Chapter 10Pricing Products:Pricing Considerations and Approaches

PricePrice is the sum of all the values that consumers exchange for the benefits of having or using the product or service.Price has been the major factor affecting buyer choice; nonprice factors have become increasingly important in buyer-choice behavior.Price is the only element in the marketing mix that produces revenues; all others represent costs.

More Factors to Consider when Setting PricesPriceStage of the PLCMarketingObjectivesSurvivalST Profit MaxMarket ShareQuality LeadershipPsychologicalAspectsReference PricePrice/Perceived QualityPrice pointsDecision Maker

Internal Factors Affecting Pricing Decisions: Marketing ObjectivesMarketingObjectives

SurvivalLow Prices to Cover Variable Costs andSome Fixed Costs to Stay in Business.

Current Profit Maximization Choose the Price that Produces the Maximum Current Profit, Etc.Market Share LeadershipLow as Possible Prices to Becomethe Market Share Leader.Product Quality LeadershipHigh Prices to Cover Higher Performance Quality and R & D.

Internal Factors Affecting Pricing Decisions: Marketing ObjectivesOther specific objectives include:Set prices low to prevent competition from entering the market,Prices might be reduced temporarily to create excitement or draw more customers.Nonprofit and public organization may have other pricing objectives such as:University aims for partial cost recovery,Hospital may aim for full cost recovery,Theater may price to fill maximum number of seats.

Internal Factors Affecting Pricing Decisions: Marketing Mix PriceProduct Design

Distribution

Promotion

NonpricePositions

Types of Cost Factors that Affect Pricing Decisions

Total CostsSum of the Fixed and Variable Costs for a Given Level of Production

Costs ConsiderationsCost per unit1234SRACLRACQuantity Produced per Day1,0002,0003,0004,000 Cost Per Unit at Different Levels of Production Per Period

Types of Cost Factors that Affect Pricing DecisionsAs a firm gains experience in production, it learns how to do it better.The experience curve (or the learning curve) indicates that average cost drops with accumulated production experience.Strategy: company should price products low; sales increases; costs continue to decrease; and then lower prices further. Risks are present with this strategy.

External Factors Affecting Pricing Decisions

Market andDemand

Competitors Costs, Prices, and OffersOther External FactorsEconomic ConditionsReseller NeedsGovernment ActionsSocial Concerns

Competitor Costs

This ad by LCI International accuses its competitors of using unfair practices in pricing, hiding fees incurred by rounding up.

Hidden fees, defined as cramming by the FCC, are the number one source of billing complaints among long-distance customers.

Why is LCI focusing onthis practice?

Market and Demand Factors Affecting Pricing Decisions

Pure CompetitionMany Buyers and Sellers Who Have Little Effect on the Price

Monopolistic CompetitionMany Buyers and Sellers Who Trade Over a Range of PricesPricing in Different Types of Markets

Oligopolistic CompetitionFew Sellers Who AreSensitive to Each Others Pricing/ Marketing StrategiesPure MonopolySingle Seller

Demand Curves and Price Elasticity of DemandA Demand Curve is a Curve that Shows the Number of Units the Market Will Buy in a Given Time Period at Different Prices that Might be Charged.Price Elasticity Refers to How Responsive Demand Will be to a Change in Price.Price Elasticity of Demand = % Change in Quantity Demanded % Change in Price

Price Elasticity of DemandPriceQuantity Demanded per PeriodA. Inelastic Demand - Demand Hardly Changes Witha Small Change in Price.P2P1Q1Q2PriceQuantity Demanded per PeriodP2P1Q1Q2B. Elastic Demand -Demand Changes Greatly Witha Small Change in Price.

Cost-Based Pricing

Break-even Chart forDetermining Target PriceT34Dollars (millions)121086420Total costFixed costTarget profit$2 millionTotal revenue2004006008001,000Sales volume in units (thousands)

Cost-Based Versus Value-Based Pricing (Fig. 10.7)

Competition-Based PricingSetting PricesSealed-BidCompany Sets Prices Based on What They Think Competitors Will Charge.Going-Rate Company Sets Prices Based on WhatCompetitors Are Charging.??

Chapter 11Pricing Products:Pricing Considerations and Strategies

Steps in Price Planning 1. Develop Pricing Objectives 2. Estimate Demand 3. Determine Costs 4. Evaluate the Pricing Environment 5. Choose a Pricing Strategy 6. Develop Pricing Tactics

New Product Pricing Strategies

Market Skimming

Market PenetrationSetting a High Price for a New Product to Maximize Revenues from the Target Market.Results in Fewer, More Profitable Sales. Setting a Low Price for a New Product in Order to Attract a Large Number of Buyers.Results in a Larger Market Share.

New Product Pricing StrategiesMarket Skimming

Setting a High Price for a New Product to Skim Maximum Revenues from the Target Market.Results in Fewer, But More Profitable Sales.

Use Under These Conditions:Products Quality and Image Must Support Its Higher Price.Costs Cant be so High that They Cancel the Advantage of Charging More.Competitors Shouldnt be Able to Enter Market Easily and Undercut the High Price.

New Product Pricing StrategiesUse Under These Conditions:Market Must be Highly Price-Sensitive so a Low Price Produces More Market Growth.Production/ Distribution Costs Must Fall as Sales Volume Increases.Must Keep Out Competition & Maintain Its Low Price Position or Benefits May Only be Temporary.Market Penetration

Setting a Low Price for a New Product in Order to Penetrate the Market Quickly and Deeply.

Attract a Large Number of Buyers and Win a Larger Market Share.

Product Mix Pricing StrategiesProductMixPricingStrategies

Price-Adjustment Strategies Price Adjustment StrategiesDiscount & AllowanceReducing Prices to RewardCustomer Responses such asPaying Early or Promotingthe Product.SegmentedAdjusting Prices to Allowfor Differences in Customers,Products, or Locations.Cash DiscountQuantity DiscountFunctional DiscountSeasonal DiscountCustomerProduct FormLocationTimeTrade-In Allowance

Price-Adjustment Strategies Adjusting Prices for PsychologicalEffect.Price Used as a Quality Indicator.

Temporarily Reducing Prices to Increase Short-Run Sales. i.e. Loss Leaders, Special-Events Adjusting Prices to Account for the Geographic Location of Customers. i.e. FOB-Origin, Uniform-Delivered, Zone Pricing, Basing-Point, & Freight-Absorption.

Adjusting Prices for International Markets. Price Depends on Costs, Consumers,Economic Conditions & Other Factors. Psychological PricingPromotional PricingGeographical Pricing International Pricing

Reactions to Price ChangesBeing Replaced by Newer ModelsCurrent Models Are Not Selling WellCompany is in Financial TroubleQuality Has Been ReducedPrice Comes Down FurtherPrice Cuts Are Seen by Buyers As:

Price-Adjustment Strategies Hold Current Price;Continue to MonitorCompetitors Price.Reduce PriceRaise PerceivedQualityImprove Quality& Increase PriceLaunch Low-PriceFighting BrandHas Competitor CutPrice?Will Lower Price Negatively Affect OurMarket Share & Profits?Can/ Should EffectiveAction be Taken?YesNoNoNo

Public Policy Issues in PricingPrice FixingPricing Within Channel LevelsPredatory Pricing

Pricing Across Channel Levels

PriceDiscrimination

Ensure Sellers Offers the Same PriceTerms to a Given LevelOf Trade

Resale PriceMaintenance

Manufacturer Cant Require Dealers to Charge a Specified RetailPrice for ItsProduct

DeceptivePricing

Occurs When a Seller States Prices or PricesSavings that Available To Consumers

Pricing and the InternetThe Web enables you to compare prices quickly.Some Web sites do bidding and price comparison for you.

4New Product Pricing StrategiesThis CTR relates to the material on pp. 330-331.Skimming strategies typically set a price as high as some segments will bear. Once all customers within this segment have purchased, prices are lowered only so far as the next segment needs to be persuaded to buy. Skimming usually works well only when: Product Distinctiveness. Product quality, image, and innovation are sufficiently distinct to support a high price. Costs of Small Production Runs. The costs of producing small volume are not prohibitive. Barriers to Entry. Competitors should not be able to enter the market easily and undercut the high price.Market Penetration Pricing. Some innovations are priced low upon introduction in order to capture large market share quickly thus penetrating the market. High volume results in lower costs, which helps keep prices low. Several conditions favor penetration pricing: Price Sensitive Markets. Highly price-sensitive markets with very large volume potential so that low price produces more market growth are needed. Falling Costs. Production and distribution costs must fall as sales volume increases. Barriers to Entry. Here the low costs must generate a sustainable advantage that cannot easily be duplicated by competitors. Discussion Note: Penetration pricing may also accelerate overall market adoption rates thus supporting low price continuance that may discourage competitors from entering the market.Pricing Innovative ProductsMarket Skimming Pricing. Market skimming pricing is the strategy of setting high initial prices to skim maximum profits from each successive layer of the target market.Product-Mix Pricing StrategiesThis CTR corresponds to Table 11-1 on p. 331 and the relates to the material on pp. 331-334.Product-Mix Pricing StrategiesProduct Line Pricing. Companies usually develop product lines rather than single products. In product line pricing, management must decide on the price steps to set between each product in the line. Companies often use price points to target distinctive combinations of product features and value represented by a particular price.Optional-Product Pricing. Under this strategy, the company offers a base product and prices differently for each combination of additional features or options added to the base product as desired by the customer. Automobile pricing is famous -- or infamous -- for this practice. But many manufacturers use optional-product pricing, such as personal computer makers.Captive-Product Pricing. Under this strategy, producers price products that must be used with a main product. The text describes razor blades as an example. The razor is priced low while high markups are attached to the price of the blades.Discussion Note: Students should distinguish captive pricing from optional pricing on the basis of need versus convenience. When Apple Computer prices its keyboards separately from its computers, it is practicing captive-product pricing. When it offers additional RAM beyond the included board memory, it is practicing optional-product pricing.By-Product Pricing. Waste from production and distribution may be marketable as by-products. Selling by-products allows producers to lower prices and costs on their main products. Otherwise, the prices of main products must cover the disposable or storage of by- products.Product-Bundle Pricing. This strategy combines several products and offers them at a reduced price from the cost of each product purchased separately. Season tickets and group rates are examples.Price Adjustment Strategies IThis CTR corresponds to Table 11-2 on p. 334 and relates to the material on pp. 334-335.Discount and Allowance Pricing. Several forms of discount and allowance pricing are used by marketers: Cash Discounts. These are price reductions to buyers who pay bills promptly. Quantity Discounts. These refer to price reductions per unit on large volumes. Functional Discounts. These are granted to channel members who perform various marketing functions. Seasonal Discounts. These are granted to buyers who purchase merchandise out of season. Allowances. These are discounts such as trade-ins for turning in old items on new purchases or promotional allowances for participating in seller sponsored advertising can also lower buyer prices.Segmented Pricing. Segmented pricing refers to pricing differences not based on costs and takes several forms: Customer-segment pricing. These target a specific segment, as in senior citizen discounts. Product-form pricing. This varies costs on versions of a product by features but not production costs. Location pricing. This stems from preferences where different locations have different perceived values, such as seating in a theater. Time pricing. This refers to price breaks given at times of lower demand.

Price Adjustment StrategiesCompanies typically adjust their prices to account for various customer differences and changing situations:Adjustment Strategies - IIThis CTR corresponds to Table 11-2 on p. 334 and relates to the discussion on pp. 335-340.Psychological Pricing. A key component in psychological pricing is the reference price consumers carry in their mind when considering sellers prices.Promotional Pricing. Promotional prices are temporary reductions below list and sometimes below costs, used to attract customers: Loss leaders. These may be offered below costs to attract attention to an entire line. Special event. This type of pricing may be used during slow seasons. Cash rebates or low financing. These extras may bring in customers on the brink and help them to decide to finally purchase.Geographical Pricing. Several forms of geographical pricing are common: FOB-Origin. Free On Board has customer pay freight. Uniform Delivered. Here the company charges the same price to all. Zone. Zone uses different areas pay different prices on freight but all customers within the same area pay the same freight charges. Basing-Point. Under this system, all customers charged freight from a specified billing location. Freight-Absorption. Here the seller pays all or part of the shipping costs to get the desired business.International Pricing. Firms may charge the same price throughout the world, especially for high-ticket, high-tech products like jetliners. Or it may offer different prices based upon differing taxes, tariffs, distribution, and promotion costs.