1. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition Chapter 11 Pricing

2. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-2 Learning Goals Identify and define the internal factors affecting a firm’s pricing decisions Identify and define the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value Contrast the two general approaches to setting prices Discuss how companies adjust their prices to take into account different types of customers and situations Discuss the key issues related to initiating and responding to price changes

3. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-3 Buys unsold rooms, seats or vacation packages at heavily discounted rates Uneven success in growing beyond travel services Selling products and services that aren’t time sensitive is difficult. Priceline has hundreds or thousands of happy repeat customers. However not all customers are thrilled with their online experience. Launched in 1998 as a new service to empower consumers to name their own prices. The idea caught on and Priceline has become the leading name-your-own-price Internet service Deals primarily in time sensitive travel-related products The concept has real appeal to consumers If you get it is like “I won!” Case Study priceline.com

4. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-4 Learning Goals Identify and define the internal factors affecting a firm’s pricing decisions Identify and define the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value Contrast the two general approaches to setting prices Discuss how companies adjust their prices to take into account different types of customers and situations Discuss the key issues related to initiating and responding to price changes

5. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-5 What Is Price? The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.

6. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-6 Price Has Many Names Rent Fee, Fare Rate Commission Assessment Tuition Toll Premium Retainer Bribe Salary Wage Interest Tax

7. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-7 Today’s New Pricing Environment Dynamic Pricing, charging different prices depending on individual customers and situations Dynamic pricing on the Web allows SELLERS to: –Monitor customer behavior and tailor offers. –Change prices on the fly to adjust for changes in demand or costs. –Aid consumers with price comparisons. –Negotiate prices in online auctions and exchanges.

8. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-8 Pricing: An Important but Difficult Decision Price and the Marketing Mix –Only element to produce revenues –Most flexible element –Can be changed quickly Common Pricing Mistakes –Reducing prices too quickly to get sales –Pricing based on costs, not customer value

9. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-9 Factors to Consider When Setting Price Internal Factors –Marketing objectives –Marketing mix strategy –Costs –Product considerations –Organizational considerations Market positioning influences pricing strategy Other pricing objectives: –Survival –Current profit maximization –Market share leadership –Product quality leadership

10. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-10 Factors to Consider When Setting Price Internal Factors –Marketing objectives –Marketing mix strategy –Costs –Product considerations –Organizational considerations Pricing must be carefully coordinated with the other marketing mix elements Target costing is often used to support product positioning strategies based on price Non-price positioning can also be used

11. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-11 Discussion Question You are the marketer of a new high-end coffee maker. What should you consider when planning your: 1.Price 2.Product 3.Place 4.Promotion??

12. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-12 Factors to Consider When Setting Price Internal Factors –Marketing objectives –Marketing mix strategy –Costs –Product considerations –Organizational considerations Costs set the floor, or lowest amount that should be charged Ideally, prices charged cover all costs and leave something left over for profit Types of costs: –Variable –Fixed –Total costs How costs vary at different production levels will influence price setting

13. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-13 Factors to Consider When Setting Price Internal Factors –Marketing objectives –Marketing mix strategy –Costs –Product considerations –Organizational considerations Market skimming pricing –Used when the product is new technology, and not easily copied Market penetration pricing –Used when there are advantages to be gained by large volumes early in the life cycle Product line pricing –Setting the price steps between products in a line

14. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-14 Factors to Consider When Setting Price Internal Factors –Marketing objectives –Marketing mix strategy –Costs –Product considerations –Organizational considerations Who sets the price? –Small companies: CEO or top management –Large companies: Divisional or product line managers Price negotiation is common in industrial settings where pricing departments may be created

15. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-15 Learning Goals Identify and define the internal factors affecting a firm’s pricing decisions Identify and define the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value Contrast the two general approaches to setting prices Discuss how companies adjust their prices to take into account different types of customers and situations Discuss the key issues related to initiating and responding to price changes

16. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-16 Factors to Consider When Setting Price External Factors –Nature of market and demand –Competitors’ costs, prices, and offers –Other environmental elements Types of markets –Pure competition –Monopolistic competition –Oligopolistic competition –Pure monopoly Consumer perceptions of price and value Price-demand relationship –Demand curve –Price elasticity of demand

17. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-17 Factors to Consider When Setting Price External Factors –Nature of market and demand –Competitors’ costs, prices, and offers –Other environmental elements Consider competitors’ costs, prices, and possible reactions when developing a pricing strategy Pricing strategy influences the nature of competition –Low-price low-margin strategies inhibit competition –High-price high-margin strategies attract competition Benchmarking costs against the competition is recommended

18. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-18 Factors to Consider When Setting Price External Factors –Nature of market and demand –Competitors’ costs, prices, and offers –Other environmental elements Economic conditions –Affect production costs –Affect buyer perceptions of price and value Reseller reactions to prices must be considered Government may restrict or limit pricing options Social considerations may be taken into account

19. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-19 Learning Goals Identify and define the internal factors affecting a firm’s pricing decisions Identify and define the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value Contrast the two general approaches to setting prices Discuss how companies adjust their prices to take into account different types of customers and situations Discuss the key issues related to initiating and responding to price changes

20. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-20 General Pricing Approaches Cost-Based Pricing: Cost-Plus Pricing –Adding a standard markup to cost –Ignores demand and competition –Popular pricing technique because: It simplifies the pricing process Price competition may be minimized It is perceived as more fair to both buyers and sellers

21. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-21 General Pricing Approaches Cost-Based Pricing Example - Variable costs: $20 - Fixed costs: $ 500,000 - Expected sales: 100,000 units - Desired Sales Markup: 20% Variable Cost + Fixed Costs/Unit Sales = Unit Cost $20 + $500,000/100,000 = $25 per unit Unit Cost/(1 – Desired Return on Sales) = Markup Price $25 / (1 -.20) = $31.25

22. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-22 General Pricing Approaches Cost-Based Pricing: Break-Even Analysis and Target Profit Pricing –Break-even charts show total cost and total revenues at different levels of unit volume. –The intersection of the total revenue and total cost curves is the break-even point. –Companies wishing to make a profit must exceed the break-even unit volume.

23. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-23 General Pricing Approaches Break-Even Analysis and Target Profit Pricing

24. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-24 General Pricing Approaches Value-Based Pricing: –Uses buyers’ perceptions of value rather than seller’s costs to set price. –Measuring perceived value can be difficult. –Consumer attitudes toward price and quality have shifted during the last decade. –Value pricing at the retail level Everyday low pricing (EDLP) vs. high-low pricing

25. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-25 Learning Goals Identify and define the internal factors affecting a firm’s pricing decisions Identify and define the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value Contrast the two general approaches to setting prices Discuss how companies adjust their prices to take into account different types of customers and situations Discuss the key issues related to initiating and responding to price changes

26. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-26 Price Adjustment Strategies Discount / allowance Segmented Psychological Promotional Geographical International Types of discounts –Cash discount –Quantity discount –Functional (trade) discount –Seasonal discount Allowances –Trade-in allowances –Promotional allowances

27. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-27 Price Adjustment Strategies Discount / allowance Segmented Psychological Promotional Geographical International Types of segmented pricing strategies: –Customer-segment –Product-form pricing –Location pricing –Time pricing Also called revenue or yield management Certain conditions must exist for segmented pricing to be effective

28. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-28 Price Adjustment Strategies Conditions Necessary for Segmented Pricing Effectiveness –Market must be segmentable –Segments must show different demand –Pricing must be legal –Costs of segmentation cannot exceed revenues earned –Segmented pricing must reflect real differences in customers’ perceived value

29. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-29 Price Adjustment Strategies Discount / allowance Segmented Psychological Promotional Geographical International The price is used to say something about the product. –Price-quality relationship –Reference prices –Differences as small as five cents can be important –Numeric digits may have symbolic and visual qualities that psychologically influence the buyer

30. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-30 Price Adjustment Strategies Discount / allowance Segmented Psychological Promotional Geographical International Temporarily pricing products below the list price or even below cost –Loss leaders –Special-event pricing –Cash rebates –Low-interest financing, longer warranties, free maintenance Promotional pricing can have adverse effects

31. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-31 Price Adjustment Strategies Promotional Pricing Problems –Easily copied by competitors –Creates deal-prone consumers –May erode brand’s value –Not a legitimate substitute for effective strategic planning –Frequent use leads to industry price wars which benefit few firms

32. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-32 Price Adjustment Strategies Discount / allowance Segmented Psychological Promotional Geographical International Types of geographic pricing strategies: –FOB-origin pricing –Uniform-delivered pricing –Zone pricing –Basing-point pricing –Freight-absorption pricing

33. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-33 Price Adjustment Strategies Discount / allowance Segmented Psychological Promotional Geographical International Prices charged in a specific country depend on many factors –Economic conditions –Competitive situation –Laws / regulations –Distribution system –Consumer perceptions –Corporate marketing objectives –Cost considerations

34. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-34 Learning Goals Identify and define the internal factors affecting a firm’s pricing decisions Identify and define the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value Contrast the two general approaches to setting prices Discuss how companies adjust their prices to take into account different types of customers and situations Discuss the key issues related to initiating and responding to price changes

35. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-35 Price Changes Initiate price cuts when a firm: –Has excess capacity –Faces falling market share due to price competition –Desires to be a market share leader Initiate price increases when a firm –can increase profit –faces cost inflation –faces greater demand than can be supplied

36. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-36 Price Changes Alternatives to Increasing Price –Explore more cost effective production or distribution –Reduce product size –Remove features –Unbundle the product

37. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-37 Price Changes Buyer reactions to price changes must be considered. Competitors are more likely to react to price changes under certain conditions. –Number of firms is small –Product is uniform –Buyers are well informed

38. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-38 Responding to competitors’ price changes –Evaluate the competitors’ reason for the price change –Evaluate marketplace response to the price change –Considers own product’s strategy Responding to Competitors’ Price Changes

39. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-39 Public Policy and Pricing Price-fixing – Competitors cannot work with each other to set prices Price discrimination –Customers must be offered proportionally equal discounts when used Deceptive pricing –Cannot mislead customers as to value received.

40. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-40 Ethical Issues in Pricing Compliance with the law is the minimum standard when judging whether pricing practices are ethical Can consumers understand prices and compare them? Consumers are unaware they can negotiate some prices Ability to negotiate prices

41. Copyright © 2008 Pearson Education CanadaPrinciples of Marketing, Seventh Canadian Edition 11-41 Learning Goals Identify and define the internal factors affecting a firm’s pricing decisions Identify and define the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value Contrast the two general approaches to setting prices Discuss how companies adjust their prices to take into account different types of customers and situations Discuss the key issues related to initiating and responding to price changes