The Marketing Mix

1
The Marketing Mix

• Price Strategies

2
The Importance of Pricing

• Pricing is one of the most vital decisions made
  by management
• Price too high and you lose the sale
• Price too low and you cant make money
• Two fundamental ways to grow revenue
• raise your price
• increase the quantity you sell
• Price is the easiest of all marketing variables
  to influence but among the most complex decisions
  to make
• price changes may be implemented immediately

3
The Internet and Pricing

• Instant price comparisons from thousands of
  vendors (e.g., www.pricescan.com )
• Name price and have it met (www.priceline.com)
• Better buyer evaluation (GE lighting)
• Reach select buyers (CDNOW)

4
Conceptual Orientation to Pricing
Nagle 1999
5
Example Progressive Insurance

• Collects and analyzes loss data in auto insurance
  better than competition
• Understands what it costs to serve various
  customer types
• Serves lucrative high risk customer no one else
  wants to insure
• Good profits from this customer base

6
Example McKinsey Results

• 1 improvement in price leads to a 11.1
  improvement in operating profit
• 1
• 1 improvement in variable cost, volume, and
  fixed cost produced profit improvements of 7.8,
  3.3, and 2.3!

7
Life Cycle Costs for Competing Automobiles
R. Best, Market-Based Management, 2005.
8
Example Consumer Electronics

• JVC, on its website, charges 1099.95 for a
  digital still/video camera
• Circuit City sells it for 799.95
• Amazon sells it for 749.95
• Why is the gap large?
• We have trained the consumer electronics buyer
  to think he is getting 20-30 off
• Manufacturers price is a psychological reference
  tool (MSRP vs. Invoice vs. Final)

9
Price and Quality are Connected

• Image pricing is useful with ego sensitive
  products like perfumes and expensive cars
• A 100 bottle of perfume may contain 10 worth of
  scent
• Gift givers pay the additional to convey
  their regard for the receiver
• Why are Carl Jr.s and Hardees not introducing
  dollar and 99 cent menus?

10
Nine Price-Quality Strategies
11
Perception of car quality
Some car brands have better quality than buyers
think. But for some brands, buyers think the
quality is better than it is.

• Actual quality meets or exceeds perceived quality
• Mercury 42.3
• Infiniti 34.1
• Buick 29.7
• Lincoln 25.3
• Chrysler 20.8
• Lexus17.4
• Toyota 8.7
• Cadillac 8.3

• Perceived quality exceeds actual quality by
  percentage
• Land Rover 75.3
• Kia 66.6
• Volkswagen 58.3
• Volvo 36.0
• Mercedes-Benz34.2
• Mitsubishi 34.1
• Hyundai 27.4
• Audi 26.4
• BMW12.4

12
Price Cues

• Stereo priced at 299 instead of 300 is seen in
  the 200 price range
• Research shows that consumers process price from
  left to right rather than by rounding
• 9 endings denote bargains/discount
• Brands with high price image should NOT have an
  odd-ending tactic
• 0 and 5 endings are easier to store in memory

13
Setting the Price
14
Setting the Price

• Pricing Procedure
• Select pricing objective
• Determine demand
• Estimate costs
• Analyze competition
• Select pricing method
• Select final price

• Survival
• Maximize current profits
• Maximize market share
• Penetration strategy
• Market skimming
• Skimming strategy
• Product quality leaders
• Partial cost recovery

15
Setting the Price

• Pricing Procedure
• Select pricing objective
• Determine demand
• Estimate costs
• Analyze competition
• Select pricing method
• Select final price

• Understand factors that affect price sensitivity
• Estimate demand curves
• Understand price elasticity of demand
• Elasticity
• Inelasticty

16
Price Sensitivity

• Situations That Increase Price Sensitivity
• Availability of product substitutes
• Higher total expenditure
• Noticeable differences
• Easy price comparison
• Situations That Decrease Price Sensitivity
• Real or perceived necessities
• Lack of product substitutes
• Complementary products
• Product differentiation
• Perceived product benefits
• Situational influences

17
Price Elasticity of Demand
18
Setting the Price

• Pricing Procedure
• Select pricing objective
• Determine demand
• Estimate costs
• Analyze competition
• Select pricing method
• Select final price

• Types of costs and levels of production must be
  considered
• Accumulated production leads to cost reduction
  via the experience curve
• Differentiated marketing offers create different
  cost levels

19
Setting the Price

• Pricing Procedure
• Select pricing objective
• Determine demand
• Estimate costs
• Analyze competition
• Select pricing method
• Select final price

• Select method
• Markup pricing
• Target-return pricing
• Perceived-value pricing
• Value pricing
• EDLP, Hi-Lo
• Going-rate pricing
• Auction-type pricing
• Group pricing

20
Example Perceived value

• Caterpillar prices tractors at 100, 000
  (compared to competitors 90,000)
• Why should the customer pay 10,000 more?
• 90,000 price is equivalent to competitor
• 7000 premium for durability
• 6000 premium for reliability
• 5000 premium for service
• 2000 premium for parts
• (Adding) 110,000 is the normal price
• 10000 discount
• Final price 100,000
• By buying Caterpillar, customer gets 20,000
  extra value!!!

21
Auction pricing

• English Auctions One seller and many buyers
• Bidders raise prices
• Dutch Auctions One seller and many buyers (or)
  one buyer and many sellers
• High initial price with slow reductions until a
  bidder accepts a price
• Sealed-bid auctions

22
Setting the Price

• Pricing Procedure
• Select pricing objective
• Determine demand
• Estimate costs
• Analyze competition
• Select pricing method
• Select final price

• Requires consideration of additional factors
• Psychological pricing
• Gain-and-risk-sharing pricing
• Influence of other marketing mix variables
• Company pricing policies
• Impact of price on other parties

23
Adapting the Price
Price Discounts and Allowances
Cash Discounts
Functional Discounts
Quantity Discounts
Seasonal Discounts
Trade-in Allowances
Promotional Allowances
24
Adapting the Price
Loss-Leader Pricing
Special Event Pricing
Promotional Pricing Tactics
Low Interest Financing
CashRebates
PsychologicalDiscounting
Warranties and Service Contracts
Longer Payment Terms
25
Adapting the Price
Discriminatory Pricing Tactics
Time Pricing
Image Pricing
Channel Pricing
Location Pricing
Product-Form Pricing
Customer Segment Pricing
26
Adapting the Price

• Price discrimination works when
• Market segments show different intensities of
  demand
• Consumers in lower-price segments can not resell
  to higher-price segments
• Competitors can not undersell the firm in
  higher-price segments
• Cost of segmenting and policing the market does
  not exceed extra revenue

27
Adapting the Price
Product-Mix Pricing Tactics
Two-Part Pricing
By-Product Pricing
Product-Line Pricing
Product-Bundle Pricing
Captive-Product Pricing
Optional-Feature Pricing
28
Legal and Ethical Issues in Pricing

• Price Discrimination
• Price Fixing
• Predatory Pricing
• Deceptive Pricing