Chapter 11 Pricing Concepts

1. Chapter 11 Pricing Concepts Professor Jason C. H. Chen, Ph.D. School of Business Administration Gonzaga University Spokane, WA 99223 chen@jepson.gonzaga.edu

2. After studying this chapter you should be able to: • Realize the importance of price and understand its role in the marketing mix. • Understand the characteristics of the different pricing objectives that companies can adopt. • Identify many of the influences on marketers’ pricing decisions. • Explain how consumers form perceptions of quality and value. • Understand price/quality relationships and internal and external reference prices.

3. OPENING VIGNETTE WWW.EDMUNDS.COM • How do auto manufacturers and dealers feel about outsiders making pricing information available to car shoppers? • How do Web sites like Edmunds.com promote the marketing process?

4. Objective Price: The amount of money a buyer pays to a seller in exchange for products and services. Countertrade: Barter, or trading goods for goods without using money. The Role of Price

5. Prices Have Other Labels • Tuition • Fees • Interest Payments • Fines • Rents • Premiums • Taxes • Donations • Time • List Prices • Partitioned Prices

6. Key Factors that Influence Price Setting Pricing objectives Price of other products in the line Pricing flexibility Demand Discounts and allowances Price Setting Cost Legal environment Competition Geographic pricing terms Markup chain in channels

7. Basic Price Mix Versus Price Promotion Mix

8. Price equals Something of Value List price Less: discounts Quantity Seasonal Cash Temporary sales Less: allowances Trade-ins Damaged goods Less: Rebate and coupon value Plus: Taxes Product: Physical good Service Assurance of quality Repair facilities Packaging Credit Warranty Place of delivery or when available equals Price as Seen by Consumers or Users

9. Price equals Something of Value Product: Branded--well known Guaranteed Warranted Service--Repair facilities Convenient packaging Place Availability--when and where Price Price-level guarantee Sufficient margin Promotion: Promotion to consumers List price Less: discounts Quantity Seasonal Cash Trade/functional Temporary deals Less: allowances Promotion Damaged goods Stocking Plus: Taxes and tariffs equals Price as Seen by Channel Members

10. Ragged Mountain ad

11. Strategy Planning for Price Target Market Product Place Promotion Price Price objectives Price flexibility Price levels over product life cycle Discounts and allowances -- to whom and when Geographic Term -- who pays transportation and how

12. The Importance of Price and Pricing Decisions • Price Elasticity of Demand: • The responsiveness of demand to price changes. Price promotions and reductions are so common that the sales price is the norm!

13. Benefits of Price Promotions Exhibit 11-2 (p.245) • Stimulate retailer sales and store traffic. • Adjustment to variations in supply and demand without changing list prices. • Enable regional businesses to compete against brands with large ad budgets. • Reduce retailer’s risk in stocking new brands. • Satisfy trade agreements. • Stimulate demand for promoted and complementary (non-promoted) products. • Customers can feel they are smart shoppers by taking advantage of price specials.

14. Final Pricing Discretion Limits to Price Setting Price Ceiling (Demand Limits) Competitive Factors Corporate Objectives Price Floor (Direct Variable Costs)

15. Internet Pricing Effects • Questions?? • If price sensitivity will increase from this easier access to information? • Will easier access to other information that differentiates products will offset these pressures toward price sensitivity?

16. Internet Pricing Effects • For goods that are common across stores or business-to-business sellers, price sensitivity will undoubtedly increase. • For sellers, savings come from lower real-estate and rental costs and reduced outlays for advertising, inventory, and transportations.

17. Global Pricing Considerations • Exchange Rate: • The price of one country’s currency in terms of another countries currency. • Protective Tariffs: • Taxes put on imported products to raise their price to keep local products competitive.

18. Pricing Degree of change in price Elasticity Pricing Change Model • Environmental • Conditions: • Foreign competition • Legal environment • change • - Technology change • More informed • consumers Profitability Sales Successfulness

19. Exchange Rates for Various Currencies against the U.S. Dollar Over Time

20. II. Pricing Objectives Five Objectives Guide Pricing Decisions: • Ensuring market survival. • Enhancing sales growth. • Maximizing company profits. • Deterring competition from entering a company’s niche or market position. • Establishing or maintaining a particular product quality image.

21. Market Survival • A firm must set prices to ensure its short-term survival. • Frequent end-of-season deals by retailers are efforts to move inventory and recover cash.

22. Sales Growth • Penetration Pricing: • Prices set low to encourage initial trial and generate sales growth as a market entry strategy. • Market Share: • The firm’s portion or percentage of the total market or of total industry sales.

23. Optimal Pricing Decisions

24. Profitability • Maximization of profits is a frequently stated objective for many companies. • Price Skimming: • Setting prices high to appeal to customers who are not price sensitive. • Return on Investment (ROI): • The ratio of income before taxes to total operating assets associated with a product.

25. Non-price Competition Competitive Strategy-positioning Continuum Competitive Pricing Price Competition

26. Quality and Image Enhancement • Prestige Pricing: • Setting a high price based on the idea that “the higher the price, the greater the quality” of the product.

27. Possible Pricing Objectives Dollar or unit sales growth Target return Maximize profits Meeting competition Status quo Oriented Pricing Objectives Profit Oriented Sales Oriented Nonprice competition Growth in market share

28. Alternative Introductory Pricing Policies

29. III. Influences on Pricing Decisions :The Five Cs of Pricing Exhibit 11-5 Influences on pricing decisions Pricing decisions Costs Customers Channels Competition Compatibility

30. Customers Customer expectations and willingness to pay are important influences on pricing decisions. • Target costing: • The profit margin the company desires. • The features sought by customers. • The prices that will be attractive to potential buyers.

31. Channels of Distribution • Prices must be set so that other members of the channel of distribution earn adequate returns on sales of the firm’s products.

32. Competition • Prices charged by competing firms and the reaction of competitors to price changes influence pricing decisions.

33. Compatibility • The price of a product must be compatible with the overall objectives of the firm.

34. IV. Ethical & Legal Restraints on Pricing • Significant U.S. Legislation Influencing Price Decisions: • Sherman Act, 1890 • Federal Trade Commission Act, 1914 • Clayton Act, 1914 • Robinson-Patman Act, 1936 • Wheeler-Lea Act, 1938 • Consumer Goods Pricing Act, 1975

35. International Pricing Issues • Dumping: • Selling a product in a foreign country at a price lower than its price in the domestic country, and lower than its marginal cost of production - is a form of price discrimination. • Predatory Dumping: • Pricing intended to drive rivals out of business.

36. Implications for Pricing Decisions • Horizontal price fixing is illegal. • Retailers are free to establish their own final selling prices, but prices charged by manufacturer or wholesaler-owned retailers may still be restricted by the owner. • Some states have enacted minimum price laws. • Prices must not deceive customers.

37. Implications for Pricing Decisions • Some states have enacted minimum price laws. • Prices must not deceive customers. • Discrimination to eliminate competition may be illegal. • In industries with a few large firms, it is generally acceptable for the pricing behavior of smaller firms to parallel that of larger firms.

38. International Agreements & Organizations • General Agreement on Tariffs and Trade (GATT). • The Organization of Petroleum Exporting Countries (OPEC). • The European Union (EU). • The North American Free Trade Agreement (NAFTA).

39. V. Customer Price Evaluations • Judgments of Perceived Value • Price/Quality Relationships describe how the consumer associates the product’s price with higher quality.

40. Price, perceived value, and willingness to buy Exhibit 11-8 Relationships among price, perceived value, and willingness to buy Perceived benefits Objective price Perception of price Perceive value Willingness To buy Perceived Monetary sacrifice

41. Customer Price Evaluations • Consumer Use of Price Information: • Best-value Strategy • Price-seeking Strategy • Price-aversion Strategy • Price Signaling Strategy

42. How Are Price Judgments Made? • External Reference Prices: • Those charged by other retailers or comparison prices that a retailer provides to enhance perceptions of the published price. • Internal Reference Prices: • Comparison standards that consumers remember and use to make their judgments. • Reservation Price: • The highest price a person is willing to pay.

43. Consumer Evaluations of Prices Exhibit 11-9 Consumers evaluation of prices Expected price Range Is the price different from the price I expected? Acceptable price Range Am I willing To pay the price? Expected future price trend Will prices next period be different from this price? • Budget constraints • Price/quality judgments • Purchase situation factors (time pressure) • Usage situation factors • Expected price range of substitutes • Cost of search

44. Advertised Comparison Prices Exhibit 11-10 A model of comparison reference price effects Consumer reads comparison price claim Beliefs about available prices change in response to reference price & offering price Offering price compared to upwardly revised beliefs about previous prices Perceived savings & transaction value increase Shopping/purchase Intention occurs

45. Discounts

46. Discount Policies • DISCOUNTS are reductions from list price that are given by a seller to a buyer who either gives up some marketing function or provides the function himself • Quantity discounts • Cumulative quantity discounts encourage repeat purchases and relationships • Noncumulative encourage large orders • Seasonal discounts smooth out demand • Cash discounts encourage early payment • Trade (functional) discounts go to middlemen

47. Cargill and CoolBid discount ads

48. Geographic Pricing Policies • "Free on Board" (F.O.B) at some place • Examples: • F.O.B. seller's factory • F.O.B. delivered • F.O.B. factory—freight prepaid • Zone Pricing: an average freight charge to all buyers within specific geographic areas • Uniform Delivered Pricing: the same (average) freight charge to all buyers • Freight Absorption Pricing: seller pays freight cost so delivered price matches competition

49. Pricing Policies Combine to Impact Customer Value • Customer value considers total costs and benefits • Costs and benefits are impacted not only by list price but by • Discounts • Allowances • Delivery terms and geographic pricing policies • Sales and deals • Price flexibility (and transaction costs) • Value pricing leads to superior customer value • Value pricing is setting a fair price level for a marketing mix that really gives the target market superior customer value

50. Photos of Goodyear and ThunkDesign discount ads