1. Pricing Considerations and Strategies 9

2. 9-2 ROAD MAP: Previewing the Concepts Identify and explain the external and internal factors affecting a firm's pricing decisions. Identify and explain the external and internal factors affecting a firm's pricing decisions. Contrast the three general approaches to setting prices. Contrast the three general approaches to setting prices. Describe the major strategies for pricing imitative and new products. 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. 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 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. Discuss the key issues related to initiating and responding to price changes.

3. 9-3 What is a Price? Narrowly, price is the amount of money charged for a product or service. 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. 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. Dynamic Pricing: charging different prices depending on individual customers and situations.

4. 9-4 Dynamic Pricing The Internet is ushering in a new era of fluid pricing. PriceSCAN.com is an independent site that provides product comparisons and guides, and searches all merchant sites for the best prices.

5. 9-5 Factors Affecting Pricing Decisions

6. 9-6 Internal Factors Affecting Pricing Decisions Marketing Objectives: Marketing Objectives: –Company must decide on its strategy for the product. –General Objectives: Survival, current profit maximization, market share leadership, and product quality leadership. Survival, current profit maximization, market share leadership, and product quality leadership.

7. 9-7 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.

8. 9-8 Internal Factors Affecting Pricing Decisions Marketing Mix Strategy: 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. Pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met.

9. 9-9 Internal Factors Affecting Pricing Decisions Costs: Costs: –Fixed Costs: Costs that do not vary with production or sales level. Costs that do not vary with production or sales level. –Variable Costs: Costs that vary directly with the level of production. Costs that vary directly with the level of production.

10. 9-10 Internal Factors Affecting Pricing Decisions Organizational Considerations: Organizational Considerations: –Must decide who within the organization should set prices. –This will vary depending on the size and type of company.

11. 9-11 External Factors Affecting Pricing Decisions The Market and Demand: The Market and Demand: –Costs set the lower limit of prices. –The market and demand set the upper limit.

12. 9-12 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 Pure Monopoly: Market consists of a single seller Oligopolistic Competition: Few sellers who are sensitive to each other’s pricing/marketing strategies

13. 9-13 Demand Curve A curve that shows the number of units the market will buy in a given time period, at different prices that might be charged.

14. 9-14 Upward Sloping Demand Curve Gibson was surprised to learn that its high-quality instruments did not sell as well at lower prices.

15. 9-15 Major Considerations in Setting Price

16. 9-16 Cost-Plus Pricing Adding a standard markup to the cost of the product. Adding a standard markup to the cost of the product. Popular because: 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

17. 9-17 Break-Even Chart

18. 9-18 Value-Based Pricing Uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing. Uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing.

19. 9-19 Perceived Value A less expensive piano might play well, but would it take you places your have never been before?

20. 9-20 Competition-Based Pricing Going-Rate 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: Sealed-Bid Pricing: –Firm bases its price on how it thinks competitors will price rather than on its own costs or on demand.

21. 9-21 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. When to use: 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.

22. 9-22 New-Product Pricing Strategies 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: 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.

23. 9-23 What type of pricing strategy is used when new drugs are released by pharmaceutical companies? What type of pricing strategy is used when new drugs are released by pharmaceutical companies? Why? Why? Discussion Question

24. 9-24 Product Line Pricing Involves setting price steps between various products in a product line based on: Involves setting price steps between various products in a product line based on: –Cost differences between products –Customer evaluations of different features –Competitors’ prices

25. 9-25 Optional- and Captive-Product Pricing Optional-Product Optional-Product –Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator). Captive-Product Captive-Product –Pricing products that must be used with the main product (e.g., replacement cartridges for Gillette razors).

26. 9-26 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).

27. 9-27 Product Bundle Pricing CityPASS bundles tickets to many attractions at a low combined price.

28. 9-28 Discounts and Allowances Cash Quantity Functional Seasonal Trade-In Promotional Discounts Allowances

29. 9-29 Segmented Pricing Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. Types: Types: 1.Customer-segment 2.Product-form 3.Location pricing 4.Time pricing

30. 9-30 Psychological Pricing Considers the psychology of prices and not simply the economics. Considers the psychology of prices and not simply the economics. Consumers usually perceive higher-priced products as having higher quality. Consumers usually perceive higher-priced products as having higher quality. Consumers use price less when they can judge quality of a product. Consumers use price less when they can judge quality of a product.

31. 9-31 Promotional Pricing Special-Event Pricing Cash Rebates Low-Interest Financing Longer Warranties Free Maintenance Discounts Loss Leaders Temporarily pricing products below list price and sometimes even below cost to create buying excitement and urgency. Approaches:

32. 9-32 Promotional Pricing Companies offer promotional prices to create buying excitement and urgency.

33. 9-33 Geographical Pricing FOB-origin pricing FOB-origin pricing Uniform-delivered pricing Uniform-delivered pricing Zone pricing Zone pricing Basing-point pricing Basing-point pricing Freight-absorption pricing Freight-absorption pricing

34. 9-34 International Pricing Price depends on many factors, including: Price depends on many factors, including: –Economic conditions –Competitive situations –Laws and regulations –Development of the wholesaling and retailing system –Costs

35. 9-35 International Pricing Companies must decide what prices to charge in different countries.

36. 9-36 Initiating Price Changes Excess Capacity Falling Market Share Dominate Market Through Lower Costs Cost Inflation Overdemand: Cannot Supply All Customers’ Needs Price Cuts Price Increases

37. 9-37 Choose a partner and consider the following. 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? Interactive Student Assignment

38. 9-38 Buyers’ Reactions to Price Changes What would you think if the price of Joy was suddenly cut in half?

39. 9-39 Assessing and Responding to Competitor Price Changes

40. 9-40 Public Policy and Pricing

41. 9-41 Rest Stop: Reviewing the Concepts 1. Identify and define the external and internal factors affecting a firm's pricing decisions. 2. Contrast the three general approaches to setting prices. 3. Describe the major strategies for pricing imitative and new products. 4. Explain how companies find a set of prices that maximizes the profits from the total product mix. 5. Discuss how companies adjust their prices to take into account different types of customers and situations. 6. Discuss the key issues related to initiating and responding to price changes.

42. 9-42 Q: Which of the following statements best represents your opinion about the pricing issue between brand name versus generic AIDS drugs? 1. Like all firms, big drug companies have the right to charge for their products whatever the market will bear and to enjoy the full benefit of patents in which they invested great amounts of time and resources. 1. Like all firms, big drug companies have the right to charge for their products whatever the market will bear and to enjoy the full benefit of patents in which they invested great amounts of time and resources. 2. To help South Africa with its public health crisis, the drug companies should have either offered their products to South African AIDS patients at discounts or taken no action when South Africa sought affordable alternatives AK, 7e – Chapter 9

43. 9-43 Q: You introduce a moderately priced motorcycle and position it in terms of value, hoping that you will gradually come to dominate the market. Through your pricing strategy to expand your share of the market, you are pursuing: 1. market-share leadership. 1. market-share leadership. 2. survival. 2. survival. 3. product-quality leadership. 3. product-quality leadership. 4. profit maximization. AK, 7e – Chapter 9

44. 9-44 Q: If you knew that soft drink vending machines adjusted prices according to the temperature, would you still purchase drinks from them? 1. Yes 2. No AK, 7e – Chapter 9

45. 9-45 Q: Because your competitor’s motorcycles perform equal to yours, you need to differentiate your products through pricing and marketing strategies, which will be mirrored by your competition. Thus, your firm works under conditions of: 1.monopolistic competition. 1.monopolistic competition. 2. oligopolistic competition. 2. oligopolistic competition. 3. pure monopoly. 3. pure monopoly. 4. pure competition. AK, 7e – Chapter 9

46. 9-46 Q: Initially, you price you new motorcycle at $30,000, but you must drop the price to $28,000 to meet your broad objective. Consequently, demand for the new motorcycle jumps by 40 percent, because the demand for this product is highly: 1. inelastic 1. inelastic 2. unpredictable 2. unpredictable 3. elastic 3. elastic 4. variable AK, 7e – Chapter 9

47. 9-47 Q: To capture a market share as quickly and inexpensively as possible with your new cosmetics company, you determine the lowest prices you can set and still turn a quick profit. Once you have done so, you begin developing products that match those prices, setting your price according to: 1. break-even pricing. 1. break-even pricing. 2. competitive targeting. 2. competitive targeting. 3. target costing. 3. target costing. 4. oligopolisitc pricing. AK, 7e – Chapter 9

48. 9-48 Q: If the aforementioned approach doesn’t work, you find yourself struggling to survive. To stabilize your position, you tally up the cost of producing your cosmetics and then set a price that will just enable you to recover those costs, employing 1. break-even pricing. 1. break-even pricing. 2. value-based pricing. 2. value-based pricing. 3. cost-plus pricing. 3. cost-plus pricing. 4. target-profit pricing. AK, 7e – Chapter 9

49. 9-49 Q: A chain of budget drugstores will allow you to offer cosmetics at slightly higher prices, as long as you also offer frequent discounts and sales. The chain will require you to use: 1. everyday low pricing. 1. everyday low pricing. 2. competition-based pricing. 2. competition-based pricing. 3. sealed-bid pricing. 3. sealed-bid pricing. 4. high-low pricing. AK, 7e – Chapter 9

50. 9-50 Q: Through _________ pricing, a business formulates prices according to consumers’ perceptions of what they get for the price they pay. 1. target-profit 1. target-profit 2. break-even 2. break-even 3. value-based 3. value-based 4. cost-based AK, 7e – Chapter 9

51. 9-51 Q: A retailer decides to mark up DVDs at 25 percent on the sales price. If she buys DVDs from a wholesaler for $15, what should be her selling price for DVDs? 1. $18.75. 1. $18.75. 2. $17.50. 2. $17.50. 3. $20.00. 3. $20.00. 4. $22.50. AK, 7e – Chapter 9

52. 9-52 Q: Market penetration pricing works best when all the following conditions are met except: 1. consumers are price sensitive. 1. consumers are price sensitive. 2. production and distribution costs fall as sales volume rises. 2. production and distribution costs fall as sales volume rises. 3. the low prices keep competitors at bay. 3. the low prices keep competitors at bay. 4. the product has a premium image. AK, 7e – Chapter 9

53. 9-53 Q: Setting a low initial price for a new product is called: 1. market penetration. 1. market penetration. 2. market skimming. 2. market skimming. 3. product line pricing. 3. product line pricing. 4. functional discounting. AK, 7e – Chapter 9

54. 9-54 Q: When a business separately prices the accessory products sold with the main product, it is employing: 1. a functional discount. 1. a functional discount. 2. captive-product pricing. 2. captive-product pricing. 3. optional-product pricing. 3. optional-product pricing. 4. market-penetration pricing. AK, 7e – Chapter 9

55. 9-55 Q: Through_________, a business combines several products and offers that set at a reduced price. 1. price increases 1. price increases 2. international pricing 2. international pricing 3. psychological pricing 3. psychological pricing 4. product bundle pricing AK, 7e – Chapter 9

56. 9-56 Q: When the Zoo Doo company started selling a zoo’s animal manure as fertilizer, it was practicing: 1. optional-product pricing. 1. optional-product pricing. 2. product line pricing. 2. product line pricing. 3. captive-product pricing. 3. captive-product pricing. 4. by-product pricing. AK, 7e – Chapter 9

57. 9-57 Q: When a business separately prices the accessory products sold with the main product, it is employing: 1. a functional discount. 1. a functional discount. 2. captive-product pricing. 2. captive-product pricing. 3. optional-product pricing. 3. optional-product pricing. 4. market-penetration pricing. AK, 7e – Chapter 9

58. 9-58 Q: Many retailers never sell products at high manufacturer’s suggested retail prices (MSRPs), and list high MSRPs only to attract customers with promises of big savings. Is this practice deceptive pricing? 1. Yes. If the retailers haven’t sold anything at a given MSRP, why use it as a comparative standard? 2. No. The MSRP is there as a rough reference point, and it is up to the consumers to know that nobody buys or sells at that price. AK, 7e – Chapter 9

59. 9-59 Q: By using _________, a business can reduce prices temporarily to increase short-term sales. 1. market-skimming pricing 1. market-skimming pricing 2. promotional pricing 2. promotional pricing 3. by-product pricing 3. by-product pricing 4. seasonal discounts AK, 7e – Chapter 9

60. 9-60 Q: Zone pricing, uniform- delivered pricing, and basing- point pricing are types of: 1. scanner fraud. 1. scanner fraud. 2. captive-product pricing. 2. captive-product pricing. 3. geographical pricing. 3. geographical pricing. 4. new-product pricing. AK, 7e – Chapter 9

61. 9-61 Q: A "2/10, net 30" discount means: 1. the buyer gets a 0.2 (i.e., 20 percent) discount if the payment is made in 30 days. 1. the buyer gets a 0.2 (i.e., 20 percent) discount if the payment is made in 30 days. 2. the buyer has to pay the net amount between the second and the tenth day from purchase. 2. the buyer has to pay the net amount between the second and the tenth day from purchase. 3. the payment is due in 30 days, however, if the buyer pays within the first 10 days, it gets a two percent discount. 3. the payment is due in 30 days, however, if the buyer pays within the first 10 days, it gets a two percent discount. 4. the discount can vary from two to 10 percent, depending on when it is paid within the 30-day payment period. AK, 7e – Chapter 9

62. 9-62 Q: Discounts offered to channel members for services they provide are called: 1. functional discounts. 1. functional discounts. 2. quantity discounts. 2. quantity discounts. 3. cash discounts. 3. cash discounts. 4. seasonal discounts. AK, 7e – Chapter 9

63. 9-63 Q: When confronted with cost inflation, a business may need to: 1. remix its products. 1. remix its products. 2. raise its prices. 2. raise its prices. 3. fix prices with competitors. 3. fix prices with competitors. 4. all the above. AK, 7e – Chapter 9

64. 9-64 Q: A company can react to a competitor’s price change in all the following ways except: 1. price fixing. 1. price fixing. 2. reducing its own prices. 2. reducing its own prices. 3. raising the perceived quality of its products. 3. raising the perceived quality of its products. 4. launching a fighting brand. AK, 7e – Chapter 9

65. 9-65 Q: All the following are common motives for price cuts except: 1. excess capacity. 1. excess capacity. 2. overdemand. 2. overdemand. 3. strong price competition. 3. strong price competition. 4. market domination. AK, 7e – Chapter 9

66. 9-66 Q: Assume a company’s profit margin is 4 percent of sales. Assuming sales volume remains unchanged, increasing the price by 1 percent will lead to a profit increase of: 1. 1 percent. 1. 1 percent. 2. 5 percent. 2. 5 percent. 3. 20 percent. 3. 20 percent. 4. 25 percent. AK, 7e – Chapter 9

67. 9-67 Q: Through _________, a business sells its products below cost in order to punish competitors or put them out of business. 1. predatory pricing 1. predatory pricing 2. promotional pricing 2. promotional pricing 3. cash discounts 3. cash discounts 4. allowances AK, 7e – Chapter 9

68. 9-68 Q: When a retailer states prices or price savings that mislead consumers or are not actually available to consumers, the retailer is said to be practicing: 1. predatory pricing. 1. predatory pricing. 2. scam pricing. 2. scam pricing. 3. deceptive pricing. 4. discriminatory pricing. AK, 7e – Chapter 9