Ch 10 Pricing

Types of good value pricing

#EDLP (every day lower price) -Keeps price consistently low with discounts (Walmart,Costco,Leon's) but fewer or no temporary price discount -Build loyal base of one-stop shoppers #HiLo (high-low) pricing -High base price with frequent price specials(Sear's -Attract consumers with specials may result in more

Dynamic pricing

-->Adjusting price continually to meet the characteristics and needs of individual customers and situations -->Internet and web-purchasing provides the technological capability for dynamic pricing -Kijiji -Auctions: ebay

Psychological pricing

-Considers psychology of prices, not just economics. -Consumers usually perceive higher-priced products as having higher quality. -Relies on consumer's : reference price Prices buyers carry in their minds and refer to when they look at a given product $99.99 rather than $100

Price-adjustment strategies

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

External factors

-Economic environment -Government -Social concerns -Competitors' costs, prices and offers -The market and demand different types of markets price-demand relationship consumer perceptions of price and -Inflation !!! coca cola

about cost-plus & break-even price

-Help to determine minimum prices to cover expected costs and profit BUT they do not take price-demand relationship into account. SOOO when using these method must consider the impact of price on sales volume needed to realized target profit and the like hood that the needed volume will be achieved

New product pricing

-Introduction stage TWO BROAD STRATEGIES: -market skimming pricing -market-penetration pricing

Issues with competition-based pricing

-It encourages firms to ignore their unique value proposition -It can lead to price wars (airline industry ) -Focusing on market share does not necessarily lead to maximum profits +Instead of setting market share objectives, firms should focus on identifying the most profitable segments to serve, and finding ways of profitably serving them while protecting themselves from price wars.

Issue with cost-based pricing

-Need to know all costs. -Does not work well with high fixed costs and near-zero variable costs -Ignoring the value you create leads to underpricing (consumer perception) -Ignoring competitor prices

Multiple product (Product Mix) Pricing

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

Market-skimming pricing

-Setting a for a new product to skim maximum revenues layer by layer from segments willing to pay the high price -Start profiting from "consumption pioneers" innovators EXAMPLE : SONY-playstation APPLE-ipod Use when: 1, the product quality and image must support its higher price and enough buyers must want the product at that price 2.The cost of producing a smaller volume cannot be so high that they cancel the advantage of charging more 3.Competitors should not be able to enter the market easily and undercut the high price

Price and happiness

5 different wine They change the price One wine :5$ same wine : 45$ One wine : 50$ same wine : only 5$ Participant likes the wine that cost more MOFC Brain is more activated related to happy when they try the high price wine Call for more rational consumer We should try to rely less on price They are not paying for that

Price perceptions: (1) Odd endings

80% of all retail food prices in U.S. end in .99 or .95 -Perceived as sale -Perceived as less

Discount and allowance

A straight reduction in price on purchase during a stated period of time or on larger quantities. -discounts (e.g. cash-rebate, quantity discount, etc) -allowance (e.g. trade-in allowances, store promotion deal, etc) ---> cash discount-->quantity discount-->seasonal discount

Elasticity

A way of measuring how sensitive the market is to price changes -Inelasticity: demand hardly changes with a change in price (medicine, gasoline) -Elastic: demand greatly changes with price (vacation product, luxury cars)

Cost-plus pricing

Adding a stander mark up to the cost (Example: many grocery stores ) Popular due to : 1.Seller are more certain about cost than about demand 2.When all firms in the industry use this pricing method, price tend to be similar, minimizing competition. BUT Does not make sense!!! Any pricing ignores consumer demand and competitor prices is not likely to lead to the best price.

Value-added pricing

Attaching value-added feature and service to differentiate a company's offers and charging higher prices. -Example : Cineplex- more service , more amenties

How to respond to competitor price change（before）

Before responding to competitors' price changes Evaluate the competitor's reason for the price change－ will lower price negatively affect our market share and profit. Observe marketplace to the price change Consider own marketing plan

Product bundle pricing

Combining several products and offering the bundle at a lower price (e.g., fast food combo meals) Why bundling? -Reduce transaction cost -Highlight benefit of joint purchase -Increase combine sales

International pricing

Companies that marker their products internationally must decide what prices to charge in different countries. -depends on how many factory ,economic conditions, competitive situation

Consideration in setting price

Customer Other internal and Product perception <==>external consideration <==> Costs of value (Marketing strategy, (price (Price ceiling) objective and mix, natural floor) of the market and demand competitors' strategy and price)

Problems with CBV-pricing

Customers do not reveal how much they value the product Customers need to be educated about the value of the product -What are advantages of 14 karat gold over 10 karat? -Why should I care about the type of wood this cutting board is made out of? Etc.

Going-rate pricing

Firm bases its price largely on competitors' prices, with less attention paid to its own costs or to demand.(set price base on competitor's price strategy)

Sealed-bid auction pricing

Firm bases its price on how it thinks competitors will price rather than on its own costs or on demand.

Types of cost

Fixed cost (Overhead)- rent, salaries Variable cost -vary directly with the level of production Total cost

Factors affecting pricing decisions

Internal factors: -Marketing objectives -Marketing mix strategy -Cost -Organizational considerations External factors: -Nature of the market and demand -Competition -Other environmental factors (economy, resellers, government, social concerns) (However, ultimately the consumer decides how much you charge )

Price

Narrow definition: Price is the amount of money charged for a product or service Broad definition: Price is the total value that customers exchange for the benefit of having or using the product or service

Good value pricing

Offering just the right combination of quality and good service at fair price -->Introducing less expensive version of established brand name product (attract first time customer) -->Offering more quality for given price & the same quality for less

How to respond to competitor price change

Options in responding to competitors' price changes -Reduce price -Raise perceived quality -Improve quality and increase price -Launch low price "fighter brand ":company can add a lower price item join the competition

Cost-based pricing

Price based on the costs for producing, distributing, and selling the product plus a fair rate of return for its effort and risk. -Costs set the floor for the price that the company can charge -Purely product-driven(not value driven) +Type of cost-based pricing -Cost-plus(mark-up) Pricing -Break-even pricing(Target return pricing) Total revenue=total cost

Optional-product pricing

Pricing optional or accessory products sold with the main product (e.g., GPS navigation system with a car)

Company objective

Pricing plays important role in helping to accomplish company objective at many level. Firm ... -can set price to attract new customers or to profitably retain existing ones. -can set price low to prevent competitor from entering the market, - set prices at competitors' level to stabilize the market

Target costing

Pricing that starts with an ideal selling price, and then targets cost that will ensure that the price is met

Major price strategies

Product Cost --> Cost-based pricing Consumer Value perception --> Value-based pricing Competitor Prices & Other Factors --> Competition-based pricing (A company's pricing practice in the real business world is typically a combination of these three general approaches )

Pricing in different markets

Pure competitive Market -- many buyers and sellers -- uniform product (e.g. potatoes, wheat) Oligopoly Market -- fewer sellers, highly sensitive to each other's marketing strategy (e.g. airline) Monopolistic Market -- many buyers and sellers -- differentiated product (e.g. clothing Monopoly Market -- Single seller (e.g. ATCO gas) [Firm's pricing power gets weaker moving from bottom to top !]

Price perceptions: (2) Reference prices

Reference prices -Consumers don't always "know" prices. -Consumers use #external references prices# from the environment to evaluate prices. +Willingness to pay differs when the order in which they observe prices changes (e.g., the prices of unrelated products , Nunes and Boatwright (2004)) -Consumers have #Internal reference#: a set price or a price range in consumers' minds that they refer to in evaluating prices.

Segmented pricing

Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. -Customer-segment: student discount and seniors discount - Product-form. -Location pricing: music festival, concert - Time-based pricing: seasonal discount -Quantity discounts.

Prestige pricing

Set a high price to attract quality or status-conscious consumers, such as Rolls-Royce, Bentley, Swiss watches. Prestige goods prices are price elastic (though not for high income consumers)or sometimes negative price.(demand increases as price increase

Market-penetration pricing

Setting a lower price for a new product in order to attract a large number of buyers and a large market share. -Can penetrate the market quickly and deeply EXAMPLE : Pamper, dell, Southwest, Ikea in China Use when: 1. The market must be highly prices sensitive so that a low prices produces more market growth.(Consumers have highly elastic demand) 2.Production and distribution cost must fall as sales volume increase. 3. The low prices must help keep out the competition, and the penetration price must maintain it's low price position. 4.There are significant learning effects & economies of scale

By-product pricing

Setting a price for by-products to make the main product's price more competitive For example, in producing processed meats, chemicals, or oil there are often by-products, which - if they had to be disposed of - would make the main product uncompetitive.

Product-line pricing

Setting price "steps" between various products in a line based on cost differences, customer evaluations of features, and competitors' prices Example : Kindle different version

Competition-Based Pricing

Setting price based on competitor strategies, price, cost and market offering TYPE: -Going-rate pricing -Sealed-bid auction pricing

Geographic pricing

Setting prices for customers located in different parts of the country or the world reason : shipping fee

Captive-product pricing

Setting the price for product that must be used along with a main product, such as blades for a razor and games for a video-game console. --> Two-part pricing : Fixed fee + usage fee

Psychology of Pricing -Willingness to pay

So... why do we pay so much? Expectations Uncertainty What kinds of things are we willing to pay for? -Scarcity : limited edition -Exclusivity: membership -Social status Is it worth it? ... not always! -But our perceptions of the final product is biased too : if we paid a lot for it, we want to like it a lot -In fact, even our brains are biased...(I pay a lot for it it has to be good)

Promotional pricing

Temporarily pricing products below list price and sometimes even below cost to create buying excitement and urgency. Example : Black Friday, Boxing day

Demand

The relationship between price changes and the number of units sold.Determines the "celling price" of a product

Break-even pricing (Target return pricing)

Total revenue = Total cost Break even volume = fixed cost / (Price -variable cost) The higher price, the lower the manufacturer's break-even point will be BUT fail to consider customer value and the relationship between price and demand -As price increase, demand decrease, and the market may not buy even the lower volume needed to break even at higher price.

Value-based pricing

Uses ,buyers' perception not the seller's cost, as the key to pricing. -Customer needs and value perceptions are assessed -Target price is based on value perception +Types of value-based pricing: 1) Good value pricing 2) Value-added pricing

Changing prices

Why might a company increase prices? - Cost inflation - Excess demand What are some issues with changing prices? -So... what can you do other than changing the price? +Find cheaper suppliers, negotiate with existing suppliers +Shrink the size of your product...

Demand curve

the higher the price the lower the demand

Market mix

市场组合 Price is only one of the market mix tools that a company use to achieve its marketing objective