Pricing Considerations and Strategies

1
9

• Pricing Considerations and Strategies

2
ROAD MAP Previewing the Concepts

• Identify and explain the external and internal
  factors affecting a firm's pricing decisions.
• Contrast the three general approaches to setting
  prices.
• 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 the key issues related to initiating and
  responding to price changes.

3
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.
• Dynamic Pricing charging different prices
  depending on individual customers and situations.

4
Factors Affecting Pricing Decisions
5
Internal Factors Affecting Pricing Decisions

• Marketing Objectives
• Company must decide on its strategy for the
  product. If the company has selected its target
  market and positioning carefully, then its
  marketing mix strategy, including price, will be
  fairly straightforward. (Acura and Lexus cars)
• General Objectives
• Survival, current profit maximization, market
  share leadership, and product quality leadership.

6
Product Quality Leadership
Four Seasons starts with very high-quality
servicewe await you with the perfect
sanctuary. It then charges a price to match.
7
Internal Factors Affecting Pricing Decisions

• Marketing Mix Strategy
• Price decisions must be coordinated with product
  design, distribution, and promotion decisions to
  form a consistent and effective marketing program.

8
Internal Factors Affecting Pricing Decisions

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

9
Internal Factors Affecting Pricing Decisions

• Organizational Considerations
• Must decide who within the organization should
  set prices.
• This will vary depending on the size and type of
  company. (small, large companies industrial
  products)

10
External Factors Affecting Pricing Decisions

• The Market and Demand
• Costs set the lower limit of prices.
• The market and demand set the upper limit.

11
Pricing in Different Types of Markets
Pure Competition Many buyers and sellers where
each has little effect on the going market
price. (A seller cannot charge more than the
going price.)
Monopolistic Competition Many buyers and
sellers who trade over a range of prices (The
physical product can be varied in quality,
features, or style, or the accompanying services
can be varied)
Oligopolistic Competition Few sellers who
are sensitive to each others pricing/marketing
strategies (each seller is alert to competitors
strategies and moves If a steel company slashes
its price by 10. Buyers will quickly switch to
this supplier.
Pure Monopoly Market consists of a single
seller The seller may be a government monopoly
(The US Postal Service)
12
Demand Curve
A curve that shows the number of units the market
will buy in a given time period, at different
prices that might be charged.
13
Major Considerations in Setting Price
14
Cost-Plus Pricing

• Adding a standard markup to the cost of the
  product.
• Popular because
• Sellers more certain about cost than demand
• Simplifies pricing
• When all sellers use, prices are similar and
  competition is minimized
• Some feel it is more fair to both buyers and
  sellers

15
Break-Even Chart
16
Value-Based Pricing

• Uses buyers perceptions of value, not the
  sellers cost, as the key to pricing.

17
Competition-Based Pricing

• Going-Rate Pricing
• Firm bases its price largely on competitors
  prices, with less attention paid to its own costs
  or to demand.
• Sealed-Bid Pricing
• Firm bases its price on how it thinks competitors
  will price rather than on its own costs or on
  demand.

18
New-Product Pricing Strategies

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

19
New-Product Pricing Strategies

• When to use
• Market must be highly price sensitive so a low
  price produces more market growth.
• Production and distribution costs must fall as
  sales volume increases.
• Must keep out competition and maintain low price
  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.

20
Discussion Question

• What type of pricing strategy is used when new
  drugs are released by pharmaceutical companies?
• Why?

21
Product Line Pricing

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

22
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).

23
Pricing Strategies
By-Product Pricing Setting a price for
by-products in order to make the main products
price more competitive (e.g., sawdust and Zoo Doo)
Product Bundle Pricing Combining several
products and offering the bundle at a reduced
price (e.g., computer with software and Internet
access).
24
Product Bundle Pricing
CityPASS bundles tickets to many attractions at a
low combined price.
25
Discounts and Allowances
Allowances
Discounts
Trade-In Promotional
Cash Quantity Functional Seasonal
26
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

27
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
  quality of a product.

28
Promotional Pricing
Temporarily pricing products below list price and
sometimes even below cost to create buying
excitement and urgency.
Low-Interest Financing
Loss Leaders
Approaches
Special-Event Pricing
Longer Warranties
Cash Rebates
Free Maintenance
Discounts
29
Promotional Pricing
Companies offer promotional prices to create
buying excitement and urgency.
30
Geographical Pricing

• FOB-origin pricing
• Uniform-delivered pricing
• Zone pricing
• Basing-point pricing
• Freight-absorption pricing

31
International Pricing

• Price depends on many factors, including
• Economic conditions
• Competitive situations
• Laws and regulations
• Development of the wholesaling and retailing
  system
• Costs

32
International Pricing
Companies must decide what prices to charge in
different countries.
33
Initiating Price Changes
Price Increases
Price Cuts
Cost Inflation Overdemand Cannot Supply All
Customers Needs
Excess Capacity Falling Market Share Dominate
Market Through Lower Costs
34
Interactive Student Assignment

• Choose a partner and consider the following.
• What would you think if Mercedes suddenly lowered
  its prices on its cars?
• What would you think if Mercedes suddenly raised
  its prices on its cars?
• Why?

35
Buyers Reactions to Price Changes
What would you think if the price of Joy was
suddenly cut in half?
36
Assessing and Responding to Competitor Price
Changes
37
Public Policy and Pricing
38
Rest Stop Reviewing the Concepts

1. Identify and define the external and internal
   factors affecting a firm's pricing decisions.
2. Contrast the three general approaches to setting
   prices.
3. Describe the major strategies for pricing
   imitative and new products.
4. Explain how companies find a set of prices that
   maximizes the profits from the total product mix.
5. Discuss how companies adjust their prices to take
   into account different types of customers and
   situations.
6. Discuss the key issues related to initiating and
   responding to price changes.