Chapter 12: Pricing Management Pride/Ferrell Foundations of Marketing Fourth Edition Prepared by Milton Pressley University of New Orleans

Objectives Understand the six major stages of the process used to establish prices. Know the issues that are related to developing pricing objectives. Understand the importance of identifying the target market's evaluation of the price. Describe how marketers analyze competitive prices. Be familiar with the bases used for setting prices. Explain the different types of pricing strategies. Understand how a final specific price is determined.

Figure 12.1 Marketers’ Six Stages for Establishing Prices

Pricing Objectives Pricing objectives Describe what a firm wants to achieve through pricing Form the basis of decisions about other stages in establishing prices Must be explicitly stated and include a time frame

Pricing Objectives and Typical Actions Taken to Achieve Pricing Objectives

Product Quality Product quality pricing objective: Set prices to recover research and development expenditures and establish a high-quality image Product Quality This ad for Kellogg’s Corn Flakes focuses on high product quality.

Discussion Question Click on the Television below and watch the commercial. Discuss which pricing objective you believe this commercial is attempting to achieve.

Assessment of the Target Market’s Evaluation of Price The importance of price depends on the type of product, the type of target market, and the purchase situation. Price also depends on the perception of value, which is a combination of price and quality attributes.

Evaluation of Competitors’ Prices In competitive situations, marketers must keep prices the same as, or lower than, competitors’ prices. In some instances, an organization’s prices are designed to be slightly above competitors’ prices to give its products an exclusive image, or below competitors to generate a low-cost image. Wal-Mart has “Everyday low prices” Starbucks has premium-priced beverages

Selection of a Basis: Cost-Based, Cost-Plus, and Markup Pricing Cost-based pricing: adding a dollar amount or percentage to the cost of the product Cost-plus pricing: adding a specific dollar amount or percentage to the seller’s cost Markup pricing: adding to the cost of the product a predetermined percentage of that cost Retailer buys tuna at 45 cents, adds 15 cents Price = 60 cents Markup as a percentage of cost = markup cost = 15 45 = 33.3 percent Markup as a percentage of selling price = markup selling price = 15 60 = 25 percent

Selection of a Basis: Demand and Competition-Based Pricing Demand-based pricing Based on the level of demand for the product Competition-based pricing Influenced primarily by competitor’s prices Demand-Based Pricing Rental car rates are frequently based on demand. High demand results in higher prices. Prices are lower when demand is low.

Discussion Question Other than rental cars, what products do you think are most often priced on a demand basis? After you have discussed all products, click on the @ symbol below to see if you mentioned the product (not the brand) that comes up on the screen. @

Common Pricing Strategies

Differential Pricing Charging different prices to different buyers for the same quality and quantity of product Negotiated pricing: Establishing a final price through bargaining Secondary-market pricing: Setting one price for the primary target market and a different price for another market Periodic discounting: Temporary reduction of prices on a patterned or systematic basis Random discounting: Temporary reduction of prices on an unsystematic basis

Selection of a Pricing Strategy Random Discounting UPS uses random discounting to attract customers to its UPS retail stores. Customers can’t predict when discounts will be available.

New-Product Pricing Price skimming Penetration pricing Charging the highest possible price that buyers who most desire the product will pay Penetration pricing Setting prices below those of competing brands to penetrate a market and gain a significant market share quickly

Discussion Question When the original iPhone was introduced, did Apple use price skimming or penetration pricing? Which of these types of pricing is currently being used for the iPhone?

Product-Line Pricing Establishing and adjusting prices of multiple products within a product line Captive pricing: Pricing the basic product in a product line low while pricing related items at a higher level Premium pricing: Pricing the highest-quality or most versatile products higher than other models in the product line Bait pricing: Pricing an item in the product line low with the intention of selling a higher-priced item in the line Price lining: Setting a limited number of prices for selected groups or lines of merchandise

Product-Line Pricing Captive Pricing The Gillette razor is inexpensive. To use this razor on a regular basis, customers must by the replacement blade cartridges. The annual cost of the replacement blade cartridges is significant. Gillette is using captive pricing.

Discussion Question Other than razors, printers and video games, what products use captive pricing? After you have discussed this question, click on the @ symbol below to see if you mentioned the product (not necessarily the brand) that comes up on the screen. @

Psychological Pricing Pricing that attempts to influence a customer’s perception of price to make a product’s price more attractive Reference pricing: Pricing a product at a moderate level and displaying it next to a more expensive model or brand Multiple-unit pricing: Packaging together two or more identical products and selling them for a single price Odd-even pricing: Ending the price with certain numbers to influence buyers’ perceptions of the price or product Customary pricing: Pricing on the basis of tradition

Psychological Pricing Bundle pricing Packaging together two or more complementary products and selling them for a single price Bundle Pricing Price bundling is commonly used in the communications industry, including phone, TV cable, and internet services.

Psychological Pricing Everyday low prices (EDLP) Setting a low price for products on a consistent basis Everyday Low Price Wal-Mart is well-known for using the Everyday Low Prices strategy.

Psychological Pricing Prestige pricing Setting prices at an artificially high level to convey prestige or a quality image Prestige Pricing Organizations employ prestige pricing to help support and communicate a premium, high-quality product

Sample Prestige Product Prices

Promotional Pricing Price leaders Special-event pricing Product priced below the usual markup, near cost or below cost Special-event pricing Advertised sales or price cutting linked to a holiday, season or event Comparison discounting Setting a price at a specific level and comparing it with a higher price

Determination of a Specific Price A flexible and convenient way to adjust the marketing mix To set the final price, it is important for marketers to: Establish pricing objectives Have considerable knowledge about target-market customers Determine demand, price elasticity, costs, and competitive factors

After Reviewing This Chapter You Should: Understand the six major stages of the process used to establish prices. Know the issues that are related to developing pricing objectives. Understand the importance of identifying the target market's evaluation of the price. Be able to describe how marketers analyze. competitive prices. Be familiar with the bases used for setting prices. Be able to explain the different types of pricing strategies. Understand how a final specific price is determined.

Key Concepts Pricing objectives Bait pricing Cost-based pricing Markup pricing Demand-based pricing Competition-based pricing Differential pricing Negotiated pricing Secondary-market pricing Periodic discounting Random discounting Price skimming Penetration pricing Product-line pricing Captive pricing Premium pricing Bait pricing Price lining Psychological pricing Reference pricing Bundle pricing Multiple-unit Everyday low prices (EDLP) Odd-even pricing Customary pricing Prestige pricing Professional pricing Price leaders Special-even pricing Comparison discounting