Marketing: An introduction -Chapter 9: Pricing Understanding and Capturing Customer Value

price elasticity of demand

*a measure of the sensitivity of demand to changes in price. 1. inelastic demand- demand hardly changes with a small change in price. 2. elastic demand- demand changes greatly with a small change in price.

Price Changing

- when a competitor lowers prices, a company may just emphasize value instead of lowering, too. - lowering price may be interpreted as a product lowering their value. - a successful price increase can generate great profits.

Other Internal and External Considerations Affecting Price Decisions

-Internal factors affecting pricing include: 1. the company's overall marketing strategy 2.objectives 3. and marketing mix as well as other organizational considerations. - External factors include: 1. the nature of the market 2. and demand and other environmental factors.

High-low pricing*

-based on sales promotion. Regular and sales pricing -charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items. -Kohl's and Macy's practice high-low pricing by having frequent sale days, early-bird savings, and bonus earnings for store credit-card holders.

considerations in setting price

-consumer perceptions of the product value set the ceiling price -product costs set the floor to the products price -perceived value is the price the customer will buy at. If priced below, you lose revenue.

breakeven calculation

-fixed cost/(price- variable costs) *$6,000,000/(15-5)=600,000

when to use market-penetration pricing

-market is highly price sensitive so a low price produces more growth (elastic) -production and distribution costs decrease as the sales volume increases -low price can help keep out the competition, and the penetration pricer can maintain its low-price position

public policy and pricing: pricing across channel levels

-price discrimination- price different to differ retailers (The Robinson-Patman Act) -retail (or resale) price maintenance -deceptive pricing- stating price or savings that mislead consumers scanner fraud and price confusion

public policy and pricing: Pricing within channel levels:

-price fixing can't talk with competitors -predatory pricing (punish competition to put out of business)

when to use market-skimming pricing

-product's quality and image supports its higher price -costs of low volume cannot be so high that they cancel out the benefit of higher price. -competitors should not be able to enter market easily and undercut price

Price Adjustment Strategies

1. Discount and allowance pricing-Reducing prices to reward customer responses such as volume purchases, paying early, or promoting the product 2. Segmented pricing- Adjusting prices to allow for differences in customers, products, or locations 3. Psychological pricing- Adjusting prices for psychological effect 4. Promotional pricing- Temporarily reducing prices to spur short-run sales 5. Geographical pricing- Adjusting prices to account for the geographic location of customers 6. Dynamic pricing- Adjusting prices continually to meet the characteristics and needs of individual customers and situations 7. International pricing- Adjusting prices for international markets

Types of cost-based pricing methods:

1. cost-plus pricing (markup pricing)-Adding a standard markup to the cost of the product. Generally don't make sense but remains popular because: 1. Sellers are more certain about costs than about demand. 2. When all firms in the industry use this pricing method, prices tend to be similar and price competition is thus minimized. 2. break even pricing (target return pricing)- Setting price to break even on the costs of making and marketing a product, or setting price to make a target return. *does not take into consideration customer value or supply

3 major pricing strategies:

1. customer value-based pricing 2. cost-based pricing 3. and competition-based pricing

In assessing competitors' pricing strategies, the company should ask several questions:

1. how does the company's market offering compare with competitors' offerings in terms of customer value? 2. how strong are current competitors, and what are their current pricing strategies? * the goal is not to match or beat competitors' prices but to set prices according to the relative value created versus competitors.

New Product Pricing Strategies

1. market skimming pricing (price skimming)- setting a high price for a new product to skim maximum revenues to layer by layer from the segments willing to pay the high price -the company makes fewer, but more profitable sales. 2. 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.

For segmented pricing to be effective certain conditions must exist:

1. must be segmentable 2 segments must show different degrees of demand. 3. The costs of segmenting and reaching the market cannot exceed the extra revenue obtained from the price difference. 4.the segmented pricing must also be legal. 5. Most important, segmented prices should reflect real differences in customers' perceived value.

product mix pricing strategies

1. product line pricing- Setting prices across an entire product line 2. optional-product pricing- Pricing optional or accessory products sold with the main product 3. captive-product pricing- Pricing products that must be used with the main product 4. by-product pricing- Pricing low-value by-products to get rid of or make money on them 5. product bundle pricing- Pricing bundles of products sold together

The market and demand: pricing in different types of markets:

1. pure competition- the market consists of many buyers and sellers trading in a uniform commodity with no single buyer or seller having much effect on the going market price (commodities: wheat, copper, financial services) 2. monopolistic- the market consists of many buyers and sellers trading over a range of prices rather than a single market price. Sellers try to develop differentiated offers for different customer segments and, in addition to price, freely use branding, advertising, and personal selling to set their offers apart. 2. oligopolistic competition- few large sellers highly sensitive to competition pricing 3. pure monopoly- dominated by one large seller by: 1. a government monopoly (the U.S. Postal Service) 2. a private regulated monopoly (a power company) 3. or a private unregulated monopoly (De Beers and diamonds).

competitors respose to price changes

1. reduce its price to match the competitor's price. 2. raise the perceived value of its offer. It could improve its communications, stressing the relative value of its product over that of the lower-price competitor. 3. improve quality and increase price, moving its brand into a higher price-value position. 4. launch a low-price "fighter brand"—adding a lower-price item to the line or creating a separate lower-price brand.

other external factors

1. resellers 2. the government 3. and social concerns.

Forms of segmented pricing: Location-based pricing

A company charges different prices for different locations, even though the cost of offering each location is the same. (seats in stadium)

Forms of segmented pricing: Time-based pricing

A firm varies its price by the season, the month, the day, and even the hour. (seasonal, hourly)

Discounts

A reduction from normal prices to increase sales and reduce inventories.

1A. Discounts

A straight reduction in price on purchases during a stated period of time or of larger quantities. 4 types: 1. Cash discount- A price reduction to buyers who pay their bills promptly. ie 2/10 net 30 2. Quantity discount- Price reduction to buyers who buy large volumes. 3.Functional discount (trade discount)-to trade-channel members who perform certain functions , such as selling, storing, and record keeping. 4.Seasonal discount- A price reduction to buyers who buy merchandise or services out of season

Limited-time offers (flash sales)

Create buying urgency and make buyers feel lucky to have gotten in on the deal.

Forms of segmented pricing: Customer-segmented pricing

Different customers pay different prices for the same product or service. (senior, student, adult)

Forms of segmented pricing: Product-form pricing

Different variations of the product are priced differently but not according to differences in their costs.

Economy impact on the firm's pricing strategies.

Economic factors such as a boom or recession, inflation, and interest rates affect pricing decisions because they affect consumer spending, 1. cut prices and offer discounts- However, such price cuts can have undesirable long-term consequences 2 use price tiers- adding both more affordable lines and premium lines that span the varied means and preferences of different customer segments. 3. holding their price positions but redefining the "value" in their value propositions.

Organizational Considerations

Management must decide who within the organization should set prices: 1. small companies prices are often set by top management 2.n large companies pricing is typically handled by divisional or product managers 3. In industrial markets, salespeople may be allowed to negotiate with customers within certain price ranges. Even so, top management sets the pricing objectives and policies, and it often approves the prices proposed by lower-level management or salespeople. 4.In industries in which pricing is a key factor (airlines, aerospace, steel, railroads, oil companies), companies often have pricing departments to set the best prices or help others set them. These departments report to the marketing department or top management. * Others who have an influence on pricing include sales managers, production managers, finance managers, and accountants.

Cash rebates

Offered to consumers who buy the product from dealers within a specified time; the manufacturer sends the rebate directly to the customer.

Reference pricing (type of psychological pricing)

Prices that buyers carry in their minds and refer to when they look at a given product. - a company might produce a higher prices product to make their other one sell better.

Special‑event pricing

Pricing differently in certain seasons to draw more customers.

3. Price adjustment strategies: Psychological pricing

Pricing that considers the psychology of prices and not simply the economics: the price is used to say something about the product. (Higher price= better quality) - lawyer prices - are they actually better if they charge more?

1B. Allowances.

Reduction from the list price for buyer actions such as a trade-in or promotional and sales support. Promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturer's products in some way. 2 types: 1.Trade-in allowances- Price reductions for turning in an old item when buying a new one. (most common in car industry). 2. Promotional allowances-payments or price reductions to reward dealers for participating in advertising and sales support programs.

2. Price adjustment strategies: Segmented pricing

Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. 3 FORMS: 1. Customer-segmented pricing 2. Product-form pricing 3. Location-based pricing 4. Time-based pricing

4. Price adjustment strategies: Promotional pricing (temp)

Temporarily pricing products below the list price, and sometimes even below cost to increase short-run sales. 1. discounts (sales) 2. special-event pricing. 3. limited time offers (flash sales) 4. cash rebates 5. low interest financing 6. longer warranties 7. free maintenance

Price adjustment strategies: Geographical Pricing =FOB-origin pricing

The goods are placed free on board (hence, FOB) a carrier. At that point the title and responsibility pass to the customer, who pays the freight from the factory to the destination.

Price adjustment strategies: Geographical Pricing =Basing-point pricing

The seller selects a given city as a "basing point" and charges all customers the freight cost from that city to the customer location, regardless of the city from which the goods are actually shipped.

Price adjustment strategies: Geographical Pricing =Freight-absorption pricing

Using this strategy, the seller absorbs all or part of the actual freight charges in order to get the desired business.

Price adjustment strategies: Geographical Pricing

Zone pricing falls between FOB-origin pricing and uniform-delivered pricing. All customers within a given zone pay a single total price; the more distant the zone, the higher the price.

demand curve

a curve that shows the number of units the market will buy (responsiveness) in a given time period, at different prices that might be charged

The market and demand

a firm's flexibility in setting price varies depending on the nature of the market.

1. Price adjustment strategies: Discount and allowances

a straight reduction in price on purchases during a stated period of time or in price on purchases during a stated period of time or in larger quantities. - to reward customers for certain responses, such as paying bills early, volume purchases, and off-season buying.

Target return pricing

a variation of break even pricing that uses the concept of a break-even chart, which shows the total cost and total revenue expected at different sales volume levels.

6. Price adjustment strategies: Dynamic pricing

adjusting prices continually to meet the characteristics and needs of individual customers and situations. *especially prevalent online

Every day low pricing (EDLP)*

an important type of good-value pricing at the retail level that involves charging a constant, everyday low price with few or no temporary price discounts. *walmart

price

before setting price,the company must decide on its overall marketing strategy. Price is: 1. The amount of money charged for a product or service. 2. The sum of the values that customers exchange for the benefits of having or using the product or service. - only element in the marketing mix that produces REVENUE. - most FLEXIBLE marketing element - number one PROBLEM facing many marketing executives - small percentage IMPROVEMENT can generate a large percentage increase in profitability - smart marketers are embracing it as an important competitive asset

Price increases

can greatly improve profits and may be initiated due to: -cost inflation -overdemand

Product mix pricing strategies: (4) product bundle pricing

combining several products and offering the bundle at a reduced price (free breakfast with room)

5. Price adjustment strategies: Geographical Pricing

involves deciding how to price products for customers located in different parts of the country or world. 5 geographical pricing strategies: 1. FOB-origin pricing, this practice means that the goods are placed free on board (hence, FOB) 2. Uniform-delivered pricing is the opposite of FOB pricing. the company charges the same price plus freight to all customers, regardless of their location. 3. Zone pricing falls between FOB-origin pricing and uniform-delivered pricing. The company sets up two or more zones. All customers within a given zone pay a single total price; the more distant the zone, the higher the price. 4. Using basing-point pricing, the seller selects a given city as a "basing point" and charges all customers the freight cost from that city to the customer location, regardless of the city from which the goods are actually shipped. 5. freight-absorption pricing. Using this strategy, the seller absorbs all or part of the actual freight charges to get the desired business.

competition based pricing (3)

involves setting prices based on competitors strategies (external), prices, costs and market offerings. Consumers will base their judgments of a product's value on the prices that competitors charge for similar products.

break-even chart

pg 270

target costing (273)

pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met. -Other companies deemphasize price and use other marketing mix tools to create nonprice positions. Often, the best strategy is not to charge the lowest price but rather to differentiate the marketing offer to make it worth a higher price.

Overall Marketing Strategy, Objectives, and Mix

see pg 273

Product mix pricing strategies: (5) by product pricing

setting a price for by-products in order to make the main products price more competitive. - ex: coca-cola sells its waste like orange peels

Product mix pricing strategies: (3) 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 (1)

setting price based on buyers' perceptions of value rather than on the seller's cost 2 types: 1. good-value pricing- offering just the right combination of quality and good service at a fair price. (EX. Mercedes CLA class) * good value is not the same as low price. 2. value-added pricing- attaching value-added features and services to differentiate a company's offers while charging higher prices to battle competition lower pricing. (Ex: movie theaters adding amenities and charging more) (Ex. Steinway piano) - price floor: no profits below this price - price ceiling: no demand above this price

cost-based pricing (2)

setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for effort and risk 2 types of cost: 1. Fixed cost (overhead)-Remain the same (rent, exec salaries, heat, interest) costs that do not vary with production or sales level 2. Variable- costs that vary directly with the level of production (raw material, packaging)

Product mix strategies: (1) product line pricing

setting the price steps between various products in a product line based on cost differences between the products, customer evaluations of different features, and competitors prices.

7. International pricing

some things like airplanes are priced the same everywhere, but some products are priced differently to fit the countries' economy.

Price adjustment strategies: Geographical Pricing =Uniform-delivered pricing

the opposite of FOB pricing. Here, the company charges the same price plus freight to all customers, regardless of their location.

Product mix strategies: (2) optional product pricing

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

Total costs

the sum of the fixed and variable costs for any given level of production