Marketing Chapter 10

Bait and switch

-Advertise very low-priced item to lure customer to store (bait) -Arriving customers find product is out of stock and are offered more expensive item (switch)

Legal and Ethical issues in B2C Pricing

-Bait and Switch -Loss Leader Pricing

Psychological Issues in Pricing

-Buyer Expectations -Internal Reference Prices -Price-Quality Inferences

Psychological Issues in Setting Prices

-Buyer's form expectations of the fair or customary price that should be charged for a given product or service. When a product or service is priced above what the buyer believes to be fair, he or she may refuse to buy, believing the product to be a bad deal. Conversely, while some buyers may gleefully purchase items priced below the fair or customary price, a price TOO low may send a negative signal to the buyer, raising suspicions that product quality is not up to par. Therefore, it is important that the marketer understand consumers' expectations in setting price. It's also important to recognize that price expectations can vary by country, culture, or even zip code. Victoria's Secret has learned to send catalogs featuring the same merchandise, but with different prices, to those residing in different zip codes. Those in higher income areas often expect to pay more, and thus receive a catalog that fulfills that expectation. -Internal reference prices sometimes influence consumers' perceptions of the customary price of a product. Internal reference prices are a set price, or price range that consumers have in mind when evaluating a product's price. Marketers often try to influence consumers' internal reference prices by comparing their price to the competition's in marketing communications, while retailers may stock a product, such as a store brand, next to higher priced versions of the same or different product. When this occurs, consumers may react in one of two ways. If the price is similar (not too far apart), many consumers experience an assimilation effect in that they come to believe the quality of the two items must also be similar, and with this in mind, ultimately choose the item that is lower priced. On the other hand, a contrast effect occurs when the price gap is too large, and the consumer comes to believe that a true difference in quality between brands exists. -Price-quality inferences are made by consumers about a product when they use price as a cue or indicator of quality. If consumers are unable to judge the product quality by direct examination or experience, they usually assume the higher priced item is of greater quality. This is particularly true for items that are bought infrequently. -Furthermore, price becomes an even greater indicator of quality when brand names are unknown. Carpet is an example of a high cost purchase that most consumers make rarely. Brand names are likely to be relatively unknown. Left with a choice between two similar products, the consumer may very well choose the higher priced option believing it to be of higher quality than the alternative.

Non-Economic Influences

-Competition -Government regulation -Consumer trends -International environment

Economoy

-Consumers become very price-sensitive when economic conditions appear bleak -Marketers must factor broad macroeconomic trends into pricing decisions -Economic growth -Consumer confidence -Recession -Inflation

Normal and Prestige Products

-Demand curves illustrate the effect of price on quantity demanded. For normal products, the demand curve isn't a curve at all, but rather is just a straight line, as shown here for normal products. In this situation, the law of demand dictates that as price goes up, quantity demanded declines. -The vertical axis of demand curves shows the various prices that a firm might be willing to charge for a product. Demand is portrayed as the number of units that consumers are willing to purchase at a given price. -However, the law of demand does not always accurately reflect how price and demand interact. -For example, brands that are marketed on the basis of prestige, status or simple snob appeal are characterized by a very different sort of demand curve, as shown on the right-hand side of Figure 11.4. -In this situation, low prices makes the product undesirable as consumers simply can't reconcile a low cost with a prestigious product. -They may suspect the brand is a counterfeit, for example. As price increases, so does demand, to a certain point. Some consumers feel that a product becomes more desirable as the price increases simply because not everyone can afford to buy it. -However, as price continues to increase, some buyers will drop out of the market. The combination of these factors creates the backward facing demand curve shown for Prestige Products in Figure 11.4 -For prestige products, a price increase may actually increase the quantity demanded

Demand

-Demand refers to how customers' collective desire for a particular product. -A key question is how much does this desire fluctuate with changes in pricing levels, a concept known as a demand curve. -Economists use a graph of a demand curve to illustrate the effect of price on the quantity demanded of a product. -The demand curve, which can be a curved or straight line, shows the quantity of a product that customers will buy in a market during a period of time at various prices if all other factors remain the same.

Examine the Pricing Environment

-Firm must also consider external influences upon pricing decisions -Economy -Competition -Government regulation -Consumer trends -International environment

Price Strategy based on competition and customer needs

-For example, a price leadership strategy is often used in oligopolistic industries when a dominant firm announces its new price, and competitors get in line or drop out, in order to minimize competition. Pricing strategies based on customers' needs tends to take the form of value pricing or everyday low pricing (EDLP) popularized by Walmart. -The purpose of an EDLP or value pricings strategy is to retain customers and thus rather than focusing on costs, value pricing begins with a consideration of the customer and what prices are justified in their eyes. But, it doesn't stop there. -The competition is also considered in determining the best price the firm should set that will provide ultimate value to customers. Some firms use hybrid EDLP to compete with low-price retailers such as Walmart. Hybrid EDLPs offer consumers lower prices on thousands of items as well as additional value in the form of a more fun shopping experience.

Cost, Demand, Revenue and the Pricing Environment

-In order to set the right price, marketers must understand quantitative and qualitative factors that can influence pricing strategy success -Once objectives are set, marketers begin the actual process of setting the price of a brand. This requires estimations of demand, costs, revenues, and an understanding of the pricing environment.

Pricing Strategies Based on Cost

-Marketers often choose cost-based strategies because they are simple to calculate and relatively risk free in that they promise a price which will at least cover the costs of producing and marketing the product -However, cost-based pricing strategies are limited, in that demand, competition, and the nature of the target market are not considered as part of the pricing process. Furthermore, it is often surprisingly difficult to accurately estimate costs. -Still, the most common cost-based approach to price the product using the cost-plus pricing strategy, in which product per unit costs are totaled and markup is added to arrive at the final price. -Retailers and wholesalers are fond of this pricing strategy due to its simplicity.

Markup and Margins

-Markup is an amount added to the cost of the product to create a price at which the channel member will sell the product -Gross margin -Retailer margin -Wholesaler margin -List price

Psychological Pricing Strategies

-Odd-Even Pricing -Price Lining -Prestige Pricing

Legal and Ethical Issues in B2B Pricing

-Price Discrimination -Price-Fixing -Predatory Pricing

Pricing Objectives

-Sales or Market Share -Profit -Customer Satisfaction -Image Enhancement -Competitive Effect

Distribution-based pricing for end-users F.O.B. (free on board) origin pricing F.O.B delivered pricing Basing-point pricing Uniform delivered pricing Freight absorption pricing

-Shipping fees can be hefty. Distribution-based pricing helps firms determine how they will handle the cost of shipping products to their customers. A number of factors influence which distribution pricing tactic is chosen, including characteristics of the product, the customer, and the competition. Business-to-business firms often use one of the F.O.B. pricing strategies. F.O.B. origin pricing means the customer must pay the cost of shipping the items from the factory to the customer's location. The customer takes title of the merchandise once it is loaded on the truck, rail, or whatever conveyance is being used to ship the product. F.O.B. delivered pricing means the seller pays both the cost of the loading and the cost of transporting the goods to the customer. -By contrast, basing-point pricing which is also used in B2B transactions, means marketers choose one or more locations to serve as intermediate delivery locations (such as plants, warehouses, or some arbitrarily selected city). Customers must pay the cost of shipping from the basing points to there final destination. Uniform delivered pricing adds an average shipping cost to the price, no matter what the distance is from the manufacturer's plant. -Freight absorption pricing means the seller takes on part or all of the cost of shipping. Usually used for high-ticket items, and in markets where that are highly competitive. For example, Amazon.com has learned that offers of free super saver shipping substantially increase their business. -Zone pricing is similar in nature to the basing-point pricing tactic, but does differ. Ask students to imagine an archery target composed of several concentric circles. The "bulls eye" in the center of the target can be thought of as the distribution point, most likely either a manufacturing plant or warehouse/distribution center. Each ring surrounding the bulls eye represents a geographic zone some distance away from the distribution point. For example, the ring nearest to the distribution point may include delivery points within 50 miles of the facility; the next ring may cover destinations between 51-100 miles from the facility, and so on. Different prices are charged for different zones, with the points furthest away from the distribution center paying the highest price. More complex variations of zone pricing draw irregular borders rather than simple concentric circles. The borders between price zones may be altered to account for geographic features or aspects of the transportation infrastructure. For example, perhaps a river spans the delivery area—if the nearest bridge is 10 miles downriver, the area on the other side of the river might well be assigned to a different zone because the actual travel distance to the cross river and reach that location is much further away than the simplistic concentric circle method would suggest.

Pricing and Electronic Commerce

-Technology available via ecommerce and the Internet in particular makes it easy for pricing to change quickly. -Dynamic pricing strategies are those in which the Internet seller can easily adjust the price to meet changes in the marketplace. The cost of changing prices on the Internet is practically zero, and firms can respond quickly and frequently to changes in costs, supply, and/or demand. Some people refer to dynamic pricing as 'real-time pricing'. For example, electricity prices might change as often as hourly and occasionally even more often based on the time of day and time of year. Another example of dynamic pricing can be found in the mortgage industry, where mortgage interest rates also vary to meet changes in the marketplace. The link provided leads to a recent article discussing Ticketmaster's plans to implement dynamic pricing in an effort to thwart scalpers. -Online auctions are familiar to most consumers and allows shoppers to purchase products through online bidding. B2B auction sites also exist. Skoreit.com is one of the newer bid sites targeting consumers. While the site is promoted as making it possible to purchase items for as much as 99% off of retail, the site itself requires users to purchase "bidpaks", beginning as low as $9.90 Each bidpack contains a limited number of bids which can be used during auctions. The cost of each bid in early 2011 was around 60 cents a piece. The freemium ((a mix of "free" and "premium.") pricing model is a business strategy in which a product in its most basic version is provide free of charge but the company charges money (the premium) for upgraded versions of the product with more features, greater functionality, or greater capacity. The freemium pricing strategy has been most popular in digital offerings such as software media, games, or Web services where the cost of one additional copy of the product is negligible. The idea is that if you give your product away, you will build a customer base of consumers willing to pay for the added benefits.

Cross-Elasticity of Demand

-The essence of cross-elasticity of demand is that when products are substitutes for one another, a price increase in one will be reflected as an increase in price for the other. -However when products are complements, meaning that one product is essential to the use of the first, an increase in the price of one will decrease demand for another.

Gross Margin

-The markup amount is often called the gross margin, which not only covers the profit expected by the channel member, but also the fixed costs of the retailer or wholesaler.

List Price

-The markup should never exceed the list price, or manufacturer's suggested retail price (MSRP), as this is the price the manufacturer has estimated that the end customer should be willing to pay. -This means that even if the customer is willing to pay $10 for a product, the manufacturer must sell the product for less than this amount to the retailer. If a distributor or wholesaler is also used, the price charged by the manufacturer will be lower still to ensure that both the distributor and retailer can add adequate markups to make handling the product viable. While markup can be calculated as a percentage of the final selling price, or as a percentage of the price paid for the product.

When setting prices for channel members, marketers may also apply tactics such as: -Trade or functional discounts -Quantity discounts -Cash discounts -Seasonal discounts

-Trade or functional discounts usually set a percentage discount off of the suggested retail or list price for each channel level. The percentage discounts typically relate to the margins needed by the various channel members. -Quantity discounts are useful for encouraging larger purchases, as the amount of the discount varies according to the quantity purchased. These discounts can be figured on a cumulative basis at the end of a specified time period such as a quarter or year, or they can be noncumulative and apply to items purchased on each individual order. Cash discounts are used to encourage customers to pay their bills promptly, and may be expressed in a fashion similar to "2 percent 10 days net 30", meaning that the customer would receive a 2% discount if the bill is paid within 10 days. Otherwise the full amount is due within 30 days. Seasonal discounts, as the name implies, are price reductions that are available only at certain times of the year. Normally such discounts are offered at times of the year when the product is NOT in high demand. For example, a Christmas Card manufacturer may offer retailers a 50% seasonal discount for cards ordered January 1 - March 31st. Another example would be the lower prices charged by Disney World resorts in the off season, compared to holiday and summertime. -Some firms choose to implement a seasonal discount during the height of the season to create a competitive advantage when people are buying.

Shift in Demand

-Typical demand curves assume that only price changes, but in reality, other factors can change and shift demand upward or downward. -For example, changes in marketing strategy such as the addition of new, highly desired product feature or the launch of a fantastic new advertising campaign can shift the demand curve upward (to the right), meaning that MORE units are now demanded at a given price compared to before the change in marketing strategy was implemented. -Correspondingly, a variety of things can cause a downward shift in demand. Product recalls can stifle demand, development of new technologies can make a product's existing technology obsolete and thus less desirable, a scandal in the parent company may stir up negative sentiment against the firm and brand, etc. -Weather can even influence demand for everything from umbrellas and sweatshirts to hotel accomodations and movie tickets.

Loss leader pricing

-Use very low prices to get customers into the store -Making up the "loss" through sale of other products

Determine Costs

-Variable Costs: Per-unit costs of production that will fluctuate depending on how many units a firm produces -Fixed Costs: Costs that do not vary with the number of units produced -Total costs are simply the combined fixed and variable costs at a given production level.

Retailer Margin or Wholesaler Margin

-are just two different names for gross margin, but specific, as the names imply, to either retailers or wholesalers.

Price Elasticity of Demand

-percentage change in quantity demanded/percentage change in price -above 1 is elastic, under 1 is inelastic -When changes in price have large effects on the amount demanded, demand is elastic. Thus an increase in price can negatively impact revenues when the percentage increase in price cannot compensate for the revenue lost through lower unit sales. -When changes in price have little or no effect on the amount demanded, demand is inelastic. Such situations make it much easier for marketers to change price without negatively impacting the volume of sales.

Elements of Price Planning

1. Set Price Objectives 2. Estimate Demand 3. Determine Costs 4. Examine the Pricing Environment 5. Choose a Pricing Strategy 6. Develop Pricing Tactics

New Product Pricing: Skimming Price, Penetration Price, Trial Price

New product pricing represents a unique challenge. Skimming, penetration, or trial pricing strategies may be followed Under a skimming pricing strategy, a very high premium price is charged by the manufacturer when the product first hits the market, with the intention of reducing price in the future. Thus each unit sold incurs a huge profit, though initially, fewer units are sol. As demand at a given price level disappears, the price is dropped, bringing new buyers to the market. Skimming is often used with new, highly desirable products with unique benefits, particularly if the item in question creates a new product category. For skimming to work, there should be little chance that competitors can get their products to market quickly. Past examples include the VCR (once priced as high as $1200), high-definition TVs (one-time as high as $32,000), and even the iPhone (priced initially at $599 in 2007). However, price drops can enrage those who paid higher prices, as Apple found to its detriment when it dropped the price $200 only months after the initial product introduction. A penetration pricing strategy is just the opposite. The marketer prices the product very low in order to build unit sales very quickly. By building a large market share quickly, the manufacturer hopes to discourage competitors from entering the market as the profit margin per unit is very small Trial pricing sets a low price initially, but only for a limited period of time, after which the price is raised to "normal" levels. The purpose of trial pricing is gain consumer acceptance firm, and defer profits until later. Microsoft used such a strategy when it first introduced Access for $99, although the suggested retail price was $499. Once the short introductory period passed, Microsoft raised the price of the product.

Pricing for multiple products -Price bundling -Captive Pricing

Pricing for multiple products is best thought of in situations when consumers typically buy multiple items at one time. A classic example is the fast food industry, where consumers may purchase a drink along with a sandwich and chips (burgers and fries, etc.). These situations are wonderful opportunities for price bundling, in which the cost of the combined items is less than if each item were purchased individually. Thus new PCs include the computer, keyboard, mouse, software and sometimes other items such as monitors. Price bundling does have its downside though. Cable and satellite providers include a variety of channels that consumers don't want and never watch, while other, more desirable channels can only be purchased as part of a higher cost package. Separately pricing each channel means that consumers would buy some, but NOT all, and the firm would most likely lose more revenue than is justified by the reduced price for the bundled package. Captive pricing is appropriate when two products can only work when used together. A classic example is the desktop printer and ink cartridge. The manufacturer typically will price the printer itself low, knowing that the cartridges needed to make the printer work will be priced with a hefty profit margin that will earn greater profits over time.

Pricing for Individual Products -Two-part pricing -Payment pricing

The sixth and last step in the price planning process is to develop pricing tactics. Once a marketer has chosen a pricing strategy, the last step in the process is to implement the strategy by means of a pricing tactic. How marketers present a price to the targeted consumers can make a difference. First, we'll consider two pricing tactics for individual products. Two-part pricing is appropriate for services or products that require separate payments to purchase the product. For example, a country club requires an annual membership fee plus separate fees related to usage which might be based on the number of rounds of golf played, pool usage, or the number of meals eaten at the country club restaurant. Can you think of some other examples of two-part pricing plans? Payment pricing simply allows consumers to break up the cost of a purchase over time. One example would be any retail store that allows consumers to put items on "lay-away". Another example would be a mortgage, which allows consumers to buy their home. Few people can afford to pay cash for home, but spreading the cost out over 30 years makes the purchase affordable.

Target Costing

allows marketers to match price with demand, by first identifying the level of quality and functionality customers need and the price they're willing to pay before designing product. Then they work backwards to design a product that meets the targeted level of cost.

Price Lining

is a practice in which a limited number of price points (different specific prices) are set for items in a product line. From a marketer's viewpoint, price lining maximizes profits by allowing the firm the opportunity to charge the highest price most customers would be willing to pay at each level. Price lining can also be applied to services. For example, many car washes offer different "packages" from which patrons may choose. The low priced alternative may include a vacuum and quick run through the automatic car wash. A higher-end package might add window cleaning, air fresheners, tire scrubbing, waxing, etc. Price lining is also present in the hospitality industry. Walt Disney World maintains a number of different properties on-site, each having a different price point. As would be expected, the different price points appeal to different segments of the target market.

Odd-even pricing

is common throughout the U.S. where prices usually include both dollars and cents rather than even dollar amounts. Is $199.99 really "less" than $200.00? Logically, a penny separates these prices, but psychologically the two prices are worlds apart. Prices ending in 99 lead to increased sales. However, in some instances having a price end in 99 can be detrimental. Professional service providers such as lawyers, dentists, or doctors who priced their service in this fashion may suffer from the perception that their quality of care is inferior. High-end restaurants have found that prices ending in 9 ($19.99) are more indicative of value than quality.

Illegal Price Discrimination

is regulated by the Robinson-Patman Act. The purpose is to prevent firms from selling the same product to different retailers and wholesalers at differ prices, IF such practices "lessen competition." This act also prohibits offering "extras" some retailers and note others, such as discounts, allowances, etc. However, there are few exceptions to this rule. If a marketers could prove that price differences resulted from differences based on order quantity and economies of scale (perhaps in relationship to shipping charges), than price discrimination would not have occurred. Also, differences in the product itself (new model year, "second" quality vs. prime quality etc.) would warrant charging different prices. Finally, it should be noted that price discrimination is only applicable in B2B pricing - consumers may very well pay different prices for identical items based on their negotiating skills, zip code, or a host of other factors.

Price

is the assignment of value, or the amount the consumer must exchange to receive the offering -Includes money, goods, services, favors, votes, or anything else that has value to the other party -Opportunity costs must also be considered

Demand-based pricing

means that the firm bases the selling price on an estimate of the quantity that it can sell in different markets at different times. Target costing and yield management are two examples of demand-based pricing strategies.

Predatory Pricing

occurs when a firm sets a very low price for purpose of driving competitors out of business, then later raise prices once the competitor is gone and they have a monopoly again. Both the Robinson-Patman Act and the Sherman Act prohibit predatory pricing.

Vertical Price Fixing

occurs when a manufacturer or wholesaler attempts to force retailers to charge a certain price for their product, usually the "suggested retail price". This is illegal, as the Consumer Goods Pricing Act of 1976 leaves retailers free to set whatever price they choose without interference by the manufacturer or wholesaler.

Horizontal Price Fixing

occurs when competitors making the same product collude by sharing price information and jointly determine what they will charge for the product. If all of the gas stations within a given town all charged the exact same price for unleaded and diesel gasoline, one might suspect that price fixing had occurred (though proving it may be difficult with evidence that all of the sellers had exchanged information and agreed to charge the prices set). In industries with few sellers, there may not be a FORMAL agreement to charge a given price; rather, each firm may independently agree to price to meet the competition. Still, without the exchange of pricing information between sellers, this action would not be consider price fixing.

Price Fixing

occurs when two or more companies conspire to keep prices at a certain level. This level of collaboration is entirely different from the situation previously discussed in which a dominant firm within an oligopoly may take a price leadership role. True price fixing can take two forms: horizontal or vertical.

Yield Management

pricing is very popular in the service industry to the perishable nature of services. The essence of yield management is that capacity is managed by charging different prices to different customers. A simple example is the "early bird special" pricing offered by many restaurants for those who are willing to dine during the early or mid afternoon. Another example would be how movie theatres price the early show cheaper than those that begin after 5 pm

Prestige Pricing

turns the relationship between price and demand upside down. Under this scenario, status conscious consumers buying luxury goods become MORE likely to purchase an item as price increases. The fact that not everyone can afford to purchase an item is exactly what makes it desirable - the more exclusive, the better in many cases.