Chapter Twelve Pricing Strategies

Chapter Objectives Define pricing and examine the external and internal influences on pricing decisions Examine the different price objectives Address the various pricing strategies Address strategic marketing applications in relation to pricing Address strategies that companies to use change prices

Influences on Pricing Decisions External influences Consumer influences Economic influences Intermediaries’ influences Competitive influences Government influence Internal influences

External Influences on Price Consumer Influence Law of Demand: Consumers purchase more products at lower prices than at higher prices. Companies can influence demand, e.g., by promoting. The price is equal to a consumers willingness to pay. (WTP) Price Price D' D When increasing promotion Quantity Demanded Quantity Demanded

External Influences on Price: Economic Influences on Costs and Price Economic Factors: Inflation Recession Interest Rates Taxes Cost of producing a product influence Change Pricing decisions

External Influences on Price: Intermediaries’ Influences on Price Intermediaries are trying to have some level of control over their own mark-up. The following are ways to accomplish it: Just-in-Time delivery methods Quick Response Inventory Systems Electronic Data Interchange Goal is to lower inventory carrying costs and accelerate the flow of products.

External Influences on Price: Competitive Influences on Price Companies need to consider the competitive environment and the firm’s position relative to competitors when making pricing decisions. A company can only control the price at the beginning of the product life cycle, or when it is the market leader. During the maturity stage companies normally start competing on price and profits go down.

External Influences on Price: Government’s Influence on Price The government has enacted legislation to protect competitors, channel members, and consumers from unfair pricing strategies. Policies Price discrimination Predatory pricing Price fixing Bait-and-Switch Resale price maintenance etc.

Internal Influences on Price Depending on the size, the organizational structure, and the industry focus, either the company owner, the brand managers, or a board of executives make the pricing decisions. Fixed Costs,Variable Costs: Total Costs = Fixed + Variable Costs (At a particular level of production)

Setting Pricing Objectives Pricing objectives have to be set in line with company goals. Profit-based pricing Sales-based pricing Status Quo pricing* Others* e.g., survival, cash flow, social, image

Pricing Strategies Cost-based pricing Demand-based pricing Competition-based pricing Combination pricing

Cost-Based Pricing Markup pricing Breakeven pricing Cost-plus pricing Markup pricing Breakeven pricing Target profit pricing

Demand-Based Pricing* Demand-based pricing: Considers customer’s perceptions of value, rather than the seller’s cost, as the fundamental component of the pricing decision a.k.a. Psychological pricing Reference price Prestige pricing Odd-Even pricing “What the market will bear”

Competition-Based Pricing Price can be above, below, or equal to competition. Best for brands in similar markets, similar demand patterns, and similar costs. Price leadership (oligopoly markets) Bid-pricing (note “Demand-Backward Pricing*”)

Combination Pricing Often used in practice Typical scenario: -Cost-based often use to establish price floor -Use demand and competition pricing strategies to estimate price -Use markup to calculate actual selling price

Strategic Marketing Applications* Price variability and marketing strategy New product pricing Product and pricing Promotion and pricing Place and pricing

Price Variability and Marketing Strategy Customary pricing Flexible pricing No-haggle pricing (Everyday low prices*) Price discounting* Quantity Trade Seasonal Promotional/Advertising Cash Allowances* (e.g., Trade-in, Rebate)

New Product Pricing Initial Pricing Strategies Penetration Pricing: Initially price the product below competition to quickly gain market share Skimming Pricing: Product priced above competition (high perceived quality and high profit-margins) Introductory Pricing*: Very short term deep price reduction to induce trial Initial Price Setting* List prices Keystone and variations

The Product and Pricing Product line pricing Accessory pricing Captive-product (Complementary*) pricing Bundling Transfer pricing*

Promotion and Pricing Multiple-unit pricing Promotional pricing Loss-leader pricing Comparison pricing*

Place and Pricing Distribution and Pricing Geographic pricing* FOB Origin FOB Destination, i.e., Delivered Pricing Uniform (Single Zone) Zone (Multiple Zone)