Pricing Considerations and Strategies 9

9-2 What is a Price? Narrowly, price is the amount of money charged for a product or service. Narrowly, price is the amount of money charged for a product or service. Broadly, price is the sum of all the _____ that consumers exchange for the benefits of having or using the product or service. Broadly, price is the sum of all the _____ that consumers exchange for the benefits of having or using the product or service. Dynamic Pricing: Dynamic Pricing:

9-3 Factors Affecting Pricing Decisions

9-4 Internal Factors Affecting Pricing Decisions Marketing Objectives Survival Current Profit Maximization Choose the Price that Produces the Maximum Current Profit, Etc. Market Share Leadership Low as Possible Prices to Become the Market Share Leader. High Prices to Cover Higher Performance Quality and R&D.

9-5 Price Product Design Distribution Promotion Nonprice Positions Target Costing Internal Factors Affecting Pricing Decisions: Marketing Mix Strategy

9-6 Internal Factors Affecting Pricing Decisions Costs: Costs: –Fixed Costs: Costs that do not vary with production or sales level. Costs that do not vary with production or sales level. –Variable Costs: Costs that vary directly with the level of production. Costs that vary directly with the level of production.

9-7 Internal Factors Affecting Pricing Decisions Organizational Considerations: Organizational Considerations: –Must decide who within the organization should set prices. –This will vary depending on the size and type of company.

9-8 Factors Affecting Pricing Decisions

9-9 External Factors Affecting Pricing Decisions The Market and Demand: The Market and Demand: –Costs set the lower limit of prices. –The market and demand set the upper limit.

9-10 Pricing in Different Types of 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 who are sensitive to each other’s pricing/marketing strategies

9-11 Demand Curve A curve that shows the number of units the market will buy in a given time period, at different prices that might be charged.

9-12 Major Considerations in Setting Price

9-13 General Pricing Approaches 1. Cost-Based Pricing a. Cost-plus pricing b. Break-even pricing 2. Value-Based Pricing 3. Competition-Based Pricing

9-14 Cost-Based Pricing Certainty About Costs Pricing is Simplified Price Competition Is Minimized Unexpected Situational Factors Attitudes of Others Ethical Ignores Current Demand & Competition Cost-Plus Pricing is an Approach That Adds a Standard Markup to the Cost of the Product Simplest Pricing Method Fairer to Buyers & Sellers

9-15 Break-Even Chart

9-16 Value-Based Pricing Uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing. Uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing.

9-17 Cost-Based Versus Value- Based Pricing

9-18 Methods for Setting Prices Going-Rate Company Sets Prices Based on What Competitors Are Charging Sealed-Bid Company Sets Prices Based on What They Think Competitors Will Charge ? ? Competition-Based Pricing

9-19 New-Product Pricing Strategies Market-Skimming  Set a high price for a new product to “skim” revenues layer by layer from the market. When to use: When to use: –Product’s quality and image must support its higher price. –Costs of smaller volume cannot be so high they cancel the advantage of charging more. –Competitors should not be able to enter market easily and undercut the high price.

9-20 New-Product Pricing Strategies Market Penetration  Set a low initial price in order to “penetrate” the market quickly and deeply. When to use: When to use: –Market must be highly price sensitive so a low price produces more market growth. –Production and distribution costs must fall as sales volume increases. –Must keep out competition and maintain low price or effects are only temporary.

9-21 Product Line Pricing Involves setting price steps between various products in a product line based on: Involves setting price steps between various products in a product line based on: –Cost differences between products –Customer evaluations of different features –Competitors’ prices

9-22 Optional- and Captive-Product Pricing Optional-Product Optional-Product –Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator). Captive-Product Captive-Product –Pricing products that must be used with the main product (e.g., replacement cartridges for Gillette razors).

9-23 Pricing Strategies By-Product Pricing: Setting a price for by-products in order to make the main product’s price more competitive Product Bundle Pricing: Combining several products and offering the bundle at a reduced price

9-24 Discounts and Allowances Cash Quantity Functional Seasonal Trade-In Promotional Discounts Allowances

9-25 Segmented Pricing

9-26 Psychological Pricing Considers the psychology of prices and not simply the economics. Considers the psychology of prices and not simply the economics. Consumers usually perceive higher-priced products as having higher quality. Consumers usually perceive higher-priced products as having higher quality. Consumers use price less when they can judge quality of a product. Consumers use price less when they can judge quality of a product.

9-27 Promotional Pricing Special-Event Pricing Cash Rebates Low-Interest Financing Longer Warranties Free Maintenance Discounts Loss Leaders Temporarily pricing products below list price and sometimes even below cost to create buying excitement and urgency. Approaches:

9-28 Geographical Pricing FOB-origin pricing FOB-origin pricing Uniform-delivered pricing Uniform-delivered pricing Zone pricing Zone pricing Basing-point pricing Basing-point pricing Freight-absorption pricing Freight-absorption pricing

9-29 International Pricing Price depends on many factors, including: Price depends on many factors, including: –Economic conditions –Competitive situations –Laws and regulations –Development of the wholesaling and retailing system –Costs

9-30 Why? Excess Capacity Falling Market Share Dominate Market Through Lower Costs Initiating Price Changes Why? Cost Inflation Overdemand: Company Can’t Supply All Customers’ Needs

9-31 Buyers’ Reactions to Price Changes What would you think if the price of Joy was suddenly cut in half?

9-32 Being Replaced by Newer Models Current Models Are Not Selling Well Company is in Financial Trouble Price Cuts Are Seen by Buyers As: Reactions to Price Changes Number of Firms is Small Product is Uniform Buyers are Well Informed Competitors Mostly React When:

9-33 Assessing and Responding to Competitor Price Changes

9-34 Public Policy and Pricing

9-35 Price Fixing Price Fixing Pricing Within Channel Levels Predatory Pricing Predatory Pricing Public Policy Issues in Pricing

9-36 Price Discrimination Ensure Sellers Offers the Same Price Terms to a Given Level Of Trade Price Discrimination Ensure Sellers Offers the Same Price Terms to a Given Level Of Trade Retail Price Maintenance Manufacturer Can’t Require Dealers to Charge a Specified Retail Price for Its Product Retail Price Maintenance Manufacturer Can’t Require Dealers to Charge a Specified Retail Price for Its Product Deceptive Pricing Occurs When a Seller States Prices or Prices Savings that are not Available To Consumers (Bait and switch) Deceptive Pricing Occurs When a Seller States Prices or Prices Savings that are not Available To Consumers (Bait and switch) Pricing Across Channel Levels