Pricing Considerations and Pricing Considerations and StrategiesStrategies

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ROAD MAP: Previewing the Concepts

• Identify and explain the external and internal Identify and explain the external and internal factors affecting a firm's pricing decisions.factors affecting a firm's pricing decisions.

• Contrast the three general approaches to Contrast the three general approaches to setting prices.setting prices.

• Describe the major strategies for pricing Describe the major strategies for pricing imitative and new products.imitative and new products.

• Explain how companies find a set of prices Explain how companies find a set of prices that maximizes the profits from the total that maximizes the profits from the total product mix.product mix.

• Discuss how companies adjust their prices to Discuss how companies adjust their prices to take into account different types of take into account different types of customers and situations.customers and situations.

• Discuss the key issues related to initiating Discuss the key issues related to initiating and responding to price changes.and responding to price changes.

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What is a Price?

• NarrowlyNarrowly, price is the amount of money , price is the amount of money charged for a product or service.charged for a product or service.

• BroadlyBroadly, price is the sum of all the , price is the sum of all the values that consumers exchange for values that consumers exchange for the benefits of having or using the the benefits of having or using the product or service.product or service.

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

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Factors Affecting Pricing Decisions

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Internal Factors Affecting Pricing Decisions

• Marketing Objectives:Marketing Objectives:– Company must decide on its strategy for the Company must decide on its strategy for the

product. If the company has selected its target product. If the company has selected its target market and positioning carefully, then its market and positioning carefully, then its marketing mix strategy, including price, will be marketing mix strategy, including price, will be fairly straightforward. (Acura and Lexus cars)fairly straightforward. (Acura and Lexus cars)

– General Objectives:General Objectives:• Survival, current profit maximization, market share Survival, current profit maximization, market share

leadership, and product quality leadership.leadership, and product quality leadership.

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Product Quality Leadership

Four Seasons starts with very high-quality service—”we await you with the perfect sanctuary.” It then charges a price to match.

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Internal Factors Affecting Pricing Decisions

• Marketing Mix Strategy:Marketing Mix Strategy:– Price decisions must be coordinated with Price decisions must be coordinated with

product design, distribution, and product design, distribution, and promotion decisions to form a consistent promotion decisions to form a consistent and effective marketing program.and effective marketing program.

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Internal Factors Affecting Pricing Decisions

• Costs:Costs:– Fixed Costs:Fixed Costs:

•Costs that do not vary with production or Costs that do not vary with production or sales level.sales level.

– Variable Costs:Variable Costs:•Costs that vary directly with the level of Costs that vary directly with the level of

production.production.

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Internal Factors Affecting Pricing Decisions

• Organizational Considerations:Organizational Considerations:– Must decide who within the organization Must decide who within the organization

should set prices.should set prices.– This will vary depending on the size and This will vary depending on the size and

type of company. (small, large type of company. (small, large companies & industrial products)companies & industrial products)

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External Factors Affecting Pricing Decisions

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

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Pricing in Different Types of Markets

Pure Competition:Many buyers and sellers

where each has little effecton 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)

Pure Monopoly:Market consists of a

single seller The seller may be a government monopoly

(The US Postal Service)

Oligopolistic Competition:Few sellers who are

sensitive to each other’spricing/marketing strategies

(each seller is alert to competitors strategies and movesIf a steel company slashes its price by 10%.

Buyers will quickly switch to this supplier.

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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.

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Major Considerations in Setting Price

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Cost-Plus Pricing

• Adding a standard markup to the Adding a standard markup to the cost of the product.cost of the product.

• Popular because:Popular because:– Sellers more certain about cost than Sellers more certain about cost than

demanddemand– Simplifies pricingSimplifies pricing– When all sellers use, prices are similar When all sellers use, prices are similar

and competition is minimizedand competition is minimized– Some feel it is more fair to both buyers Some feel it is more fair to both buyers

and sellersand sellers

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Break-Even Chart

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Value-Based Pricing

• Uses buyers’ perceptions of value, Uses buyers’ perceptions of value, not the seller’s cost, as the key to not the seller’s cost, as the key to pricing.pricing.

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Competition-Based Pricing

• Going-Rate Pricing:Going-Rate Pricing:– Firm bases its price largely on Firm bases its price largely on

competitors’ prices, with less attention competitors’ prices, with less attention paid to its own costs or to demand.paid to its own costs or to demand.

• Sealed-Bid Pricing:Sealed-Bid Pricing:– Firm bases its price on how it thinks Firm bases its price on how it thinks

competitors will price rather than on its competitors will price rather than on its own costs or on demand.own costs or on demand.

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New-Product Pricing Strategies

Market-SkimmingMarket-Skimming

Set a high price for a Set a high price for a new product to new product to “skim” revenues “skim” revenues layer by layer from layer by layer from the market.the market.

Company makes Company makes fewer, but more fewer, but more profitable sales.profitable sales.

• When to use:When to use:– Product’s quality and Product’s quality and

image must support its image must support its higher price.higher price.

– Costs of smaller volume Costs of smaller volume cannot be so high they cannot be so high they cancel the advantage of cancel the advantage of charging more.charging more.

– Competitors should not Competitors should not be able to enter market be able to enter market easily and undercut the easily and undercut the high price.high price.

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New-Product Pricing Strategies

Market Market PenetrationPenetration

Set a low initial price Set a low initial price in order to “penetrate” in order to “penetrate” the market quickly the market quickly and deeply.and deeply.

Can attract a large Can attract a large number of buyers number of buyers quickly and win a quickly and win a large market share.large market share.

• When to use:When to use:– Market must be highly Market must be highly

price sensitive so a low price sensitive so a low price produces more price produces more market growth.market growth.

– Production and Production and distribution costs must distribution costs must fall as sales volume fall as sales volume increases.increases.

– Must keep out Must keep out competition and maintain competition and maintain low price or effects are low price or effects are only temporary.only temporary.

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

•Why?Why?

Discussion Question

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Product Line Pricing

• Involves setting price steps between Involves setting price steps between various products in a product line various products in a product line based on:based on:– Cost differences between productsCost differences between products– Customer evaluations of different Customer evaluations of different

features features – Competitors’ pricesCompetitors’ prices

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Optional- and Captive-Product Pricing

•Optional-ProductOptional-Product– Pricing optional or accessory products Pricing optional or accessory products

sold with the main product (e.g., ice sold with the main product (e.g., ice maker with the refrigerator).maker with the refrigerator).

•Captive-ProductCaptive-Product– Pricing products that must be used with Pricing products that must be used with

the main product (e.g., replacement the main product (e.g., replacement cartridges for Gillette razors).cartridges for Gillette razors).

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Pricing Strategies

By-Product Pricing:Setting a price for by-products in order to make the mainproduct’s price more competitive (e.g., sawdust andZoo Doo)

Product Bundle Pricing:Combining several products and offering the bundleat a reduced price (e.g., computer with software and Internet access).

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Product Bundle Pricing

CityPASS bundles tickets to many attractions at a low combined price.

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Discounts and Allowances

Cash

Quantity

Functional

Seasonal

Trade-In

Promotional

Discounts Allowances

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Segmented Pricing

• Selling a product or service at two Selling a product or service at two or more prices, where the or more prices, where the difference in prices is not based on difference in prices is not based on differences in costs.differences in costs.

• Types:Types:1.1. Customer-segmentCustomer-segment

2.2. Product-formProduct-form

3.3. Location pricingLocation pricing

4.4. Time pricingTime pricing

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Psychological Pricing

• Considers the psychology Considers the psychology of prices and not simply of prices and not simply the economics.the economics.

• Consumers usually Consumers usually perceive higher-priced perceive higher-priced products as having higher products as having higher quality.quality.

• Consumers use price Consumers use price lessless when they can judge when they can judge quality of a product.quality of a product.

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Promotional Pricing

Special-Event PricingSpecial-Event Pricing

Cash RebatesCash Rebates

Low-Interest FinancingLow-Interest Financing

Longer WarrantiesLonger Warranties

Free MaintenanceFree Maintenance

DiscountsDiscounts

Loss LeadersLoss Leaders

Temporarily pricing products below list price and sometimes even below cost to create buying excitement and urgency.

Approaches:

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Promotional Pricing

Companies offer promotional prices to create buying excitement and urgency.

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Geographical Pricing

• FOB-origin pricingFOB-origin pricing

• Uniform-delivered Uniform-delivered pricingpricing

• Zone pricingZone pricing

• Basing-point pricingBasing-point pricing

• Freight-absorption Freight-absorption pricingpricing

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International Pricing

• Price depends on Price depends on many factors, many factors, including:including:– Economic conditionsEconomic conditions– Competitive Competitive

situationssituations– Laws and regulationsLaws and regulations– Development of the Development of the

wholesaling and wholesaling and retailing systemretailing system

– CostsCosts

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International Pricing

Companies must decide what prices to charge in different countries.

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Initiating Price Changes

Excess Capacity

Falling MarketShare

Dominate MarketThrough Lower

Costs

Cost Inflation

Overdemand:Cannot SupplyAll Customers’

Needs

Price Cuts Price Increases

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•Choose a partner and consider the Choose a partner and consider the following.following.– What would you think if Mercedes What would you think if Mercedes

suddenly lowered its prices on its cars?suddenly lowered its prices on its cars?– What would you think if Mercedes What would you think if Mercedes

suddenly raised its prices on its cars?suddenly raised its prices on its cars?– Why?Why?

Interactive Student Assignment

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Buyers’ Reactions to Price Changes

What would you think if the price of Joy was suddenly cut in half?

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Assessing and Responding to Competitor Price Changes

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Public Policy and Pricing

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Rest Stop: Reviewing the Concepts

1.1. Identify and define the external and internal Identify and define the external and internal factors affecting a firm's pricing decisions.factors affecting a firm's pricing decisions.

2.2. Contrast the three general approaches to Contrast the three general approaches to setting prices.setting prices.

3.3. Describe the major strategies for pricing Describe the major strategies for pricing imitative and new products.imitative and new products.

4.4. Explain how companies find a set of prices Explain how companies find a set of prices that maximizes the profits from the total that maximizes the profits from the total product mix.product mix.

5.5. Discuss how companies adjust their prices to Discuss how companies adjust their prices to take into account different types of take into account different types of customers and situations.customers and situations.

6.6. Discuss the key issues related to initiating Discuss the key issues related to initiating and responding to price changes.and responding to price changes.