1. Chapter 1 Pricing Considerations and Strategies7
Pricing Considerations and Strategies

2. ROAD MAP: Previewing the Concepts
Identify and explain the external and internal factors affecting a firm's pricing decisions.
Contrast the three general approaches to setting prices.
Describe the major strategies for pricing imitative and new products.
Explain how companies find a set of prices that maximizes the profits from the total product mix.
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.
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3. Synonyms for Price Special assessment Rent Bribe Tuition Dues Fee
Salary
Commission
Wage
Tax
Rent
Tuition
Fee
Fare
Rate
Toll
Premium
Honorarium
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4. Possible Consumer Reference Prices
“Fair price”
Typical price
Last price paid
Upper-bound price
Lower-bound price
Competitor prices
Expected future price
Usual discounted price
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5. What is a Price?
Narrowly, price is the amount of money charged for a product or service.
Broadly, price is the sum of all the values that consumers exchange for the benefits of having or using the product or service.
Dynamic Pricing: charging different prices depending on individual customers and situations.
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6. The Internet and Pricing Effects
Buyers can:
-Get instant price comparisons from vendors: PriceScan.com
-Name their price and have it met: Priceline.com
Sellers can:
-Monitor customer behavior and tailor offers to individuals.
-Giver certain customers access to special prices: CDNOW
Both buyers and sellers can:
-Negotiate prices in online auctions and exchanges: eBay
Kotler and Keller (2006)
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7. ROAD MAP
Identify and explain the external and internal factors affecting a firm's pricing decisions.
Contrast the three general approaches to setting prices.
Describe the major strategies for pricing imitative and new products.
Explain how companies find a set of prices that maximizes the profits from the total product mix.
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.
Professor Takada

8. Factors Affecting Pricing Decisions
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9. Internal Factors Affecting Pricing Decisions
Marketing Mix Strategy:
Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective marketing program.
Target costing:
Pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met.
Marketing Objectives:
Company must decide on its strategy for the product.
General Objectives:
Survival, current profit maximization, market share leadership, and product quality leadership.
Organizational Considerations:
Must decide who within the organization should set prices.
This will vary depending on the size and type of company.
Costs:
Fixed Costs:
Costs that do not vary with production or sales level.
Variable Costs:
Costs that vary directly with the level of production.
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10. Product Quality Leadership
Four Seasons starts with very high-quality service—”we await you with the perfect sanctuary.” It then charges a price to match.
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11. External Factors Affecting Pricing Decisions Market and Demand Pricing in Different Types of Markets
Pure Competition:
Many buyers and sellers
where each has little effect
on the going market price
Monopolistic Competition:
Many buyers and sellers
who trade over a
range of prices
Oligopolistic Competition:
Few sellers who are
sensitive to each other’s
pricing/marketing strategies
Pure Monopoly:
Market consists of a
single seller
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12. Determining Demand Price Sensitivity Estimating Demand Curves
Price Elasticity
of Demand
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13. Price Elasticity of Demand
Demand Curve
Upward Sloping Demand Curve
Gibson was surprised to learn that its high-quality instruments did not sell as well at lower prices.
Price Elasticity of Demand
Elastic demand
Inelastic demand
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14. Inelastic and Elastic Demand
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15. ROAD MAP
Identify and explain the external and internal factors affecting a firm's pricing decisions.
Contrast the three general approaches to setting prices.
Describe the major strategies for pricing imitative and new products.
Explain how companies find a set of prices that maximizes the profits from the total product mix.
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.
Professor Takada

16. Major Considerations in Setting Price
Cost-based pricing
Cost-plus pricing
Break-even pricing
(Target profit pricing)
Competition-based pricing
Value-based pricing
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17. Cost-Plus Pricing Adding a standard markup to the cost of the product.
Popular because:
Sellers more certain about cost than demand
Simplifies pricing
When all sellers use, prices are similar and competition is minimized
Some feel it is more fair to both buyers and sellers
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18. Step 3: Estimating Costs
Types of Costs
Accumulated
Production
Activity-Based
Cost Accounting
Target Costing
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19. Cost Terms and Production
Fixed costs
Variable costs
Total costs
Average cost
Cost at different levels of production
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20. Cost per Unit as a Function of Accumulated Production
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21. Target Profit Pricing (Break-Even Analysis)
At break even: Total revenue=Total cost
Total revenue = Price ($15)*Quantity sold
Total cost = Fixed cost + Variable cost ($5 per unit)* units sold
What is the sales volume to break even?
If price is raised to $20, how does this change affect the above analysis?
If the company decides to increase advertising by $1million, how does this affect 　　the break even point?
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22. Value-Based Pricing
Uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing.
Wal-Mart, EDLP
What does value mean?
Does “value” mean the same thing as “low price”?
How do these concepts differ?
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23. Competition-Based Pricing
Going-Rate Pricing:
Firm bases its price largely on competitors’ prices, with less attention paid to its own costs or to demand.
Sealed-Bid Pricing:
Firm bases its price on how it thinks competitors will price rather than on its own costs or on demand.
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24. Price Tiers in the Ice Cream Market
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25. ROAD MAP
Identify and explain the external and internal factors affecting a firm's pricing decisions.
Contrast the three general approaches to setting prices.
Describe the major strategies for pricing imitative and new products.
Explain how companies find a set of prices that maximizes the profits from the total product mix.
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.
Professor Takada

26. New-Product Pricing Strategies
Chapter 1
New-Product Pricing Strategies
Market-Skimming
Set a high price for a new product to “skim” revenues layer by layer from the market.
Company makes fewer, but more profitable sales.
Market Penetration
Set a low initial price in order to “penetrate” the market quickly and deeply.
Can attract a large number of buyers quickly and win a large market share.
When to use:
Product’s quality and image must support its higher price.
Costs of smaller volume cannot be so high they cancel the advantage of charging more.
Competitors should not be able to enter market easily and undercut the high price.
When to use:
Market must be highly price sensitive so a low price produces more market growth.
Production and distribution costs must fall as sales volume increases.
Must keep out competition and maintain low price or effects are only temporary.
Which strategy is employed by Sony, Dell, Wal-Mart, and Apple iPod?
Why?
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27. ROAD MAP
Identify and explain the external and internal factors affecting a firm's pricing decisions.
Contrast the three general approaches to setting prices.
Describe the major strategies for pricing imitative and new products.
Explain how companies find a set of prices that maximizes the profits from the total product mix.
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.
Professor Takada

28. Product Mix Pricing Strategies
Product line pricing
Optional-product pricing
Captive-product pricing
By-product pricing
Product bundle pricing
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29. 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
Competitors’ prices
Optional- and Captive-Product Pricing
Optional-Product
Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator).
Captive-Product
Pricing products that must be used with the main product (e.g., replacement cartridges for Gillette razors).
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30. Product Mix Pricing Strategies
By-Product Pricing:
Setting a price for by-products in order to make the main
product’s price more competitive (e.g., sawdust and
Zoo Doo)
Product Bundle Pricing:
Combining several products and offering the bundle
at a reduced price (e.g., computer with software and
Internet access).
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31. ROAD MAP
Identify and explain the external and internal factors affecting a firm's pricing decisions.
Contrast the three general approaches to setting prices.
Describe the major strategies for pricing imitative and new products.
Explain how companies find a set of prices that maximizes the profits from the total product mix.
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.
Professor Takada

32. Price-Adjustment Strategies
Discounts and allowances
Segmented pricing
Psychological pricing
Promotional pricing
Geographical pricing
International pricing
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33. Discounts and Allowances
Cash
Quantity
Functional
Seasonal
Trade-In
Promotional
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34. Segmented Pricing
Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs.
Types:
Customer-segment
Product-form
Location pricing
Time pricing
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35. Psychological Pricing
Considers the psychology of prices and not simply the economics.
Consumers usually perceive higher-priced products as having higher quality.
Consumers use price less when they can judge quality of a product.
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36. Promotional Pricing Approaches:
Chapter 1
Promotional Pricing
Temporarily pricing products below list price and sometimes even below cost to create buying excitement and urgency.
Low-Interest Financing
Loss Leaders
Approaches:
Special-Event Pricing
Longer Warranties
Cash Rebates
Free Maintenance
Discounts
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37. Geographical Pricing FOB-origin pricing Uniform-delivered pricing
Zone pricing
Basing-point pricing
Freight-absorption pricing
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38. International Pricing
Price depends on many factors, including:
Economic conditions
Competitive situations
Laws and regulations
Development of the wholesaling and retailing system
Costs
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39. ROAD MAP
Identify and explain the external and internal factors affecting a firm's pricing decisions.
Contrast the three general approaches to setting prices.
Describe the major strategies for pricing imitative and new products.
Explain how companies find a set of prices that maximizes the profits from the total product mix.
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.
Professor Takada

40. Initiating Price Changes
Price Cuts
Price Increases
Excess Capacity
Falling Market
Share
Dominate Market
Through Lower
Costs
Cost Inflation
Overdemand:
Cannot Supply
All Customers’
Needs
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41. Interactive Student Assignment
Chapter 1
Choose a partner and consider the following.
What would you think if Mercedes suddenly lowered its prices on its cars?
What would you think if Mercedes suddenly raised its prices on its cars?
Why?
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42. Assessing and Responding to Competitor Price Changes
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43. Price-Reaction Program for Meeting Competitor’s Price Cut
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44. Public Policy and Pricing
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45. Rest Stop: Reviewing the Concepts
Chapter 1
Rest Stop: Reviewing the Concepts
Identify and define the external and internal factors affecting a firm's pricing decisions.
Contrast the three general approaches to setting prices.
Describe the major strategies for pricing imitative and new products.
Explain how companies find a set of prices that maximizes the profits from the total product mix.
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.
Professor Takada