C H A P T E RC H A P T E R

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Pricing ConceptsPricing Concepts

11

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Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

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.

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Wal-MartWal-MartWal-MartWal-Mart

Wal-Mart stores are known for their size, assortment of brands and product categories, and low prices. In the fiscal year ending January 31, 2005, Wal-Mart Stores, Inc., the world’s largest retailer, had $285.2 billion in sales with more than 3,600 stores in the United States and more than 1,500 stores outside the United States.

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The Role of PriceThe Role of PriceThe Role of PriceThe Role of Price

Tuition Fees Interest Payments Fines Rents Premiums

Taxes Donations Time List Prices Partitioned

Prices

Price is the amount of money a buyer pays to a seller in exchange for products and services. It reflects the economic sacrifice a buyer must make to acquire something. This is the traditional economic concept of price, called the objective price.

Other labels for prices are:

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Price MixPrice MixPrice MixPrice Mix

The basic price mix includes those components that define the size and means of payment exchanged for goods or services.

The price promotion mix includes supplemental components of price, which aim at encouraging purchase behavior by strengthening the basic price mix during relatively short periods.

Exhibit 11-1

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Pricing DecisionsPricing DecisionsPricing DecisionsPricing Decisions

Price elasticity of demand is the responsiveness of demand to changes in price.

Both the importance and difficulty of pricing decisions have increased in recent years. Introduction of look-alike products increases sensitivity to

small price differences. Internet access to price and competitive information has

made price comparisons easier and has increased pressures on prices.

Demand for services, which are labor-intensive, hard to price, and sensitive to inflation, has increased.

Increased foreign competition particularly from economies with low labor costs like chains, has placed added pressure on firms’ pricing decisions.

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Pricing Decisions Pricing Decisions (con’t)(con’t)Pricing Decisions Pricing Decisions (con’t)(con’t)

Changes within the legal environment and economic uncertainty have made pricing decisions more complex.

Shifts in the relative power within distribution channels from manufacturers to retailers, who are more price-oriented, also has increased the importance of price decisions.

A bottom-line emphasis places more pressure on performance. Price reductions boost short-term earnings more effectively than does advertising.

Technology that has reduced the time from new product idea generation to production also shortens the average life span of products.

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Benefits of Price PromotionsBenefits of Price PromotionsBenefits of Price PromotionsBenefits of Price Promotions

Stimulate retailer sales and store traffic. Enable manufacturers to adjust to variations in supply and

demand without changing list prices. Enable regional businesses to compete against brands

with large advertising budgets. Reduce retailer’s risk in stocking new brands by

encouraging consumer trial and clearing retail inventories of obsolete or unsold merchandise.

Satisfy trade agreements between retailers and manufacturers.

Stimulate demand for both promoted products and complementary (nonpromoted) products.

Give consumers the satisfaction of being smart shoppers who are taking advantage of price specials.

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Limits to Price SettingLimits to Price SettingLimits to Price SettingLimits to Price Setting

Exhibit 11-3

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New Product Pricing DecisionsNew Product Pricing DecisionsNew Product Pricing DecisionsNew Product Pricing Decisions

The answers to the following questions enhance the ability of firms to make final new product pricing decisions: What new benefits can prospective customers acquire

from the innovation? Which market segments will benefit from these new

benefits the most? What current problem solutions will be replaced? What range of prices will be possible in the segments that

will benefit the most? Given this range of prices, what costs can be afforded? What complementary products are associated with use of

the new introduction? How can the innovation’s benefits and price be

communicated?

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Global Pricing ConsiderationsGlobal Pricing ConsiderationsGlobal Pricing ConsiderationsGlobal Pricing Considerations

Pricing in international markets is particularly difficult. Firms pursuing global opportunities find that prices for the same item can be extraordinarily different across countries, even within countries; prices seem to be driven by different dynamics in each situation.

ProtectiveProtectiveTariffsTariffs

Taxes levied on imported products to raise the prices of those products in efforts to keep local prices competitive.

Exchange Exchange RateRate

The price of one country’s currency in terms of another country’s currency

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Pricing ObjectivesPricing ObjectivesPricing ObjectivesPricing 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.

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Sales GrowthSales GrowthSales GrowthSales Growth

MarketMarketShareShare

Market share describes the firm’s portion, or percentage, of the total market or total industry sales. Price setting to maximize market share is similar to price setting in pursuit of sales growth.

PenetrationPenetrationPricingPricing

Penetration pricing is often the strategy used to accomplish this objective. Firms set penetration prices low to encourage initial product trial and generate sales growth, often as part of market entrystrategies.

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ProfitabilityProfitabilityProfitabilityProfitability

Profit maximization requires complete understanding of cost and demand relationships; and estimates of cost and demand for different price alternatives are difficult to obtain.

Exhibit 11-4

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ProfitabilityProfitabilityProfitabilityProfitability

Return on Return on InvestmentInvestment

Profitability is often related to return on investment (ROI). ROI is the ratio of income before taxes to total operatingassets associated with the product, such as plant and equipment and inventory.

PricePriceSkimmingSkimming

Price skimming is a strategy often associated with profit maximization. It includes setting prices high initially to appeal to consumers who are not price sensitive.

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Competitive PricingCompetitive PricingCompetitive PricingCompetitive Pricing

Competitive strategies are arrayed on a continuum labeled the competitive strategy-positioning continuum. This continuum is anchored by “lowcost leadership” on one end and “differentiation” on the other.

NonpriceNonpriceCompetitionCompetition

In nonprice competition, the firm attempts to develop buyer interest in benefits such as quality, specific product features, or service.

Price Price CompetitionCompetition

Price competition occurs most often when the competing brands are very similar, or when differences between brands are not apparent to prospective buyers.

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Five Cs of PricingFive Cs of PricingFive Cs of PricingFive Cs of Pricing

To ensure that pricing decisions are effective and consistent with the firm’s objectives, marketers should consider the five Cs of pricing shown below:

Exhibit 11-5

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Costs Costs Costs Costs

Costs associated with producing, distributing, and promoting a product or service are instrumental in establishing the minimum price or floor for pricing decisions.

Exhibit 11-6

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CustomersCustomersCustomersCustomers

Customer expectations and willingness to pay are important influences on pricing decisions.

Target costing, a concept developed in Japan, combines both cost and customer input into price decisions. The process results in a market-driven cost estimation procedure to determine for a product what the manufacturing costs must be to achieve: the profit margin the company desires the features sought by customers the prices that will be attractive to potential buyers.

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Channels, Competition, CompatibilityChannels, Competition, CompatibilityChannels, Competition, CompatibilityChannels, Competition, Compatibility

Channels of Channels of DistributionDistribution

CompetitionCompetition

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

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

CompatibilityCompatibilityThe price of a product must be compatible with the overall objectives of the firm.

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Ethical and Legal Restraints Ethical and Legal Restraints Ethical and Legal Restraints Ethical and Legal Restraints

Marketers must consider more than the influences of the five Cs in price decisions. Pricing practices must also conform to laws and regulations and ethical expectations of customers and society in general.

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DumpingDumpingDumpingDumping

PredatoryPredatoryDumpingDumping

Predatory dumping is pricing intended to drive rivals out of business. A successful predator firm raises prices once the rival is driven from the market.

DumpingDumping Dumping is 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.

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Primary Implications of LegislationPrimary Implications of LegislationPrimary Implications of LegislationPrimary Implications of Legislation

Horizontal price fixing among companies at the same level of a distribution channel is illegal.

In most cases, retailers are free to establish their own final selling prices. Prices charged by manufacturer- or wholesaler-owned retailers may still be restricted by the owner.

Some states have enacted minimum price laws that prevent retailers from selling merchandise for less than cost.

Prices must not be presented in a way that deceives customers.

Discrimination that reflects extremely low prices to eliminate competition, or that does not reflect cost differentials, 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.

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International AgreementsInternational AgreementsInternational AgreementsInternational Agreements

1. General Agreement on Tariffs and Trade (GATT).

2. The Organization of Petroleum Exporting Countries (OPEC).

3. The European Union (EU).

4. The North American Free Trade Agreement (NAFTA).

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Perceived ValuePerceived ValuePerceived ValuePerceived Value

Perceived value describes the buyer’s overall assessment of a product’s utility based on what is received and what is given.

Exhibit 11-8

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Consumer Evaluations of PricesConsumer Evaluations of PricesConsumer Evaluations of PricesConsumer Evaluations of Prices

Exhibit 11-9

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Comparison PricesComparison PricesComparison PricesComparison Prices

Advertisers often provide comparison prices (external reference prices) to persuade shoppers to buy.

Exhibit 11-10

11-28 © 2007 The McGraw-Hill Companies, Inc. All rights reserved. Bearden Marketing 5th Ed

SummarySummarySummarySummary

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.