Pricing Considerations and Approaches

1
Pricing Considerations and Approaches

• Chapter 11

2
Objectives

• Understand the internal factors affecting a
  firms pricing decisions.
• Understand the external factors affecting pricing
  decisions, including the impact of consumer
  perceptions of price and value.
• Be able to contrast the three general approaches
  to setting prices.

3
c
Priceline.com

• Buyer-driven commerce concept offers lower
  prices to consumers and the ability to sell
  excess inventory to sellers
• 13.5 million user customer base
• Tremendous growth

• Most deals relate to travel or time sensitive/
  perishable services
• Not all ventures have been profitable
• Some customers find it difficult to commit to
  purchase prior to learning details

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What is Price?
Price Has Many Names

• Rent
• Fee
• Rate
• Commission
• Assessment

• Tuition
• Fare
• Toll
• Premium
• Retainer

• Bribe
• Salary
• Wage
• Interest
• Tax

5
Definition

• Price
• The amount of money charged for a product or
  service, or the sum of the values that consumers
  exchange for the benefits of having or using the
  product or service.

6
What is Price?

• Dynamic Pricing on the Web allows SELLERS to
• Charge lower prices, reap higher margins.
• Monitor customer behavior and tailor offers.
• Change prices on the fly to adjust for changes in
  demand or costs.
• Negotiate prices in online auctions and
  exchanges.

7
MySimon is one of several independent web sites
that provides product price comparisons.
MySimon
8
What is Price?

• Dynamic Pricing on the Web allows BUYERS to
• Get instant price comparisons from thousands of
  vendors.
• Find and negotiate lower prices.
• Negotiate prices in online auctions and exchanges.

9
What is Price?

• Price and the Marketing Mix
• Only element to produce revenues
• Most flexible element
• Can be changed quickly
• Price Competition
• Common Pricing Mistakes

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Common Mistakes

• Too quick to reduce price
• Too cost oriented
• Prices not revised enough
• Pricing that ignores the rest of the marketing
  mix
• Prices not varied enough for different products,
  market segments, and purchase occasions

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Figure 11-1 Factors Affecting Price Decisions
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Factors to Consider When Setting Price

• Market positioning influences strategy
• Other pricing objectives
• Survival
• Current profit maximization
• Market share leadership
• Product quality leadership
• Not-for-profit objectives
• Partial or full cost recovery
• Social pricing

Internal Factors

• Marketing objectives
• Marketing mix strategies
• Costs
• Organizational considerations

13
Product quality leadership Four Seasons starts
with very high quality service, then charges a
price to match.
14
Factors to Consider When Setting Price

• Pricing must be carefully coordinated with the
  other marketing mix elements
• Target costing is often used to support product
  positioning strategies based on price
• Nonprice positioning can also be used

Internal Factors

• Marketing objectives
• Marketing mix strategies
• Costs
• Organizational considerations

15
Swatch used target costing to manage costs
carefully and create a watch offering the right
blend of fashion and functions at a price
consumers would pay.
16
Factors to Consider When Setting Price

• Types of costs
• Variable
• Fixed
• Total costs
• How costs vary at different production levels
  will influence price-setting
• Experience (learning) curve effects on price

Internal Factors

• Marketing objectives
• Marketing mix strategies
• Costs
• Organizational considerations

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Figure 11-2 Cost Per Unit at Different
Production Levels
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Figure 11-3 Cost Per Unit As a Function of
Accumulated Production
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Factors to Consider When Setting Price

• Who sets the price?
• Small companies CEO or top management
• Large companies Divisional or product line
  managers
• Price negotiation is common in industrial
  settings
• Some industries have pricing departments

Internal Factors

• Marketing objectives
• Marketing mix strategies
• Costs
• Organizational considerations

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• External factors must also be considered when
  planning pricing strategy.

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Factors to Consider When Setting Price

• Types of markets
• Pure competition
• Monopolistic competition
• Oligopolistic competition
• Pure monopoly
• Consumer perceptions of price and value
• Price-demand relationship
• Demand curve
• Price elasticity of demand

External Factors

• Nature of market and demand
• Competitors costs, prices, and offers
• Other environmental elements

22
Discussion Question

• How would you characterize the type of market
  in terms of level of competition for the
  following
• Electricity and gas utilities
• Cable TV, Internet services
• Local, long-distance, wireless telephone
  service

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Figure 11-4 Demand Curves
24
Demand curves sometimes slope upward Gibson
learned that its high-quality guitars didnt sell
as well at lower prices
25
Factors to Consider When Setting Price

• Consider competitors costs, prices, and possible
  reactions when developing a pricing strategy
• Pricing strategy influences the nature of
  competition
• Low-price low-margin strategies inhibit
  competition
• High-price high-margin strategies attract
  competition
• Benchmarking costs against the competition is
  recommended

External Factors

• Nature of market and demand
• Competitors costs, prices, and offers
• Other environmental elements

26
PC marketing has become extremely price
competitive. Knowledge of competitive prices,
offers, and costs is key to pricing strategy.
27
Factors to Consider When Setting Price

• Economic conditions
• Affect production costs
• Affect buyer perceptions of price and value
• Reseller reactions to prices must be considered
• Government may limit or restrict pricing options
• Social considerations may be taken into account

External Factors

• Nature of market and demand
• Competitors costs, prices, and offers
• Other environmental elements

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Figure 11-5 Major Considerations in Setting
Price
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General Pricing Approaches

• Cost-Based Pricing Cost-Plus Pricing
• Adding a standard markup to cost
• Ignores demand and competition
• Popular pricing technique because
• It simplifies the pricing process
• Price competition may be minimized
• It is perceived as fairer to both buyers and
  sellers

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General Pricing Approaches

• Cost-Based Pricing Example
• Variable costs 20 Fixed costs 500,000
• Expected sales 100,000 units Desired Sales
  Markup 20
• Variable Cost Fixed Costs/Unit Sales Unit
  Cost
• 20 500,000/100,000 25 per unit
• Unit Cost/(1 Desired Return on Sales) Markup
  Price
• 25 / (1 - .20) 31.25

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General Pricing Approaches

• Cost-Based Pricing Break-Even Analysis and
  Target Profit Pricing
• Break-even charts show total cost and total
  revenues at different levels of unit volume.
• The intersection of the total revenue and total
  cost curves is the break-even point.
• Companies wishing to make a profit must exceed
  the break-even unit volume.

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Figure 11-6 Break-Even Chart for Determining
Target Price
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Discussion Question

• Assume the following costs
• Fixed costs (FC) 500,000
• Variable cost/unit (VC) 10.00
• Recalling that BE FC/(P-VC), calculate the
  break-even unit volume at selling prices of
  15.00 and 20.00 per unit.
• How many units would need to be sold if a profit
  of 250,000 was desired?

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Figure 11-7 Cost-Based Versus Value-Based
Pricing
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General Pricing Approaches

• Value-Based Pricing
• Uses buyers perceptions of value rather than
  sellers costs to set price.
• Measuring perceived value can be difficult.
• Consumer attitudes toward price and quality have
  shifted during the last decade.
• Introduction of less expensive versions of
  established brands has become common.

36
Perceived value reflects more than just the
functional benefits of a product. The pen at
left costs 185.00
37
General Pricing Approaches

• Value-Based Pricing
• Business-to-business firms seek to retain pricing
  power
• Value-added strategies can help
• Value pricing at the retail level
• Everyday low pricing (EDLP) vs. high-low
  pricing

38
General Pricing Approaches

• Competition-Based Pricing
• Also called going-rate pricing
• May price at the same level, above, or below the
  competition
• Bidding for jobs is another variation of
  competition-based pricing
• Sealed bid pricing

39
BusinessNow
Metreo Video Clip
Pricing in business-to-business sales is often
negotiable. Metreos software helps companies
make pricing decisions.
Click the picture above to play video
40
Objectives

• Learn the major strategies for pricing imitative
  and new products.
• Understand how companies find a set of prices
  that maximizes the profits from the total product
  mix.

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Objectives

• Learn how companies adjust their prices to take
  into account different types of customers and
  situations.
• Know the key issues related to initiating and
  responding to price changes.

42
c
ATT Wireless

• Price is 1 factor influencing choice of cellular
  companies
• Prices in wireless industry dropped 25 in three
  years
• Few companies were profitable

• mLife ad campaign attempted to build the ATT
  wireless brand so consumers would consider value
  rather than just price
• Campaign met with strong initial success

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Definitions

• Market-Skimming Pricing
• Setting a high price for a new product to skim
  maximum revenues layer by layer from segments
  willing to pay the high price.

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Definitions

• Market-Penetration Pricing

Setting a low price for a new product in order to
attract a large number of buyers and a large
market share.
45
Which pricing strategy does Dell appear to use?
46
Product Mix Pricing Strategies

• Product Line Pricing
• Setting price steps between product line items.
• Price points

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Product Mix Pricing Strategies

• Optional-Product Pricing
• Pricing optional or accessory products sold with
  the main product
• Supplemental software, digital cameras, and
  printers sold with a new PC are examples

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Product Mix Pricing Strategies

• Captive-Product Pricing
• Pricing products that must be used with the main
  product
• High margins are often set for supplies
• Services two-part pricing strategy
• Fixed fee plus a variable usage rate

49
Discussion Question
Country clubs are an example of entities that use
a two-part pricing strategy. Name some other
examples.
50
Product Mix Pricing Strategies

• By-Product Pricing
• Pricing of low-value by-products to get rid of
  them

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Product Mix Pricing Strategies

• Product Bundle Pricing
• Pricing bundles of products sold together
• Common in fast food industry

52
Price Adjustment Strategies

• Types of discounts
• Cash discount
• Quantity discount
• Functional (trade) discount
• Seasonal discount
• Allowances
• Trade-in allowances
• Promotional allowances

Strategies

• Discount / allowance
• Segmented
• Psychological
• Promotional
• Geographical
• International

53
Discussion Question
Hotels offer seasonal discounts during slow sales
periods. What are some other examples of
products or services that could benefit from a
seasonal pricing strategy?
54
Price Adjustment Strategies

• Types of segmented pricing strategies
• Customer-segment
• Product-form pricing
• Location pricing
• Time pricing
• Also called revenue or yield management
• Certain conditions must exist for segmented
  pricing to be effective

Strategies

• Discount / allowance
• Segmented
• Psychological
• Promotional
• Geographical
• International

55
Price Adjustment Strategies
Conditions Necessary for Segmented Pricing
Effectiveness

• Market can be segmented
• Lower priced segments are not able to resell to
  higher priced segments
• Competitors can not undersell segments charging
  higher prices

• Pricing must be legal
• Costs of segmentation can not exceed revenues
  earned
• Segmented pricing must reflect real differences
  in buyers perceived value

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Price Adjustment Strategies

• The price is used to say something about the
  product.
• Price-quality relationship
• Reference prices
• Differences as small as five cents can be
  important
• Numeric digits may have symbolic and visual
  qualities that psychologically influence the
  buyer

Strategies

• Discount / allowance
• Segmented
• Psychological
• Promotional
• Geographical
• International

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Price Adjustment Strategies

• Temporarily pricing products below the list price
  or even below cost
• Loss leaders
• Special-event pricing
• Cash rebates
• Low-interest financing, longer warranties, free
  maintenance
• Promotional pricing can have adverse effects

Strategies

• Discount / allowance
• Segmented
• Psychological
• Promotional
• Geographical
• International

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Price Adjustment Strategies
Promotional Pricing Strategies

• Easily copied by competitors
• Creates deal-prone consumers
• May erode the brands value

• Not a substitute for effective strategic planning
• Frequent use leads to industry price wars which
  benefit only a few firms

60
Discussion Question
How might Home Depot use various promotional
pricing tactics to engage shoppers, while
minimizing the potential negative consequences?
For example, what products would work well as
loss leaders?
61
Price Adjustment Strategies

• Types of geographic pricing strategies
• FOB-origin pricing
• Uniform-delivered pricing
• Zone pricing
• Basing-point pricing
• Freight-absorption pricing

Strategies

• Discount / allowance
• Segmented
• Psychological
• Promotional
• Geographical
• International

62
Price Adjustment Strategies

• Prices charged in a specific country depend on
  many factors
• Economic conditions
• Competitive situation
• Laws / regulations
• Distribution system
• Consumer perceptions
• Cost considerations

Strategies

• Discount / allowance
• Segmented
• Psychological
• Promotional
• Geographical
• International

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Figure 12-1 Assessing Responding to
Competitors Price Changes
64
BusinessNow
Metreo Video Clip
Whether or not to match competitors pricing in
an attempt to win a sale is a question faced by
many B2B marketers.
Click the picture above to play video
65
Price Changes

• Initiating Price Cuts is Desirable When a
  Firm

• Has excess capacity
• Faces falling market share due to price
  competition
• Desires to be a market share leader

66
Price Changes

• Price Increases are Desirable
• If a firm can increase profit, faces cost
  inflation, or faces greater demand than can be
  supplied.

67
Price Changes

• Methods of Increasing Price
• Eliminating discounts
• Adding higher-priced units to the product line
• Alternatives to Increasing Price
• Reducing product size
• Using less expensive materials
• Unbundling the product

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Price Changes

• Buyer reactions to price changes must be
  considered.

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Price Changes

• Competitors are more likely to react to price
  changes under certain conditions.
• Number of firms is small
• Product is uniform
• Buyers are well informed

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Price Changes

• Respond To Price Changes Only If
• Market share / profits will be negatively
  affected if nothing is changed.
• Effective action can be taken
• Reducing price
• Raising perceived quality
• Improving quality and increasing price
• Launching low-price fighting brand

71
Scott Towels is a good example of a fighting
brand. The value-priced brand costs less than
PGs Bounty but delivers high customer
satisfaction.
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Figure 12-2 Public Policy Issues in Pricing
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Public Policy and Pricing

• Pricing within Channel Levels
• Price-fixing
• Competitors can not work with each other to
  set prices
• Predatory pricing
• Firms may not sell below cost with the
  intention of punishing a competitor or gaining
  higher long-run profits or running a competitor
  out of business.

74
Public Policy and Pricing

• Pricing across Channel Levels
• Price discrimination
• Retail price maintenance
• Deceptive pricing
• Bogus reference / comparison pricing
• Scanner fraud
• Price confusion

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Marketing Channels and Supply Chain Management

• Chapter 13

76
Objectives

• Know why companies use distribution channels and
  understand the functions that these channels
  perform.
• Learn how channel members interact and how they
  organize to perform the work of the channel.
• Know the major channel alternatives that are open
  to a company.

77
Objectives

• Comprehend how companies select, motivate, and
  evaluate channel members.
• Understand the nature and importance of marketing
  logistics and integrated supply chain management.

78
c
Caterpillar

• Dominates worlds markets for heavy construction
  and mining equipment.
• Independent dealers are key to success
• Dealer network is linked via computers

• Caterpillar stresses dealer profitability,
  extraordinary dealer support, personal
  relationships, dealer performance and full,
  honest, and frequent communications

79
Definition

• Value Delivery Network
• The network made up of the company, suppliers,
  distributors, and ultimately customers who
  partner with each other to improve the
  performance of the entire system.

80
In building its value delivery network, Palm
manages a whole community of suppliers,
assemblers, resellers and complementors who must
work effectively together.
81
Nature Importance of Marketing Channels

• Channel choices affect other decisions in the
  marketing mix
• A strong distribution system can be a competitive
  advantage
• Channel decisions involve long-term commitments
  to other firms

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Figure 13-1 How Channel Members Add Value
83
Nature Importance of Marketing Channels

• How Channel Members Add Value
• Intermediaries
• Require fewer contacts to move the product to the
  final purchaser.
• Help match product assortment demand with
  supply.
• Help bridge major time, place, and possession gaps

84
Nature Importance of Marketing Channels
Key Functions Performed by Channel Members

• Information
• Promotion
• Contact
• Matching

• Negotiation
• Physical Distribution
• Financing
• Risk taking

85
Figure 13-2a Consumer Marketing Channels
86
Figure 13-2b Business Marketing Channels
87
Nature Importance of Marketing Channels

• Number of Channel Levels
• The number of intermediary levels indicates the
  length of a marketing channel.
• Direct Channels
• Indirect Channels
• Producers lose more control and face greater
  channel complexity as additional channel levels
  are added.

88
L.L. Bean sells direct via the Internet,
telephone, and mail catalogs
89
Nature Importance of Marketing Channels
Channel Members Are Connected Via A Variety of
Flows

• Physical Flow
• Payment Flow

• Information Flow
• Promotion Flow

• Flow of Ownership

90
Channel Behavior and Organization

• Channel Conflict
• Occurs when channel members disagree on roles,
  activities, or rewards.
• Types of Conflict
• Horizontal conflict occurs among firms at the
  same channel level
• Vertical conflict occurs among firms at
  different channel levels

91
Figure 13-3 Conventional Versus Vertical
Marketing System
92
Channel Behavior and Organization

• Vertical Marketing Systems
• Corporate VMS
• Contractual VMS
• Manufacturer-sponsored retailer franchise
  system
• Manufacturer-sponsored wholesaler franchise
  system
• Service-firm-sponsored retailer franchise
  system
• Administered VMS

93
Channel Behavior and Organization

• Horizontal Marketing Systems
• Two or more companies at one level join together
  to follow a new marketing opportunity.

Nestle and General Mills work together to market
cereal outside of North America
94
Figure 13-4 Multichannel Distribution System
95
Channel Behavior and Organization

• Multichannel Distribution Systems
• Also called hybrid marketing channels
• Occurs when a firm uses two or more marketing
  channels
• Hybrid marketing has many advantages

96
Channel Behavior and Organization

• Changing Channel Organization
• Disintermediation has hurt many established
  companies

97
Channel Behavior and Organization
Disintermediation Traditional brick and mortar
travel agencies face competition from online
travel agencies, airlines, and reverse auction
web sites such as Priceline.
See how Sunflower Travel has tried to adapt
98
Channel Design Decisions

• Step 1 Analyzing Consumer Needs
• Cost and feasibility of meeting needs must be
  considered

99
Channel Design Decisions

• Step 2 Setting Channel Objectives
• Set channel objectives in terms of targeted level
  of customer service
• Many factors influence channel objectives

100
GEICOs channel objectives led them to sell
direct via telephone and the Web in order to
serve those who are looking to save money.
Geico
101
Channel Design Decisions

• Step 3 Identifying Major Alternatives

• Types of Intermediaries
• Company sales force
• Manufacturers agency
• Industrial distributors

102
Discussion Question
What are the key disadvantages that a producer
firm might face when relying on manufacturers
agents?
103
Channel Design Decisions

• Step 3 Identifying Major Alternatives
• Number of marketing intermediaries
• Intensive distribution
• Selective distribution
• Exclusive distribution
• Responsibilities of channel members

104
Channel Design Decisions

• Step 4 Evaluating Major Alternatives
• Economic criteria
• Sales, costs, profitability
• Control issues
• Adaptive criteria

105
Channel Design Decisions

• Designing International Distribution Channels
• Global marketers usually adapt their channel
  strategies to structures that exist within
  foreign countries
• Key challenges
• Channels may be complex or hard to penetrate
• Channels may be scattered, inefficient, or
  totally lacking

106
Channel Management Decisions

• Selecting Channel Members
• Identify characteristics that distinguish the
  best channel members
• Managing and Motivating Channel Members
• Partner relationship management (PRM) is key

107
Channel Management Decisions

• Evaluating Channel Members
• Performance should be checked against standards
• Channel members should be rewarded or replaced as
  dictated by performance

108
Public Policy and Distribution Decisions

• Exclusive distribution
• Only certain outlets are allowed to carry a
  firms products (grey marketing)
• Exclusive dealing
• Exclusive territorial agreements
• Tying agreements

109
Marketing Logistics and Supply Chain Management

• Marketing Logistics
• Outbound distribution
• Inbound distribution
• Reverse distribution
• Involves the entire supply chain management
  system

110
Figure 13-5 Supply Chain Management
111
Marketing Logistics and Supply Chain Management

• Why Greater Emphasis is Being Placed on
  Logistics
• Offers firms a competitive advantage
• Can yield cost savings
• Greater product variety requires improved
  logistics
• Improvements in distribution efficiency are
  possible due to information technology

112
Marketing Logistics and Supply Chain Management

• Goals of the Logistics System
• No system can both maximize customer service and
  minimize costs.
• Firms must first weigh the benefits of higher
  service against the costs.
• State goals in terms of a targeted level of
  customer service at the least cost.

113
Marketing Logistics and Supply Chain Management

• Major Logistics Functions
• Warehousing
• Inventory Management
• Transportation
• Logistics Information Management

114

• EOQ
• Costs of Ordering/Setup
• Costs of Holding in Inventory
• JIT
• One touch
• Partnership relationships

115
Marketing Logistics and Supply Chain Management
Transportation Carrier Options

• Truck
• Rail
• Water

• Pipeline
• Air
• Internet

Intermodal transportation is becoming more
common
116
BusinessNow
Celarix Video Clip
Arranging transportation for goods can be
challenging
Click the picture above to play video
117
Marketing Logistics and Supply Chain Management

• Integrated Logistics Management
• Cross-functional teamwork inside the company is
  critical
• Logistics partnerships are also built through
  shared projects

118
Many companies use sophisticated, system-wide
supply chain management software, such as that
which is available from Oracle and other software
providers.
119
Discussion Question
Western Publishing Group partnered with Toys R
Us to create mini-bookstore sections within each
store. Can you think of other examples of
similar logistics partnerships?
120
Marketing Logistics and Supply Chain Management

• Outsourcing of logistic firms to third party
  firms is becoming more common