1. Important part of product positioning
PRICING
Often the only marketing mix variable allowing for immediate competitive response
Important part of product positioning
Long term effects of pricing decisions—your decisions may come back to haunt you!

2. Learning Objectives Understanding
Price choices faced by managers, the constraints faced on these choices (e.g., legal), and the consequences of these choices
“Signaling” effects of product prices
The respective interests of manufacturers and retailers in product pricing
Appreciating the advantages and disadvantages of different pricing strategies

3. _____________________________________
One View of Price
Price =
resources given up
_____________________________________
goods received
E.g., 12 bullets for $6.00 = $0.50 per bullet
Ways to change the price:
Sticker price
Quantity—same sticker price but lesser quantity
Quality—use of lower cost materials—e.g., “gooeye” stuff rather than chocolate in candy
Terms
E.g., support, accessories, payment terms, delivery

4. Views of Consumers and Price Response
Economics
Assumed to have perfect information about
Quality of all brands
Prices of each brand at all locations
Elasticity: A “down-sloping” demand curve means that a higher quantity will be demanded when the price is reduced
Marketing
Consumer knowledge of product quality and prices is imperfect
Due to imperfect information, a higher price may sometimes be used by consumers to infer greater quality (Research suggests that actual product quality as rated by Consumer Reports accounts for about 25% of product price differences among brands)

5. Supply, Demand, and Quantities Supplied and Demanded

6. Supply, Demand, and Quantities Supplied and Demanded
Supply: The “schedule,” or “curve,” of quantities supplied by the sellers at various prices offered by buyers
Tends to increase with price—a greater quantity will be supplied at a higher level of incentive to produce
Demand: The “schedule,” or “curve,” of quantities demanded by the buyers at various prices offered by sellers
Tends to decrease with price—the marginal value of additional quantity tends to decline with a greater price
Occasionally, higher prices may lead to higher quantity demanded due to a possible “signal” of quality
Equilibrium: The intersection of the supply and demand curves—neither side is interested in buying or selling more or less given the resultant market prices
This equilibrium may be temporary and may change once the market changes—e.g.,
Changes in the availability  change in supply
Changes in cost of production  change in supply
Availability of new substitutes  change in demand
Quantity supplied: The quantity that will be supplied (sold) by sellers at a given price point
Quantity demanded: The quantity that will be demanded (bought) by buyers at a given price point

7. Price Discrimination Explicit
Only some customers are eligible for special pricing—e.g.,
Student discounts on software
Senior citizen discounts
Geographic: Only customers in the 900**-935** zip code areas are eligible for discount Disneyland Admission
Implicit
No outright rule, but discounted deal is unattractive to some customers
Airlines: Saturday night stay-over or advance purchase requirement
Daily special meal—one cheaper meal but no choice
Periodic discounting (products going on and off sale)

8. Some Approaches to Pricing
Cost-plus: Add fixed percentage markup
Skimming: high intro price ---> take advantage of price insensitive consumers
Penetration pricing: low intro price ---> volume
Buyer-based
Perceived value
Going-rate (competition)
---> Balancing cost and
market considerations

9. Skimming Pricing P2 P3 Q3
The product is introduced at a high price, P1. Very few customers—only the least price sensitive ones—buy at this price. When the price is later lowered to P2 and then to P3, other customers who value the product less will start to buy.
The least price sensitive customers pay a premium for quick access to the new product.

10. Penetration Pricing P1 Q1
The product is immediately introduced at a relatively low price. The seller sacrifices the higher margins that would have resulted from selling to some customers at a higher price, but, in return gains immediate sales. Fewer competitors are attracted into the market since the apparent profits are not as high. Because of economies of scale and experience curves—the tendency of production costs to decline with the cumulative production—costs are reduced.

11. Legal Issues Banned by Federal law:
Discrimination in prices paid by firms which compete against each other unless supported by evidence of cost savings
OK to charge restaurants more than grocery stores
Can only charge Wal-Mart less than Joe’s Supermarket if volume savings can be proven—and the price difference must be no greater than the actual provable cost savings.
Banned by some state laws:
Gender discrimination (e.g., charging more for dry cleaning women’s clothes than men’s clothes)
Discrimination between consumers in general
Senior citizen discounts are explicitly permitted in California

12. More Legal Issues Federal and State bans on:
Collusion (coordinating or even discussing prices with competitors)
Predation (offering temporary prices below cost of production to drive competitors out of business and then raising prices)
In general, fully absorbed average cost must be used—cannot use marginal cost
Using monopoly power in one market to “subsidize” new market

13. Price Maintenance
In 2007, the U.S. Supreme Court reversed the longstanding ban on explicit agreements between manufacturers that the branded product would not be sold below an agreed upon “floor” price
Although setting minimum retail prices for a brand reduces intra-brand competition (competition between different retailers selling the brand), some believe that minimum prices may encourage investment in service and brand building to the extent that competition between brands increases (inter-brand competition)
Manufacturers generally cannot enforce minimum price agreements on existing inventory, but they can “cut off” offending retailers
“Gray market” goods: Retailers in the U.S. generally have an absolute right to sell products that they have bought legally at a price lower than the suggested retail price.
Diversion: Legitimate retailers buy up extra quantity to be resold to unauthorized dealers and/or geographic shipment. (More details will be given under distribution).

14. Other Manufacturers’ “Suggested” Retail Prices (MSRPs)
U.S. manufacturers often put an exorbitantly high “suggested” price on a product so that even full service retailers can look good by selling below the MSRP
In some EU countries, selling below the MSRP may not be legal—manufacturers must therefore be careful not to “recommend” excessive prices

15. INCOME ≠ WILLINGNESS TO SPEND!
REMINDER
INCOME ≠ WILLINGNESS TO SPEND!

16. Price Adjustments For and Discrimination Among Consumers
Cars: List price – manufacturer discounts and rebates – dealer discount
Tuition: List price – scholarships – financial aid
Text, p Copyright © 2005 McGraw-Hill.

17. Introductory Effects
In an experiment, laundry detergent was introduced at $0.49 in one condition and $0.79 in another.
After 8 weeks, price was raised to $0.79 for low price intro condition.
There were higher cumulative sales in high price intro.

18. Consumer Price Awareness
A survey revealed of consumers who had just selected a product suggested:
Avg. time spent before departing from product area: 12 seconds
Avg. no. of products inspected: 1.2; only 21.6% claimed to check price of non-chosen brand
55.6% could state price of just chosen product within 5%

19. Consumer Reference Prices
Consumers typically have some expectation of what they will pay. This is based on:
previous experience
common sense
perceived fairness
Two kinds of reference prices:
Internal: Based on consumer’s memory.
External: Based on environment (e.g., signs, other products in the store)

20. Internal Reference Prices
Consumers tend to develop some memory of prices of frequently purchased items ---> to make store prices look low, you may want to price especially salient products lower
More knowledgeable consumers typically have tighter price range expectations
Reference prices are constantly updated to some extent, but are hard to change upwards--certain unreasonable “stimuli” (prices) may be rejected as unreal
Consumer reference prices tend to be lower than actual prices ---> “sticker shock”

21. External Reference Prices
Reference prices provided by seller or environment
E.g.,
“MSRP $3.99; our price $2.49”
“Sold elsewhere for $20.00; our price $14.99”
“Was $100.00; now $69.95”

22. The Promotion Signal
A segment of consumers will respond to negligible discounts--e.g., “SALE! $3.95 (Was $4.02).
However, merely placing a sign “EVERYDAY LOW PRICE” randomly also increased sales of affected products.

23. Odd/Even Pricing--Does It Have an Impact?
Theory: $3.00 is rounded to $3.00 while $2.99 is rounded to “$2.00 plus change”
Reality: Studies in U.S. have found a small impact; no impact found in Germany
Note that odd pricing may signal receiving a bargain, which may nor may not be compatible with the desired product image
Odd pricing has typically been used by tradition (initially implemented to force cashiers to ring up purchases).