Pricing Strategy 8 C H A P T E R

Pricing Is a key factor in producing revenue for the firm Is the easiest of all marketing variables to change Is an important consideration in competitive intelligence Is considered to be the only means of differentiation in highly commoditized markets Is among the most complex decisions in the marketing plan

Discussion Question One of the key themes of today’s economy is the challenge of marketing goods and services in mature markets that are plagued by commoditization. In what ways is pricing strategy related to commoditization? How can a firm offer good value in a mature market where price is the only visible means of differentiation? Are most firms too concerned about their costs to really deliver value in other ways? Explain.

The Role of Pricing in Marketing Strategy (1 of 2) The Seller’s Perspective on Pricing Four key issues: Costs Demand Customer value Competitors’ prices The Buyer’s Perspective on Pricing Two key issues: Perceived value Price sensitivity

The Role of Pricing in Marketing Strategy (2 of 2) A Shift in the Balance of Power A buyer’s market occurs when: Large number of sellers in the market Many substitutes for the product Economy is weak A seller’s market occurs when: Products are in short supply Products are in high demand Economy is strong

The Relationship Between Price and Revenue Myth #1 – When business is good, a price cut will increase market share. Myth #2 – When business is bad, a price cut will stimulate sales. Price cutting is generally not in the best interests of the firm unless sales volume will increase. A better strategy is to build value into the product offering at the same (or even a higher) price.

Key Issues in Pricing Strategy Pricing Objectives Supply and Demand The Firm’s Cost Structure Competition and Industry Structure Pure Competition Monopolistic Competition Oligopoly Monopoly Stage of the Product Life Cycle

Common Pricing Objectives Exhibit 8.1

Pricing Strategy Over the Product Life Cycle Exhibit 8.2

Pricing Strategy in Services Is critical because price may be the only cue to quality Becomes more important and difficult when: Service quality is hard to detect prior to purchase Costs are difficult to determine Customers are unfamiliar with the process Brand names are not well established Customers can perform the service themselves Service has poorly defined units of consumption Advertising within the service category is limited The total price of the service is difficult to state beforehand

Discussion Question Pricing strategy associated with services is typically more complex than the pricing of tangible goods. As a consumer, what pricing issues do you consider when purchasing services? How difficult is it to compare prices among competing services, or to determine the complete price of the service before purchase? What could service providers do to solve these issues?

Price Elasticity and Yield Management Allows simultaneous control of capacity and demand Control capacity by limiting available capacity at certain price points Control demand through price changes and overbooking capacity

Yield Management for a Hypothetical Hotel Exhibit 8.3

Price Elasticity of Demand (1 of 2) Exhibit 8.4

Price Elasticity of Demand (2 of 2) Situations that increase price sensitivity: Availability of product substitutes Higher total expenditure Noticeable differences Easy price comparison Situations that decrease price sensitivity: Real or perceived necessities Lack of product substitutes Complementary products Product differentiation Perceived product benefits Situational influences

Discussion Question Price elasticity often varies for the same product based on the situation. What situational factors might affect the price elasticity of these products: sporting event or concert tickets staple goods such as milk, eggs, or bread an electric razor eye surgery to correct vision

Pricing Strategies (1 of 2) Base Pricing Strategies Market Introduction Pricing (skimming and penetration) Prestige Pricing Value-Based Pricing (EDLP) Competitive Matching Non-Price Strategies Adjusting Prices in Consumer Markets Promotional Discounting Reference Pricing Odd-Even Pricing Price Bundling

Marketing Strategy in Action Chrysler’s initial price skimming strategy for the Pacifica was not successful in attracting customers. Why would customers balk at a $40,000 price tag for the Pacifica? What are the issues affecting price sensitivity in this situation?

Pricing Strategies (2 of 2) Adjusting Prices in Business Markets Trade discounts Discounts and allowances Geographic pricing Transfer pricing Barter and countertrade Price discrimination

Fixed vs. Dynamic Pricing Pricing levels in a negotiated pricing situation: Opening position Aspiration price Limit Guidelines for making concessions: Avoid being the first side to make a concession Start with modest concessions and make them smaller as you proceed Avoid making concessions early in the negotiation Do not give up anything without something in return

Major Online Auction Strategies Exhibit 8.5

Legal and Ethical Issues in Pricing Price Discrimination Price Fixing Predatory Pricing Deceptive Pricing

Selling at a Loss Sony is expected to lose money on each PlayStation 3 console due to the cost of the cell processor and the Blu-ray DVD drive. Sony plans to make up for the loss in games and accessories. Is this a sound pricing strategy? How can Sony minimize the loss on each console? Beyond the Pages 8.2