Transcript Chapter 11 - Austin Community College

C H A P T E R
11
Pricing Concepts
McGraw-Hill/Irwin
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Learning 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.
Bearden Marketing 5th Ed
11-2
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Wal-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.
Bearden Marketing 5th Ed
11-3
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
The Role of Price
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:











Tuition
Fees
Interest Payments
Fines
Rents
Premiums
Bearden Marketing 5th Ed
11-4
Taxes
Donations
Time
List Prices
Partitioned
Prices
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Price 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
Bearden Marketing 5th Ed
11-5
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Pricing 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.
Bearden Marketing 5th Ed
11-6
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Pricing Decisions (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 priceoriented, 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.
Bearden Marketing 5th Ed
11-7
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Benefits 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.
Bearden Marketing 5th Ed
11-8
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Limits to Price Setting
Exhibit 11-3
Bearden Marketing 5th Ed
11-9
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
New 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?
Bearden Marketing 5th Ed
11-10
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Global 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.
Exchange
Rate
The price of one country’s currency in
terms of another country’s currency
Protective
Tariffs
Taxes levied on imported products to
raise the prices of those products in
efforts to keep local prices competitive.
Bearden Marketing 5th Ed
11-11
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Pricing 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.
Bearden Marketing 5th Ed
11-12
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Sales Growth
Penetration
Pricing
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 entry
strategies.
Market
Share
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.
Bearden Marketing 5th Ed
11-13
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Profitability
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
Bearden Marketing 5th Ed
11-14
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Profitability
Price
Skimming
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.
Return on
Investment
Profitability is often related to return on
investment (ROI). ROI is the ratio of
income before taxes to total operating
assets associated with the product, such
as plant and equipment and inventory.
Bearden Marketing 5th Ed
11-15
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Competitive 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.
Price
Competition
Price competition occurs most often when
the competing brands are very similar, or
when differences between brands are not
apparent to prospective buyers.
Nonprice
Competition
In nonprice competition, the firm attempts
to develop buyer interest in benefits such as
quality, specific product features, or service.
Bearden Marketing 5th Ed
11-16
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Five 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
Bearden Marketing 5th Ed
11-17
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
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
Bearden Marketing 5th Ed
11-18
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Customers
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 marketdriven 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.
Bearden Marketing 5th Ed
11-19
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Channels, Competition, Compatibility
Channels of
Distribution
Prices must be set so that other
members of the channel of distribution
earn adequate returns on sales of the
firm’s products.
Competition
Prices charged by competing firms and
the reaction of competitors to price
changes influence pricing decisions.
Compatibility
The price of a product must be
compatible with the overall objectives of
the firm.
Bearden Marketing 5th Ed
11-20
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
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.
Bearden Marketing 5th Ed
11-21
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Dumping
Dumping
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.
Predatory
Dumping
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.
Bearden Marketing 5th Ed
11-22
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Primary 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.
Bearden Marketing 5th Ed
11-23
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
International 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).
Bearden Marketing 5th Ed
11-24
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Perceived 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
Bearden Marketing 5th Ed
11-25
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Consumer Evaluations of Prices
Exhibit 11-9
Bearden Marketing 5th Ed
11-26
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Comparison Prices
Advertisers often provide comparison prices
(external reference prices) to persuade
shoppers to buy.
Exhibit 11-10
Bearden Marketing 5th Ed
11-27
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Summary
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.
Bearden Marketing 5th Ed
11-28
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.