Chapter 20: Setting Prices
What must marketers do when determine a specific price?
- Establish pricing objectives - Have considerable knowledge about target market customers - Determine demand, price elasticity, costs, and competitive factors
What are advantages of penetration pricing?
- If the low price stimulates sales, the firm may be able to order longer production runs, increasing economies of scale and resulting in decreased production costs per unit - If penetration pricing allows the marketer to gain a large market share quickly, competitors may be discouraged from entering the market - Because the lower per-unit penetration price results in lower per-unit profit, the market may not appear to be especially lucrative to potential new entrants
What are disadvantages of penetration pricing?
- It places a firm in a less-flexible pricing position - It is more difficult to raise prices significantly than it is to lower them
How can markup be stated as a percentage?
- Markup can be stated as a percentage of cost of making the product or as a percentage of selling price markup as percentage of cost = markup cost = 15/45 = 33.3% - Markup as percentage of selling price = markup/selling price = 15/60 = 25.0%
What are the forms of psychological pricing?
- Reference pricing - Bundle pricing - Multiple-unit pricing - Everyday low prices (EDLP) - Odd-even pricing - Customary pricing - Prestige pricing
How can price skimming be dangerous?
- They make the product appear more lucrative than it actually is to potential competitors - A firm risks misjudging demand and facing insufficient sales at the higher price
What is differential pricing?
An important issue in pricing decisions is whether to use a single price or different prices for the same product; A single price has several benefits Simplicity and Reduces the risk of a marketer developing an adversarial relationship with customers; The use of a single price does create some challenges: If the single price is too high, some potential customers may be unable to afford the product, If the single price is too low, the organization loses revenue from those customers who would have paid more had the price been higher
What is Status Quo?
Identify price levels that help stabilize demand and sales; Status quo objectives can focus on several dimensions, such as: Maintaining a certain market share, Meeting competitors' prices, Achieving price stability, Maintaining a favorable public image; A status quo pricing objective can reduce a firm's risks by helping to stabilize demand for its products; A firm that chooses status quo pricing objectives risks minimizing pricing as a competitive tool, which could lead to a climate of nonprime competition
How is Competitors' Price evaluated?
Identifying competitors' prices should be a regular part of marketing research; Regardless of its actual costs, a firm does not want to sell its product at a price that is significantly above competitors' prices because the products may not sell as well, or at a price that is significantly below because customers may believe the product is of low quality; In some instances, an organization's prices are designed to be slightly above competitors' prices to lend an exclusive image and to signal product quality to consumers
Psychological pricing (definition)
Pricing that attempts to influence a customer's perception of price to make a product's price more attractive; Psychological pricing strategies encourage purchases based on consumers' emotional responses, rather than economically rational ones; Used primarily for consumer products rather than business products
Premium pricing (definition)
Pricing the highest-quality or most versatile products higher than other models in the product line; Other products in the line are priced to appeal to price-sensitive shoppers or to those who seek product-specific features; Examples of product categories in which premium pricing is common are: small kitchen appliances, beer, ice cream, television cable service.
Price leaders (definition)
Products priced near or even below cost; Is used most often in supermarkets and restaurants to attract customers by offering them especially low prices on a few items, with the expectation that they will purchase other items as well; Management expects that sales of regularly-priced products will more than offset the reduced revenues from the price leaders
What is Cash Flow?
Set price levels to encourage rapid sales;• Some companies set prices so they can recover cash as quickly as possible (Choosing this pricing objective may have the support of a marketing manager if he or she anticipates a short product life cycle)
What is Product Quality?
Set prices to recover research and development expenditures and establish a high-quality image; Attaining a high level of product quality is generally more expensive for the firm, as the costs of materials, research, and development may be greater; The products and brands that customers perceive to be of high quality are more likely to survive in a competitive marketplace because they trust these products more, even if the prices are higher
Price lining (definition)
Setting a limited number of prices for selected groups or lines of merchandise; Example: Selling men's ties only at $22 and $37; Is common in clothing and accessory stores; The basic assumption in price lining is that the demand for various groups or sets of products is inelastic; If the prices are attractive, customers will concentrate their purchases without responding to slight changes in price
Comparison discounting (definition)
Setting a price at a specific level and comparing it with a higher price; The higher price may be: The product's previous price, The price of a competing brand, The product's price at another retail outlet, A manufacturer's suggested retail price
Secondary-market pricing (definition)
Setting one price for the primary target market and a different price for another market; Often the price charged in the secondary market is lower; Examples of secondary markets include: A geographically-isolated domestic market, A market in a foreign country, A segment willing to purchase a product during off-peak times
Prestige pricing (definition)
Setting prices at an artificially high level to convey prestige or a quality image; Is used especially when buyers associate a higher price with higher quality; Typical product categories that are subject to prestige pricing include: perfumes, liquor, jewelry, cars, food items
Random discounting (definition)
Temporary reduction of prices on an unsystematic basis; Marketers use random discounting to attract new customers and to draw attention to a relatively new product; Tensile pricing - Involves making a broad statement about price reductions (e.g., "20 to 50 percent off" or "up to 75 percent off"), as opposed to detailed specific price discounts; Often used with periodic discounting or random discounting
When assessing the target market's evaluation of price, what does price depend on?
The importance of price varies depending on the: 1. Type of product 2. Type of target market 3. Purchase situation
What is the purpose of Stages of Establishing Prices?
These stages are guidelines that provide a logical sequence for establishing prices, not rigid steps that must be followed in a particular order
Differential pricing (definition)
Charging different prices to different buyers for the same quality and quantity of product
How can setting appropriate prices be difficult for firms to balance?
- A high price may reduce demand for the product - A low price will hurt profit margins and may instill in customers a perception that the product is of low quality
What benefits can price skimming provide?
- Can generate much-needed initial cash flows to help offset development costs - Protects the marketer from problems that arise when the price is set too low to cover costs - Can help keep demand consistent with the firm's production capabilities
What strategies must marketers choose from when employing product-line pricing?
- Captive pricing - Premium pricing - Bait pricing - Price lining
What factors must firms weigh when setting prices?
- Costs - Competition - Consumer buying behavior and price sensitivity - Manufacturing capacity - Product life cycles
What are characteristics of development of pricing objectives?
- Developing pricing objectives is an important task because they form the basis for decisions for other stages of the pricing process - Pricing objectives must be stated explicitly and in measurable terms, and should include a time frame for accomplishing them - Marketers must ensure that pricing objectives are consistent with the firm's marketing and overall objectives because pricing objectives influence decisions in many functional areas - A marketer can use both short- and long-term pricing objectives and can employ one or multiple pricing objectives
What are the 3 major dimensions on which price can be based on?
1. Cost 2. Demand 3. Competition An organization generally considers at least two, or perhaps all three, dimensions
What are the 6 stages for establishing prices?
1. Development of pricing objectives 2.Assessment of target market's evaluation of price 3. Evaluation of competitors' prices 4. Selection of a basis for pricing 5. Selection of a pricing strategy 6. Determination of a specific price
What are the guidelines the Federal Trade Commission established for comparison discounting?
1. If the higher price against which the comparison is made is the price formerly charged for the product, the seller must have made the previous price available to customers for a reasonable time period 2. If sellers present the higher price as the one charged by other retailers in the same trade area, they must be able to demonstrate that this claim is true 3. When they present the higher price as the manufacturer's suggested retail price, the higher price must be close to the price at which a reasonable proportion of the product was sold
What do marketers analyze when determining the appropriate pricing basis?
1. Type of product 2. Market structure of the industry 3. Brand's market share position relative to competing brands 4. Customer characteristics
What is a pricing strategy?
A pricing strategy is a course of action designed to achieve pricing objectives, which are set to help marketers solve the practical problems of setting prices
What does a pricing strategy yield?
A pricing strategy will yield a certain price or range of prices; Marketers may need to refine this price in order to make it consistent with circumstances and with pricing practices in a particular market or industry; Pricing strategies should help in setting a final price
Price skimming (definition)
Charging the highest possible price that buyers who most desire the product will pay; Some consumers are willing to pay a high price for an innovative product, either because of its novelty or because of the prestige or status that ownership confers; Provides the most flexible introductory base price
Cost-based pricing (definition)
Adding a dollar amount or percentage to the cost of the product
Cost-plus pricing (definition)
Adding a specified dollar amount or percentage to the seller's cost; Is appropriate when production costs are difficult to predict
Markup pricing (defintion)
Adding to the cost of the product a predetermined percentage of that cost; Although the percentage markup in a retail store varies from one category to another, the same percentage is often used to determine the prices on items within a single product category, and the percentage markup may be largely standardized across an industry at the retail level
What is Survival?
Adjust price levels so the firm can increase sales volume to match organizational expenses; Achieving this objective generally involves temporarily setting prices low, at times below costs, in order to attract more sales; Because price is a flexible ingredient in the marketing mix, survival strategy can be useful in keeping a company afloat by increasing sales volume
What is Market Share?
Adjust price levels so the firm can maintain or increase sales relative to competitors' sales; Market share - A product's sales in relation to total industry sales; Maintaining or increasing market share need not depend on growth in industry sales - An organization can increase its market share even if sales for the total industry are flat or decreasing - A firm's sales volume can increase while its market share decreases if the overall market grows
Special-event pricing (definition)
Advertised sales or price cutting linked to a holiday, a season, or other event; Used to increase sales volume; Can be an effective strategy to combat sales lags
Why did the Federal Trade Commission establish guidelines for comparison discounting?
Because this pricing strategy on occasion has led to deceptive pricing practices, the Federal Trade Commission has established guidelines for comparison discounting
What must marketers evaluate before setting prices for a product line?
Before setting prices for a product line, marketers evaluate the relationship among the products in the line; When products in a line are complementary, sales increases in one item raise demand for other items; When products in a line function as substitutes for one another, buyers of one product in the line are unlikely to purchase one of the other products in the same line
What are characteristics of demand-based pricing?
Demand-based pricing is appropriate for industries in which companies have a fixed amount of available resources that are perishable; The effectiveness of demand-based pricing depends on the marketer's ability to estimate demand accurately; Compared with cost-based pricing, demand-based pricing places a firm in a better position to reach high profit levels, as long as demand is strong at times and buyers value the product at levels sufficiently above the product's cost
What are characteristics of cost-based pricing?
Does not necessarily take into account the economic aspects of supply and demand, nor must it relate to just one pricing strategy or pricing objective; Two common forms: Cost-plus pricing and Markup pricing
Odd-even pricing (definition)
Ending the price with certain numbers to influence buyers' perceptions of the price or product; Odd pricing is the strategy of setting prices using odd numbers that are slightly below whole-dollar amounts (e.g., $4.99 rather than $5); Sellers who use odd pricing believe that odd numbers increase sales because consumers register the dollar amount, not the cents; Even prices are often used to give a product an exclusive or upscale image; An even price is believed to influence a customer to view the product as being a high-quality, premium brand
Negotiated pricing (definition)
Establishing a final price through bargaining between the seller and the customer; Occurs in a number of industries and at all levels of distribution
Product-line pricing (definition)
Establishing and adjusting prices of multiple products within a product line; When marketers use product-line pricing, their goal is to maximize profits for an entire product line rather than to focus on the profitability of an individual product item
What are characteristics of markup pricing?
Markups normally reflect expectations about operating costs, risks, and stock turnovers; Wholesalers and manufacturers often suggest standard retail markups that are considered profitable; To the extent that retailers use similar markups for the same product category, price competition is reduced •Using rigid markups is convenient and is the major reason retailers favor this method
Professional pricing (definition)
Fees set by people with great skill or experience in a particular field; Although costs are considered when setting prices, professionals often believe their fees should not relate directly to the time and/or effort spent in specific cases; Rather, professionals may charge a standard fee regardless of the problems involved in performing the job; Professionals have an ethical responsibility not to overcharge customers
What must be present for differential pricing to be effective?
For differential pricing to be effective, the market must consist of multiple segments with different price sensitivities; Differential pricing can occur in several ways, including: Negotiated pricing, Secondary-market pricing, Periodic discounting, Random discounting
Pricing objectives (definition)
Goals that describe what a firm wants to achieve through pricing
What is Profit?
Identify price and cost levels that allow the firm to maximize profit; The objective of profit maximization is rarely operational because its achievement is difficult to measure (Therefore, profit objectives tend to be set at levels that the owners and top-level decision makers view as satisfactory and attainable); Specific profit objectives may be stated in terms of either actual dollar amounts or a percentage of sales revenues
What is Return on Investment?
Identify price levels that enable the firm to yield targeted ROI; Pricing to attain a specified rate of return on the company's investment is a profit-related pricing objective; A return on investment (ROI) pricing objective generally requires some trial and error, as it is unusual for all data and inputs required to determine the necessary ROI to be available when first setting prices
What occurs in the absence of government price controls when determining of a specific price?
In absence of government price controls, pricing remains a flexible and convenient way to adjust the marketing mix
Bundle pricing (definition)
Packaging together two or more complementary products and selling them at a single price; To be attractive to customers, the single price generally is markedly less than the sum of the prices of the individual products; Is common for: Banking and travel services, Computers, Automobiles with option packages, Products that are used in tandem, such as television, Internet, and phone service; Can help firms sell slow-moving inventory and increase revenues by bundling it with products with a higher turnover
Multiple-unit pricing (definition)
Packaging together two or more identical products and selling them at a single price; Example: Selling two cans for 99 cents rather than 50 cents per can; Can increase sales by encouraging consumers to purchase multiple units when they might otherwise have only purchased one at a time; Offers cost savings and convenience to customers; Used to attract new customers to brands and to increase consumption; Major users of multiple-unit pricing are supermarkets, discount stores, and warehouse clubs
Everyday low prices (EDLP) (definition)
Pricing products low on a consistent basis; EDLPs, through not deeply discounted, are set low enough to make customers feel confident they are receiving a good deal; A company that uses EDLP benefits from: Reduced promotional costs, Reduced losses from frequent markdowns, More stable sales; A major issue with this approach is that, in some instances, customers believe that EDLPs are a marketing gimmick and not truly the good deal that they proclaim
What is promotional pricing?
Price—as an ingredient in the marketing mix—often is coordinated with promotion; Examples of promotional pricing include: Price leaders, Special-event pricing, Comparison discounting
Reference pricing (definition)
Pricing a product at a moderate level and displaying it next to a more expensive model or brand; Used in the hope that the customer will use the higher price as a reference price (i.e., a comparison price); Because of the comparison, the customer is expected to view the moderate price more favorably than he or she would if the product were considered alone
Bait pricing (definition)
Pricing an item in a product line low with the intention of selling a higher-priced item in the line; Is acceptable as long as a retailer has sufficient quantities of the advertised low-priced model available for sale; Bait and switch - Occurs when retailers have no intention of selling the bait product and use the low price merely to entice customers into the store to sell them higher-priced products
Demand-based pricing (definition)
Pricing based on the level of demand for the product; Customers pay a higher price when demand for the product is strong and a lower price when demand is weak; Marketers must be able to estimate the quantity of a product consumers will demand at different times and how demand will be affected by changes in the price; The marketer then chooses the price that generates the highest total revenue
Competition-based pricing (definition)
Pricing influenced primarily by competitors' prices; Is a common method among producers of relatively homogeneous products, particularly when the target market considers price to be an important purchase consideration; A firm that uses competition-based pricing may choose to set their prices below competitors' or at the same level
Customary pricing (definition)
Pricing on the basis of tradition; Example: 25-cent gumballs sold in gumball machines
Captive pricing (definition)
Pricing the basic product in a product line low, while pricing related items higher
Penetration pricing (definition)
Setting prices below those of competing brands to penetrate a market and gain a significant market share quickly
What is new-product pricing?
Setting the base price for a new product is a necessary part of formulating a marketing strategy; Marketers can easily adjust the base price in industries that are not subject to government price controls, and its establishment is one of the most fundamental decisions in the marketing mix; When a marketer sets base prices, he or she considers how quickly competitors are expected to enter the market, whether they will mount a strong campaign on entry, and what effect their entry will have on the development of primary demand; Two strategies used in new-product pricing are: Price skimming and Penetration pricing
What are the possible objectives?
Survival, profit, return on investment, market share, cash flow, status quo, product quality
Periodic discounting (definition)
Temporary reduction of prices on a patterned or systematic basis; From the marketer's point of view, a major problem with periodic discounting is customers can predict when the reductions will occur and may delay their purchases until they can take advantage of the lower prices; Is less effective in an environment where many consumers shop online because they can easily comparison shop for a better deal
What defines value?
Value combines a product's price with quality attributes, which customers use to differentiate among competing brands; Consumers may perceive relatively expensive products to have great value if the products have desirable features or characteristics; Consumers are generally willing to pay a higher price for products that offer convenience and save time