1. MARKETING STRATEGY O.C. FERRELL • MICHAEL D. HARTLINE8
Pricing Strategy

2. The Role of Pricing in Marketing Strategy (1 of 2)
The Seller’s Perspective on Pricing
Four key issues:
(1) Costs
(2) Demand
(3) Customer value
(4) Competitors’ prices
The Buyer’s Perspective on Pricing
Two key issues:
(1) Perceived value
(2) Price sensitivity

3. The Role of Pricing in Marketing Strategy (2 of 2)
A Shift in the Balance of Power
Buyer’s market
Large number of sellers in the market
Many substitutes for the product
Economy is weak
Seller’s market
Products are in short supply
High demand
Economy is strong
The Relationship Between Price and Revenue
Myth #1: When business is good, a price cut will increase market share.
Myth #2: When business is bad, a price cut will
stimulate sales.

4. Major Determinants of Pricing Strategy
Pricing Objectives
Supply and Demand
The Firm’s Cost Structure
Competition and Industry Structure
Four basic competitive market structures:
Pure Competition
Monopolistic Competition
Oligopoly
Monopoly
Stage of the Product Life Cycle
Other Elements of the Marketing Mix

5. Regulated Utilities as Monopolies

6. Description of Common Pricing Objectives
Exhibit 8.1

7. Pricing Strategy Over the Product Life Cycle
Exhibit 8.2

8. Price Elasticity of Demand (1 of 2)
Formula for calculating price elasticity:
Situations That Increase Price Sensitivity
Availability of product substitutes
Higher total expenditure
Noticeable differences
Easy price comparison

9. Price Elasticity of Demand
Exhibit 8.3

10. Price Elasticity of Demand (2 of 2)
Situations That Decrease Price Sensitivity
Real or perceived necessities
Lack of product substitutes
Complementary products
Product differentiation
Perceived product benefits
Situational influences
Price Elasticity and Yield Management
Allows simultaneous control of capacity and demand
Control capacity by limiting available capacity at certain price points
Control demand through price changes and overbooking capacity

11. Yield Management for a Hypothetical Model
Exhibit 8.4

12. Discussion Question
Discuss the variety of situational factors that could come into play and impact elasticity in the purchase of each of the following products: a) sporting event or concert tickets, b) staple goods such as milk, eggs, or bread, c) an electric razor, d) eye surgery to improve vision.

13. Pricing Strategies (1 of 2)
Base Pricing Strategies
Price Skimming
Penetration Pricing
Prestige Pricing
Value-Based Pricing (EDLP)
Competitive Matching
Non-Price Strategies
Adjusting Prices in Consumer Markets
Promotional Discounting
Reference Pricing
Odd-Even Pricing
Price Bundling

14. Marketing Strategy in Action
Chrysler’s price skimming strategy for the Pacifica model has not been successful in attracting customers. Why do you think the $40,000 price tag has not been successful for the Pacifica? What do you think Chrysler should do in rethinking its pricing strategy for this model?

15. Price Bundling

16. Pricing Strategies (2 of 2)
Adjusting Prices in Business Markets
Pricing techniques unique to business markets:
Trade discounts
Discounts and allowances
Geographic pricing
Transfer pricing
Barter and countertrade
Price discrimination

17. Fixed vs. Negotiated Pricing
Three pricing levels in a negotiated price situation:
(1) Opening position
(2) Aspiration price
(3) Limit
Guidelines for making concessions:
Avoid being the first side to make a concession
Start with modest concessions and make them smaller as you proceed
Avoid making concessions early in the negotiation
Do not give up anything without something in return

18. Discussion Question
If you were trying to sell your used car through the newspaper, what factors would determine how you might set your opening position, your aspiration price, and your limit during the negotiation process?

19. Major Online Auction Strategies
Exhibit 8.5

20. Legal and Ethical Issues in Pricing
Price Discrimination
Price Fixing
Predatory Pricing
Deceptive Pricing

21. Discussion Question
One of the key decisions that managers often make is to change prices that have been set inappropriately. What issues should be considered in deciding whether it is the price that is wrong, or whether the problem lies in another element of the marketing mix?

22. Role of Pricing Segments markets Defines products
Creates customer incentives
Sends signals to competitors
Determines success or failure

23. To enter crowded field, use penetration strategy:
E.g. Sears Discover card with its low price no membership fee

24. How to Set Price Establish marketing objectives
Survival, maximum current profit, maximum current revenue, maximum sales growth, maximum market skimming or product-quality leadership
Determine the elasticity of demand
More inelastic the demand, the higher the company can set the price

25. How to Set Price 1. Establish marketing objectives
Determine the elasticity of demand
Estimate the costs depending on production level, marketing strategies, etc.
Examine competitors’ prices as basis for positioning it own price
Select pricing method
Markup
Target return
Perceived-value
Value
Going-rate
Sealed-bid
6. Determine final price

26. Setting Final Price Conforms to company pricing policies
OK with distributors and dealers
In sync with sales force, competitors, suppliers, and government

27. Adapting the Price (To various conditions in Marketplace)
Geographical Conditions
Price Discounts & Allowances
Cash discounts, quantity discounts, trade discounts, seasonal discounts, allowances, trade-ins
Promotional Pricing
Loss-leader - to stimulate traffic
Special event pricing – to draw customers
Cash rebates – to encourage purchase within a specified time period
Low-interest financing – to facilitate purchase
Longer payment terms – for lower monthly payments
Warranties and service contracts – added value
Psychological discounting – set an artificially high initial price

28. Adapting the Price Discriminatory Pricing Product-line pricing
Optional feature pricing
Captive product pricing – main products that require ancillary products
Two-part pricing – fixed fee plus variable fee based on usage

29. Adapting the Price Discriminatory Pricing
Customer segment pricing – different prices for different groups
Product-form pricing – different versions priced differently
Image pricing
Location pricing- same product priced differently at different locations
Time Pricing – same product priced differently at different locations

30. Pricing Decisions Summary
Consider Costs – break-even analysis
Demand - elasticity
Competition

31. Pricing Objectives
Survival – short term used to combat overcapacity, intense competition or changing consumer wants
Maximum current profit – set prices to obtain highest profit, cash flow or return on investment given demand and costs; may encounter competitive or legal reaction
Maximum market share (market penetration) = higher sales volume will lead to lower unit costs
Market highly price sensitive
Production & distribution costs fall with accumulated production experience
Low price discourages competition

32. Pricing Objectives
Maximum market skimming –set prices high to skim the market
Sufficient number of buyers have a high current demand
Unit costs of producing a small volume are not so high that they cancel advantage charging what traffic will bear
High initial price does not attract more competitors to the market
High price communicates image of a superior product
Product-quality leadership – Offer top quality, innovation at premium prices

33. Price less elastic or inelastic if…
There are few or no substitutes or competitors
Buyers do not readily notice the higher price
Buyers are slow to change their buying habits & search for lower prices
Buyers think the higher prices are justifies by quality differences

34. Will price discrimination work?
Market segmentable with different intensities of demand?
Can members in lower price segment resell product to higher price segment?
Can competitors undersell firm in the higher-price segment?
Does the cost of segment the market exceed the extra revenue derived from price discrimination???
Does the practice breed customer resentment?
Is form of price discrimination legal (selling below cost)??