1. Pricing Strategy

2. Pricing Strategy Is a key factor in producing revenue for the firm
Is the easiest of all marketing variables to change
Is an important consideration in competitive intelligence
Is considered to be the only real means of differentiation in highly commoditized markets

3. Key Issues in Pricing Strategy
The Firm’s Cost Structure
Perceived Value
The Price/Revenue Relationship
Pricing Objectives
Price Elasticity

4. The Firm’s Cost Structure
Breakeven in Units
Total Fixed Costs
Unit Price - Unit Variable Costs
Selling Price
Average Unit Cost
1 - Markup Percent (decimal)

5. Perceived Value
Value is a customer’s subjective evaluation of benefits relative to costs to determine the worth of a firm’s product offering relative to other product offerings.
Benefits – everything the customer obtains from the offering
Costs – everything the customer must give up
Value is intricately tied to every element in the marketing program.

6. The Price/Revenue Relationship
Myth #1 – When business is good, a price cut will capture greater market share.
Myth #2 – When business is bad, a price cut will stimulate sales.
Price cutting is generally not in the best interests of the firm unless sales volume will increase.
A better strategy is to build value into the product offering at the same (or even a higher) price.

7. Common Pricing Objectives (Exhibit 6.4)

8. Price Elasticity Refers to customers’ sensitivity to changes in price
The relative impact on the demand for a product, given specific increases or decreases in the price charged for that product
Perhaps the most important overall consideration in setting effective prices.

9. Situations That Increase Price Sensitivity
Availability of Substitute Products
Customers are more sensitive to price changes when they can choose among a number of substitute products.
Higher Total Expenditure
The higher the total expense, the more elastic the demand.
Noticeable Price Differences
Products having heavily promoted prices tend to experience more elastic demand.
Easy Price Comparisons
Customers are more price sensitive if they can shop around for a better price.

10. Situations That Decrease Price Sensitivity
Lack of Substitutes
Customers are less price sensitive when they have fewer options.
Real or Perceived Necessities
These products have very inelastic demand because customers have to have them.
Complementary Products
If the price of one product falls, customers will be less sensitive to the price of complementary products.

11. Situations That Decrease Price Sensitivity (continued)
Perceived Product Benefits
Sometimes, products are “just worth it” to consumers.
Situational Influences
Customers are less price sensitive in certain situations (time pressure, emergencies, gift giving, etc.)
Product Differentiation
Differentiation reduces the number of perceived substitutes.
The goal is to differentiate the product so well that customers perceive that no competing product can take its place.

12. Pricing Service Products
Service pricing is critical because price may be the only cue to quality in advance of purchase.
Service pricing becomes more important and difficult when:
Service quality is hard to detect prior to purchase
Costs are difficult to determine
Customers are unfamiliar with the service process
Brand names are not well established
Customers can perform the service themselves
Advertising within the service category is limited
The total price of the service is difficult to state beforehand

13. Pricing strategy associated with services is typically more complex than the pricing of tangible goods. As a consumer, what pricing issues do you consider when purchasing services? How difficult is it to compare prices among competing services, or to determine the complete price of the service before purchase? What could service providers do to solve these issues?

14. Service Pricing and Yield Management
Service pricing becomes a key issue in balancing supply and demand during peak and off-peak demand times.
Yield management allows the firm to simultaneously control capacity and demand.
Control capacity by limiting available capacity at certain price points
Control demand through price changes and overbooking capacity
Yield management also allows service firms to segment markets based on price elasticity.

15. Yield Management for a Hypothetical Hotel (Exhibit 6.5)

16. Base Pricing Strategies
Price Skimming
Price Penetration
Prestige Pricing
Value-Based Pricing (EDLP)
Competitive Matching
Non-Price Strategies

17. Adjusting the Base Price
Discounting
Reference Pricing
Price Lining
Odd Pricing
Price Bundling

18. Pricing Strategies in Business Markets
Adjusting Prices in Business Markets
Trade discounts
Discounts and allowances
Geographic pricing
Transfer pricing
Barter and countertrade
Price discrimination