early or out of season) Promotional allowance (to help channel members promote product)
  7. 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
  8. 8. Price-Adjustment Strategies: Segmented Pricing (p. 404) 8 Selling products at different prices based on differences in demand, not on differences in cost Customer segment pricing Location pricing Product form pricing Product - Form Time pricing
  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 9  Show price comparisons  Display with more/less expensive alternatives Odd-pricing, even-pricing  E.g., $49.99 versus $50.00
  10. 10. Price-Adjustment Strategies: Promotional Pricing (p. 408) pricing products below the regular price to increase short-term 10 LLoossss lleeaaddeerrss SSppeecciiaall--eevveenntt pprriicciinngg CCaasshh rreebbaatteess LLooww--iinntteerreesstt ffiinnaanncciinngg LLoonnggeerr wwaarrrraannttiieess Temporarily FFrreeee mmeerrcchhaannddiissee sales Danger – addictive; over-reliance can damage brand equity & train consumers to be “deal prone”
  11. 11. 11 Discussion Connections Many industries have created “deal-prone” consumers through the heavy use of promotional pricing – e.g., fast foods, airlines, department stores, and others. Pick a company in one of these industries and suggest ways that it might deal with this problem. How does the concept of value relate to promotional pricing? Does promotional pricing add to or detract from customer value?
  12. 12. 12 Initiating Price Changes (pp. 411-413) Why? •Excess capacity •Falling market share •Strategy to dominate market through lower costs Why? •Cost inflation •Over-demand •Increase profit margin Price Cut Price Increase Consumer Reaction: • Positive; or • Being replaced? • Not selling? • Co. in trouble? • Quality lower? • Prices coming down further? Consumer Reaction: • Negative (explain, disguise?) • Positive (“hot,” prestige) Competitor Response: Follow? – oligopoly, perfect competition Position against? – monopolistic competition
  13. 13. Assessing & Responding to Competitor’s Price Changes (Fig. 11.1, pp. 413-414) 13 Has competitor cut price? Will lower price negatively affect our market share & profits? Can / should effective action be taken? Hold current price; continue to monitor competitor’s price Reduce price Raise perceived quality Improve quality & increase price Launch low-price “fighting brand”
  14. 14. Consumers 14 Public Policy Issues: Prohibited Pricing Practices (Fig. 11.2, pp. 415-420) Manufacturer A • Price-fixing • Predatory pricing Manufacturer B • Retail price maintenance • Discriminatory pricing Retailer 1 • Price-fixing • Predatory pricing Retailer 2 • Deceptive pricing • Deceptive pricing
  15. 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 market Across 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.)
  16. 16. 16 Review of Concept Connections Describe the major strategies for pricing new products. Explain how companies set prices to maximize profits from the total product mix. Discuss the ways companies adjust their prices to take into account different types of customers and situations. Discuss the key issues related to initiating and responding to price changes. Identify the key prohibited pricing practices.