Chapter 18 Consumer Behavior and Pricing Strategy McGraw-Hill/Irwin Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

Exhibit 18.1 - The Wheel of Consumer Analysis: Pricing Strategy Issues

Conceptual Issues in Pricing From a consumer’s point of view, price is usually defined as what the consumer must give up to purchase a product or service. Difference between for-profit and nonprofit exchanges: Nonprofit organizations do not seek surplus funds beyond costs. Value derived in nonprofit exchanges is often less tangible.

Exhibit 18.2 - The Pivotal Role of Price In Marketing Exchanges

Money Most pricing research has focused on money. Several important aspects of the dollar cost of offerings are not always considered. Source of funds The type of work consumers do may affect: How valuable a particular amount of money is to them. Their willingness to spend that money. A number of methods can reduce the dollar amount spent for a particular item, although they often involve increasing other costs.

Time Necessary to learn about a product or service. Required to travel to purchase a product or service. Spent in a store. Should not be treated only as the cost of purchasing. Time spent may be perceived as a benefit.

Cognitive Activity A frequently overlooked cost of making purchases. Process of comparing purchase alternatives can be stressful. The cost involved in decision making is often the easiest one for consumers to reduce or eliminate. In some situations, consumers actively seek some form of cognitive involvement.

Behavior Effort Purchasing involves behavior effort. Can be a benefit rather than a cost. Consumers are willing to: Take on some marketing costs to reduce the dollar amount they spend. Make trade-offs among various types of costs.

Behavior Effort (cont.) In some cases, consumers will take on at least part of the cost of the distribution to lower the dollar price. Consumers have several options with regard to purchase and the degree to which they participate in purchase/ownership.

Value Whatever is being purchased must be perceived to be of greater value to the consumer than merely the sum of the costs. Consumers seldom thoroughly calculate each of the costs and benefits in making brand-level decisions. For some purchases, all of the costs and trade-offs may be considered by consumers. This view has direct implications for the design of marketing strategy.

Price Affect and Cognition Typically little sensory experience is connected with the price variable. There is little consensus on basic issues regarding how price influences consumer choice processes and behavior.

Price Perceptions and Attitudes Price perceptions concern how price information is comprehended by consumers and made meaningful to them. Conceptual model of cognitive processing of price information The price consumers have in mind for making comparisons is called the internal reference price. The stated price for a particular brand may be considered a product attribute.

Price Perceptions and Attitudes (cont.) For a low-involvement product or purchase situation, dollar price may have little or no impact on consumer affect and cognition, or behavior. Price information may not be carefully analyzed because consumers have a particular price image for the store they are shopping in. Consumers often do not carefully store detailed information in memory.

Exhibit 18.3 - Conceptual Model of Cognitive Processing of Price Information

Price Behavior Funds access Cash Checks Credit card Convenient Makes purchase seem less expensive Little effort The exchange of funds for products and services is typically a relatively simple transaction

Price Behavior (cont.) Transactions The exchange of funds for products and services is typically a relatively simple transaction Consumers exchange much more than money for goods and services. They also exchange their time, cognitive activity, and behavior effort.

Price Environment Price is perhaps the most intangible element of the marketing mix. The price variable offers very little for the consumer to experience at the sensory level. It may generate considerable cognitive activity and behavior effort.

Price Environment (cont.) The price variable may also include an external reference price–an explicit comparison of the stated price with another price in advertising, catalog listings, price guides, shopping tags, etc. How price information is communication has an effect

Pricing Strategy Of concern in three general situations: When a price is being set for a new product. When a long-term change is being considered of an established product. When a short-term price change is being considered.

Exhibit 18.4 - A Strategic Approach to Pricing

Analyze Consumer-Product Relationships Does the product itself have a clear competitive advantage that consumers would be willing to pay for? Does a competitive advantage need to be created on the basis of other marketing mix variables?

Exhibit 18.5 - Analyzing Consumer–Product Relationships: Comparing Consumer Costs for In-store versus Online Purchases

Analyze Consumer-Product Relationships (cont.) Generalizations about analyzing consumer-product relationships in terms of consumer costs: Sensitivity of the target market to money costs. Price elasticity is the relative change in demand for a product for a given change in dollar price. Competing on marketing mix variables other than money costs is often a more defensible and more profitable strategy. Value consumers receive from purchasing a product in-store versus online.

Analyze the Environmental Situation Factors to be considered include: Number of competitors. Market share of competitors. Location of competitors. Conditions of entry into the industry. Degree of vertical integration of competitors. Financial strength of competitors. Number of products and brands sold by competitors. Cost structure of competitors. Historical reaction of competitors to price changes.

Determine the Role of Price in Marketing Strategy Determining whether the dollar price is to be a key aspect of positioning the product or whether it is to play a different role. In many situations, dollar price may not play a particularly important positioning role other than in terms of pricing competitively.

Estimate Relevant Production and Marketing Costs Provides a useful benchmark for making pricing decisions. The variable costs of production and marketing usually determine the lowest dollar price a firm must charge to make an offering in the market. Exceptions to this rule typically involve interrelationships among products.

Set Pricing Objectives Should be derived from overall marketing objectives, which in turn should be derived from corporate objectives. The most common objective is to achieve a target return on investment. Marketers should be aware of the sensitivity of profits to small differences in the prices they receive for their products and services.

Develop Pricing Strategy and Set Prices Determine a pricing strategy and specific prices that are: Sufficiently above costs to generate the desired level of profit and achieve stated objectives. Related to competitive prices in a manner consistent with the overall marketing and positioning strategy. Designed to generate consumer demand based on consumer cost trade-offs and values.

Develop Pricing Strategy and Set Prices (cont.) Prices may be developed with a long-run strategy in mind. Penetration pricing involves sequentially raising prices after introduction at a relatively low price. Skimming pricing involves systematically lowering prices after a high-price introduction.

Develop Pricing Strategy and Set Prices (cont.) Most price changes occur as a result of changes in: Consumers Environment Competition Costs Strategies Objectives

Summary A conceptual framework for considering pricing decisions includes four types of consumer costs: money, time, cognitive activity, and behavior effort. These elements, when coupled with value, provide a framework for examining price from the consumer’s point of view.

Summary (cont.) Cognitive factors involved in price include price perceptions and attitudes. Behaviors relevant to the price variable include funds access and transactions. The environment focuses on price information. A pricing strategy model can be used for pricing new products or for making price-change decisions.