1. Marketing: Real People, Real Decisions Pricing Methods Chapter 13 Lecture Slides Solomon, Stuart, Carson, & Smith Your name here Course title/number Date

2. Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.13-2 Chapter Learning Objectives When you have completed your study of this chapter, you should be able to: Understand key pricing strategies. Explain pricing tactics for individual and multiple products. Describe the psychological aspects of pricing. Understand some of the legal and ethical considerations in pricing.

3. Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.13-3 Introduction to the Topic This chapter picks up from where the previous discussion on pricing left off, namely, the need to determine what pricing strategy would be the most effective way for the organization to achieve its objectives. Companies have a choice of pricing strategies: –Based on costs –Based on demand –Based on the competition –Strategies for new products It might help to remember that to be effective, any choice of pricing strategy must take into account the customer’s willingness to pay and the concept of perceived value. Figure 13.1

4. Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.13-4 Pricing Strategies Cost-plus pricing: a method of setting prices in which the seller totals all the costs for the product and then adds the desired profit per unit. Companies may add a fixed percentage to their costs using a markup, or they may calculate prices based on a desired gross margin. Example of markup on cost: marking up a $1 item by 33% yields a gross profit margin of 25%. Example of markup on selling price: desiring a 35% gross margin on a $1 product, the calculation would be $1 divided by (1-.35), equals a selling price of $1.54. Figure 13.1

5. Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.13-5 Pricing Strategies (continued) Price-floor pricing: a method for calculating price in which, to maintain full plant operating capacity, a portion of a firm’s output may be sold at a price that covers only marginal costs of production. This would be only a temporary measure to ensure operating at capacity, as it does not provide for the covering of fixed expenses, which need to be paid eventually or the company goes broke. Cost-based pricing strategies are easy to use and apply, but they bear little relation to the customer’s willingness to pay or the competitive environment for the company’s products. For that, we need to look at demand- based pricing strategies. Figure 13.1

6. Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.13-6 Pricing Strategies (continued) Demand-based pricing: a price-setting method based on estimates of demand at different prices. This requires finding out what the customer is willing to pay, which can be difficult. Companies would conduct marketing research such as test markets to determine the product’s elasticity of demand. Demand-backward pricing: pricing strategy that starts with what customers are willing to pay, followed up with cost management strategies to hold costs to a satisfactory level. This is the marketing concept in action, but it can be difficult to implement unless the customer’s willingness to pay is fairly close to the company’s costs. Figure 13.1

7. Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.13-7 Pricing Strategies (continued) Chain-markup pricing: a pricing strategy that extends demand- backward pricing from the ultimate consumer all the way back through the channel of distribution to the manufacturer. This strategy depends on all of the distribution channel members being able to cooperate with each other to perform all of the functions necessary to get the product to the consumer, while still making a satisfactory profit. Variable pricing: a flexible pricing strategy that reflects what individual customers are willing to pay. Also known as custom pricing. Commonly used in business-to-business selling, and high-ticket items. Figure 13.1

8. Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.13-8 Pricing Strategies (continued) Price leader: the firm that sets price first in an industry; other major firms in the industry follow the leader by staying in line. At one time, General Motors had the power (and market share) to use this strategy, but this is no longer the case. This situation comes perilously close to price fixing, which is an illegal practice. Under the Competition Act, competitors must not collude or conspire to fix prices. Zellers was the price leader in Canadian retailing until Wal-Mart showed up, which required a relatively quick change in strategy to move up-market using brand name merchandise in a more narrow range. Figure 13.1

9. Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.13-9 Pricing Strategies (continued) Value pricing or every day low pricing (EDLP): a pricing strategy in which a firm sets prices that provide ultimate value to customers. This is the pricing strategy used (rather successfully) by Wal-Mart, who boast that they do not have promotional “sales”, but rather, have good prices every day. The success of EDLP is based on: –Wal-Mart’s huge buying power and use of this power to negotiate with suppliers for better prices. –Today’s time-pressed consumer who is more interested in getting good value at one place than having to shop around for it. Figure 13.1

10. Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.13-10 Pricing Strategies for New Products Skimming price: a very high, premium price that a firm charges for its new, highly desirable product. This price is periodically lowered to “skim” off the profits from each successive group of buyers as the new product is adopted. This strategy works well for specialty goods such as electronics. Penetration pricing: a pricing strategy in which a firm introduces a new product at a very low price to encourage more customers to purchase it. Trial pricing: pricing a new product low for limited period of time to lower the risk for a customer. Figure 9.5

11. Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.13-11 Developing Pricing Tactics Two-part pricing: selling a product or service using two different types of payments, such as an initial fee and then ongoing charges. Cellular telephone plans and golf clubs use this type of pricing. Payment pricing: a pricing tactic that breaks up the total purchase price into smaller payments to make it appear more affordable to consumers. Leases of new vehicles and other high ticket items are sold in this way. Price bundling: selling two or more goods or services as a single package for one price. Figure 13.3

12. Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.13-12 Developing Pricing Tactics (continued) Captive pricing: a pricing tactic for two items that must be used together; one item is priced very low and the firm makes its profit on another, high-margin item essential to the operation of the first item. F.O.B. origin pricing: a pricing tactic in which the cost of transporting the product from the factory to the customer’s location is the responsibility of the customer. F.O.B. delivered pricing: A pricing tactic in which the cost of loading and transporting the product to the customer is included in the selling price, paid by the manufacturer. Figure 13.3

13. Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.13-13 Developing Pricing Tactics (continued) Zone pricing: a pricing tactic in which customers in different geographic zones pay different transportation rates. Uniform delivered pricing: a pricing tactic in which a firm adds a standard shipping charge to the price for all customers regardless of location. Freight absorption pricing: a pricing tactic in which the seller absorbs the total cost of transportation. List price: the price the end customer is expected to pay as determined by the manufacturer. Can also be known as manufacturer’s suggested retail price, or MSRP. Dealers may sell for less! Figure 13.3

14. Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.13-14 Developing Pricing Tactics (continued) Trade or functional discounts: discounts off list price of products to members of the channel of distribution that perform various marketing functions. Quantity discounts: a pricing tactic of charging reduced prices for larger quantities of a product. Cumulative quantity discounts: discounts based on the total quantity bought within a specified time period. Non-cumulative quantity discounts: discounts based only on the quantity purchased in individual orders. Figure 13.3

15. Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.13-15 Developing Pricing Tactics (continued) Cash discounts: a pricing tactic in which customers are offered a discount for paying their bills promptly. Canadian Tire has long offered their own money, redeemable for merchandise as a reward for paying cash. Debit cards have made this process easier for consumers but an additional expense for retailers. Seasonal discounts: offering discounts at certain times of the year based on demand for the product. Producers offer their retailers discounts for products ordered in advance of the season, to help smooth out their production scheduling. Figure 13.3

16. Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.13-16 Psychological Pricing Issues Internal reference price: a set price or a price range in consumers’ minds that they refer to in evaluating a product’s price. At one time, a cup of coffee cost 10 cents and there was such a thing as penny candy! Price lining: the practice of setting a limited number of different specific prices, called price points, for items in a product line. This makes the purchase decision easier for consumers. General Motors pioneered this type of pricing with their five brands of vehicles.

17. Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.13-17 Ethical and Legal Pricing Issues Bait and switch: an illegal marketing practice in which an advertised price special is used as bait to get customers into the store with the intention of switching them to a higher-priced item. Predatory pricing: the policy of selling products at unreasonable low prices to drive competitors out of business. Loss-leader pricing: the pricing policy of setting prices below cost to attract customers into a store. All of these tactics are difficult to prove and require the customer to complain first to the appropriate authorities to investigate.

18. Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.13-18 Ethical and Legal Pricing Issues (continued) Price discrimination: the illegal practice of offering the same product of like quality and quantity to different business customers at different prices, thus lessening competition. The charging of different prices to different customers is allowed if it can be shown that there are cost savings associated with larger orders which are being passed on, or the prices are given to remain competitive. Price maintenance: the collaboration of two or more firms in setting prices, usually to keep prices high. Bid rigging: collusion between suppliers responding to bid requests to lessen competition and secure higher margins.

19. Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.13-19 Famous Last Words… Pricing strategy is difficult to get just right, and just when you think you do, everything changes! In the long run, nobody wins in a price war. In the short run, the customer wins!