Chap 11 e161

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  • Chap 11 e161

    1. 1. Chapter 11 Pricing Products: Pricing Strategies
    2. 2. Case Study Kmart <ul><li>Once the top discount retailer in the U.S. </li></ul><ul><li>Wal-Mart positioned on price and Target as “upscale discount” </li></ul><ul><li>Kmart tried a value repositioning approach which turned to a price war with Wal-Mart </li></ul><ul><li>Kmart failed to deliver on its value proposition </li></ul><ul><li>Forced into bankruptcy and closing of nearly 1/3 of stores </li></ul><ul><li>Kmart emerged from bankruptcy in May 2003 </li></ul><ul><li>How are they positioned now? </li></ul>11 -
    3. 3. Learning Goals <ul><li>Describe the major strategies for pricing imitative and new products </li></ul><ul><li>Explain how companies find a set of prices that maximize the profits from the total product mix </li></ul><ul><li>Discuss how companies adjust their prices to take into account different types of customers and situations </li></ul><ul><li>Discuss the key issues related to imitating and responding to price changes </li></ul>
    4. 4. Definitions <ul><li>Market-Skimming Pricing </li></ul><ul><ul><li>Setting a high price for a new product to skim maximum revenues layer by layer from segments willing to pay the high price. </li></ul></ul><ul><li>Market-Penetration Pricing </li></ul><ul><ul><li>Setting a low price for a new product in order to attract a large number of buyers and a large market share. </li></ul></ul>
    5. 5. Skimming Pricing Example <ul><li>Most consumer electronic products enter at a high price with skimming. </li></ul><ul><li>For example, the iPod entered around $259 in 2004. Check the current price at amazon.com </li></ul>Marketing in Action Click on iPod for website 11 -
    6. 6. Learning Goals <ul><li>Describe the major strategies for pricing imitative and new products </li></ul><ul><li>Explain how companies find a set of prices that maximize the profits from the total product mix </li></ul><ul><li>Discuss how companies adjust their prices to take into account different types of customers and situations </li></ul><ul><li>Discuss the key issues related to imitating and responding to price changes </li></ul>
    7. 7. Product Mix Pricing Strategies <ul><li>Product Line Pricing </li></ul><ul><ul><li>Setting price steps between product line items. </li></ul></ul><ul><ul><ul><li>Price points </li></ul></ul></ul><ul><li>Optional-Product Pricing </li></ul><ul><ul><li>Pricing optional or accessory products sold with the main product </li></ul></ul>
    8. 8. <ul><li>Oral B has a full line of electric toothbrushes. Visit the site to see the products and examine attributes which justify price differences </li></ul>Product Line Pricing Marketing in Action Click on screenshot for website 11 -
    9. 9. Product Mix Pricing Strategies <ul><li>Captive-Product Pricing </li></ul><ul><ul><li>Pricing products that must be used with the main product </li></ul></ul><ul><ul><ul><li>High margins are often set for supplies </li></ul></ul></ul><ul><ul><li>Services: two-part pricing strategy </li></ul></ul><ul><ul><ul><li>Fixed fee plus a variable usage rate </li></ul></ul></ul>
    10. 10. Captive Product Pricing <ul><li>Companies like Gillette will often price the razor at or below cost and make the profit on the blades </li></ul>Marketing in Action 11 -
    11. 11. Product Mix Pricing Strategies <ul><li>By-Product Pricing </li></ul><ul><ul><li>Pricing low-value by-products to get rid of them </li></ul></ul><ul><li>Product Bundle Pricing </li></ul><ul><ul><li>Pricing bundles of products sold together </li></ul></ul>
    12. 12. How does AOL bundle? Marketing in Action Click on screenshot for website 11 -
    13. 13. Learning Goals <ul><li>Describe the major strategies for pricing imitative and new products </li></ul><ul><li>Explain how companies find a set of prices that maximize the profits from the total product mix </li></ul><ul><li>Discuss how companies adjust their prices to take into account different types of customers and situations </li></ul><ul><li>Discuss the key issues related to imitating and responding to price changes </li></ul>
    14. 14. Price Adjustment Strategies <ul><li>Discount / allowance </li></ul><ul><li>Segmented </li></ul><ul><li>Psychological </li></ul><ul><li>Promotional </li></ul><ul><li>Geographical </li></ul><ul><li>International </li></ul><ul><li>Types of discounts </li></ul><ul><ul><li>Cash discount </li></ul></ul><ul><ul><li>Quantity discount </li></ul></ul><ul><ul><li>Functional (trade) discount </li></ul></ul><ul><ul><li>Seasonal discount </li></ul></ul><ul><li>Allowances </li></ul><ul><ul><li>Trade-in allowances </li></ul></ul><ul><ul><li>Promotional allowances </li></ul></ul>Strategies
    15. 15. This small inn located in a summer resort uses seasonal discounts Marketing in Action 11 -
    16. 16. Price Adjustment Strategies <ul><li>Discount / allowance </li></ul><ul><li>Segmented </li></ul><ul><li>Psychological </li></ul><ul><li>Promotional </li></ul><ul><li>Geographical </li></ul><ul><li>International </li></ul><ul><li>Types of segmented pricing strategies: </li></ul><ul><ul><li>Customer-segment </li></ul></ul><ul><ul><li>Product-form pricing </li></ul></ul><ul><ul><li>Location pricing </li></ul></ul><ul><ul><li>Time pricing </li></ul></ul><ul><li>Also called revenue or yield management </li></ul><ul><li>Certain conditions must exist for segmented pricing to be effective </li></ul>Strategies
    17. 17. Movie theatres, resorts and hotels often use segmented pricing for children Marketing in Action 11 -
    18. 18. Price Adjustment Strategies <ul><li>Conditions Necessary for Segmented Pricing Effectiveness </li></ul><ul><ul><li>Market must be segmentable </li></ul></ul><ul><ul><li>Segments must show different demand </li></ul></ul><ul><ul><li>Pricing must be legal </li></ul></ul><ul><ul><li>Costs of segmentation cannot exceed revenues earned </li></ul></ul><ul><ul><li>Segmented pricing must reflect real differences in customers’ perceived value </li></ul></ul>
    19. 19. Price Adjustment Strategies <ul><li>Discount / allowance </li></ul><ul><li>Segmented </li></ul><ul><li>Psychological </li></ul><ul><li>Promotional </li></ul><ul><li>Geographical </li></ul><ul><li>International </li></ul><ul><li>The price is used to say something about the product. </li></ul><ul><ul><li>Price-quality relationship </li></ul></ul><ul><ul><li>Reference prices </li></ul></ul><ul><ul><li>Differences as small as five cents can be important </li></ul></ul><ul><ul><li>Numeric digits may have symbolic and visual qualities that psychologically influence the buyer </li></ul></ul>Strategies
    20. 20. Psychological Pricing <ul><li>This ad for a luxury priced car attempts to show that Mercedes owners form important relationships with their cars </li></ul>Marketing in Action 11 -
    21. 21. Price Adjustment Strategies <ul><li>Discount / allowance </li></ul><ul><li>Segmented </li></ul><ul><li>Psychological </li></ul><ul><li>Promotional </li></ul><ul><li>Geographical </li></ul><ul><li>International </li></ul><ul><li>Temporarily pricing products below the list price or even below cost </li></ul><ul><ul><li>Loss leaders </li></ul></ul><ul><ul><li>Special-event pricing </li></ul></ul><ul><ul><li>Cash rebates </li></ul></ul><ul><ul><li>Low-interest financing, longer warranties, free maintenance </li></ul></ul><ul><li>Promotional pricing can have adverse effects </li></ul>Strategies
    22. 22. Promotional Pricing <ul><li>Cell phone marketers will take a loss on the phone to use as a promotional discount </li></ul>Marketing in Action 11 -
    23. 23. Price Adjustment Strategies <ul><li>Promotional Pricing Problems </li></ul><ul><ul><li>Easily copied by competitors </li></ul></ul><ul><ul><li>Creates deal-prone consumers </li></ul></ul><ul><ul><li>May erode brand’s value </li></ul></ul><ul><ul><li>Not a legitimate substitute for effective strategic planning </li></ul></ul><ul><ul><li>Frequent use leads to industry price wars which benefit few firms </li></ul></ul>
    24. 24. Price Adjustment Strategies <ul><li>Discount / allowance </li></ul><ul><li>Segmented </li></ul><ul><li>Psychological </li></ul><ul><li>Promotional </li></ul><ul><li>Geographical </li></ul><ul><li>International </li></ul><ul><li>Types of geographic pricing strategies: </li></ul><ul><ul><li>FOB-origin pricing </li></ul></ul><ul><ul><li>Uniform-delivered pricing </li></ul></ul><ul><ul><li>Zone pricing </li></ul></ul><ul><ul><li>Basing-point pricing </li></ul></ul><ul><ul><li>Freight-absorption pricing </li></ul></ul>Strategies
    25. 25. Price Adjustment Strategies <ul><li>Discount / allowance </li></ul><ul><li>Segmented </li></ul><ul><li>Psychological </li></ul><ul><li>Promotional </li></ul><ul><li>Geographical </li></ul><ul><li>International </li></ul><ul><li>Prices charged in a specific country depend on many factors </li></ul><ul><ul><li>Economic conditions </li></ul></ul><ul><ul><li>Competitive situation </li></ul></ul><ul><ul><li>Laws / regulations </li></ul></ul><ul><ul><li>Distribution system </li></ul></ul><ul><ul><li>Consumer perceptions </li></ul></ul><ul><ul><li>Corporate marketing objectives </li></ul></ul><ul><ul><li>Cost considerations </li></ul></ul>Strategies
    26. 26. Learning Goals <ul><li>Describe the major strategies for pricing imitative and new products </li></ul><ul><li>Explain how companies find a set of prices that maximize the profits from the total product mix </li></ul><ul><li>Discuss how companies adjust their prices to take into account different types of customers and situations </li></ul><ul><li>Discuss the key issues related to imitating and responding to price changes </li></ul>
    27. 27. Price Changes <ul><li>Initiate price cuts when a firm: </li></ul><ul><ul><li>Has excess capacity </li></ul></ul><ul><ul><li>Faces falling market share due to price competition </li></ul></ul><ul><ul><li>Desires to be a market share leader </li></ul></ul><ul><li>Initiate price increases when a firm </li></ul><ul><ul><li>can increase profit </li></ul></ul><ul><ul><li>faces cost inflation </li></ul></ul><ul><ul><li>faces greater demand than can be supplied </li></ul></ul>
    28. 28. Price Changes <ul><li>Alternatives to Increasing Price </li></ul><ul><ul><li>Explore more cost effective production or distribution </li></ul></ul><ul><ul><li>Reduce product size </li></ul></ul><ul><ul><li>Remove features </li></ul></ul><ul><ul><li>Unbundle the product </li></ul></ul>
    29. 29. Price Changes <ul><li>Buyer reactions to price changes must be considered. </li></ul><ul><li>Competitors are more likely to react to price changes under certain conditions. </li></ul><ul><ul><li>Number of firms is small </li></ul></ul><ul><ul><li>Product is uniform </li></ul></ul><ul><ul><li>Buyers are well informed </li></ul></ul>
    30. 30. Responding to Competitors’ Price Changes <ul><li>Responding to competitors’ price changes </li></ul><ul><ul><li>Evaluate the competitors’ reason for the price change </li></ul></ul><ul><ul><li>Evaluate marketplace response to the price change </li></ul></ul><ul><ul><li>Considers own product’s strategy </li></ul></ul>
    31. 31. Responding to Competitors’ Price Changes Figure 11.1 11 -
    32. 32. Kellogg’s Responds to Price Cuts <ul><li>In 1995, a government study called “Consumers in a Box” called for lowering of cereal prices. </li></ul><ul><li>Cereal prices had increased faster than most other food products. </li></ul>Marketing in Action 11 -
    33. 33. <ul><li>In 1996, Kraft announced 20% across the board price cut. </li></ul><ul><li>Kellogg’s followed with 19% cut. </li></ul><ul><li>Kellogg’s also introduced lower price bagged cereal. </li></ul>Kellogg’s Responds to Price Cuts Marketing in Action 11 -
    34. 34. Public Policy and Pricing <ul><li>Pricing within Channel Levels </li></ul><ul><ul><li>Price-fixing </li></ul></ul><ul><ul><ul><li>Competitors cannot work with each other to set prices </li></ul></ul></ul><ul><ul><li>Predatory pricing </li></ul></ul><ul><ul><ul><li>Firms may not sell below cost with the intention of punishing a competitor or gaining higher long-run profits or running a competitor out of business. </li></ul></ul></ul>
    35. 35. Public Policy and Pricing <ul><li>Pricing across Channel Levels </li></ul><ul><ul><li>Price discrimination </li></ul></ul><ul><ul><li>Retail price maintenance </li></ul></ul><ul><ul><li>Deceptive pricing </li></ul></ul><ul><ul><ul><li>Bogus reference / comparison pricing </li></ul></ul></ul><ul><ul><ul><li>Scanner fraud </li></ul></ul></ul><ul><ul><ul><li>Price confusion </li></ul></ul></ul>
    36. 36. Learning Goals <ul><li>Describe the major strategies for pricing imitative and new products </li></ul><ul><li>Explain how companies find a set of prices that maximize the profits from the total product mix </li></ul><ul><li>Discuss how companies adjust their prices to take into account different types of customers and situations </li></ul><ul><li>Discuss the key issues related to imitating and responding to price changes </li></ul>

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