C Priceline.com “Buyer-driven commerce” concept offers lower prices to consumers and the ability to sell excess inventory to sellers 13.5 million user.

Pricing Chapters 11 & 12

c Priceline.com “Buyer-driven commerce” concept offers lower prices to consumers and the ability to sell excess inventory to sellers 13.5 million user customer base Tremendous growth Most deals relate to travel or time sensitive/ perishable services Not all ventures have been profitable Some customers find it difficult to commit to purchase prior to learning details

What is Price? Dynamic Pricing on the Web allows SELLERS to:
Charge lower prices, reap higher margins. Monitor customer behavior and tailor offers. Change prices on the fly to adjust for changes in demand or costs. Negotiate prices in online auctions and exchanges.

MySimon is one of several independent web sites that provides product price comparisons.

Objectives Understand the internal factors affecting a firm’s pricing decisions. Understand the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value. Be able to contrast the three general approaches to setting prices.

Objectives Learn how companies adjust their prices to take into account different types of customers and situations. Know the key issues related to initiating and responding to price changes.

What is Price? Price Has Many Names Rent Fee Rate Commission
Assessment Tuition Fare Toll Premium Retainer Bribe Salary Wage Interest Tax

What is Price? Price and the Marketing Mix: Price Competition
Only element to produce revenues Most flexible element Can be changed quickly Price Competition Common Pricing Mistakes

Price Monetary or non-monetary compensations exchanged for the ownership or use of a product or a service

Factors to Consider When Setting Prices
Internal Factors Factors to Consider When Setting Prices Factors to Consider When Setting Prices This CTR corresponds to Figure 10-1 on p. 303 and relates to the discussion on pp Pricing Decisions Positioning Objectives External Factors Target Market

Internal Factors Affecting Pricing Decisions
Marketing Objectives Internal Factors Affecting Pricing Decisions Marketing-Mix Strategy Costs Organizational Considerations Organizational consideration: Who set the price?

Marketing Objectives that Affect Pricing Decisions
Internal Factors Affecting Pricing Decisions This CTR relates to the discussion on pp Marketing Objectives that Affect Pricing Decisions Survival Current Profit Maximization Marketing Objectives Marketing Objectives The overall marketing objectives that influence price: Survival. This can be the primary factor in setting price especially in marginal businesses or industries. Price is used to stay in business in hopes of making profits when conditions improve. Current Profit Maximization. This objective means the company is emphasizing short term results over long-run performance. Market-Share Leadership. This factor affects price when the company seeks the dominant market share. Low prices increase demand so that later volume creates profit. Product-Quality Leadership. This tends to push prices high. This pricing strategy may be linked to niching strategy in other discussions. Market Share Leadership Product Quality Leadership

Product quality leadership:
Four Seasons starts with very high quality service, then charges a price to match.

Marketing Mix Variables that Affect Pricing Decisions
Internal Factors Affecting Pricing Decisions This CTR relates to the discussion on pp Product Design and Quality Marketing-Mix Strategy Marketing Mix Strategy Price must be considered in light of its role in support of the overall marketing mix. Price is one kind of information the consumer receives about the product. Price should consistently support the overall positioning strategy targeted by the marketing mix. Non-Price Factors Distribution Promotion

Swatch used target costing to manage costs carefully and create a watch offering the right blend of fashion and functions at a price consumers would pay.

Types of Cost Factors that Affect Pricing Decisions
Internal Factors Affecting Pricing Decisions This CTR relates to the discussion on pp Types of Cost Factors that Affect Pricing Decisions Fixed Costs (Overhead) Costs that don’t Vary with sales or production levels Ex) Salary, rent Variable Costs Costs that do vary Directly with the level of production Ex) Raw material Costs Costs set the pricing floor that the company can charge for its product. Types of costs include: Fixed Costs (or overhead) are costs that do not vary much with production or sales levels. Variable Costs vary directly with the level of production. Total Costs are the sum of the fixed and variable costs for any given level of production. Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production

Costs Considerations Costs Considerations This CTR corresponds to Figure 10-2 B on p. 308 relates to the discussion on pp Cost Per Unit at Different Levels of Production Per Period Costs at Different Levels of Production Management must consider how costs will change at different levels of production as part of their overall demand management strategy. A key concept to this planning is the Short-Run Average Cost curve (SRAC) shown on the CTR. Use of SRAC comparisons help summarize and illustrate quickly the optimal level of production for a particular enterprise. The SRAC curves follow a larger Long-Run Average Cost curve (LRAC) that indicates the turning point where manufacturing economies of scale are overturned by the increased costs associated with managing and administering a larger workforce. Cost per unit 1 2 3 SRAC 4 LRAC 1,000 2,000 3,000 4,000 Quantity Produced per Day

Factors to Consider When Setting Price
Who sets the price? Small companies: CEO or top management Large companies: Divisional or product line managers Price negotiation is common in industrial settings Some industries have pricing departments Internal Factors Marketing objectives Marketing mix strategies Costs Organizational considerations

Other External Factors
Market and Demand External Factors Affecting Pricing Decisions Price/Demand Relationship Competitors’ Costs, Prices, and Offers Other External Factors

The Market and Demand Factors that Affect Pricing Decisions
Pure Competition Monopolistic Competition The Market and Demand Factors that Affect Pricing Decisions Different Types of Markets The Market and Demand This CTR relates to the discussion on pp The Market and Demand Types of Markets. Each presents distinct pricing challenges: Pure Competition - is characterized by many buyers and sellers to that no one agent affects pricing. Going rate pricing is the rule. Monopolistic Competition - consists of many buyers and sellers trading over a range of prices. Products can be differentiated in quality, features, or styles. Oligopolistic Competition - consists of few sellers each sensitive to the other's pricing and marketing strategies. Barriers to entry prohibit new sellers from entering the market. Pure Monopoly. This market consists of a single seller. The seller may by a government, private regulated monopoly, or unregulated monopoly. Pricing may be linked to other than cost or profit factors, including fear of competition entering or regulation. Consumer Perceptions of Price and Value. Buyers ultimately decide prices. Marketers must combine technical expertise with creative judgment and an awareness of buyers’ motivations. Oligopolistic Competition Pure Monopoly

Demand Curves Demand Curves Price Quantity Demanded per Period
This CTR corresponds to Figure 10-4 on p. 311 and relates to the discussion on pp Price Quantity Demanded per Period A. Inelastic Demand - Demand Hardly Changes With a Small Change in Price. P2 P1 Q1 Q2 P’2 P’1 B. Elastic Demand - Demand Changes Greatly With Price Demand Relationship A demand curve show the number of units the market will buy in a given time period at various prices. The price elasticity of demand illustrates how responsive demand will be to a change in price. Two concepts are important here: Inelastic Demand. If demand hardly changes with a small change in price, demand is inelastic. Elastic Demand. If a small change in prices changes demand greatly, demand is elastic. Discussion Note: The ethical issues involved in pricing products characterized by inelastic demand are often complicated and controversial. For example, many new drugs are extremely expensive to develop and market but may be the only treatment available for an illness. In other cases, relatively cheap drugs are sold for high prices under the same “must have” conditions. Also, the concept of induced demand, which characterizes both the medical and legal professions is a controversial issue. Induced demand refers to the fact that in these industries, the provider also determines the level of demand or product to be used. In both cases, those providers also set the price of their services. To make matters worse, consumers do not have price comparison information. For example, the WSJ reported heart by-pass operations for two hospitals within four miles of each other varying on price by over $20,000. And even if consumers have knowledge, in critical care situations they may not have time to exercise choice.

Discussion Question How would you characterize the type of market – in terms of level of competition – for the following: Electricity and gas utilities Cable TV, Internet services Local, long-distance, wireless telephone service

Figure 11-4: Demand Curves

Demand curves sometimes slope upward— Gibson learned that its high-quality guitars didn’t sell as well at lower prices

PC marketing has become extremely price competitive.
Knowledge of competitive prices, offers, and costs is key to pricing strategy.

Factors to Consider When Setting Price
Economic conditions Affect production costs Affect buyer perceptions of price and value Reseller reactions to prices must be considered Government may limit or restrict pricing options Social considerations may be taken into account External Factors Nature of market and demand Competitors’ costs, prices, and offers Other environmental elements

Major Considerations in Setting Price

General Pricing Approaches*
Cost Based cost plus break-even - target profit pricing Buyer Based perceived value Competitor Based going rate sealed bid

General Pricing Approaches
Cost-Based Pricing Example Variable costs: $ 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 / ( ) = $31.25

What is Cost-Plus Pricing and Why is it Popular?
This CTR relates to the discussion on pp. 314. Instructor’s Note: The remaining CTRs and Notes for this chapter cover the cost-based, value-based, and competition-based approaches to pricing. What is Cost-Plus Pricing and Why is it Popular? Adding a Standard Markup to the Cost of the Product Sellers Are More Certain About Costs Than Demand Minimizes Price Competition Cost-Plus Pricing Cost-Plus Pricing consists of adding a standard markup to the cost of the product. Markups vary widely across different industries. Cost-plus simplifies pricing strategy and covers costs but ignores market demand factors. Reasons for cost-plus pricing popularity include: Certainty. Sellers are more certain of their costs than they are about demand. This approach simplifies pricing. Minimize Price Competition. When all firms in the industry use this method, prices tend to be similar and price competition is minimized. Perceived Fairness. Cost-plus pricing ensures a profit for sellers for their value-added activities and does not take advantage of consumers when demand is greater. Discussion Note: You might have to discuss macroeconomic concepts to explain to students why cost-plus pricing isn’t the best approach. The idea that supply and demand balance in a dynamic and impersonal marketplace may require a leap of faith abstraction most students aren’t willing to make. Perceived Fairness to Both Buyers and Sellers

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.

Breakeven Analysis or Target Profit Pricing
This CTR corresponds to Figure 10-6 on p. 315 and relates to the discussion on pp Tries to Determine the Price at Which a Firm Will Break Even or Make a Target Profit 200 400 600 800 1,000 1,200 10 20 30 40 50 Total Revenue Cost in Dollars (thousands) Other Cost-Oriented Approaches Breakeven Analysis. Breakeven analysis utilizes an analysis of the company's costs in relation to units of the product produced and sold. This approach identifies the minimum pricing level the company's activities can support. Teaching Tip: You might ask students doing a term marketing project to include a break-even chart in their financial projections. Target Profit Pricing. Target profit pricing is a variation on break-even analysis that links price to profit objectives above total costs. Discussion Note: Target profit pricing is mathematically appealing but be sure students understand that its use in planning should accommodate the fact that increased prices decrease demand. Target Profit ($200,000) Total Cost Fixed Cost Sales Volume in Units (thousands)

Discussion Question Assume the following costs:
Fixed costs (FC): $ 500,000 Variable cost/unit (VC): $ 10.00 Recalling that BE = FC/(P-VC), calculate the break-even unit volume at selling prices of $15.00 and $20.00 per unit. How many units would need to be sold if a profit of $250,000 was desired?

Value-Based Pricing Product Cost Price Value Customers Customer Value
This CTR corresponds to Figure 10-7 on p. 316 and relates to the discussion on pp Cost-Based Pricing Value-Based Pricing Product Cost Price Value Customers Customer Value Price Cost Product Buyer-Based Approach Value-Based Pricing . This approach uses the buyer's perception of value as the key to pricing. Strategy under this approach utilizes non price mix variables to help set perceived value in the buyer's mind. As illustrated on the CTR, this approach is the reverse of the cost-based approach to pricing. The key is that the marketer must have an accurate view of what benefits and features consumer want and are willing to pay for in setting a specific value-pricing goal. Discussion Note: Toyota Motor company used a value-based approach on its lower end cars like the Tercel and the Corolla in the early 1980s. Once the value price was determined and profit per car objectives set, engineers and designers were challenged with the task of making the cost of production support those goals.

Perceived value reflects more than just the functional benefits of a product. The pen at left costs $185.00

Value-Based Pricing: Business-to-business firms seek to retain pricing power Value-added strategies can help Value pricing at the retail level Everyday low pricing (EDLP) vs. high-low pricing

Competition-Based Pricing
Setting Prices Competition-Based Pricing Competition-Based Pricing This CTR relates to the discussion on pp Going-Rate Company Sets Prices Based on What Competitors Are Charging. Competition-Based Approach Going-Rate Pricing. This approach bases price largely on what competitors charge for their products. This approach is popular in markets where demand elasticity is difficult to measure. Sealed-Bid Pricing. This approach involves competition between sellers attempting to under price each other while still covering costs. Winning a sealed bid contract requires careful estimation of competitor's costs and likely profit margins to bid successfully. This approach is common in bidding for government contracts. Teaching Tip: You might consider giving students an out of class assignment to obtain bids on one or more projects from cooperating vendors in your area. For example, a two-car garage pricing might vary by 100% among three contractors in a sealed bid. Sealed-Bid Company Sets Prices Based on What They Think Competitors Will Charge. ? ?

BusinessNow Metreo Video Clip
Pricing in business-to-business sales is often negotiable. Metreo’s software helps companies make pricing decisions. Click the picture above to play video

New Product Pricing Strategies
This CTR relates to the material on pp New Product Pricing Strategies Market Skimming Market Penetration Pricing Innovative Products Market Skimming Pricing. Market skimming pricing is the strategy of setting high initial prices to skim maximum profits from each successive layer of the target market. Setting a High Price for a New Product to Maximize Revenues from the Target Market. Results in Fewer, More Profitable Sales. Setting a Low Price for a New Product in Order to Attract a Large Number of Buyers. Results in a Larger Market Share. Skimming strategies typically set a price as high as some segments will bear. Once all customers within this segment have purchased, prices are lowered only so far as the next segment needs to be persuaded to buy. Skimming usually works well only when: Product Distinctiveness. Product quality, image, and innovation are sufficiently distinct to support a high price. Costs of Small Production Runs. The costs of producing small volume are not prohibitive. Barriers to Entry. Competitors should not be able to enter the market easily and undercut the high price. Market Penetration Pricing. Some innovations are priced low upon introduction in order to capture large market share quickly thus penetrating the market. High volume results in lower costs, which helps keep prices low. Several conditions favor penetration pricing: Price Sensitive Markets. Highly price-sensitive markets with very large volume potential so that low price produces more market growth are needed. Falling Costs. Production and distribution costs must fall as sales volume increases. Barriers to Entry. Here the low costs must generate a sustainable advantage that cannot easily be duplicated by competitors. Discussion Note: Penetration pricing may also accelerate overall market adoption rates thus supporting low price continuance that may discourage competitors from entering the market.

Which pricing strategy does Dell appear to use?

Product Mix Pricing Strategies
Product Line Pricing Setting Price Steps Between Product Line Items i.e. $299, $399 Optional-Product Pricing Pricing Optional or Accessory Products Sold With The Main Product i.e. Car Options Product Mix Pricing Strategies Product-Mix Pricing Strategies This CTR corresponds to Table 11-1 on p. 331 and the relates to the material on pp Captive-Product Pricing Pricing Products That Must Be Used With The Main Product i.e. Razor Blades, Film, Software By-Product Pricing Pricing Low-Value By-Products To Get Rid of Them i.e. Lumber Mills, Zoos Product Mix Pricing Strategies Product-Mix Pricing Strategies Product Line Pricing. Companies usually develop product lines rather than single products. In product line pricing, management must decide on the price steps to set between each product in the line. Companies often use price points to target distinctive combinations of product features and value represented by a particular price. Optional-Product Pricing. Under this strategy, the company offers a base product and prices differently for each combination of additional features or options added to the base product as desired by the customer. Automobile pricing is famous -- or infamous -- for this practice. But many manufacturers use optional-product pricing, such as personal computer makers. Captive-Product Pricing. Under this strategy, producers price products that must be used with a main product. The text describes razor blades as an example. The razor is priced low while high markups are attached to the price of the blades. Discussion Note: Students should distinguish captive pricing from optional pricing on the basis of need versus convenience. When Apple Computer prices its keyboards separately from its computers, it is practicing captive-product pricing. When it offers additional RAM beyond the included board memory, it is practicing optional-product pricing. By-Product Pricing. Waste from production and distribution may be marketable as by-products. Selling by-products allows producers to lower prices and costs on their main products. Otherwise, the prices of main products must cover the disposable or storage of by- products. Product-Bundle Pricing. This strategy combines several products and offers them at a reduced price from the cost of each product purchased separately. Season tickets and group rates are examples. Product-Bundle Pricing Pricing Bundles Of Products Sold Together i.e. Season Tickets, Computer Makers

Product Mix-Pricing Strategies: Product Line Pricing
Involves setting price steps between various products in a product line based on: Cost differences between products, Customer evaluations of different features, and competitors’ prices.

Product Line Pricing Setting price steps between product line items. Price points

Optional-Product Pricing Pricing optional or accessory products sold with the main product Supplemental software, digital cameras, and printers sold with a new PC are examples

Captive-Product Pricing Pricing products that must be used with the main product High margins are often set for supplies Services: two-part pricing strategy Fixed fee plus a variable usage rate

By-Product Pricing Pricing of low-value by-products to get rid of them

Product Bundle Pricing Pricing bundles of products sold together Common in fast food industry

Price-Adjustment Strategies
Price Adjustment Strategies I This CTR corresponds to Table 11-2 on p. 334 and relates to the material on pp Price-Adjustment Strategies Discount & Allowance Reducing Prices to Reward Customer Responses such as Paying Early or Promoting the Product. Segmented Adjusting Prices to Allow for Differences in Customers, Products, or Locations. Price Adjustment Strategies Companies typically adjust their prices to account for various customer differences and changing situations: Cash Discount Customer Discount and Allowance Pricing. Several forms of discount and allowance pricing are used by marketers: Cash Discounts. These are price reductions to buyers who pay bills promptly. Quantity Discounts. These refer to price reductions per unit on large volumes. Functional Discounts. These are granted to channel members who perform various marketing functions. Seasonal Discounts. These are granted to buyers who purchase merchandise out of season. Allowances. These are discounts such as trade-ins for turning in old items on new purchases or promotional allowances for participating in seller sponsored advertising can also lower buyer prices. Segmented Pricing. Segmented pricing refers to pricing differences not based on costs and takes several forms: Customer-segment pricing. These target a specific segment, as in senior citizen discounts. Product-form pricing. This varies costs on versions of a product by features but not production costs. Location pricing. This stems from preferences where different locations have different perceived values, such as seating in a theater. Time pricing. This refers to price breaks given at times of lower demand. Quantity Discount Product Form Functional Discount Location Seasonal Discount Time Trade-In Allowance

Price-Adjustment Strategies
Adjustment Strategies - II This CTR corresponds to Table 11-2 on p. 334 and relates to the discussion on pp Psychological Pricing Price-Adjustment Strategies Promotional Pricing Adjusting Prices for Psychological Effect. Price Used as a Quality Indicator. Geographical Pricing Temporarily Reducing Prices to Increase Short-Run Sales. i.e. Loss Leaders, Special-Events Psychological Pricing. A key component in psychological pricing is the reference price consumers carry in their mind when considering sellers prices. Promotional Pricing. Promotional prices are temporary reductions below list and sometimes below costs, used to attract customers: Loss leaders. These may be offered below costs to attract attention to an entire line. Special event. This type of pricing may be used during slow seasons. Cash rebates or low financing. These “extras” may bring in customers “on the brink” and help them to decide to finally purchase. Geographical Pricing. Several forms of geographical pricing are common: FOB-Origin. Free On Board has customer pay freight. Uniform Delivered. Here the company charges the same price to all. Zone. Zone uses different areas pay different prices on freight but all customers within the same area pay the same freight charges. Basing-Point. Under this system, all customers charged freight from a specified billing location. Freight-Absorption. Here the seller pays all or part of the shipping costs to get the desired business. International Pricing. Firms may charge the same price throughout the world, especially for high-ticket, high-tech products like jetliners. Or it may offer different prices based upon differing taxes, tariffs, distribution, and promotion costs. International Pricing Adjusting Prices to Account for the Geographic Location of Customers. Adjusting prices to foreign markets.

BusinessNow Metreo Video Clip
Whether or not to match competitor’s pricing in an attempt to win a sale is a question faced by many B2B marketers. Clicking the Video Clip icon will launch a short video (typically between 20 seconds and 1 minute in length) extracted from one of the BusinessNow Video shorts that accompany the text. You must have RealPlayer, QuickTime, or Windows Media Player installed for the video clip to function correctly. From the VIEW menu, select COMMENTS to hide this box. Click the picture above to play video

Price Changes Initiating Price Cuts is Desirable When a Firm:
Has excess capacity Faces falling market share due to price competition Desires to be a market share leader

Price Changes Price Increases are Desirable:
If a firm can increase profit, faces cost inflation, or faces greater demand than can be supplied.

Price Changes Methods of Increasing Price
Eliminating discounts Adding higher-priced units to the product line Alternatives to Increasing Price Reducing product size Using less expensive materials Unbundling the product

Price Changes Competitors are more likely to react to price changes under certain conditions. Number of firms is small Product is uniform Buyers are well informed

Price Changes Respond To Price Changes Only If:
Market share / profits will be negatively affected if nothing is changed. Effective action can be taken: Reducing price Raising perceived quality Improving quality and increasing price Launching low-price “fighting brand”

Price-Quality Association
Tend to be stronger when Tend to be weaker when Empirical evidence Correlation: .25 25% of the cases:

Public Policy Issues in Pricing
Price Fixing sellers must set prices without talking to competitors Price Discrimination sellers must offer the same price terms to a given level of trade (may be permitted if seller can prove costs are different to different retailers - must be used in good faith) Deceptive Pricing seller states prices that are not available to consumers

Public Policy Issues in Pricing continued
Predatory Pricing selling below cost to destroy competition (Wal-Mart pharmacy case) Resale Price Maintenance manufacturer can not require dealers to charge a specific price, they can however suggest .

C Priceline.com “Buyer-driven commerce” concept offers lower prices to consumers and the ability to sell excess inventory to sellers 13.5 million user.

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C Priceline.com “Buyer-driven commerce” concept offers lower prices to consumers and the ability to sell excess inventory to sellers 13.5 million user.

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