1. Pricing Decisions
Jeremy Kees, Ph.D.

2. Pricing Overview Price: the exchange value of a good or service
Robinson-Patman Act
Federal legislation prohibiting price discrimination that is not based on a cost differential
Fair Trade Laws
Allow manufacturers to stipulate minimum prices for their products and force retailers to adhere to them

3. The Importance of Pricing…
Prices, and the resulting sales, determine how much revenue a company receives
Prices thus influence a firm’s profits
Prices also influence the firm’s employment of the factors of production:
Natural resources
Capital
Human Resources
Entrepreneurship

4. Just a few strategic issues…
How much focus should be on costs?
Should we always strive for the industry’s traditional margins
How often should we revise price? (often enough to capitalize on market changes)
Should pricing decisions happen independently or as an intrinsic element of market-positioning strategy?
How much should we vary price for different products, segments, channels, and purchase occasions?

5. Strategies
“Freemium” strategy —giving some offering away for free while profiting from extras that are priced appropriately
Skype
Ryanair
parody

6. Consumer Psychology and Pricing
Reference Prices
Internal
External
Price-Quality Inferences
Moderated by category/product knowledge
Price Cues
“Psychological Pricing”
Odd Pricing
Unit Pricing

7. Setting the Price Select the objective Determine demand Estimate costs
Analyze competitors
Select the final price

8. Objective
Purpose
Example
Profitability Objectives
Profit Maximization
Target Return
Low introductory interest rates on credit cards with high standard rates after 6 months.
Market Share Objectives     
Sales Maximization
Market Share
Dell’s low-priced PCs increase market share and sales of services
Value Objectives  
Value Pricing
Per-song charges for music downloads
Prestige Objectives  
Lifestyle
Image
High-priced luxury autos such as BMW and watches by Piaget
NFP Objectives
Cost Recovery
Market Incentives
Market Suppression
High prices for tobacco and alcohol to reduce consumption

10. Determining Demand Price sensitivity Estimating demand curves
Implications for branding!!
Estimating demand curves
Done primarily through marketing research
Price elasticity of demand
Elastic vs. Inelastic

11. Estimating Costs
Types of Costs
Fixed
Variable
Total
Average

12. Competitive Analysis
Only after we determine market demand and company costs
We need to examine…
Product features
Perceived value

13. Select Pricing Method “3 Cs” Customer Demand Cost Function
Competitors Prices

14. Pricing Strategies Skimming Penetration Pricing High-End Products
Introduction Stage of the PLC
Adidas / Fathead
Penetration Pricing
Generates Trials

15. Pricing Strategies Value Pricing - EDLP Competitive Pricing Wal-Mart
Compete on other product attributes

16. Select Pricing Method Markup pricing (cost-plus)
Target-return pricing (breakeven analysis)
Perceived-value pricing
Going-rate pricing (customary)
Auction-type pricing

17. Select Final Price Factors to consider:
Impact of other marketing activities
Company pricing policies
Gain-and-risk sharing pricing
Impact of price on other parties

18. Adapting the Price By geographic area Discounts and Allowances
Cash Discount
Trade Discount
Quantity Discount
Allowances
Rebates
Promotional Pricing
Loss Leaders
Differentiated Pricing
Product Mix Pricing (Product-Line Pricing)
Bundling

19. Risks of Making Price Adjustments
Customers assume quality is low
A low price buys market share but not loyalty (remember relationship marketing?)
Higher-priced competitors match the lower prices but have longer staying power because of deeper cash reserves
Trigger a price war

20. Responding to Low-Price Competitors