1. Pricing

2. What Is a Price?
Narrow Definition: The amount of money charged or paid for a product or service.
Broad Definition: The sum of all values consumers exchange for the product or service.
Time Costs
Cognitive and Emotional Costs
Transaction Costs

3. Internal and External Factors Affect Prices

4. Value-Based Pricing vs. Cost-Based Pricing

5. Internal Factors Affecting Pricing Decisions
Company and Product Costs:
Fixed Costs:
Costs that do not vary with production or sales level.
Variable Costs:
Costs that vary directly with the level of production.

6. Cost-Based Pricing Methods
Cost-plus pricing
Add a standard markup to the cost of the product
Break-even pricing
Pricing to break-even (Why?!)
Target-profit pricing
Pricing to meet a profit objective.
Formulas
Standard Markup
Break-even
Target Profit

7. Break-Even Chart for Determining Price

8. Internal Factors Affecting Pricing Decisions
Marketing Mix Strategy:
Price must be coordinated with the other three P’s (Product, Promotion and Place) to form a consistent and effective marketing program.

9. External Factors Affecting Pricing Decisions
The Market and Demand:
Costs set price floors; demand sets price ceilings.
Supply and Demand Curves
Pricing in different types of markets:
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
Price elasticity of demand.
Cross price elasticity of demand.

10. What kind of markets do the following companies/products compete in?
(Pure competition, Monopolistic Competition, Oligopoly, or Pure Monopoly)

11. External Factors Affecting Pricing Decisions
Competition’s Prices Affect Our Price
What are our competitors charging? How and Why?
Will our pricing attract, restrict, or drive out competitors?
How does our value compare to the competition’s?
How strong/permanent are current competitors?
How does competition influence price sensitivity?
Avoiding price wars
Other External Factors
Economy
Inflation
Purchasing Power
Business Cycle (Boom, Recession, Depression)
Counter-cyclical products

12. Questions du Jour Which products sell better in a lousy economy?
Can companies ever raise prices in a lousy economy?

13. New-Product Pricing Strategies – Market Skimming
Initially set a high price for a new product so as to “skim” revenues layer by layer from the market.
Lower prices over time, “skimming” revenue from different demand tiers.
Initially make fewer, but more profitable sales.
Best used when:
Higher quality / ”premium” product.
Lower Fixed Cost structure.
Competitors with similar quality cannot easily undercut price.

14. New-Product Pricing Strategies – Penetration Strategy
Best used when:
Market is highly price sensitive.
High fixed cost structure.
Need to keep competition out or effects are only temporary.
Set a low initial price so the brand to “penetrates” the market quickly.
Eventually raise prices when wide adoption and brand loyalty have been achieved.

15. Which pricing strategy (skimming or penetration) is normally used when a new prescription drug is introduced in the U.S.?
Why?

16. Product Mix Pricing Strategies
Product line pricing
Optional-product pricing
Captive-product pricing
By-product pricing
Product bundle pricing

17. Product Line Pricing
Sets price steps between various product line items based on:
Cost differences between products
Customer demand for additional/different features
Price-Value Gradients

18. Optional-Product Pricing
Definition:
Pricing optional or accessory products sold with the main product
Examples:
Cruise control added to basic car.
Computer sold with additional RAM (memory)
Rental car sold with “luxury” or size upgrade
Often abused in “Bait and Switch” tactics

19. Captive-Product Pricing
Definition:
Pricing products that must be used with the main product
Base product is relatively “cheap” or free
Replacement product is relatively “expensive”
Examples:
Replacement cartridges for Gillette razors.
Toner/ink for HP printers.
Replacement car parts sold at car dealers

20. Product Bundle Pricing
Definition:
Multiple products sold together for one price
Creates perception of savings
Eases decision-making and ordering for consumers
Examples:
Computer package: PC, monitor, software, and printer.
McDonald’s Value Meal: Burger, Fries and Drink
Vacation package: Flight, hotel and meals

21. Question du Jour When are companies better off bundling prices?
When are companies better off charging separate prices for each item?

22. Price Adjustment Strategies
Discount and allowance pricing
Price discrimination (Segmented pricing)
Psychological pricing
Promotional pricing
Dynamic pricing

23. Discounts and Allowances
Cash
Quantity
Seasonal
Allowances
Trade-in
Promotional
Dangers of discounts
Seasonal Discount: Christmas cards purchased out of season, such as in March or July, are often sold at a discount.

24. Price Discrimination (Segmented Pricing)
Definition:
Selling a product or service for different prices to different people, where differences in price are not driven by different costs.
Types:
First Degree – by person
Second Degree – self-selection (menus)
Third Degree – by market
Pricing at Disney World hotels varies by time of year.

25. Psychological Pricing
Considers the psychological effects of prices – usually irrational responses.
Economic consideration of prices diminished.
Standard practice among most retailers

26. Even-Odd Pricing
Why do marketers use the following prices?

27. Question du Jour
What impression are consumers left with when they see even-numbered prices like
$12 ?

28. Price as Signal of Quality
The typical Price-Quality Inference
Effects of price changes on quality inferences
When pricing is NOT used as a quality signal
Extensive product knowledge/expertise
Repeat buys

29. Reference Prices
What is a fair price for gas?

30. Possible Consumer Reference Prices
Expected future price
Usual discounted price
Phantom prices
“Fair Price”
Average Price
Typical price
Last price paid
Upper-bound price
Lower-bound price
Competitor prices

31. Promotional Pricing Techniques
Cash Rebates
Special-Event Pricing
Loss Leaders
Low-Interest (or Free) Financing
Deals (BOGOs)
Clearance Sales

32. Promotional Pricing – Deals, Clearance Sales and 0% Financing
Promotional pricing creates excitement and a sense of urgency.

33. Which strategy is more profitable?
Hi-Low Pricing vs. EDLP
Which strategy is more profitable?

34. Dynamic Pricing
Adjusting prices continually to meet the characteristics and needs of continuously changing supply and demand.

35. Internet Price Shopping
Have consumers benefitted?

36. Initiating Price Changes
Price cuts
Falling sales or market share – demand issues
Grab market share from competitors
Lower production/service costs
Respond to competitor’s price drop
Consumers have less purchasing power
Price Increases
Cost inflation
Over-demand
Match competitor’s increase
Market leadership
Time

37. When Cutting Price is a Bad Idea
How would consumers likely react if Joy suddenly cut its price in half?

38. Assessing and Responding to Competitor Price Changes

39. Public Policy Issues in Pricing