Chapter Ten Pricing Considerations and Strategies Marketing: An Introduction Second Canadian Edition Armstrong, Kotler, Cunningham, Mitchell and Buchwitz Chapter Ten Pricing Considerations and Strategies Copyright © 2007 Pearson Education Canada

Copyright © 2007 Pearson Education Canada Looking Ahead Identify and explain the external and internal factors affecting a firm's pricing decisions. Contrast the three general approaches to setting prices. Describe the major strategies for pricing imitative and new products. Explain how companies find a set of prices that maximizes the profits from the total product mix. Discuss how companies adjust their prices to take into account different types of customers and situations. Discuss the key issues related to initiating and responding to price changes. Chapter 10, page 372 Copyright © 2007 Pearson Education Canada

Copyright © 2007 Pearson Education Canada What is a Price? Narrow definition. price is the amount of money charged for a product or service. Broad definition. price is the sum of all the values that consumers exchange for the benefits of having or using the product or service. Dynamic pricing. charging different prices depending on individual customers and situations. Chapter 10, page 376-77 Copyright © 2007 Pearson Education Canada

Pricing Best Practices Develop a 1 percent pricing mentality. Consistently deliver more value. Price strategically, not opportunistically. Know your competition. Make pricing a process . Chapter 10, page 377 Copyright © 2007 Pearson Education Canada

Copyright © 2007 Pearson Education Canada Dynamic Pricing The practice of charging different prices depending on individual customers and situations. Internet and web-purchasing provides the technological capability for dynamic pricing Sites like eBay even add the ability to negotiate price to dynamic pricing practices. Chapter 10, page 376-78 Copyright © 2007 Pearson Education Canada

Pricing Decision Factors Internal Factors Marketing objectives. Marketing mix. Costs. Organization style. Target market. Positioning objectives. External Factors Nature of the market. Demand Competitor. Economic state. Reseller needs. Government actions. Social concerns. Chapter 10, page 379 Copyright © 2007 Pearson Education Canada

Pricing Decision Internal Factors Marketing objectives. Company must decide on its strategy for the product. General objectives. Survival, current profit maximization, market share leadership and product quality leadership. Chapter 10, page 379 Copyright © 2007 Pearson Education Canada

Pricing Decision Internal Factors Price decisions must be coordinated with product design, distribution and promotion decisions to form a consistent and effective marketing program. Target costing. Pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met. Chapter 10, page 379-80 Copyright © 2007 Pearson Education Canada

Pricing Decision Internal Factors Costs. Fixed Costs. Costs that do not vary with production or sales level. Variable Costs. Costs that vary directly with the level of production. Chapter 10, page 380-81 Copyright © 2007 Pearson Education Canada

Pricing Decision Internal Factors Organizational considerations. Must decide who within the organization should set prices. This will vary depending on the size and type of company. Chapter 10, page 381 Copyright © 2007 Pearson Education Canada

Pricing Decision External Factors The market and demand: Costs set the lower limit of prices. The market and demand set the upper limit. Chapter 10, page 381 Copyright © 2007 Pearson Education Canada

Pricing in Different Markets Pure competition. Many buyers and sellers where each has little effect on the going market price Monopolistic competition. Many buyers and sellers who trade over a range of prices Oligopolistic competition. Few sellers and sensitive to each other’s pricing/marketing strategies Pure monopoly. Market consists of a single seller Chapter 10, page 383-84 Copyright © 2007 Pearson Education Canada

Copyright © 2007 Pearson Education Canada Demand and Elasticity Demand. The relationship between price changes and the number of units sold. Elasticity. A way of measuring how sensitive the market is to price changes. Inelastic – minimal change in demand as price increases. Elastic – significant drop in demand as price increases. Chapter 10, page 383-84 Copyright © 2007 Pearson Education Canada

Price Setting Considerations Product costs. Price floor – no profits below this price. Competitors’ prices and other internal and external factors. Consumer perceptions of value. Price ceiling – no demand above this price. Chapter 10, page 385 Copyright © 2007 Pearson Education Canada

General Pricing Approaches Cost-based approach. Cost-plus pricing. Break-even analysis. Target profit pricing. Value-based approach. Consumer perceptions of value. Competition-based approach. What competitors are charging. Chapter 10, page 386-91 Copyright © 2007 Pearson Education Canada

Copyright © 2007 Pearson Education Canada Cost-Plus Pricing Adding a standard markup to the cost of the product. Popular because: Sellers more certain about cost than demand. Simplifies pricing. When all sellers use, prices are similar and competition is minimized. Some feel it is more fair to both buyers and sellers. Chapter 10, page 386-67 Copyright © 2007 Pearson Education Canada

Copyright © 2007 Pearson Education Canada Value-Based Pricing Uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing. A less expensive piano might play well, but would it take you places you’ve never been before? Chapter 10, page 387-89 Copyright © 2007 Pearson Education Canada

Competition-Based Pricing Going-rate pricing. Firm bases its price largely on competitors’ prices, with less attention paid to its own costs or to demand. Sealed-bid pricing. Firm bases its price on how it thinks competitors will price rather than on its own costs or on demand. Chapter 10, page 389-91 Copyright © 2007 Pearson Education Canada

Copyright © 2007 Pearson Education Canada Pricing New Products Skimming pricing. High price to reap maximum profit from early adopter segments. Can encourage competition. Products must be unique and hard to copy. Penetration pricing. Low price to gain maximum market share. May discourage competition. Used when the product is easily copied. Chapter 10, page 391-92 Copyright © 2007 Pearson Education Canada

Product Mix Pricing Strategies Product line -- pricing levels to deliver value to different segments. Optional products – separate options available for the main product. Captive products – needed to make main product usable. By-products – created from the manufacture of the main product. Product bundles – combinations. Chapter 10, page 392 Copyright © 2007 Pearson Education Canada

Copyright © 2007 Pearson Education Canada Product Line Pricing Involves setting price steps between various products in a product line based on: Cost differences between products. Customer evaluations of different features. Competitors’ prices. Chapter 10, page 392-93 Copyright © 2007 Pearson Education Canada

Optional/Captive Product Pricing Optional-product. Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator). Product bundle pricing. Combining several products and offering the bundle at a reduced price (e.g., computer with software and Internet access). Chapter 10, page 393 Copyright © 2007 Pearson Education Canada

Copyright © 2007 Pearson Education Canada Pricing Strategies Captive-product. Pricing products that must be used with the main product (e.g., replacement cartridges for Gillette razors). By-product pricing. Setting a price for by-products in order to make the main product’s price more competitive (e.g., sawdust and buttermilk). Chapter 10, page 393-94 Copyright © 2007 Pearson Education Canada

Price-Adjustment Strategies Discount and allowance pricing. Segmented pricing. Psychological pricing. Promotional pricing. Geographical pricing. International pricing. Chapter 10, page 394 Copyright © 2007 Pearson Education Canada

Discounts and Allowances Discounts – a straight reduction based on: Cash. Quantity. Function. Season. Allowances – promotional money paid by manufacturer to retailer. Chapter 10, page 395-96 Copyright © 2007 Pearson Education Canada

Copyright © 2007 Pearson Education Canada Segmented Pricing Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. Customer-segment. Product-form. Location pricing. Time pricing. Chapter 10, page 395 Copyright © 2007 Pearson Education Canada

Psychological Pricing Considers the psychology of prices and not simply the economics. Consumers usually perceive higher-priced products as having higher quality. Consumers use price less when they can judge quality of a product. Chapter 10, page 396-97 Copyright © 2007 Pearson Education Canada

Copyright © 2007 Pearson Education Canada Promotional Pricing Promotional pricing approaches. Loss leaders. Special event pricing. Low-interest financing. Longer warranties. Free maintenance. Discounts. Cash rebates. Chapter 10, page 398 Copyright © 2007 Pearson Education Canada

Copyright © 2007 Pearson Education Canada Geographical Pricing FOB-origin pricing. Uniform-delivered pricing. Zone pricing. Basing-point pricing. Freight-absorption pricing. Chapter 10, page 399-400 Copyright © 2007 Pearson Education Canada

International Pricing Price depends on many factors, including: Economic conditions. Competitive situations. Laws and regulations. Development of the wholesaling and retailing system. Costs. Internet. Chapter 10, page 400-01 Copyright © 2007 Pearson Education Canada

Initiating Price Changes Price Cuts Excess capacity. Falling market share. Dominate market through lower costs. Price Increases Cost inflation. Over-demand. Cannot supply all customers’ needs. Chapter 10, page 401-03 Copyright © 2007 Pearson Education Canada

Responding to Competitor Price Changes When a competitor lowers prices: Reduce price to match the competitors’ price. Maintain price but increase the perceived value of the offer. Improve quality and raise price. Hold price and introduce a new brand at a higher price. Hold price and introduce a new brand at a lower price (fighting brand). Chapter 10, page 404 Copyright © 2007 Pearson Education Canada

Copyright © 2007 Pearson Education Canada Pricing Ethics Competitors. Price-fixing. Predatory pricing. Manufacturer and retailer. Retail price maintenance. Discriminatory pricing. Manufacturer/retailer and consumer. Deceptive pricing. Chapter 10, page 404-07 Copyright © 2007 Pearson Education Canada

Copyright © 2007 Pearson Education Canada Looking Back Identify and explain the external and internal factors affecting a firm's pricing decisions. Contrast the three general approaches to setting prices. Describe the major strategies for pricing imitative and new products. Explain how companies find a set of prices that maximizes the profits from the total product mix. Discuss how companies adjust their prices to take into account different types of customers and situations. Discuss the key issues related to initiating and responding to price changes. Copyright © 2007 Pearson Education Canada