Transcript Chapter 9

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
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PRICE: PERSPECTIVES
CUSTOMER
SOCIETY
RATIONAL/ECONOMIC
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MARKETER
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
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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 predetermined 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
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• Reductions on out-ofseason merchandise
e.g., discount on
snowmobiles in
summer
• Spread demand over
the year
• Fuller use of production
facilities
• Improved cash flow
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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
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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., twofor-one
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ALTERNATIVES
COST-ORIENTED
COST-PLUS
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DEMAND-ORIENTED
VALUE-BASED
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
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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
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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
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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
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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
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