Pricing Considerations and Strategies

1. 9 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.

3. 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.

4. Factors Affecting Pricing Decisions

5. Internal Factors Affecting Pricing Decisions • Marketing Objectives: • Company must decide on its strategy for the product. If the company has selected its target market and positioning carefully, then its marketing mix strategy, including price, will be fairly straightforward. (Acura and Lexus cars) • General Objectives: • Survival, current profit maximization, market share leadership, and product quality leadership.

6. 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.

7. 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.

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

9. Internal Factors Affecting Pricing Decisions • Organizational Considerations: • Must decide who within the organization should set prices. • This will vary depending on the size and type of company. (small, large companies & industrial products)

10. External Factors Affecting Pricing Decisions • The Market and Demand: • Costs set the lower limit of prices. • The market and demand set the upper limit.

11. Pricing in Different Types of Markets Pure Competition: Many buyers and sellers where each has little effect on the going market price. (A seller cannot charge more than the going price.) Monopolistic Competition: Many buyers and sellers who trade over a range of prices (The physical product can be varied in quality, features, or style, or the accompanying services can be varied) Oligopolistic Competition: Few sellers who are sensitive to each other’s pricing/marketing strategies (each seller is alert to competitors strategies and moves If a steel company slashes its price by 10%. Buyers will quickly switch to this supplier. Pure Monopoly: Market consists of a single seller The seller may be a government monopoly (The US Postal Service)

12. 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.

13. Major Considerations in Setting Price

14. 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

15. Break-Even Chart

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

17. 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.

18. 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: 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. New-Product Pricing Strategies

19. 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: 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. New-Product Pricing Strategies

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

21. 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

22. 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).

23. 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).

24. Product Bundle Pricing CityPASS bundles tickets to many attractions at a low combined price.

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

26. 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

27. 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.

28. 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

29. Promotional Pricing Companies offer promotional prices to create buying excitement and urgency.

30. Geographical Pricing • FOB-origin pricing • Uniform-delivered pricing • Zone pricing • Basing-point pricing • Freight-absorption pricing

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

32. International Pricing Companies must decide what prices to charge in different countries.

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

34. Interactive Student Assignment • 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?

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

36. Assessing and Responding to Competitor Price Changes

37. Public Policy and Pricing

38. 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.