Chapter 15 Strategic Pricing Methods

Learning Objectives Learning Objective 15.1 Identify three methods that firms use to set their prices. Learning Objective 15.2 Describe the difference between an everyday low pricing (EDLP) strategy and a high/low strategy. Learning Objective 15.3 Explain the difference between a price skimming and a market penetration pricing strategy. Learning Objective 15.4 Identify tactics used to reduce prices to consumers. Learning Objective 15.5 Identify tactics used to reduce prices to businesses. Learning Objective 15.6 List the pricing practices that are illegal or unethical. LO15-1 Identify three methods that firms use to set their prices. LO15-2 Describe the difference between an everyday low pricing (EDLP) strategy and a high/low strategy. LO15-3 Explain the difference between a price skimming and a market penetration pricing strategy. LO15-4 Identify tactics used to reduce prices to consumers. LO15-5 Identify tactics used to reduce prices to businesses. LO15-6 List the pricing practices that are illegal or unethical. These are the learning objectives guiding the chapter and will be explored in more detail in the following slides.

Pricing Strategies (1 of 2) Note the many factors that go into formulating a pricing strategy and discuss why some strategies choose not to take into consideration the value that consumers place on an offering.

Cost-Based Methods Cost-base pricing methods start with cost All costs calculated on a per unit basis Assumes costs don’t vary for different levels of production As their name implies, cost-based pricing methods determine the final price to charge by starting with the cost. These simple methods add a percentage amount to the unit cost to derive the price of the good. Ask students: Simplicity is the major benefit of this method; what are some of the potential problems associated with it? Answer: It does not consider the value the customer places on the product or service.

Competition-Based Methods Set prices to signal how product compares with competitors Premium pricing Using a competition-based pricing method, firmsmay set their prices to reflect the way they want consumers to interpret their own prices relative to competitors’ offerings. Ask students: Why would someone pay far more for the same item in different stores? Real estate prices are based heavily on the prices of other homes in the area. There are many websites like zillow.com to help gather information when pricing your home. This web link takes you to the zillow homepage. Zillow

Beauty is Nothing without Brains Value-Based Methods Setting prices that focus on the overall value of the product Consumer perceptions Sellers need to determine consumer value perceptions. One way to determine the price of a new product, like a new cell phone model, is to determine the improvement value from the customers’ perspective. This YouTube ad (always check link before class) depicts the value the Mercedes-Benz brand offers in both the beauty and brains categories. YouTube link: http://www.youtube.com/watch?v=GHX2mvFVQMs&feature=player_embedded Funny Commercial: Beauty is Nothing without Brains Courtesy Rolex USA

PROGRESS CHECK (1 of 4) What are the three different considerations for setting pricing? How can you use value-based methods for setting prices? Cost-based, competitor-based, value-based Value-based methods include approaches to setting prices that focus on the overall value of the product offering as perceived by the consumer. Two key approaches include Improvement Value Method and Cost of Ownership Method.

Pricing Strategies (2 of 2) Everyday low pricing (EDLP) High/Low Pricing This slide introduces the subsequent series of slides or can be used as a basis for a shortened lecture.

Everyday Low Pricing (EDLP) vs. High/Low Pricing Create value in different ways EDLP saves search costs of finding lowest overall prices High/low provides the thrill of the chase for the lowest price Group activity: Imagine you need an outfit for an upcoming party. You can visit TJMaxx, where you know you will find an EDLP pricing strategy. However, Nordstrom is having its semi-annual sale, during which it drastically marks down its usually high prices. Where do you think you will find a better price? Which offers better value? Why?

Consumers’ Use of Reference Prices Internal reference price External reference price Group activity: In groups, list the average prices of the following items: rent on a one-bedroom apartment, a backpack, a washing machine, a mid-size car, a house, a bicycle, and a soda. Compare the price points among groups. Usually, students provide relatively accurate price points for products they use frequently, but their estimates likely vary significantly for the other items. Discuss how they determined these prices.

New Product Pricing Strategies Market Penetration Pricing Price skimming Group activity: Develop a list of products that might use price skimming versus penetration pricing. What qualities should a product possess to use a price skimming strategy? For example, Godiva introduced its hot chocolate mix at a price point that was double that of other hot cocoa mixes. How was it able to achieve success with this product? Penetration pricing helps firms build market share for their new products quickly, but consumers must be price elastic for this strategy to work.

PROGRESS CHECK (2 of 4) Explain the difference between EDLP and high/low pricing. What pricing strategies should be considered when introducing a new product? EDLP saves search costs of finding lowest overall prices, and High/low provides the thrill of the chase for the lowest price. Price skimming and penetration pricing

Pricing Tactics Aimed at Consumers Mark downs Leader Pricing Quantity Discounts Price Bundling Seasonal Discounts This slide can be used as the basis for a shortened lecture or to introduce the subsequent slides. Leasing Coupons Rebates

Business Pricing Tactics and Discounts Seasonal discounts Cash discounts Vendor Allowances Uniform delivered vs. Zone pricing This slides provide the basis for a shortened lecture or introduces the more detailed discussion that follows. Quantity discounts

PROGRESS CHECK (3 of 4) What are some consumer-oriented pricing tactics? What are some B2B-oriented pricing tactics? Price lining, price bundling, leader pricing Seasonal discounts, cash discounts, allowances, quantity discounts, uniform delivered versus zone pricing

Legal Aspects and Ethics of Pricing Deceptive or illegal price advertising Predatory pricing Legal Aspects and Ethics of Pricing A host of laws and regulations at both the federal and state levels attempt to prevent unfair pricing practices, but some are poorly enforced, and others are difficult to prove. Price discrimination Price fixing

PROGRESS CHECK (4 of 4) What common pricing practices are considered to be illegal or unethical? Deceptive reference prices, loss-leader pricing, bait and switch

Marketing Chapter 15 The End The End