Pricing Considerations and Strategies 7. 7-2 Professor Takada ROAD MAP: Previewing the Concepts...

Pricing Considerations and Pricing Considerations and StrategiesStrategies

7

Professor TakadaProfessor Takada 7-2

ROAD MAP: Previewing the Concepts

• Identify and explain the external and internal Identify and explain the external and internal factors affecting a firm's pricing decisions.factors affecting a firm's pricing decisions.

• Contrast the three general approaches to Contrast the three general approaches to setting prices.setting prices.

• Describe the major strategies for pricing Describe the major strategies for pricing imitative and new products.imitative and new products.

• Explain how companies find a set of prices Explain how companies find a set of prices that maximizes the profits from the total that maximizes the profits from the total product mix.product mix.

• Discuss how companies adjust their prices to Discuss how companies adjust their prices to take into account different types of take into account different types of customers and situations.customers and situations.

• Discuss the key issues related to initiating Discuss the key issues related to initiating and responding to price changes.and responding to price changes.


Synonyms for Price

• RentRent

• TuitionTuition

• FeeFee

• FareFare

• RateRate

• TollToll

• PremiumPremium

• Honorarium Honorarium

• Special assessmentSpecial assessment

• BribeBribe

• DuesDues

• SalarySalary

• CommissionCommission

• WageWage

• Tax Tax


Possible Consumer Reference Prices

• ““Fair price”Fair price”

• Typical priceTypical price

• Last price paidLast price paid

• Upper-bound priceUpper-bound price

• Lower-bound priceLower-bound price

• Competitor pricesCompetitor prices

• Expected future Expected future priceprice

• Usual discounted Usual discounted priceprice


What is a Price?

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

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

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


The Internet and Pricing Effects

Buyers can: -Get instant price comparisons from vendors: PriceScan.com -Name their price and have it met: Priceline.com

Sellers can: -Monitor customer behavior and tailor offers to individuals. -Giver certain customers access to special prices: CDNOW

Both buyers and sellers can: -Negotiate prices in online auctions and exchanges: eBay

Kotler and Keller (2006)


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Factors Affecting Pricing Decisions


Internal Factors Affecting Pricing Decisions

• Marketing Objectives:Marketing Objectives:– Company must decide on its Company must decide on its

strategy for the product.strategy for the product.– General Objectives:General Objectives:

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

• Marketing Mix Strategy:Marketing Mix Strategy:– Price decisions must be Price decisions must be

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

– Target costing:Target costing:• Pricing that starts with an ideal Pricing that starts with an ideal

selling price, then targets costs that selling price, then targets costs that will ensure that the price is met.will ensure that the price is met.

• Costs:Costs:– Fixed Costs:Fixed Costs:

• Costs that do not vary with Costs that do not vary with production or sales level.production or sales level.

– Variable Costs:Variable Costs:• Costs that vary directly with Costs that vary directly with

the level of productionthe level of production..

• Organizational Considerations:Organizational Considerations:– Must decide who within the Must decide who within the

organization should set prices.organization should set prices.– This will vary depending on the This will vary depending on the

size and type of company.size and type of company.


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.


External Factors Affecting Pricing DecisionsMarket and Demand

Pricing in Different Types of Markets

Pure Competition:

Many buyers and sellerswhere each has little effecton the going market price

Monopolistic Competition:

Many buyers and sellerswho trade over a

range of prices

Pure Monopoly:

Market consists of a single seller

Oligopolistic Competition:

Few sellers who aresensitive to each other’s

pricing/marketing strategies


Determining Demand

Price Sensitivity

Estimating

Demand Curves

Price Elasticity

of Demand


Demand Curve

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

Upward Sloping Demand Curve

Price Elasticity of Demand

Elastic demandInelastic demand


Inelastic and Elastic Demand


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Major Considerations in Setting Price

Cost-based pricing Cost-plus pricing Break-even pricing (Target profit pricing)

Value-based pricingCompetition-based pricing


Cost-Plus Pricing

• Adding a standard markup to the Adding a standard markup to the cost of the product.cost of the product.

• Popular because:Popular because:– Sellers more certain about cost than Sellers more certain about cost than

demanddemand– Simplifies pricingSimplifies pricing– When all sellers use, prices are similar When all sellers use, prices are similar

and competition is minimizedand competition is minimized– Some feel it is more fair to both buyers Some feel it is more fair to both buyers

and sellersand sellers


Step 3: Estimating Costs

Types of Costs

Target Costing

Accumulated

ProductionActivity-Based

Cost Accounting


Cost Terms and Production• Fixed costsFixed costs

• Variable costsVariable costs

• Total costsTotal costs

• Average costAverage cost

• Cost at different Cost at different levels of productionlevels of production


Cost per Unit as a Function of Accumulated Production


Target Profit Pricing (Break-Even Analysis)

At break even: Total revenue=Total cost Total revenue = Price ($15)*Quantity sold Total cost = Fixed cost + Variable cost ($5 per unit)* units sold

What is the sales volume to break even?If price is raised to $20, how does this change affect the above analysis?If the company decides to increase advertising by $1million, how does this affect the break even point?


Value-Based Pricing

Uses buyers’ perceptions of value, not Uses buyers’ perceptions of value, not the seller’s cost, as the key to the seller’s cost, as the key to pricing.pricing.– Wal-Mart, EDLPWal-Mart, EDLP

• What does value mean?What does value mean?– Does “value” mean the same thing as Does “value” mean the same thing as

“low price”?“low price”?– How do these concepts differ?How do these concepts differ?


Competition-Based Pricing

• Going-Rate Pricing:Going-Rate Pricing:– Firm bases its price largely on Firm bases its price largely on

competitors’ prices, with less attention competitors’ prices, with less attention paid to its own costs or to demand.paid to its own costs or to demand.

• Sealed-Bid Pricing:Sealed-Bid Pricing:– Firm bases its price on how it thinks Firm bases its price on how it thinks

competitors will price rather than on its competitors will price rather than on its own costs or on demand.own costs or on demand.


Price Tiers in the Ice Cream Market


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New-Product Pricing Strategies

Market-SkimmingMarket-Skimming

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

Company makes fewer, but Company makes fewer, but more profitable sales.more profitable sales.

• When to use:When to use:– Product’s quality and image must Product’s quality and image must

support its higher price.support its higher price.– Costs of smaller volume cannot be Costs of smaller volume cannot be

so high they cancel the advantage so high they cancel the advantage of charging more.of charging more.

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

Market PenetrationMarket Penetration

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

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

• When to use:When to use:– Market must be highly price sensitive so Market must be highly price sensitive so

a low price produces more market a low price produces more market growth.growth.

– Production and distribution costs must Production and distribution costs must fall as sales volume increases.fall as sales volume increases.

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

Which strategy is employed by Sony, Dell, Wal-Mart, and Apple iPod?Why?


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Product Mix Pricing Strategies

• Product line pricingProduct line pricing

• Optional-product pricingOptional-product pricing

• Captive-product pricingCaptive-product pricing

• By-product pricingBy-product pricing

• Product bundle pricingProduct bundle pricing


Product Line Pricing• Involves setting price steps between various Involves setting price steps between various

products in a product line based on:products in a product line based on:– Cost differences between productsCost differences between products– Customer evaluations of different features Customer evaluations of different features – Competitors’ pricesCompetitors’ prices

Optional- and Captive-Product Pricing• Optional-ProductOptional-Product

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

• Captive-ProductCaptive-Product– Pricing products that must be used with the main product Pricing products that must be used with the main product

(e.g., replacement cartridges for Gillette razors).(e.g., replacement cartridges for Gillette razors).




By-Product Pricing:Setting a price for by-products in order to make the mainproduct’s price more competitive (e.g., sawdust andZoo Doo)

Product Bundle Pricing:Combining several products and offering the bundleat a reduced price (e.g., computer with software and Internet access).


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Price-Adjustment Strategies

• Discounts and allowancesDiscounts and allowances

• Segmented pricingSegmented pricing

• Psychological pricingPsychological pricing

• Promotional pricingPromotional pricing

• Geographical pricingGeographical pricing

• International pricingInternational pricing


Discounts and Allowances

Cash

Quantity

Functional

Seasonal

Trade-In

Promotional

Discounts Allowances


Segmented Pricing

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

• Types:Types:1.1. Customer-segmentCustomer-segment

2.2. Product-formProduct-form

3.3. Location pricingLocation pricing

4.4. Time pricingTime pricing


Psychological Pricing

• Considers the psychology Considers the psychology of prices and not simply of prices and not simply the economics.the economics.

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

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


Promotional Pricing

Special-Event PricingSpecial-Event Pricing

Cash RebatesCash Rebates

Low-Interest FinancingLow-Interest Financing

Longer WarrantiesLonger Warranties

Free MaintenanceFree Maintenance

DiscountsDiscounts

Loss LeadersLoss Leaders

Temporarily pricing products below list price and sometimes even below cost to create buying excitement and urgency.

Approaches:


Geographical Pricing

• FOB-origin pricingFOB-origin pricing

• Uniform-delivered Uniform-delivered pricingpricing

• Zone pricingZone pricing

• Basing-point pricingBasing-point pricing

• Freight-absorption Freight-absorption pricingpricing


International Pricing

• Price depends on Price depends on many factors, many factors, including:including:– Economic conditionsEconomic conditions– Competitive Competitive

situationssituations– Laws and regulationsLaws and regulations– Development of the Development of the

wholesaling and wholesaling and retailing systemretailing system

– CostsCosts


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Initiating Price Changes

Excess Capacity

Falling MarketShare

Dominate MarketThrough Lower

Costs

Cost Inflation

Overdemand:Cannot SupplyAll Customers’

Needs

Price Cuts Price Increases


•Choose a partner and consider the Choose a partner and consider the following.following.– What would you think if Mercedes What would you think if Mercedes

suddenly lowered its prices on its cars?suddenly lowered its prices on its cars?– What would you think if Mercedes What would you think if Mercedes

suddenly raised its prices on its cars?suddenly raised its prices on its cars?– Why?Why?

Interactive Student Assignment


Assessing and Responding to Competitor Price Changes


Price-Reaction Program for Meeting Competitor’s Price Cut


Public Policy and Pricing


Rest Stop: Reviewing the Concepts

1.1. Identify and define the external and internal Identify and define the external and internal factors affecting a firm's pricing decisions.factors affecting a firm's pricing decisions.

2.2. Contrast the three general approaches to Contrast the three general approaches to setting prices.setting prices.

3.3. Describe the major strategies for pricing Describe the major strategies for pricing imitative and new products.imitative and new products.

4.4. Explain how companies find a set of prices Explain how companies find a set of prices that maximizes the profits from the total that maximizes the profits from the total product mix.product mix.

5.5. Discuss how companies adjust their prices to Discuss how companies adjust their prices to take into account different types of take into account different types of customers and situations.customers and situations.

6.6. Discuss the key issues related to initiating Discuss the key issues related to initiating and responding to price changes.and responding to price changes.

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Pricing Considerations and Strategies 7. 7-2 Professor Takada ROAD MAP: Previewing the Concepts...

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