1. Dhruv Grewal Michael Levy
Marketing
Chapter 13
Pricing Concepts for Establishing Value
Dhruv Grewal
Michael Levy

2. © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
13-2
Panera Bread
Patrons spend on average $4 more
Offers upscale food and ambiance
Consumers willing to pay more will choose Panera, others will choose other options
The many market segments that purchase convenience food differ in their price sensitivity; some are willing to pay more for quality and convenience, and Panera has pursued them actively.
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Price
Benefits vs. Sacrifice
Remind students that price refers not just to money but also other costs such as time.
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Price is a Signal
Prices can be both too high and too low
Price too low may signal poor quality
Price set too high might signal low value
Consumers recognize price as a signal. If a marketer sets a price too high or too low, the wrong message gets sent to the market.
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5. Price’s Role in the Marketing Mix
Price is usually ranked as one of the most important factors in purchase decisions
Price is the only marketing mix element that generates revenue
Ask students to provide an example of a purchase where they did not consider price. They will probably be hard-pressed to come up with anything, thus making the point.
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6. Test Your Knowledge
The key to successful pricing is to match the product or service with the consumer’s _______________.
A) income level
B) value perceptions
C) shopping habits
D) brand consciousness
Answer: B

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The 5 C’s of Pricing
The following slides discuss each C in detail; alternatively, you can use this graph as a basis for a shortened discussion.
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8. 1st C: Company Objectives
Each firm has a specific orientation in the marketplace that dominates its pricing strategy. Profit-oriented firms do not use value as a consideration but rather focus on generating a set level of profit from each sale.
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Profit Orientation
Ask students: What are the issues with a profit orientation?
Answer: The key issue is that it does not take into consideration the value customers have for the product. This may lead to prices being set below and optimal level.  
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Sales Orientation
Focus on increasing sales
More concerned with overall market share
Does not always imply low setting low prices
Firms that want to attain market leadership set prices at less profitable levels to gain market share.
Ask Students: Why would firms adopt this orientation? Many first adopt this orientation to establish a position in the market by getting the most price sensitive consumers to change brands.
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11. Competitor Orientation
Competitive parity
Status quo pricing
Value is not part of this pricing strategy
This strategy is particularly common among smaller firms that lack knowledge or experience in setting prices. Non-market leader firms also use it to signal they are similar to the market leader.
Ask students: What are the benefits of a competitor strategy? For example, can a new hotel chain indicate its level of service through price? The answer is yes. In many instances new brands will set price equal to the competitors they wish to be compared with knowing that consumers use reference prices to indicate quality
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Customer Orientation
Focus on customer expectations by matching prices to customer expectations
A recent study indicates that a variety of retailers sell one-carat diamonds, but consumers pay vastly different prices at Costco versus Tiffany’s. The diamonds are a commodity; they must meet the same standards and are rated the same. Ask students: Why would a consumer spend thousands more to buy a stone at Tiffany’s?
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13. Test Your Knowledge
Which of the following is NOT an example of how a firm might invoke the concept of value?
A) Set a “no-haggle” price
B) Set prices to match consumer expectations
C) Change prices to meet those of the competition
D) Offer very high-priced, “state-of-the-art” products or services
Answer: C

14. Implementing Pricing Strategies to Achieve Objectives
How can a consumer’s perception of value affect a firms pricing strategy?
When a price is set too low, it actually destroys value.

15. Case in Point: Ursinus College
College was losing applicants.
Challenge
Answer
Results
Raise tuition. A consultant had found that the tuition was too low compared to other schools of similar quality and thus signaling lower quality.
When this business raised its price to a level similar to other providers, it increased returns dramatically, even though few consumers pay the advertised price.
Tuition was raised by 17.6 percent and within 4 years the size of the freshman class had increased 35%.

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2nd C: Customers
The following slides address different parts of this graph; this slide serves as an introduction to the topic of demand curves.
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17. Demand Curves and Pricing
Knowing demand curve enables to see relationship between price and demand.
This information should be a review from students’ micro-economics coursework, so they should be familiar with the concept, but this discussion applies it in a slightly different way.
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Demand Curves
Not all are downward sloping
Prestige product or services have upward sloping curves.
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19. Price Elasticity of Demand
Elastic (price sensitive)
Inelastic (price insensitive)
Consumers less sensitive to price increases for necessities
For pricing, elasticity is a crucial concept.
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20. Price Elasticity of Demand
Ask students: In what circumstances will raising the price NOT result in an increase in revenue? In what circumstances will raising the price result in an increase in revenue?
In elastic markets, depending on the level of elasticity, a price increase can increase revenues, but if the increase drives consumers out of the market, demand falls, and a loss of revenue may result.
In contrast, in inelastic markets, a price increase almost always increases revenues, because the relationship between price and demand is weak. Pharmaceuticals provide a good example; even if the price of a cancer drug increases, consumers still demand it, so the firm generates more revenue.
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21. Entrepreneurial Marketing 13.1: JetBlue Provides Value
Founder David Neelam decided to focus on creating value
Emphasize those services that mattered most
New model = low prices + high customer service
Other major carriers are filing for bankruptcy; JetBlue is growing rapidly. Customers love the extras like in-flight TV, as well as the reasonable prices, so JetBlue has become quite profitable. In 2007 Jet Blue became the first airline to introduce a “Customer Bill of Rights” which guarantees air travelers that the airline will perform certain activities and if they fail to do so then fliers will be compensated.
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22. Factors Influencing Price Elasticity of Demand
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23. Test Your Knowledge
Consumers are generally less sensitive to price increases for which of the following items?
A) milk
B) steak
C) cars
D) clothing
Answer: A

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Substitution Effect
Consider Pete, college student on a budget
Old Spice Sport Deodorant user
At the store he notices that Old Spice is more expensive
Pete decides to give another brand a try and save money
Discuss the case of Pete and how the income and substitution effects alter his buying behavior. As a college student, he prefers a less expensive substitute deodorant, because it demands less of his total income. Ask students: When Pete graduates and gets a high-paying job, will he worry as much about the cost of deodorant? Do you expect him to switch back to Old Spice? Why or why not?
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25. Substitution Effect
How can a firm win market share in the highly competitive technology arena?
New products with competing technologies offer interesting pricing examples.

26. Case in Point: HD DVD Players
To win the market for this new technology.
Challenge
Answer
Results
Toshiba introduces a $500 HD DVD player to compete with Sony’s Blu-ray technology DVD players retailing for $ $1800.
The two current standards for high-definition DVD players, HD-DVD and Blue Ray, are battling for market share. By introducing a much lower priced entry, Toshiba hopes to garner enough market share to force Sony’s competing product from the market. Only time will tell which technology will prevail.
Toshiba has undercut the market on price and has convinced some companies to produce HD DVD’s rather than Blu-ray versions. The winner is not yet determined.

27. Cross-Price Elasticity
Consider Kendra, self-supporting college student
Buys a new printer on sale for a great price
Learns it requires special ink cartridges* that cost more than the printer
*complementary products
Just like Kendra, many people buy products without considering the price of necessary peripherals. Kendra is caught in a cross-elasticity trap, because her demand for one product generated demand for the other.
Group activity: Brainstorm a list of other products that exhibit cross-price elasticity.
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3rd C: Costs
Variable Costs
Vary with production volume
Fixed Costs
Unaffected by production volume
Total Cost
Sum of variable and fixed costs
No discussion of price would be complete without a discussion of cost. The price must at least cover the cost of the item. However, as students may have learned in their finance courses, understanding costs is rarely easy.
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29. Test Your Knowledge
In general, prices should not be based on cost because consumers make purchase decisions based on their _______________.
A) cross-price elasticity
B) Internet research
C) substitution effect
D) perceived value
Answer: D

30. Break Even Analysis and Decision Making
*You may want to use the Toolkit associated with this chapter to demonstrate break-even analysis.
Any point above the break-even point is profit. Some firms also use a target profit point to identify when sales create a specified target profit rather than zero profit
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Break Even Analysis
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32. Break Even to Achieve Target Profit
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33. Test Your Knowledge
When a firm’s profits hits the break-even point, their profits are _____________.
A) less than expected
B) more than expected
C) zero
D) undetermined
Answer: C

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4th C: Competition
Group activity: List a product or service market that demonstrates each type of competition.
Monopoly: Microsoft and software products.
Oligopolistic: Cable TV firms.
Pure: Most frequently purchased consumer goods such as soft drinks.
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35. Ethical Dilemma 13.1: Do Protectionist Laws Hurt or Help Consumers
Keep some companies from conducting business in a particular region
The Wright Amendment
Prohibits Southwest from flying directly from Dallas Love Field to certain places
When Southwest Airlines enters a market, fares drop an average of 30%, so other airlines clearly have a strong incentive to keep Southwest out of their markets.
Ask students: Is this type of regulation harmful to consumers? Despite the increased costs, are there any benefits? What would competing airlines say?
Clearly this type of regulation harms consumers by keeping prices higher than they would be in an open market. In this instance there really are no clear benefits to this regulation. The competitors would claim that it allows them to remain in business and be competitive, which in the long run is beneficial to consumers.
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5th C: Channel Members
Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies
Manufactures must protect against gray market transactions
Ask students: have you ever bought books marked “Instructor Copy: Not for Resale,” or “International Student Edition”? Is the bookstore engaging in unethical behavior? Whom does this gray market benefit? Whom does it hurt?
Answer: The purchase of gray market textbooks hurt the publisher and authors. These books do not help recover the costs of all the ancillary packages that are provided to instructors.
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37. Macro Influences on Pricing
The Internet
Increased price sensitivity
Growth of online auctions
Ask students: How has online shopping affected firms’ pricing strategies?
Answers: Internet shopping has provided people with more information so they have become more sensitive to prices, alternative product options and retailers
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38. Economic Factors Economic factors Increasing disposable income
Local economic conditions
Economic factors
Increasing status consciousness
Increasing globalization
Firms and consumers alike should constantly monitor the economic environment, because economic conditions have a direct impact on pricing.
Ask students: How many people cross-shop? Do you believe this practice has influenced the way some firms price their merchandise?
Answer: it has made prestige products more expensive and more moderately priced merchandise even less expensive.
Cross- shopping
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39. Economic Factors
How can a large retailer gain market share in an environment where even status-conscious shoppers want to shop cheap?
For many people without medical insurance, their economic reality means they cannot afford necessary medications

40. Case in Point: Wal-Mart Answers the Need for Lower Priced Drugs
Challenge
Answer
Results
Stem the rising cost of prescription drugs for consumers.
Wal-Mart announced that it had lowered the cost on 291 generic drugs to $4/prescription.
Initially launched in Florida, Wal-Mart plans to expand the program throughout the US. Target matched the program and KMart has launched a competing program that may in fact be cheaper.
Wal-Mart’s pricing program for generic prescription drugs allows many consumers access to needed medications, even without insurance. Other retailers have since introduced their own versions of this program

41. © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Chapter 13 Glossary
Competitive parity: A firm’s strategy of setting prices that are similar to those of major competitors.
Complementary products: Products whose demand curves are positively related, such that they rise or fall together.
Cross-price elasticity: The percentage change in demand for product A that occurs in response to a percentage change in price of product B.
Cross-shopping: The pattern of buying both premium and low-priced merchandise or patronizing both expensive, status-oriented retailers and price-oriented retailers.
Demand curves: Shows how many units of a product or service consumers will demand during a specific period at different prices.
Gray market: Employs irregular but not necessarily illegal methods; generally, it legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer.
Income effect: Refers to the change in the quantity of a product demanded by consumers due to a change in their income.
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42. Chapter 13 Glossary (continued)
Maximizing profit: A pricing strategy that relies primarily on economic theory; identifies the price at which profits are maximized by using a specific mathematical model that captures all the factors required to explain and predict sales and profits.
Prestige products or services: Those that consumers purchase for status rather than functionality.
Status quo pricing: A competitor-oriented strategy in which a firm changes prices only to meet those of competition.
Substitution effect: Refers to consumers’ ability to substitute other products for the focal brand, thus increasing the price elasticity of demand for the focal brand.
Target profit pricing: A pricing strategy implemented by firms when they have a particular profit goal as their overriding concern; uses price to stimulate a certain level of sales at a certain profit per unit.
Target return pricing: A pricing strategy implemented by firms less concerned with the absolute level of profits and more interested in the rate at which their profits are generated relative to their investments; designed to produce a specific return on investment, usually expressed as a percentage of sales.
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