Chapter Ten
EXECUTE PRICE CHANGES
Among the marketing mix variables, price is the easiest and quickest to alter.... A change in an offering's price - either up or down - can dramatically impact the effectiveness of the overall marketing mix variables in reflecting your offering's positioning in the eyes of customers.
Average-cost pricing
all costs/total number of units = avg cost of a single unit
Price bundling
allows customers to buy a package deal at a lower price than if items bought separately Cable TV, land line phone service, internet
Elements of Managing Pricing decisions
establish pricing objectives and related strategies select pricing tactics set the exact price determine channel discounts and allowances execute price changes understand legal considerations in pricing
Reference pricing
gives the buyer a comparative price Store brands on the shelf next to national brands
Price fixing
Companies that collude to set prices at a mutually beneficial high level are engaged in price fixing. When competitors are involved in the collusion, horizontal price fixing occurs. The Sherman Act forbids horizontal price fixing, which could result in overall higher prices for consumers since various competitors are all pricing the same to maximize their profits.
Captive Pricing
Complementary pricing or "razors and blades" like printers and ink cartridges In the service sector may be called two-part pricing for firms that charge a monthly fee and then bills for specific services like a gym membership and personal trainer fees
Set the Exact Price
Cost-plus pricing/markup on cost Markup on sales price Average-cost pricing Target Return Pricing
Fair trade/minimum markup laws
Fair trade laws were popular in the past because they allowed manufacturers to establish artificially high prices by limiting the ability of wholesalers and retailers to offer reduced or discounted prices. Fair trade laws varied greatly from state to state, depending largely on how strong the independent retailer and wholesaler lobby was in a particular locale. These laws protected mom-and-pop operators from the price discounting by chain stores. Closely associated with fair trade laws are minimum markup laws, which require a certain percentage markup be applied to products. In one extreme case in the early 1970s, the State of Oklahoma took legal action against Target Corporation to force the discounter to obey Oklahoma's minimum markup law that prohibited advertising a wide variety of merchandise for less than a 6 percent profit. This effectively shut down Target's ability to advertise loss leader products, items (typically paper towels, toilet paper, toothpaste, and the like) sacrificed at prices below cost to attract shoppers to the store
Prestige pricing
Higher that the competition...like luxury goods or ultra-premium products
Markup on sales price
In most applications, when a marketing manager simply refers to "markup," he or she is referring to this calculation—markup on sales price, which uses the sales price as a basis of calculating the markup percentage. This is because most important items on financial reports (gross sales, revenue, etc.) are sales, not cost, figures.
UNDERSTAND LEGAL CONSIDERATIONS IN PRICING
Price Fixing: high pricing/collusion Price discrimination: different prices Deceptive pricing: wrong price Predatory pricing: Low pricing then high pricing Fair trade and minimum markup laws
Price discrimination
Price discrimination occurs when a seller offers different prices to different customers without a substantive basis, such that competition is reduced. The Robinson-Patman Act explicitly prohibits giving, inducing, or receiving discriminatory prices except under certain specific conditions such as situations where proof exists that the costs of selling to one customer are higher than to another (such as making distribution to remote locations) or when temporary, defensive price reductions are necessary to meet competition in a specific local area.
Target Return Pricing
To better take into account the differential impact of fixed and variable costs, marketing managers can use target return pricing. First, a few definitions are in order. Fixed costs are incurred over time, regardless of volume. Variable costs fluctuate with volume. And total costs are simply a sum of the fixed and variable costs. To use target return pricing, one must first calculate total fixed costs. Second, a target return must be established.
PRICE IS A CORE COMPONENT OF VALUE
Value is a ratio of the bundle of benefits a customer receives from an offering compared to the costs incurred by the customer in acquiring that bundle of benefits. Price - or more specifically the customer's perception of the offering's pricing - is a key determinant of perceived value. Developing pricing strategy implies looking at branding and product decisions, service approaches, supply chain, and marketing communication.
One price strategy and variable pricinge
With one-price, there is no bargaining. Everyone pays the same for most goods in the U.S. Variable pricing allows for haggling and is more common around the world
Everyday low pricing EDLP and High/low Pricing
EDLP reduces investment in promotion High/Low uses heavy promotional pricing and customers wait for the best price Auction Pricing reflects demand. Ex. eBay
Odd/Even Pricing
No even numbers. Examples: $1.98 or $1.99 vs. $2.00 Developed before sales tax and credit cards to bolster cash register security and reduce employee theft Today is a key element in psychological pricing
ESTABLISH PRICING OBJECTIVES AND RELATED STRATEGIES etc
Pricing Objective: Communicate positioning through price Strategy = Value Pricing: meet/exceed expectations Value pricing overtly attempts to take into account the role of price as it reflects the bundle of benefits sought by the customer. Considers the whole deliverable and all sources of differential advantage—image, service, product quality, personnel, innovation—that create customer benefits Toyota and Honda cars cost more initially but last long, need fewer repairs, are more fuel efficient, and have strong resale value.
ESTABLISH PRICING OBJECTIVES AND RELATED STRATEGIES etc
Pricing Objective: Market entry at the highest possible initial price Strategy = Price Skimming Initial high price indicates a strong price-quality relationship Used by firms with first-mover advantage with high level of panache and exclusivity Electronics Pharmaceuticals Used effectively in niche markets with few competitors
ESTABLISH PRICING OBJECTIVES AND RELATED STRATEGIES
Pricing objectives are the desired or expected result associated with a pricing strategy. Pricing objectives must be consistent with other marketing-related objectives as well as with the firm's overall objectives for doing business. EX: SWA: Cost Leader: Cost advantage to customers , help profit margins...to reward share owners, and to reinvest for growth. Dunkin: focuses on positioning itself against Starbucks vs. McDonald's. New loyalty program.
Pricing for your Marketing Plan
Review the options for pricing objectives and strategies and choose what is right for your company. Pentration Pricing Profit Maximization Competitor Based Pricing Review the available pricing tactics and select a mix appropriate for your offering Bundling Prestige Value Will you provide any discounts or allowances or special offers?
DETERMINE CHANNEL DISCOUNTS AND ALLOWANCES
Discounts are direct, immediate reductions in price provided to purchasers. Allowances remit monies to purchasers after the fact. Sellers offer cash discounts to elicit quicker payment of invoices. Trade discounts, also sometime called functional discounts, provide an incentive to a channel member for performing some function in the channel that benefits seller. Examples include stocking a seller's product or performing a service related to that product, such as installation or repair, within the channel. Trade discounts are normally expressed as a percentage off the invoice price. Quantity discounts are taken off an invoice price based on different levels of product purchased. Quantity discounts may be offered on an order-by-order basis, in which case they are noncumulative, or they may be offered on a cumulative basis over time as an incentive to promote customer loyalty. From a legal standpoint, it is essential that quantity discounts are offered to all customers on an equally proportionate basis so that small buyers as well as large buyers follow the same rules for qualification. Firms often purchase seasonal products many months before the season begins. For example, a retailer might purchase a winter apparel line at a trade show a year before its season, accept delivery in August, begin displaying it in September, yet cold weather may not hit until November or December. To accommodate such lengthy sales processes, firms offer seasonal discounts, which reward the purchaser for shifting part of the inventory storage function away from the manufacturer. Within a given channel, sellers often want purchasers to help execute their promotional strategies. A consumer products marketer like P&G, for example, depends heavily on wholesalers, distributors, and retailers to promote its brands. When a retailer runs an ad for a P&G brand such as Crest toothpaste, it is nearly always in response to promotional allowances provided by the manufacturer
Why is Pricing Important?
Price is the amount of something—money, time, or effort—that a buyer exchanges with a seller to obtain a product Pricing is one of the most important strategic decisions a firm faces because it reflects the value the product delivers to consumers as well as the value it captures for the firm Revenue is the result of the price charged to customers multiplied by the number of units sold Profits are simply revenue minus total costs The objective of strategic pricing is profitability The majority of marketers and firms throughout the world seek to increase revenue, which can ultimately lead to increased profits There are only two ways to increase revenue: sell more products or sell them at a higher price Ultimately, marketers want to charge as much as they possibly can as long as the consumer still perceives value in the product at that price Integrating the pricing strategy with other marketing mix elements ensures that the firm's products include only those features that add value to customers Many factors influence how a firm sets prices A firm's various stakeholders may voice a preference for higher or lower prices depending on their point of view Marketing executives in search of substantial profits typically want high prices across the products they sell, while customers and salespeople often want low prices to increase the perceived customer value and ultimately the number of units
Product Line Pricing
Price points reflect different benefits at different prices Hotel rooms, autos, appliances or different brands like Ritz-Carlton, Marriott, Fairfield Inn, Courtyard
ESTABLISH PRICING OBJECTIVES AND RELATED STRATEGIES etc
Pricing Objective: Market share maximization The strategy = Penetration Pricing Used to gain maximum market share Price sensitive customers Firm's internal efficiencies lead to cost advantages which allows lower price Sometimes used for new product introduction Be careful with penetration pricing Price influences customer perception of quality Customers prefer lowering price, not raising it Changing price confuses positioning and brand image
ESTABLISH PRICING OBJECTIVES AND RELATED STRATEGIES etc
Pricing Objective: Profit maximization Strategy = Target ROI Bottom-line profit is set and then price to meet the target profit Price Elasticity Of Demand Will consumers buy at the target ROI price? Pricing Objective: Benchmark the competition Strategy = Competitor-Based Pricing At the competitor's price or slightly above or below Price war occurs when one competitor tries to gain sales and net market share Stability pricing is a neutral set point that doesn't irk competitors or endanger the value proposition
Select Pricing tactics
Product line Pricing Auction pricing EDLP and High/low pricing One price/variable pricing Odd/even pricing Prestige pricing Reference pricing Price Building Captive pricing
Cost-plus pricing/markup on cost
is really just a general heuristic that builds a price by adding a standardized markup on top of costs for an offering, hence the term markup on cost. First an estimate of costs involved must be developed. In accounting courses, you learn that determining costs is no easy task. For example, many different types of costs can be considered, including fixed and variable costs, direct costs and indirect costs, and shared or overhead costs, which might be allocated to the offering on some prorated basis. Nevertheless, once a cost has been established, cost-plus pricing requires the predetermination of some standardized markup percentage that is to be applied based on company guidelines.
