1 1 Marketing Management SECTION 1 7th Edition Pricing Strategy menu Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors C H A P T E R E L E V E N Marketing Management 7th Edition J. Paul Peter James H. Donnelly, Jr. 1 1 Pricing Strategy McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

1 1 SECTION 1 Demographic Considerations menu SECTION 1 Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors Demographic Considerations Number of potential buyers; their age, gender and education Location of potential buyers Position of potential buyers Expected consumption of potential buyers Economic strength of potential buyers 1 1

1 1 SECTION 1 Psychological Considerations menu SECTION 1 Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors Psychological Considerations Will potential buyers use price as an indicator of quality? Will potential buyers be favorably attracted by odd pricing? Woo potential buyers perceive price as too high relative to the service product gives? Are potential buyers prestige oriented and willing to pay a premium to fill this need? How much will potential buyers be willing to pay for the product? 1 1

1 1 SECTION 1 e = Price Elasticity menu SECTION 1 Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors Price Elasticity Price elasticity is a measure of consumers’ price sensitivity Even a crude estimate of price elasticity is useful input in pricing decisions Percent change in quantity demanded 1 1 e = Percent change in price

1 1 SECTION 1 Pricing Objectives menu SECTION 1 Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors Pricing Objectives Pricing to achieve a target return on investment Stabilization of price and margin Pricing to achieve a target market share Pricing to meet or prevent competition 1 1

1 1 SECTION 1 Everyday Low Pricing Advantages Reduces price wars menu SECTION 1 Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors Everyday Low Pricing Advantages Reduces price wars Reduces advertising Improves customer service Reduces stock-outs and improves inventory management Increases overall profit margins 1 1

1 1 SECTION 1 High/Low Pricing Advantages Helps segment the market menu SECTION 1 Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors High/Low Pricing Advantages Helps segment the market Creates excitement Moves merchandise Emphasizes product quality and store service Is easier to use 1 1

1 1 SECTION 1 Pricing Strategy menu SECTION 1 Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors Pricing Strategy Markup pricing – percentage is added to the retailer’s invoice to determine final price Cost-plus pricing – costs of producing a product plus desired profit are added to achieve price Rate-of-return or target pricing – price is determined by adding desired rate of return on investment to total costs 1 1

1 1 SECTION 1 Key Product Considerations menu SECTION 1 Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors Key Product Considerations Perishability – must be priced to sell without costly delays; includes fruit to high fashion Distinctiveness – homogeneous goods have easy substitutes and make distinguishing between competitors difficult Life Cycle – Skimming policy is when seller charges a high price on a new product. Penetration policy is when producer charges a low price for a new product. 1 1

1 1 SECTION 1 Competitive Considerations Number of competitors menu SECTION 1 Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors Competitive Considerations Number of competitors Size of competitors Location of competitors Conditions of entry into the industry Degree of vertical integration of competitors Number of products sold by competitors Cost structure of competitors Historical reaction of competitors to price changes 1 1

1 1 SECTION 1 Governmental Considerations menu SECTION 1 Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors Governmental Considerations Price fixing ruled illegal – sellers cannot make any agreements with competitors regarding final price Deceptive pricing tactics outlawed – claiming high price then selling at lower price Price discrimination eliminated– can’t charge different customers different prices without justification 1 1

1 1 SECTION 1 General Pricing Model SET PRICING OBJECTIVES menu SECTION 1 Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors General Pricing Model SET PRICING OBJECTIVES EVALUATE PRODUCT-PRICE RELATIONSHIPS ESTIMATE COST AND OTHER PRICE LIMIATIONS ANALYZE PROFIT POTENTIAL 1 1 SET INITIAL PRICE STRUCTURE CHANGE PRICE AS NEEDED FIGURE 11-1

1 1 SECTION 1 Pricing Strategy Improvement menu SECTION 1 Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors Pricing Strategy Improvement Base pricing strategies on sound research in order to understand relevant price factors. Continuously monitor pricing decisions because they often help define company image. Remember that consumers have trouble recognizing subtle price differences. Remember that consumers evaluate prices comparatively. They often use a sense of what they think the item should cost as a benchmark. 1 1

1 1 SECTION 1 Pricing Strategy Improvement menu SECTION 1 Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors Pricing Strategy Improvement 5. Recognize that buyers typically have a range of acceptable prices defined by upper and lower limits. 6. Understand the importance of relative price to buyers – the relationship between a price and your competitors’ price. 7. Understand the importance of price information and it effects on differentiating products within a product line. 8. Recognize that price elasticity vary – it is easier to lose customers to price increases then gain them from price decreases. 1 1

1 1 SECTION 1 The Authors menu J. Paul Peter, Ph.D. Chapter Eleven Demographic Considerations Psychological Considerations Price Elasticity Pricing Objectives EDLP Advantages High/Low Advantages Pricing Strategy Key Product Considerations Competitive Considerations Governmental Considerations General Pricing Model Pricing Strategy Improvement The Authors The Authors J. Paul Peter, Ph.D. University of Wisconsin – Madison 3Click image to go to author’s web site James H. Donnelly, Jr., Ph.D. University of Kentucky – Lexington 3Click image to go to author’s web site 1 1 Marketing Management 7th Edition – McGraw-Hill 3Click on the book to go to the book site PowerPoint design by Lance Fuhrer, MBA PowerPoint content by Larry Fuhrer, MBA, MBA Keller Graduate School of Management of DeVry University