marketing chapter 9

considerations affecting pricing decisions

-Internal Factors (Overall marketing strategy, objectives, and mix, organizational considerations) -External Factors (Market and demand economy, impact on other parties in its environment)

Initiating Price Changes

-Reasons for price cuts: • Excess capacity • Falling demand due to strong price competition or a weakened economy • Attempt to dominate the market Reasons for price increases: • Cost inflation • Over-demand

Price Adjustment Strategies

1. Discount and allowance pricing 2. Segmented pricing 3. Psychological pricing 4. Promotional pricing 5. Geographical pricing 6. Dynamic pricing 7. International pricing

Product Mix Pricing Strategies

1. Product line pricing 2. Optional-product pricing 3. Captive-product pricing 4. By-product pricing 5. Product bundle pricing

discount pricing

A straight reduction in price on purchases during a stated period of time or of larger quantities

international pricing

Adjusting prices for international markets, subject to many considerations

learning objective 9-5 (Discuss how companies adjust their prices to take into account different types of customers and situations.)

Companies apply a variety of price adjustment strategies to account for differences in consumer segments and situations. One is discount and allowance pricing, whereby the company establishes cash, quantity, functional, or seasonal discounts or varying types of allowances. A second strategy is segmented pricing, where the company sells a product at two or more prices to accommodate different customers, product forms, locations, or times. Sometimes companies consider more than economics in their pricing decisions, using psychological pricing to better communicate a product's intended position. In promotional pricing, a company offers discounts or temporarily sells a product below list price as a special event, sometimes even selling below cost as a loss leader. Another approach is geographical pricing, whereby the company decides how to price to near or distant customers. In dynamic pricing, companies adjust prices continually to meet the characteristics and needs of individual customers and situations. Finally, international pricing means that the company adjusts its price to meet different conditions and expectations in different world markets

learning objective 9-1 . (Identify the three major pricing strategies and discuss the importance of understanding customer value perceptions, company costs, and competitor strategies when setting prices.)

The three major pricing strategies include customer value-based pricing, cost-based pricing, and competition-based pricing. Good pricing begins with a complete understanding of the value that a product or service creates for customers and setting a price that captures that value.

learning objective 9-6 (Discuss the key issues related to initiating and responding to price changes.)

When a firm considers initiating a price change, it must consider customers' and competitors' reactions. There are different implications to initiating price cuts and initiating price increases. Buyer reactions to price changes are influenced by the meaning customers see in the price change. Competitors' reactions flow from a set reaction policy or a fresh analysis of each situation. There are also many factors to consider in responding to a competitor's price changes. The company that faces a price change initiated by a competitor must try to understand the competitor's intent as well as the likely duration and impact of the change. If a swift reaction is desirable, the firm should pre-plan its reactions to different possible price actions by competitors. When facing a competitor's price change, the company might sit tight, reduce its own price, raise perceived quality, improve quality and raise price, or launch a fighting brand.

learning objective 9-4 (Explain how companies find a set of prices that maximizes the profits from the total product mix)

When the product is part of a product mix, the firm searches for a set of prices that will maximize the profits from the total mix. In product line pricing, the company decides on price steps for the entire set of products it offers. In addition, the company must set prices for optional products (optional or accessory products included with the main product), captive products (products that are required for use of the main product), by-products (waste or residual products produced when making the main product), and product bundles (combinations of products at a reduced price).

price elasticity of demand

a measure of the sensitivity of demand to changes in price inelastic demand: demand hardly changes with a a small change in price elastic demand: demand changes greatly with a small change in price

dynamic pricing

adjusting prices continually to meet the characteristics and needs of individual customers and situations

Value-added pricing

attaching value-added features and services to differentiate a company's offers and charging higher prices

product bundle pricing

combining several products and offering the bundle at a reduced price

psychological pricing

considers the psychology of prices and not simply the economics; the price is used to say something about the product

product line pricing

determining the price steps to set between various products in a product line based on cost differences between the products, customer evaluations of different features, and competitors' prices

oligopolistic competition

few sellers highly sensitive to each other's pricing and marketing strategies

pure competition

many buyers/sellers of commodity products, wheat, copper, financial securities

monopolistic competition

many buyers/sellers trading over a range of prices

reference price

prices that buyers carry in their minds when looking for a given product

Allowance Pricing

promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturer's products in some way

segmented pricing

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

Market-skimming pricing

setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price; the company makes fewer but more profitable sales

market penetration pricing

setting a low price for a new product in order to attract a large number of buyers and a large market share

By-product pricing

setting a price for by-products in order to make the main product's price more competitive

captive product pricing

setting a price for products that must be used along with a main product, such as blades for a razor and games for a video-game console

Customer value-based pricing

setting price based on buyers' perceptions of value rather than on the seller's cost

competition-based pricing

setting prices based on competitors' strategies, prices, costs, and market offerings

cost-based pricing

setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for effort and risk

geographical pricing

setting prices for customers located in different parts of the country or world

promotional pricing

temporarily pricing products below the list price, and sometimes even below cost, to increase short-run sales

price

the amount of money charged for a product or service determines a firms market share and profitability produces revenue

optional product pricing

the pricing of optional or accessory products along with a main product

learning objective 9-2 (Identify and define the other important external and internal factors affecting a firm's pricing decisions.)

•Factors affecting a firm's pricing decisions: -Internal - marketing strategy, objectives, marketing mix, and organizational considerations -External - nature of market, demand, economy, reseller needs, and government actions Other internal factors that influence pricing decisions include the company's overall marketing strategy, objectives, and marketing mix as well as organizational considerations. If the company has selected its target market and positioning carefully, then its marketing mix strategy, including price, will be fairly straightforward.. Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective marketing program.

learning objective 9-3 (. Describe the major strategies for pricing new products.)

•Strategies for pricing new products include -Market-skimming pricing -Market-penetrating pricing Pricing is a dynamic process. Companies design a pricing structure that covers all their products. They change this structure over time and adjust it to account for different customers and situations. Pricing strategies usually change as a product passes through its life cycle. In pricing innovative new products, a company can use market-skimming pricing by initially setting high prices to "skim" the maximum amount of revenue from various segments of the market. Or, it can use market-penetrating pricing by setting a low initial price to penetrate the market deeply and win a large market share.