Pricing Decisions

Jeremy Kees, Ph.D.

Pricing Overview

• PricePrice: the exchange value of a good or service

• Robinson-Patman ActRobinson-Patman Act– Federal legislation prohibiting price

discrimination that is not based on a cost differential

• Fair Trade LawsFair Trade Laws– Allow manufacturers to stipulate minimum

prices for their products and force retailers to adhere to them

The Importance of Pricing…

• Prices, and the resulting sales, determine how much revenue a company receives

• Prices thus influence a firm’s profits• Prices also influence the firm’s

employment of the factors of production:– Natural resources– Capital– Human Resources– Entrepreneurship

Just a few strategic issues…

• How much focus should be on costs?• Should we always strive for the industry’s

traditional margins• How often should we revise price? (often

enough to capitalize on market changes)• Should pricing decisions happen

independently or as an intrinsic element of market-positioning strategy?

• How much should we vary price for different products, segments, channels, and purchase occasions?

Strategies

• “Freemium” strategy —giving some offering away for free while profiting from extras that are priced appropriately– Skype

– Ryanair• parody

Consumer Psychology and Pricing

• Reference Prices– Internal

– External

• Price-Quality Inferences– Moderated by category/product knowledge

• Price Cues– “Psychological Pricing”

• Odd Pricing• Unit Pricing

Setting the Price

Select the objectiveSelect the objective

Determine demandDetermine demand

Estimate costsEstimate costs

Select the final priceSelect the final price

Analyze competitorsAnalyze competitors

Objective Purpose Example

Profitability Objectives Profit Maximization

Target Return

Low introductory interest rates on credit cards with high standard rates after 6 months.

Market Share Objectives     

Sales Maximization

Market Share

Dell’s low-priced PCs increase market share and sales of services

Value Objectives   Value Pricing Per-song charges for music downloads

Prestige Objectives   Lifestyle

Image

High-priced luxury autos such as BMW and watches by Piaget

NFP Objectives Cost Recovery

Market Incentives

Market Suppression

High prices for tobacco and alcohol to reduce consumption

Determining Demand

• Price sensitivity– Implications for branding!!

• Estimating demand curves– Done primarily through marketing research

• Price elasticity of demand– Elastic vs. Inelastic

Estimating Costs

• Types of Costs– Fixed

– Variable

– Total

– Average

Competitive Analysis

• Only after we determine market demand and company costs

• We need to examine…– Product features

– Perceived value

Select Pricing Method

• “3 Cs”– Customer Demand

– Cost Function

– Competitors Prices

Pricing Strategies

• Skimming– High-End Products

– Introduction Stage of the PLC– Adidas / Fathead

• Penetration Pricing– Generates Trials

Pricing Strategies

• Value Pricing - EDLP– Wal-Mart

• Competitive Pricing– Compete on other product attributes

Select Pricing Method

• Markup pricing (cost-plus)• Target-return pricing (breakeven analysis)• Perceived-value pricing• Going-rate pricing (customary)• Auction-type pricing

Select Final Price

• Factors to consider:– Impact of other marketing activities

– Company pricing policies

– Gain-and-risk sharing pricing

– Impact of price on other parties

Adapting the Price

• By geographic area

• Discounts and Allowances– Cash Discount

– Trade Discount

– Quantity Discount

– Allowances

– Rebates

• Promotional Pricing– Loss Leaders

• Differentiated Pricing

• Product Mix Pricing (Product-Line Pricing)– Bundling

Risks of Making Price Adjustments

• Customers assume quality is low• A low price buys market share but not

loyalty (remember relationship marketing?)

• Higher-priced competitors match the lower prices but have longer staying power because of deeper cash reserves

• Trigger a price war

Responding to Low-Price Competitors