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Chapter 9

PRICING THE PRODUCT

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• Meaning of pricing from the perspective of the buyer, seller and society

• Seller’s objectives in making pricing decisions

• Alternative pricing approaches available to the manager

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PRICE: PERSPECTIVES

CUSTOMER SOCIETY MARKETER

RATIONAL/ECONOMIC IRRATIONAL/FREEDOM

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Value sole justification for price Value = perceived (benefits - costs) Perceived benefits directly related to

price: status, convenience, the deal, brand, quality, choice

Providing value-added elements to the product is a popular strategic alternative

Perceived costs: actual dollar amount paid, inconvenience, limited choice, poor service, risk of making a mistake, related costs, lost opportunity, unexpected consequences

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• Bartering system / exchange of goods of equal value to monetary system – a more convenient way to purchase goods and accumulate wealth

• Society can employ price to control its economic health

• Price can be inclusive / exclusive

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• Results of price manipulation are predictable

• Consumer is a rational decision-maker, has perfect information; demand is inversely proportional to price

• Primary demand: total market demand by all buyers for a product type

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• Man’s response to price is sometimes unpredictable and pre-testing price manipulation is a necessary task

• Example: prices go down, people become suspicious and buy less

• Conspicuous consumption

• Non-profit organizations

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• Foreign competition: lower price, high quality

• Competitors: try to gain market share by reducing their prices

• New products: more prevalent today than in the past; difficult to price due to lack of historical base

• Technology: reduced ‘shelf life’ of existing products; pressure to recover costs more quickly

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• Survival: long-term through generation of sufficient revenues

• Profit: satisfies stockholders• Sales: demand managed to

regulate sales that generate profit• Market share: attracting

appropriate market segments in significant numbers ensures sales volume sufficient for survival and prosperity

• Image: fairness in dealings, reliability, accountability ensure position of respect, esteem in the community

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• Competitive pricing strategy

• Non-price competition

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• Pricing to meet competition: price is an indicator/baseline; marketing mix elements targeted at customers interested in products in a particular price category

• Pricing above competitors: requires clear advantage on some non-price element of the marketing mix; high price-quality association cannot be presumed

• Pricing below competitors: market niche; control costs, reduce services; generate large sales volume through lower profit margins; price wars; inability to raise price or image

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• Non-price competitive strategy: use strategies other than price to attract customers e.g., advertising, credit, delivery, displays, convenience

• Difficult to match non-price characteristics; may not create competitive advantage

• Deleterious effect on company profitability

• Main target: price smarter, focus not on matching the price of a competitor

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• Tracks demands over several years

• Balance through ‘yield management’ that keeps supply and demand in check

• Aspects of pricing: the rate charged and the length of the rental

• Price as a legitimate rationing device

• Smart pricing: base on the value to the customer; profit through customizing prices to different customers

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• Penetration: introductory stage of lifecycle, accept relatively low price, lower profit margin for more sales and quicker establishment; best in case of price sensitive customers, anticipation of quick entry by competitors, likelihood of rapid acceptance, adequate resource base e.g, Texas Instruments calculators

• Price skimming: high prices, target buyers willing to pay premium to get the new product; best under opposite conditions e.g., Motorola cell phones

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Each price must be far enough apart so that buyers can see definite quality differences e.g., ties at $15, $17, $20.50

Consumer shopping goods e.g., apparel rather than product lines e.g., groceries

Customers want wide assortment of goods Simpler and more efficient to use relatively fewer

prices, product/service mix can be tailored Price points: different prices that make up the line Smaller inventory As costs change, prices can be kept constant and

quality changed

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Price is bid or negotiated separately for each exchange

Discounts and allowances Quantity Seasonal Cash Trade Personal allowances Trade-in allowances

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• Reductions in base price given for purchasing some pre-determined quantity of merchandise

• Non-cumulative: applies to each purchase and encourages larger purchases; buyer cannot switch to a competitor till his stock is used

• Cumulative: applies to total bought over a period of time; helps build repeat purchase e.g., building materials dealers

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• Reductions on out-of-season merchandise e.g., discount on snowmobiles in summer

• Spread demand over the year

• Fuller use of production facilities

• Improved cash flow during the year

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• Cash: reductions on base price for paying in cash, or within a short period of time e.g., a 2% discount on bills paid within ten days

• Trade: price reductions given to middlemen e.g., wholesalers, industrial distributors, retailers; encourage them to stock and give preferred treatment to an organization’s products; discounts may also be used to gain shelf space or preferred position in the store

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• Personal: aimed at middlemen e.g., wholesalers giving prize money called spiffs for retailers to pass on to retailer’s sales clerks for aggressively selling certain items

• Trade-in: allow the seller to negotiate best price with the buyer; the trade-in can be of value if it can be resold e.g., a construction company trading in a used grader worth $70,000 for a new model from an equipment company

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• Group similar or complementary products and charge a total price that is lower than if they were sold separately e.g., Gateway Computers

• Increased sales will compensate for lower profit margins e.g., annual newspaper subscription

• Sell a less popular product by combining it with popular ones e.g., season ticket for college hockey games

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• Prestige pricing: inferring quality from price e.g., fur coat

• Customary prices: those that consumers identify with particular items e.g., candy bars typically cost 60 cents

• Odd prices: prices that end in such digits as 5, 7, 8, 9 e.g., a price of $2.95 is perceived by consumers as a bargain or saving than a price of $3.00

• Combination pricing: e.g., two-for-one

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ALTERNATIVES

COST-ORIENTED DEMAND-ORIENTED VALUE-BASED

COST-PLUS MARK-UPS

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• Goal: a particular gross margin (how much the goods cost and the actual price for which it sells) that will produce a desirable profit level

• Do not need forecasts of general business conditions or customer demand

• Consumer perception: fair as price is related to the cost of producing the item

• Inherent inflexibility; ignoring consumer’s perception of product’s value creates disadvantage

• Company’s costs may fluctuate, so constant price changing is not a viable strategy

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• Difference between average cost and price of all merchandise in stock, for particular department or individual item

• May be designated as a percent of selling price or as a percent of cost of the merchandise

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TYPES

• Cumulative: difference between total dollar delivered cost of all merchandise and the total dollar price of the goods put into stock for a specified period of time

• Initial: original mark-up at which individual items are put into stock

• Maintained: difference between actual price for which all of the merchandise is sold and the total dollar delivered cost of the goods exclusive of deductions; typically less than initial due to mark-downs, stock-shrinkages from theft, breakage; essential in estimating operating profits; provides indication of efficiency

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• Price that will produce enough revenues to cover all costs at a given level of production

• Total costs: fixed and variable

• Effective when a target return objective is sought

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• Nature of the demand curve for the product or service being priced

• Demand curve influenced by the structure of the industry; competitive – price may be used to gain market share; few dominant players: variation in prices minimal

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• Focuses entirely on the customer as a determinant of the total price/value package

Acknowledge that:• To the customer the price is the only unpleasant

part of buying• Price is the easiest marketing tool to copy• Price represents everything about the product• Asks and answers:• What is the highest price that can be charged

and still make the sale? (customers, competitors)

• Is the firm willing to sell at that price? (costs, constraints)

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• Customer buying process: price knowledge, price expectations

• Competitors: define indirect competitors• Incremental costs: cost of producing each additional

unit• Avoidable costs: unnecessary, those that can be

passed onto some other institution in the marketing channel

• Opportunity costs• Constraints: formal e.g., government restrictions in

respect to strategies like price-fixing; informal e.g., matching the price of competitors

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• Employ a segmented approach towards price, based on criteria like customer type, location, order size

• Establish highest possible price level and justify it with comparable value

• Use price as a basis for establishing strong customer relationships

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• More strategic element of marketing

• Smarter pricing