Pricing: Chapters 10 and 11 Review

1
Pricing Chapters 10 and 11Review

• Internal factors
• External factors
• Market and Demand
• Other external factors
• Price strategies (3)
• New product pricing
• Product Line pricing

• Price adjustments
• Segmented pricing
• Other types of pricing
• Initiating price changes
• Responding to price changes

2
Pricing Internal Factors

• Marketing objectives
• Marketing mix strategy
• Costs
• Organizational considerations

3
Pricing Marketing Objectives

• Pricing strategy flows from positioning
• Additional objectives include survival, current
  profit
• maximization market-share leadership and product
  quality leadership
• More short-term pricing objectives incl
  preventing competition from entering market or
  stabilizing a market by matching competitor price

4
Pricing Strategies

• Cost-based
• Product not consumer driven
• Value based flow from customers perception of
  value
• Value pricing is the right combination of
  attributes at a price the consumer considers fair
• Competition based
• Sealed bid and going rate pricing

5
Internal FactorsMarketing mix strategy

• It all depends
• Price is inherently the most flexible element of
  the marketing mix
• Some companies start with price and base other
  mix decisions on that price
• Target costing or design to price starts with
  the ideal price and works backward

6
Internal FactorsMarketing mix strategy

• Other firms seek to differentiate the product.
  They focus on non-price aspects of marketing mix
  i.e. quality, promotion and distribution and on
  augmented product.
• Decisions on these factors will strongly
  influence pricing
• Both approaches must recognize that consumer
  seeks best value in terms of benefits received
  for the price paid

7
Internal FactorsCosts

• Costs determine the price floor.
• Over time, price must cover cost of producing,
  distributing, promoting and selling the product
  as well as cost of capital

8
Internal FactorsExperience Curve Costs

• When costs per unit fall dramatically as volumes
  rise
• Market must be growing fast, or firm must
  increase its market share enough to absorb added
  production
• Assumes competitors are weak or behind
• Risks competitor finds lower-cost technology
  or lower price reduces image in consumers mind

9
External Factors Affecting Price

• Nature of the market and demand
• Competition
• Other factors economy, resellers, governments

10
External Factors Affecting PriceMarket and Demand

• Pure competition
• Monopolistic competition
• Oligopolistic competition
• Pure monopoly

11
Market and DemandPure competition

• Many buyers and sellers
• Uniform commodity money,wheat, copper
• Pricing flexibility virtually nil
• Research, product devt, advert and sales
  promotion have little role
• At same time, vulnerable to new seller trying to
  change basis of competition by differentiated
  product or service

12
Market and DemandMonopolistic competition

• Many buyers and sellers
• Differentiated product
• Pricing flexibility quite high
• Product devt, pricing, branding, advert and
  sales promotion may have big role

13
Market and DemandOligopolistic competition

• Many buyers and few sellers high barriers to
  entry
• Sellers highly sensitive to competitor pricing
  and marketing
• Little price flexibility market leader usually
  sets
• Research, product devt, advert and sales
  promotion have little role

14
Market and DemandPure monopoly

• Many buyers one seller huge barriers to entry
• Different types price differently govt,
  private- regulated, and private non-regulated
  monopoly
• Pricing flexibility high
• Research, product devt, and sales promotion may
  have minor role
• Advertise to persuade public of benefits to avoid
  additional regulation/govt intervention

15
Buyer-oriented pricing Consumer Perceptions of
Value

• Buyer-oriented pricing depends on fully
  understanding how much value consumers place on
  the various benefits they receive from the
  product and then setting a price that fits that
  value
• This may vary from consumer to consumer

16
Price-Demand Relationship

• In all but prestige goods, price and demand are
  at least somewhat inversely related the higher
  the price the lower the demand.
• The less demand falls as prices rise
  (inelasticity) the more it pays to raise prices

17
Competitors costs, prices and offers

• Need to establish relative costs of each
  competitor in production, financing, promotion,
  distribution and after-market service - relative
  to your firm
• Pricing needs to be relative to consumers
  perception of relative product quality

18
External Factors other

• Economic conditions boom, recession, inflation,
  stable rates etc
• Reaction of resellers to pricing
• Fair profit and support in selling will impact
  allocated shelf space
• Government/regulatory agencies
• Possible social concerns

19
Cost-based pricingProduct not consumer- driven

• Simplifies but ignores consumer, competitors and
  demand
• If all firms use it and all firms have similar
  costs, price competition is avoided
• More stable pricing
• Very vulnerable to competitor shifting basis of
  competition to price from non-price factors

20
Breakeven Analysis Target profit pricing

• Breakeven Volume
• Fixed Cost/(Price-Variable Cost)
• Table 10-1 Analytic framework for Breakeven
  volume and profits at different prices

21
Value-Based PricingConsumer not product-based

• Setting price based on buyers perception of
  value rather than on sellers cost
• Setting price based on right combination of
  quality and good service at a fair price

22
Value-Based Pricing

• Price must be considered together with other
  marketing mix variables (product, promotion and
  place) before the marketing program is set
• Pricing begins with analyzing consumer needs and
  value perceptions
• Targeted price drives decisions about design and
  what costs can be incurred

23
Value Pricing

• Consumer shift through 1990s toward value
  (combination of price and quality)
• Response
• redesigning existing brands to increase perceived
  value for the same price
• Introduction of less expensive, value line
• everyday low prices stabilize price
  variability from sales and discounts or hi-low
  pricing

24
Value Pricing EDLPEconomic basis

• Stabilizes, and hence increases, predictability
  of demand for maker
• Eliminates need for resellers to buy on discounts
  and store to sell later
• Busy consumer doesnt need to wait for sales
• Consumer gets lower price all the time but not as
  low as previous sale price
• Restores credibility in everyday shelf prices

25
Competition-based pricing

• Going rate pricing
• Focus on competitor price rather than own costs
  also constant rate difference
• Holding competitor price also avoids price wars
• Sealed bid pricing
• Firm bids above its costs and just below point
  where it believes next lowest bid will be
• Expected profit is an alternative method for
  companies who make many bids

26
Procter Gamble

• P G replaced its 450 gram pkgs of regular
  Folgers coffee with 365 gram pkgs of
  fast-roasted. Fast roasted allows for use of few
  coffee beans per pack with impact on number of
  services per package or on flavor. Which pricing
  approach was most appropriate for fast roasted
  Folgers cost-based, buyer-based or competition-
  based pricing? BUYER-based

27
Car Dealerships

• The sticker price is generally higher than the
  actual selling price of a car.
• How do car dealers actually set their prices?
• Starts from manuracturers cost but basically is
  competitior driven or going rate
• What is the approach of no-haggle pricing?
• Value-based pricing ie the right combination of
  benefits desired by the consumer at a price the
  consumer considers fair

28
Break-even exercise

• You just inherited an automatic car wash where
  fixed costs are 50,000 and variable costs are
  0.50 per car washed. You think people would be
  willing to pay 1 to have their car washed.
  Determine what the break-even volume would be at
  that price.

29
New Product Pricing Strategies

• Price-Quality strategies See Figure 11-1
• Premium higher quality price
• Good Value strategy - hi quality lower price
• Overcharging higher price lower quality
• Economy strategy lower price quality

30
Pricing of innovative patent-protected products

• Market skimming
• Set high initial price to skim revenues layer by
  layer from the market
• Right conditions include high quality image,
  costs cannot be so high they cancel out advantage
  of higher price clear competitive advantage
• Market penetration
• Set lower price in order to increase demand and
  gain dominant market share which is obstacle to
  potential entrants e.g. Dell, Home Depot

31
Pricing of innovative patent-protected products

• Market penetration
• Set lower price in order to increase demand and
  gain dominant market share which is obstacle to
  potential entrants e.g. Dell, Home Depot
• Needed conditions highly price sensitive market
  product ion and distribution costs must fall as
  volumes rise cost structure must be lower than
  competitors

32
Pricing StrategiesMarket Skimming or
Penetration?

• McDonalds
• Intel
• Future Shop
• Bic Corp (pens, lighters)
• IBM

33
Genetech Pharmaceutical

• Genetech developed a clot dissolving drug called
  TPA which will halt a heart attack in progress.
  Saves lives, minimizes hospital stays and reduces
  damage to heart. Initially priced at 3060 per
  done. What pricing approach is Genetech using.
  What pricing strategy might it adopt? Is demand
  likely to be elastic?

34
Product Line Pricing

• Firms typically offer a product line rather than
  a single product or service
• Usually each successive item offers more feature
  or benefits (eg Kodak film different qualities
  from Funtime to Kodak Gold and each in different
  sizes, speeds and formats

35
Product Line Pricing

• Seller must decide on price steps between various
  products in a line
• If price between two steps is high it will
  discourage trading up and converse if price step
  is small
• Seller then establishes perceived quality
  differences to support price steps
• In many cases, there are well-established price
  points which will correspond in consumers minds
  with low, average and high quality

36
Price Adjustment Strategies (1)

• Cash discount improves sellers cash reduces
  bad debt
• Quantity discount inventive to customer to buy
  more from one seller sellers selling inventory
  and delivery costs are lower
• Functional (or trade) discount offered to trade
  channel member in recognition of service they
  perform most offer same discount to all members
  at same level in trade

37
Segmented Pricing

• Customer segment pricing
• By customer class (seniors, children) retail
  versus commercial
• Product form, features pricing
• Location pricing
• City centre vs suburb vs small town
• Time pricing
• Toll highways, utilities peak/off peak

38
Segmented Pricing

• Offering the right product to the right customer
  at the right time for the right price
• Difference is rooted in perceived value not in
  cost to seller

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Segmented PricingConditions for effectiveness

• Segments must show different degrees of demand
• Segmented prices must reflect real differences in
  customers perceived value or practice will lead
  to ill-will
• Competitors wont be able to undersell in a given
  market
• Must be legal

40
Psychological Pricing

• Psychological pricing considers the psychology of
  prices not the economics or cost
• Price is an important quality signal where
  consumers cannot otherwise judge the quality by
  examining it or relying on past experience

41
Promotional and geographicPricing

• Promotional below list and possibly below cost
  to increase sales in short term
• Various methods which have the effect of
  neutralizing (to the buyer) the transportation
  component in the product price

42
International Pricing

• Products can be sold for same price in all
  markets (when cost structure of buyer is global
  eg selling planes to airlines)
• More often prices differ from market to market to
  reflect local demand and costs considerations

43
Initiating Price ChangesPrice Cuts Why make
them?

• Seller needs more revenue. Other avenues
  exhausted, i.e. greater sales effort, product
  improvement, etc
• Seller faces falling market share due to tougher
  competition consumer perceives competitor
  product to have greater value therefore seller
  must reduce price
• Seller seeks market dominance either starts with
  low costs or wants to lower cost via inc output.
  Low price-low cost strategy

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Initiating Price ChangesPrice Hikes Why ?

• Want more profit If net margin is 3 a 1 inc in
  price will increase profits by 33. If net margin
  is 6, a 3 price will increase profits 50.
• Seller faces cost inflation price usually rises
  by more than actual inflation temporary boost
  to profit. Must explain price increase to
  consumer
• Alternatives economize on inputs rightsize or
  shrink product unbundle product and price
  separately service previously included in offer
  

45
Initiating Price Changes

• Must anticipate reactions of both buyer and
  competitors

46
Competitor Reaction to Price Chg

• Most likely to react when relatively few
  sellers, product is uniform, buyers are
  well-informed (ie an efficient market like
  gasoline)
• Price change will be interpreted in many ways. Is
  seller in financial trouble? is the seller trying
  to lead an industry wide price change?
  Interpretations of various competitors may be
  different.
• Different reactions likely if competitors differ
  in size, markets share, and strategy. Typically
  if one matches price, the others do as well.

47
Responding to Price ChangesAlternatives

• Reduce price
• Raise perceived quality
• Improve quality and increase price
• Launch a fighting brand ( brand extension
  positioned against new competitor brand in price
  and quality).

48
Mercedes and Porsche

• When dollar is weak, import prices rise and
  Mercedes and Porsche prices rise with them. Yet
  the dollar strengthens, the prices for these cars
  are kept high yielding unusually large profits.
  Should Mercedes and Porsche drop prices when
  dollar rises? What would effect be on used car
  and trade in values?

49
Mens suits

• A retailer sells mens jackets at 180, 250 and
  340. If shoppers use these price points as
  reference prices, what will be the effect of
  adding a new line of suits priced at 280? Would
  sales of the retailers 250 line increase,
  decrease or stay the same?