BA320

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Pricing

• BA320
• Summer 2006

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Agenda for Today

• Discuss the importance of understanding customer
  value perceptions and company costs when setting
  prices.
• Identify and define the other important internal
  and external factors affecting a firms pricing
  decisions.
• Describe the major strategies for pricing
  imitative and new products.
• Explain how companies find a set of prices that
  maximizes the profits from the total product mix.
• Discuss how companies adjust their prices to take
  into account different types of customers and
  situations.
• Discuss key issues related to initiating and
  responding to price changes.

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What Is a Price?

• Narrowly, price is the amount of money charged
  for a product or service.
• Broadly, price is the sum of all the values that
  consumers exchange for the benefits of having or
  using the product or service.

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Figure 9-1Factors Affecting Pricing Decisions
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Customer Value Perceptions

• Customer-oriented pricing
• Involves understanding how much value consumers
  place on the benefits they receive from the
  product and setting a price that captures that
  value.
• Value-based pricing
• Uses buyers perceptions of value, not the
  sellers cost, as the key to pricing.
• Good value pricing
• Value-added pricing

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Value-Added Pricing
Marketing in Action

• Caterpillar offers dealers a wide range of
  value-added services, including training,
  investment advice, and guaranteed parts delivery.
  These services justify charging a higher price.

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Internal Factors Affecting Pricing Decisions

• Company and Product Costs
• Fixed Costs
• Costs that do not vary with production or sales
  level.
• Variable Costs
• Costs that vary directly with the level of
  production.

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Cost-Based Pricing

• Cost-plus pricing
• Adding a standard markup to the cost of the
  product
• Break-even pricing
• Target-profit pricing

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Figure 9-3Break-Even Chart for Determining Price
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Internal Factors Affecting Pricing Decisions

• Marketing Objectives
• Company must decide on its strategy for the
  product.
• Price is only one of the marketing mix tools.
• Marketing Mix Strategy
• Price decisions must be coordinated with product
  design, distribution, and promotion decisions to
  form a consistent and effective marketing
  program.
• Target costing
• Pricing that starts with an ideal selling price,
  then targets costs that will ensure that the
  price is met.

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External Factors Affecting Pricing Decisions

• The Market and Demand
• Costs set the lower limit of prices while the
  market and demand set the upper limit.
• Pricing in different types of markets
• Pure competition
• Monopolistic competition
• Oligopolistic competition
• Pure monopoly
• Analyzing the price-demand relationship
• The price elasticity of demand

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Figure 9-4The Demand Curve
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comcast.com
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External Factors Affecting Pricing Decisions

• Competitors Strategies and Prices
• How does the market offering compare?
• How strong is competition and what is their
  pricing strategy?
• How does competition influence price sensitivity?
• Other External Factors (Macroenvironment)

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New-Product Pricing Strategies

• When to Use
• Products quality and image must support its
  higher price.
• Costs of low volume cannot be so high they cancel
  the advantage of charging more.
• Competitors should not be able to enter market
  easily and undercut the price.

• Market Skimming
• Set a high price for a new product to skim
  revenues layer by layer from the market.
• Company makes fewer, but more profitable sales.

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New-Product Pricing Strategies

• When to Use
• Market is highly price sensitive so a low price
  produces more growth.
• Costs must fall as sales volume increases.
• Need to keep competition out or effects are only
  temporary.

• Market Penetration
• Set a low initial price in order to penetrate
  the market quickly and deeply.
• Can attract a large number of buyers quickly and
  win a large market share.

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Product Mix Pricing Strategies

• Product line pricing
• Optional-product pricing
• Captive-product pricing
• By-product pricing
• Product bundle pricing

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Product Line Pricing

• Sets price steps between various items in a
  product line based on
• Cost differences between products
• Customer evaluations of different features
  
• Competitors prices

Product Line Pricing Gramophone sells a line of
high-end sound systems ranging in price from
5,000 to 120,000.
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Optional- and Captive-Product Pricing

• Optional-Product
• Pricing optional or accessory products sold with
  the main product (e.g., ice maker with the
  refrigerator).
• Captive-Product
• Pricing products that must be used with the main
  product (e.g., replacement cartridges for
  Gillette razors).

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Product-Bundle Pricing
Marketing in Action

• Travelers who book flight, hotel, and car
  together can save on average 189.00 from
  Expedia.com

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Price Adjustment Strategies

• Discount and allowance pricing
• Segmented pricing
• Psychological pricing
• Promotional pricing
• Geographical pricing
• Dynamic pricing
• International pricing

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Discounts and Allowances

• Discounts
• Cash
• Quantity
• Functional
• Seasonal
• Allowances
• Trade-in
• Promotional

Christmas cards purchased out of season, such as
in March or July, are often sold at a discount.
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Segmented Pricing

• Selling a product or service at two or more
  prices, where the difference in prices is not
  based on differences in costs.
• Types
• Customer-segment
• Product-form
• Location pricing
• Time pricing

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Psychological Pricing

• Considers the psychology of prices and not simply
  the economics.
• Consumers usually perceive higher-priced products
  as having higher quality.
• Consumers use price less when they can judge the
  quality of a product by examining it or recalling
  experiences.

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Promotional Pricing Techniques

• Cash Rebates
• Special-Event Pricing
• Loss Leaders

• Low-Interest Financing
• Longer Warranties
• Free Maintenance

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Promotional Pricing
Marketing in Action

• Companies offer promotional pricing to create
  excitement and a sense of urgency.

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Dynamic Pricing
Marketing in Action

• Adjusting prices continually to meet the
  characteristics and needs of individual customers
  and situations.

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Lets Talk!
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Rest Stop Reviewing the Concepts

• Discuss the importance of understanding customer
  value perceptions and company costs when setting
  prices.
• Identify and define the other important internal
  and external factors affecting a firms pricing
  decisions.
• Describe the major strategies for pricing
  imitative and new products.
• Explain how companies find a set of prices that
  maximizes the profits from the total product mix.
• Discuss how companies adjust their prices to take
  into account different types of customers and
  situations.
• Discuss key issues related to initiating and
  responding to price changes.