Slide 8-1© 2013 Pearson Education, Inc. publishing as Prentice Hall CHAPTER 8 Pricing Strategy and Management

Slide 8-2© 2013 Pearson Education, Inc. publishing as Prentice Hall 1.Identify the factors that determine price. 3.Explain the concept of price elasticity. AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO: 2.Describe how price is an indicator of demand. 4.Estimate the profit impact from changes in price.

Slide 8-3© 2013 Pearson Education, Inc. publishing as Prentice Hall 6.Discuss how pricing is affected by competitive interactions. AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO: 5.Describe the pricing strategies available to a marketing manager.

Slide 8-4© 2013 Pearson Education, Inc. publishing as Prentice Hall PRICING DECISIONS “Pricing is an art, a game played for marketing strategists, it is the moment of truth. All of marketing comes to focus in the pricing decision.”  Pricing decisions determine the types of customers and competitors a firm attracts  A single pricing error can effectively nullify all other marketing mix activities

Slide 8-5© 2013 Pearson Education, Inc. publishing as Prentice Hall PROFIT EQUATION Price affects the quantity sold and hence profit because it directly affects both revenues and costs: Profit = Total Revenue Total Costs – Total Revenue Unit Variable Costs Unit Price Fixed Costs + Quantity Sold ×– Profit () [ ] = ( ) Quantity Sold × Total Costs

Slide 8-6© 2013 Pearson Education, Inc. publishing as Prentice Hall PRICING CONSIDERATIONS CHAPTER 8: PRICING STRATEGY AND MANAGEMENT

Slide 8-7© 2013 Pearson Education, Inc. publishing as Prentice Hall  Be consistent with a firm’s overall marketing objectives  Objectives include: PRICING CONSIDERATIONS Enhancing brand image Providing customer value Obtaining an adequate ROI or cash flow Maintaining price stability in an industry or market Pricing Objectives

Slide 8-8© 2013 Pearson Education, Inc. publishing as Prentice Hall EXHIBIT 8.1: CONCEPTUAL ORIENTATION TO PRICING Corporate Objectives Regulatory Constraints Competitive Factors Initial Pricing Discretion (Price Ceiling) Direct Variable Costs Demand Factors Final Pricing Discretion (Price Floor) (Value to Buyers)

Slide 8-9© 2013 Pearson Education, Inc. publishing as Prentice Hall  Demand for an offering sets the price ceiling PRICING CONSIDERATIONS  Costs, particularly variable costs, determine the price floor  Consumer value perceptions and price sensitivity determines the maximum price charged  The price must at least cover unit variable costs; otherwise, a loss will result for each offering sold  Government regulations, such as predatory pricing Pricing Factors

Slide 8-10© 2013 Pearson Education, Inc. publishing as Prentice Hall PRICING CONSIDERATIONS  Consumers pair price with the perceived benefits derived from an offering to determine value  Value is the ratio of perceived benefits to price: Value Price Perceived Benefits =  This shows that for a given price, value increases as perceived benefits increase and vice versa Price as an Indicator of Value

Slide 8-11© 2013 Pearson Education, Inc. publishing as Prentice Hall PRICING CONSIDERATIONS  For some offerings, price influences consumers’ perception of quality— and ultimately value  Price affects consumer perceptions of prestige: As the price for an item increases, the demand for it rises Price as an Indicator of Value

Slide 8-12© 2013 Pearson Education, Inc. publishing as Prentice Hall PRICING CONSIDERATIONS  Measures how responsive consumer demand is to changes in an offering’s price  Is the ratio of the percentage change in quantity demanded relative to a percentage change in price = Price Elasticity of Demand E Percentage Change in Price Percentage Change in Quantity Demanded = Price Elasticity of Demand (E)

Slide 8-13© 2013 Pearson Education, Inc. publishing as Prentice Hall PRICING CONSIDERATIONS Elastic Demand The percentage change in quantity demanded is greater than the percentage change in price ( E > 1)  A small price reduction will result in a large increase in the quantity purchased  As a result, total revenue will rise significantly Price Elasticity of Demand (E)

Slide 8-14© 2013 Pearson Education, Inc. publishing as Prentice Hall PRICING CONSIDERATIONS Inelastic Demand The percentage change in quantity demanded is less than the percentage change in price ( E < 1)  A small price reduction will result in a small increase in the quantity purchased  As a result, total revenue will rise very little Price Elasticity of Demand (E)

Slide 8-15© 2013 Pearson Education, Inc. publishing as Prentice Hall PRICING CONSIDERATIONS Is the traffic builder designed to capture the attention of the hesitant or first-time buyer Lowest-Priced Product Price Highest-Priced Product & Price Is typically positioned as the premium item in quality and features Price Differentials for All Other Products in the Line Should reflect differences in their perceived value of the products offered Should get larger from less to more expensive items as one moves up the product line Product-Line Pricing Involves determining the:

Slide 8-16© 2013 Pearson Education, Inc. publishing as Prentice Hall Product-Line Pricing

Slide 8-17© 2013 Pearson Education, Inc. publishing as Prentice Hall Price-Benefits Strategy Matrix The value proposition is the full positioning of a brand—the full mix of benefits upon which it is positioned

Slide 8-18© 2013 Pearson Education, Inc. publishing as Prentice Hall NEW-OFFERING PRICING STRATEGIES Conceptual new-offering pricing strategies are: Skimming Pricing Strategy The price for a new offering is set very high initially and is typically reduced over time Penetration Pricing Strategy An offering is introduced at a low price Intermediate Pricing Strategy The price is set between the two extremes and is used in the vast majority of initial pricing decisions

Slide 8-19© 2013 Pearson Education, Inc. publishing as Prentice Hall NEW-OFFERING PRICING STRATEGIES Is appropriate for a new offering if: 1.Demand is likely to be price inelastic 2.There are different price-market segments, of which one will pay a higher price for it 3.It can be protected by patent or copyright 4.Production or marketing costs are unknown 5.Production capacity is constrained 6.The firm wants to quickly recoup its investment or fund other projects 7.There is a realistic perceived value in it Skimming Pricing Strategy

Slide 8-20© 2013 Pearson Education, Inc. publishing as Prentice Hall NEW-OFFERING PRICING STRATEGIES 1.Demand is likely to be price elastic in the target market segments at which the product or service is aimed 2.It is neither unique nor protected by patent or copyright 3.Competitors are expected to quickly enter the market 4.There are no distinct and separate price-market segments 5.There is a possibility of large savings in production and marketing costs if a large sales volume can be generated 6.The firm’s major objective is to obtain a large market share Penetration Pricing Strategy Is appropriate for a new offering if:

Slide 8-21© 2013 Pearson Education, Inc. publishing as Prentice Hall PRICING AND COMPETITIVE INTERACTION Marketers rarely look beyond an initial pricing decision to consider:  Competitor countermoves  Their own subsequent moves  The outcomes of these maneuvers Remedy #1: Long-Term Focus Remedy #2: Competitor Focus

Slide 8-22© 2013 Pearson Education, Inc. publishing as Prentice Hall PRICING AND COMPETITIVE INTERACTION: LOOKING BEYOND THE INITIAL DECISION  Competitive interactions are rarely confined to one period—an action followed by a reaction  The consequences of actions and reactions are not always immediately observable  Marketers are advised to “look forward and reason backward” by envisioning patterns of: Future pricing moves Competitor countermoves Likely outcomes Long-Term Focus

Slide 8-23© 2013 Pearson Education, Inc. publishing as Prentice Hall PRICING STRATEGIES AND COMPETITIVE INTERACTION Competitive interaction refers to the sequential action and reaction of rival companies in:  Setting and changing prices for their offering(s)  Assessing likely outcomes, such as sales, unit volume, and profit for each company and an entire market

Slide 8-24© 2013 Pearson Education, Inc. publishing as Prentice Hall PRICING AND COMPETITIVE INTERACTION: LOOKING BEYOND THE INITIAL DECISION  Answer these questions to avoid misjudgments about prices set or changed by competitors: 1.What are competitors’ goals and objectives? 2.How are they different from our goals and objectives? 3.What differing assumptions do we and each competitor make about our companies, offerings, and the market? 4.What strengths and weaknesses does each competitor believe it has and we have?  Misreading the situation can result in price wars! Competitor Focus

9-25 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Initiating Price Changes Initiating Price Cuts Initiating Price Increases Buyer Reactions to Price Changes Competitor Reactions to Price Changes

Slide 8-26© 2013 Pearson Education, Inc. publishing as Prentice Hall Responding to Price Changes

Slide 8-27© 2013 Pearson Education, Inc. publishing as Prentice Hall PRICING AND COMPETITIVE INTERACTION Involves successive price cutting by competitors to increase or maintain their unit sales or market share  If competitors match the lower price, market share, sales, and profit gains could be lost  The overall price level resulting from the lower price benefits none of the competitors Price War

Slide 8-28© 2013 Pearson Education, Inc. publishing as Prentice Hall All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.