MARKETING STRATEGY O.C. FERRELL • MICHAEL D. HARTLINE 8 Pricing Strategy

The Role of Pricing in Marketing Strategy (1 of 2) The Seller’s Perspective on Pricing Four key issues: (1) Costs (2) Demand (3) Customer value (4) Competitors’ prices The Buyer’s Perspective on Pricing Two key issues: (1) Perceived value (2) Price sensitivity

The Role of Pricing in Marketing Strategy (2 of 2) A Shift in the Balance of Power Buyer’s market Large number of sellers in the market Many substitutes for the product Economy is weak Seller’s market Products are in short supply 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.

Major Determinants of Pricing Strategy Pricing Objectives Supply and Demand The Firm’s Cost Structure Competition and Industry Structure Four basic competitive market structures: Pure Competition Monopolistic Competition Oligopoly Monopoly Stage of the Product Life Cycle Other Elements of the Marketing Mix

Regulated Utilities as Monopolies

Description of Common Pricing Objectives Exhibit 8.1

Pricing Strategy Over the Product Life Cycle Exhibit 8.2

Price Elasticity of Demand (1 of 2) Formula for calculating price elasticity: Situations That Increase Price Sensitivity Availability of product substitutes Higher total expenditure Noticeable differences Easy price comparison

Price Elasticity of Demand Exhibit 8.3

Price Elasticity of Demand (2 of 2) Situations That Decrease Price Sensitivity Real or perceived necessities Lack of product substitutes Complementary products Product differentiation Perceived product benefits Situational influences 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 Model Exhibit 8.4

Discussion Question Discuss the variety of situational factors that could come into play and impact elasticity in the purchase of each of the following products: a) sporting event or concert tickets, b) staple goods such as milk, eggs, or bread, c) an electric razor, d) eye surgery to improve vision.

Pricing Strategies (1 of 2) Base Pricing Strategies Price Skimming Penetration Pricing 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 price skimming strategy for the Pacifica model has not been successful in attracting customers. Why do you think the $40,000 price tag has not been successful for the Pacifica? What do you think Chrysler should do in rethinking its pricing strategy for this model?

Price Bundling

Pricing Strategies (2 of 2) Adjusting Prices in Business Markets Pricing techniques unique to business markets: Trade discounts Discounts and allowances Geographic pricing Transfer pricing Barter and countertrade Price discrimination

Fixed vs. Negotiated Pricing Three pricing levels in a negotiated price situation: (1) Opening position (2) Aspiration price (3) 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

Discussion Question If you were trying to sell your used car through the newspaper, what factors would determine how you might set your opening position, your aspiration price, and your limit during the negotiation process?

Major Online Auction Strategies Exhibit 8.5

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

Discussion Question One of the key decisions that managers often make is to change prices that have been set inappropriately. What issues should be considered in deciding whether it is the price that is wrong, or whether the problem lies in another element of the marketing mix?