Marketing Management 2nd Edition

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Marketing Management2nd Edition
Michael R. Czinkota and Masaaki Kotabe

• Chapter 10
• Pricing Decisions

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Importance of PriceProbably the single most
important marketing decision.

• Three variables that determine profit

-
X

Sales Volume
Price
Cost
Profit
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Service Prices

• Differences in pricing for services
• Negotiation
• Variability leaves more room for negotiation
• Discounts
• Perishability leads to price incentives at
  off-peak times
• Quality
• Higher Pricing to signal Quality

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Price for Non-Profit Organizations

• Surplus Allocation of service
• Queuing
• (e.g., organ transplant)
• Price is perceived value.

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Supply and Demand
Supply curve
Equilibrium Price
Price
Demand curve
Quantity
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Price Elasticity of DemandThe degree to which
demand is sensitive to price.
change in demand
Price elasticity of demand

change in price
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Demand

• If an increase in price results in a decrease in
  revenue, demand is elastic. Demand is sensitive
  to price change.
• P? leads to R ? demand is elastic
• If an increase in price results in an increase in
  revenue, demand is inelastic. Demand is
  insensitive to price change.
• P? leads to R ? demand is inelastic

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Three Ways to Estimate the Demand Curve

• Statistical analysis of historical data
• Problem Too many variables in normal complexity
  of markets
• Survey research
• Problem Results often inaccurate
• Experiment
• Can be successful.
• Problem Costs

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Factors Affecting Demand ElasticityOrganization
Factors

• Product life cycle
• Stage in Life Cycle
• Skimming vs. Penetration
• Product portfolio
• Product line pricing
• Interrelated Demand (i.e., complementary or
  alternatives)
• Interrelated Costs (e.g., same facilities or
  processes used)
• Segmentation and positioning
• Can offer protection from pricing pressures.
• Branding

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Factors Affecting Demand ElasticityCustomer
Factors

• Demand
• Benefits
• commodity price vs. premium price
• Value as perceived by the customer
• Distribution channel costs added

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Factors Affecting Demand ElasticityMarket
Factors

• Competition
• Economic and regulatory environment
• Exchange rate
• Depreciation Making Imports more expensive and
  Exports less expensive
• Geography
• Uniform Pricing
• FOB (free on board) customer pays transport costs
• Zone Pricing

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Pricing Strategies
Price Skimming Price HIGH

• Inelastic prices
• New or unique product
• Distinct market segments
• Quality important
• Competitive costs unknown

Penetration Pricing Price LOW

• Elastic prices
• Competitors can enter market
• No distinct market segments
• Products undifferentiated
• Economies of scale

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Practical Pricing Policies

• Cost-plus pricing
• Target pricing (e.g., ROI)
• Historical pricing
• Product line pricing (e.g., price lining)
• Competitive pricing
• Market leader niche marketer in favored
  position.
• loss-leader pricing
• Market-based pricing (a.k.a., perceived value
  pricing)
• Price Positioning Where will brand be priced
  relative to competition?
• Quality Pricing (e.g., Rolls-Royce, Hilton
  Hotels)
• Budget Pricing
• Selective pricing
• Category Pricing
• Customer Group Pricing (e.g., students, seniors)
• Peak Pricing
• Yield Pricing (e.g., airlines)
• Service Level Pricing

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Fundamental Errors in Setting Prices

• The tendency to think in terms of averages.
• The reluctance to let bygones be bygones (i.e.,
  sunk costs).
• The tendency to ignore alternatives (i.e.,
  opportunity costs).
• The tendency to emphasize cost considerations
  over demand considerations (e.g., cost-plus
  pricing).

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Discounts

• Trade discounts
• Quantity discounts
• Cash discounts
• Allowances (e.g., trade-ins)
• Seasonal discounts
• Promotional pricing
• Individual pricing (i.e., haggling)
• Optional features (e.g., autos)
• Product bundling
• Value package
• Psychological pricing (e.g., recommended price,
  9.99

11.99
9.99
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Price Negotiation

• Sellers are in a strong position when
• Buyers each buy small quantities relative to the
  total sales of the seller.
• Buyers lack suitable alternative sources.
• Buyers face high switching costs.
• The cost of the item is a small part of the
  buyers costs.
• The cost of the product failing would be high.
• Cost savings resulting from use of the product
  are significant.
• Buyers have high quality images.
• Buyers want custom-designed products.
• Buyers organizations are highly profitable.
• The buyer is poorly informed.
• Large buyers are not necessarily the most price
  conscious.

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Price Wars

• Price competition is seen as the most savage and
  destructive forms of business warfare.
• The dangers of initiating a price war
• Low Quality Image
• Temporary Advantage
• Loss of Profit
• In some cases sales volume may make up for price
  decrease.
• Reasons to implement a price reduction
• Actual Cost Advantage
• Market Leadership Targeting
• Excess Capacity
• Falling Brand Share

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Reactions to Price Challenges

• Reduce Price most popular reaction
• Maintain Price
• Split the Market
• Increase quality of main brand while launching a
  fighting brand
• React with Other Measures (e.g., improved quality
  or increased promotion)

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Price Increases

• Increase the price when everyone else does.
• Dont increase too much at any one time.
• Incremental increases (around the price of
  inflation) are less noticeable.
• Dont increase too often.
• Look after your key account (80/20).
• Provide sound and true - explanations.

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Temporal Price Discrimination

• Time of day pricing
• Time when purchased
• Day of week pricing
• Seasonal pricing