Transcript Pricing strategies

MARKETING
Real People, Real Choices
Fourth Edition
CHAPTER 11
Pricing The Product
Yes, But What Does It Cost?
• Price is the value that customers give
up or exchange to obtain a desired
product
• Payment may be in the form of money,
goods, services, favors, votes, or
anything else that has value to the other
party
11-2
Opportunity Costs
• The value of something that is given up
to obtain something else also affects the
“price” of a decision.
• Example: the cost of going to college is
charged in tuition and fees but also
includes the opportunity cost of what a
student cannot earn by working instead.
11-3
Steps in Price Planning
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Develop pricing objectives
Estimate demand
Determine costs
Evaluate the pricing environment
Choose a pricing strategy
Develop pricing tactics
11-4
Types of Pricing Objectives
• Sales or market share objectives (e.g. long
distance telephone services)
• Profit objectives
– Work back from a desired profit level
• Competitive effect objectives (e.g. Jet Blue
and Delta)
• Customer satisfaction objectives (e.g. Saturn
and firm pricing)
• Image enhancement objectives – prestige
products like Rolex, Rolls Royce, etc.
11-5
Estimating Demand
• Demand refers to customers’ desire for
products
– How much of a product do consumers
want?
– How will this change as the price
goes up or down?
11-6
Demand Curves
• Shows the quantity of a product that
customers will buy in a market during a
period of time at various prices if all
other factors remain the same
• Vertical axis represents the different
prices a firm might charge
• Horizontal axis shows the number of
units demanded
• Upward and downward shifts in demand
curves
11-7
The Price Elasticity of Demand
• How sensitive are customers to
changes in the price of a product?
• Price elasticity of demand is a measure
of the sensitivity of customers to
changes in price
• Price elasticity of demand = Percentage
change in quantity demanded /
Percentage change in price
• Elastic / Inelastic demand / Unit
Elasticity
11-8
Other types of demand elasticities
• Income elasticity of demand
– Percentage change in demand as a result of
percentage change in incomes
• Cross elasticity of demand
– Percentage in demand for a product as a
result of percentage change in price of a
substitute (e.g. if price of Pepsi goes up the
demand for Coke will increase) OR
– Percentage in demand for a product as a
result of percentage change in price of a
complementary product (e.g. if price of gas
goes up demand for tires may come down)
11-9
Estimating Demand
• Identify demand for an entire product
category in markets the company
serves
• Predict what the company’s market
share is likely to be
• Marketing research to find out price
elasticity of demand
11-10
Types of Costs_1
• Variable costs – per-unit costs of
production that will fluctuate, depending
on how many units or individual
products a firm produces
• Fixed costs – do not vary with the
number of units produced. Costs remain
the same regardless of amount
produced
11-11
Types of Costs_2
• Average fixed cost is the fixed cost per
unit produced (total fixed costs / number
of units produced)
• Total costs = variable costs plus fixed
costs
11-12
Break-Even Analysis
• Technique used to examine the relationship
between cost and price and to determine
what sales volume must be reached at a
given price at which company will completely
cover its total costs
• Sales – Variable Costs = Contribution
• Losses < BE point < Profits
• Angle of incidence, Margin of Safety
• BE sales in units = Total Fixed Costs /
Contribution per unit
11-13
Evaluating the Pricing Environment
• The Economy
– Pricing in a Recession: Consumers
pull back on their spending
– Pricing in inflation: Consumers
desensitized to rising prices
• The Competition: Perfect, Oligopoly,
Monopolistic competition
• Consumer Trends: Affluent people hunt
for bargains
11-14
Cost-Plus Pricing
• Most common cost-based approach
• Marketer figures all costs for the product
and then adds desired profit per unit
• Straight markup pricing is the most
frequently used type of cost-plus pricing
– price is calculated by adding a predetermined percentage to the cost
11-15
Pricing Strategies Based on Cost
• Advantages
– Simple to calculate
– Relatively risk free
• Disadvantages
– Fail to consider
several factors
• target market
• demand
• competition
• product life cycle
• product’s image
– Difficult to accurately
estimate costs
11-16
Steps in Cost-Plus Pricing
• Estimate unit cost
• Calculate markup
– Markup on cost
– Markup on selling price
11-17
Pricing Strategies Based on Demand_1
• Demand-based pricing means that the
selling price is based on an estimate of
volume or quantity that a firm can sell in
different markets at different prices
– Target costing: find out what
customers will be willing to pay and
work backwards to design a product
within that cost
– Yield management pricing: services
use this method to fill capacity
11-18
Pricing strategies
• Price leadership: the biggest firm in the
industry announces a new price and all
other firms fall in line - oligopoly
• ELDP – Every Day Low Pricing: prices
based on customer perceptions of
value. No further discounts given e.g.
Walmart, P&G, etc.
11-19
New Product Pricing
• Skimming price – firm charges a high,
premium price for its new product with
the intention of reducing it in future
response to market pressures
• Penetration pricing – new product is
introduced at a very low price
• Trial pricing – product carries a low
price for a limited time period
11-20
Pricing Tactics
• Pricing for Individual Products
– two-part pricing (e.g., country clubs, cell
phone services)
– payment pricing (e.g., easy payments for
new cars)
• Pricing for Multiple Products
– Price bundling (e.g., monitor, keyboard,
CPU in a computer package)
– Captive pricing (e.g., razors and razor
blades)
11-21
More Pricing Tactics
• Distribution-based pricing
– FOB pricing
– CIF pricing
• Basing-point pricing
• Uniform delivered pricing
• Freight absorption pricing
11-22
Discounting for Channel Members
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Trade or functional discounts
Quantity discounts
Cash discounts
Seasonal discounts
11-23
Trade Discounts
• Pricing structure built around list price
– List price, also called suggested retail
price, is the price that the
manufacturer sets as the appropriate
price for the end consumer
– Manufacturers offer discounts
because channel members perform
selling, credit, storage, and
transportation services
11-24
Pricing with Electronic Commerce
• Dynamic pricing strategies
– price can be adjusted to meet
changes in the marketplace
– online price changes can occur
quickly, easily, and at virtually no cost
• Auctions
– sites offer chance to bid on items
– sites offer reverse-price auctions
11-25
Price Discrimination
• Means that marketers classify
customers based on some
characteristic that indicates what they
are willing or able to pay
• Acceptable when price differences are
in response to:
– changes in cost of product
– changes in competitive activity
– changes in marketplace
11-26
Psychological Issues in Pricing
• Internal Reference Prices – consumers have
a set price or price range in mind
– If the actual price is higher, consumers will
feel the product is overpriced
– If it is too low below the internal reference
price, consumers may assume its quality is
inferior
• Competition as Reference Price – If the price
is close, the assimilation effect will encourage
the customer to think the products are similar
enough and choose the lower-priced product
11-27
Price-Quality Inferences
• If consumers are unable to judge the
quality of a product through examination
or prior experience, they usually will
assume that the higher-priced product is
the higher-quality product
11-28
Psychological Pricing Strategies
• Odd-even pricing
• Price lining
11-29
Legal and Ethical Considerations
• Deceptive pricing practices
• Unfair sales act
• Price discrimination
11-30
Deceptive Pricing Practices
• Retailers must not claim prices are lower than
competitors unless it is true
• A going out-of-business sale should be the
last sale before going out of business
• Bait-and-switch – consumers are lured into
store for a very low price, but then the item is
not available. A more expensive product is
offered instead
– Trading up is acceptable
11-31
Unfair Sales Acts
• Laws or regulations prohibiting selling
products below cost
– loss leader pricing
– many regulations even set a
percentage markup below which the
distributor may not sell the products
11-32
Price Discrimination
• Means selling the same product to
different wholesalers and retailers at
different prices if practices lessen
competition
• Regulated by Robinson-Patman Act
– only applies to resellers
– discounts are legal if based on established
policy and offered to any customer who
chooses to buy under those conditions
11-33
Price Fixing
• Occurs when two or more companies
conspire to keep prices at a certain level
– Horizontal price fixing occurs when
competitors making the same product
jointly determine what price they each
will charge
– Vertical price fixing occurs when
manufacturers attempt to force the
retailer to charge the suggested retail
price
11-34
Predatory Pricing
• Means that a company sets a very low
price for the purpose of driving
competitors out of business
11-35