MKT Chpt 14

Horizontal price fixing

occurs when competitors that produce and sell competing products collude, or work together, to control prices, effectively taking price out of the decision process for consumers. Clearly illegal under the Sherman Antitrust Act

Vertical price fixing

occurs when parties at different levels of the same marketing channel (eg manufacturers and retailers) collude to control the prices passed on to consumers. falls into a gray area on whether or not it is illegal. Supreme Court Justice Sandra Day O'Connor in 1997 rendered a decision that vertical price fixing isn't always illegal, but rather must be reviewed on a case by case basis to determine its legality.

Bait and Switch

occurs when sellers advertise items for a very low price without the intent to really sell any. This bait-and-switch tactic is a deceptive practice because the store lures customers in with a very low price on an item (bait) only to aggressively pressure these customer into purchasing a higher-priced model (the switch) by disparaging the low-priced item, comparing it unfavorable with the higher-priced model, or professing an inadequate supply of the lower-priced item. Laws against this are hard to enforce because sales people always try to get customers to buy the higher priced model without necessarily deliberately baiting them.

3) Odd Prices

odd prices are those that end in odd numbers, usually 9. Most marketers believe that odd pricing got its start as a way to prevent sales clerks from just pocketing money. today it's so traditional that sellers are afraid to round off their prices for fear that customers will respond negatively. Sellers may believe that consumers mentally truncate the actual price, making the perceived price lower than it really is--ex: 21.99 think people focus on the 21 instead of the 99. Customers may also think that an odd price must have been precisely calculated to wind up with such an odd result. Thus the price must be fair because the seller obviously could have rounded it up but they didn't. Odd prices signal to consumers that the price is low. However odd prices can suggest low quality. Some consumers may perceive higher value because of the low price, whereas other may infer lower value on the basis of the low-quality image the odd price suggests.

the choice of a pricing strategy is specific to

the product/service and the target market. Although firms tend to rely on similar strategies when they can, each product or service requires its own specific strategy because no two are ever exactly the same in terms of the marketing mix

high/low pricing strategy

alternative to EDLP. it relies on the promotion of sales, during which prices are temporarily reduced to encourage purchases.

The reasons for using price skimming

1) by pricing the product high, it signals high quality to the market. 2) Others price high at first to limit demand, which gives them time to build their production capacities. 3) Some do it to try to quickly earn back some of the high research and development investments they made for the new product. 4) Some do it to test consumers' price sensitivity. A firm that prices too high can always lower, but if you price low its almost impossible to raise the price.

how to calculate improvement value

Ex: consumers evaluate how much better or worse the new cell phone is than an existing product on five dimensions: clarity, range, security, battery life, and ease of use. These consumers also weight the importance of the five attributes by allocating 100 points among them to indicate their relative importance. When the manager multiplies the improvement weight by the relative importance percentage, each dimension emerges with a weighted factor of ___%. Then he sums the weighted factors to arrive at an approximation of the improvement value of the new product. If the improvement value is = 21%, then you can charge a 21% markup from the existing product.

4) The Price-Quality Relationship

Not all customers rely on price to judge quality. When consumers know the brands, have had experience with the products, or have considerable knowledge about how to judge the quality of products objectively, price becomes less important. The store, brand name, product guaranteees, and where the product was produced are indicators of quality. But price generally plays a critical role in the consumers' judgments of quality.

pricing tactics

Pricing tacts, in contrast to pricing strategies, offer short-term methods to focus on select components of the five Cs. generally a pricing tactic represents either a short term response to a competitive threat (eg lowering price temporarily to meet a competitor's price reduction) or a broadly accepted method of calculating a final price for the customer that is short term in nature

2) Cash Discounts

a cash discount reduces the invoice cost if the buyer pays the invoice prior to the end of the discount period. typically expressed in the form of a percentage: 3/10, n/30, or 3%, 10 days, net 30: means the buyer can take a 3% discount on the total amount of the invoice if the bill is paid within 10 days of the invoice date; otherwise the full, or net amount is due within 30 days. By encouraging early payment they benefit from the time value of money-getting money earlier rather than later enables the firm to either invest the money to earn a return on it or avoid borrowing money and paying interest on it.

the experience curve effect

although its not always the case, firms expect the unit cost to drop significantly as the accumulated volume sold increases. With this effect, as sales continue to grow, the costs continue to drop, allowing even further reductions in the price.

1) Markdowns

are the reductions retailers take on the initial selling price of the product or service. An integral component of the high/low pricing strategy, markdowns enable retailers to get rid of slow moving or obsolete merchandise, sell seasonal items after the appropriate season, and match competitors' prices on specific merchandise. Retailers also use markdowns to promote merchandise and increase sales. They can increase traffic to the store.

Problem with coupons

coupon promotions may be stealing sales from a future period without any new increase in sales. people may stock up on the item and won't buy it in the future. So unless the coupon is used mostly by new buyers, the new impact on sales is negligible and there will be a negative impact on profits

relationship among reference prices

external reference prices influence internal reference prices--when consumers are repeatedly exposed to higher reference prices, their internal reference prices shift toward the higher external reference prices, assuming their initial internal reference price was not too far away from it. The new effect is that consumers will perceive the product or service in question to have a relatively lower selling price, and therefore it becomes a better deal in their perceptions

Legal and Ethical Aspects of Pricing

firms usually engage in pricing practices that can unfairly reduce competition or harm consumers directly through fraud and deception. A lot of laws and regulations at the federal and state levels try to prevent unfair pricing practices but some are poorly enforced and others are difficult to prove.

Deceptive Reference Prices

if the reference price is bona fide, the advertisement is information. If the reference price has been inflated or is just plain fictitious, the advertisement is deceptive and may cause harm to customers. In general, if a seller is going to label a price as a regular price, the Better Business Bureau suggests that at least 50% of the sales have occurred at that price.

external reference price

in some cases, the seller itself provides an external reference price, a higher price to which the consumer can compare the selling price to evaluate the deal. The seller labels the external reference price at the "regular price" or an "original price" Then when consumers view the "sale price" and compare it with the provided external reference price, their perceptions of the value of the deal will likely increase

3) Allowances

lowers the final cost to channel members like the others. Allowances, such as advertising or slotting allowances, offered in return for specific behaviors. An advertising allowance offers a price reduction to channel members if they agree to feature the manufacturer's product in their advertising and promotional efforts. Slotting allowance are fees paid to retailers simply to get new products into stores or to gain more or better shelf space for their products. They put small manufacturers at a competitive disadvantage because they can't afford it.

2) Quantity Discounts for Customers

most common implementation of a quantity discount at the consumer level is the size discount- the larger quantity box of cereal will be less cost per ounce. The larger the quantity-the less the cost per ounce, which means the manufacturer is providing a quantity discount. Goal: encourage consumers to purchase large quantities each time they buy--less likely to switch brands and tend to consume more of the product

4) Coupons

offer a discount on the price of specific items when they're purchased. Retailers use coupons because they are thought to induce customers to try products for the first time, convert those first-time users into regular users, encourage large purchases, increase usage, and protect market share against competition. The impact of coupons on profitability is questionable.

Price Discrimination

only some forms of price discrimination are considered illegal under the Clayton Act and the Robinson-Patman Act. When firms sell the same product to different resellers (wholesalers, distributors, or retailers) at different prices, it can be considered price discrimination; usually, larger firms receive lower prices. Quantity discounts must be available to all customer and not be structured in a way that they consistently and obviously favor one or a few buyers over others. Subtle forms of price discrimination such as rebates, free delivery, advertising allowances, and other methods used to lower the price without actually changing the invoice are prohibited by the Robinson-Patman Act. This act doesn't apply to sales to end consumers, where many forms of price discrimination occur.

3) Seasonal Discounts

price reductions offered on products and services to stimulate demand during off-peak seasons

5) Rebates

provide another form of discounts for consumers off the final selling price. In this case the manufacturer, instead of the retailer, issues the refund as a portion of the purchase price returned to the buyer in the form of cash. They can be even more frustrating than coupons for customers.--has the "hassle factor". Manufacturers like rebates because as much as 90% of consumers never bother to redeem them. Rebates can also be rolled out and shut off quickly, which allows manufacturers to fine-tune inventories or respond quickly to competitors without actually cutting prices. Because customers are required to fill out forms with all their data, rebates become a great way for vendors to build a customer data warehouse. Rebates increase demand in the same way coupons may, but the retailer has no handling costs.

Loss Leader Pricing

takes the leader pricing tactic one step further by lowering the price below the store's cost. Some states prohibit loss leader pricing by requiring some min markup but such laws are difficult to enforce. As long as the price is not below cost, the practice is legal.

Consumer Price Reductions

the final price the customer pays for a product or service often has been adjusted from the original price because marketers have used carious techniques designed to enhance value. Some of these techniques include markdowns, quantity discounts, coupons, and rebates.

premium pricing

the firm deliberately prices a product above the prices set for competing products to capture those consumers who always shop for the best or for whom price does not matter. they premium price green products- people are willing to pay more for a product that is friendly to the environment

1) Improvement Value Method

the manager must estimate the improvement value of a new product or service

Price Fixing

the practice of colluding with other firms to control prices.

2) Price Bundling

the practice of selling more than one product for a single, lower price. When firms are stuck with a slow moving item, to encourage sales they sometimes will "bundle" it with a faster-moving item and price the bundle below what the two items would cost separately. Sometimes however firms bundle products together just to encourage customers to stock up so they won't purchase competing brands, to encourage trial of a new product, or to provide an incentive to purchase a less desirable product or service to obtain a more desirable one in the same bundle.

1) Reference Price

the price against which buyers compare the actual selling price of the product and that facilitates their evaluation process

B2B pricing tactics and discounts

the pricing tactics employed in B2B settings differ significantly from those used in consumer markets. Among the most prominent are seasonal and cash discounts, allowances, quantity discounts, and uniform delivered vs. zone pricing

4b) Noncumulative quantity discount

though still a quantity discount, is based only on the amount purchased in a single order. Therefore provides the buyer with an incentive to purchase more merchandise immediately. Such larger, less frequent orders can save manufacturers order processing, sales, and transportation expenses

Firms using a skimming strategy for new products must face the consequences of:

ultimately having to lower the price as demand wanes. margins suffer and people who purchased the product at a higher price may become mad when the price falls.

Psychological factors affecting value-based pricing strategies

understanding the psychology underlying the way consumers arrive at their perceptions, make judgments, and finally invoke a choice is critical to effective pricing strategies

Pricing strategy vs. pricing tactics

a pricing strategy is a long-term approach to setting prices broadly in an integrative effort (Across all the firm's products) based on the five Cs. Pricing tacts, in contrast, offer short-term methods to focus on select components of the five Cs.

For price skimming to work:

1) product or service must be perceived as breaking new ground in some way, offering consumers new benefits currently unavailable in alternative products. 2) competitors can't be able to enter the market easily, otherwise price competition will likely force lower prices and undermine the whole strategy (competitors can be prevented by patent protections or the high cost of entry)

drawbacks of the penetration strategy

1) the firm must have the capacity to satisfy a rapid rise in demand--or at least be able to add that capacity quickly 2) low price doesn't signal high quality 3) firms should avoid a penetration pricing strategy if some segments of the market are willing to pay more for the product; otherwise the firm is just "leaving money on the table"

Deceptive or Illegal Price Advertising

a certain amount of "puffery" is allowed in advertising. But price advertisements should never deceive consumers to the point of causing harm. Ex of puffery: car dealer saying they have the best deals in town. contrast: advertising: the lowest prices guaranteed, makes a specific claim and if not true then it is deceptive.

pricing strategy

a pricing strategy is a long-term approach to setting prices broadly in an integrative effort (Across all the firm's products) based on the five Cs. The three pricing strategies are Cost-Based methods, Competitor-Based methods, and Value-based methods

1) Seasonal Discounts

a seasonal discount is an additional reduction offered as an incentive to retailers to order merchandise in advance of the normal buying season. If the co. can get the orders in early then they can plan its production schedules more easily and lessen its finished goods inventory. Its dealers however must weight the benefits of a larger profit because of the discount versus the extra cost of carrying the inventory for a longer period of time

3) Leader Pricing

a tactic that attempts to build store traffic by aggressively pricing and advertising a regularly purchased item, often priced at or just above the store's cost. While in the store to get the great deal on,say milk, the consumer will also probably pick up other items he or she needs. The store has priced these items at higher profit margins, so their purchase will more than cover the lower markup on the milk. Ex- uses leader pricing on cocktail sauce, which gives employees the perfect opportunity to ask if the customer wants a pound of shrimp with that sauce. Leader pricing can be illegal

How to apply psychological factors in the pricing decisions for new products

below

how EDLP adds value

by reducing consumers' search costs--consumers can spend less of their valuable time comparing prices, including sale prices, at different stores. Ex- Wal-Mart relies on EDLP to communicate to customers that for any given group of often-purchased items, its prices are lower than those of any other company in that market--doesn't mean every product will be the lowest price, but for an average purchase, Wal-Mart's prices tend to be lower overall

New Product Pricing

challenging. When the new product is truly innovative, or "new to the world", determining consumers' perceptions of its value and pricing it accordingly becomes more difficult. 2 pricing strategies for new products: 1) Skimming 2) Penetrations

everyday low pricing (EDLP) strategy

companies stress the continuity of their retail prices at a level somewhere between the regular, non-sale price and the deep-discount sale prices their competitors may offer

2) Everyday Low Pricing (EDLP) vs. High/Low Pricing

compare the two below

internal reference price

consumers may rely on these to judge a price offering by accessing price information stored in their memory--perhaps the last price they paid or what they expect to pay

Three types of pricing strategies

cost-based, competitor-based, value-based

Cost-based pricing methods

determine the final price to charge by starting with cost. Don't recognize the role that consumers or competitors' prices play in the marketplace. requires that all costs can be identified and calculated on a per-unit basis. The process assumes that these costs will not vary much for different levels of production and if they do then the price may need to be raised or lowered according to the production level. Thus prices are usually set on the basis of estimates of average costs with this method.

value-based methods

include approaches to setting prices that focus on the overall value of the product offering as perceived by the consumer. Consumers determine value by comparing the benefits they expect the product to deliver with the sacrifice they will need to make to acquire the product. However different consumers perceive value differently--so how do managers use value based pricing methods? 2 key approaches: 1) Improvement value method 2) cost of ownership method

1) Price Skimming

innovators and early adopters are willing to pay a higher price to obtain the new product or service. Price skimming appeals to these segments of consumers who are willing to pay the premium price to have the innovation first. However, after this high-priced market segment becomes saturated and sales begin to slow down, companies generally lower the price to capture (or skim) the next most price sensitive market segment, which is willing to pay a somewhat lower price. The price dropping process can continue until the demand for the product has been satisfied, even at the lowest price points.

2) Market Penetration Pricing

instead of setting the price high, firms using this strategy set the initial price low for the introduction of the new product or service. Their objective is to build sales, market share, and profits quickly. Low market penetration price encourages consumers to purchase the product immediately rather than wait for the price to drop. This strategy discourages competitors from entering the market because the profit margin is relatively low. If the costs to produce the product drop because of the accumulated volume, competitors that enter the market later will face higher unit costs, at least until their volume catches up with the early entrant.

4) Quantity Discounts

provides a reduced price according to the amount purchased. The more the buyer purchases, the higher the discount and of course, the greater the value. 2 types: 1) cumulative quantity discount 2) noncumulative quantity discount

improvement value

represents an estimate of how much more (or less) consumers are willing to pay for a product relative to other comparable products. Ex-using a host of research methods--such as consumer surveys--could get customers to assess the new product relative to an existing product and provide an estimate of how much better it is, or its improvement value

quality perceptions

some consumers perceive that stores that use EDLP carry lower-quality goods, whereas high/low pricing stores tend to carry better-quality items. this perception forms because consumers view the initial price at a high/low store as the reference price. In the end, however, the consumer's decision comes down to value.

5) Uniform delivery vs. Zone Pricing

these pricing tactics are specific to shipping, which represents a major cost for many manufacturers. with a 1) uniform delivered pricing tactic, the shipper charges one rate, no matter where the buyer is located, which makes things very simple for both the seller and the buyer 2) zone pricing sets different prices depending on a geographical division of the delivery areas--ex might divide the US into seven diff zones and use diff shipping rates for each zone--reflects the actual shipping charges more closely than uniform delivery tactic can

although value-based pricing strategies can be quite effective,

they also necessitate a great deal of consumer research to be implemented successfully. Sellers must know how consumers in different market segments will attach value to the benefits delivered by their products. Also must account for changes in consumer attitudes

2) Cost of ownership method

this method determines the total cost of owning the product over its useful life. Using this method, consumers may be wiling to pay more for a particular product because, over its entire lifetime, it will eventually cost less to own than a cheaper alternative.

4a) Cumulative quantity discount

uses the amount purchased over a specified time period and usually involves several transactions--encourages resellers to maintain their current supplier because the cost to switch must include the loss of the discount. Ex:if a car dealer meets their quota for a specific time period, then they earn discounts on all the cars they purchased from the manufacturer during that time period in the form of a rebate check

competitor based methods

using this method, they may set their prices to reflect the way they want consumers to interpret their own prices relative to the competitors' offerings. Ex: setting a price close to a competitor's price signals to consumers that the product is similar, whereas setting the price much higher signals greater features, better quality, or some other valued benefit. some companies use this method to gain market share or to exploit a cost advantage they have achieved. price wars can start due to this method- unless a company has a real cost advantage and therefore can lower prices without harming profits, a co. may find that a price war leads only to an empty victory. another competitor-based method: premium pricing

Predatory Pricing

when a firm sets a very low price for one or more of its products with the intent to drive its competition out of business, it is using predatory pricing. It is illegal under both the Sherman Act and the Federal Trade Commission Act because it constraints free trade and represents a form of unfair competition. It also tends to promote a concentrated market with a few dominant firms (an oligopoly). It is difficult to prove: 1) one must demonstrate intent 2) the complaint must prove that the firm charged prices lower than its average cost

Pricing Tactics Aimed at Consumers

when firms sell their products and services directly to consumers, rather than to other businesses, the pricing tactics that they use differ. Some of the tactics for products and services aimed directly at consumers: price lining, price bundling, and leader pricing.

1) Price Lining

when marketers establish a price floor and a price ceiling for an entire line of similar products and then set a few other price points in between to represent distinct differences in quality, the tactic is called price lining.

which strategy?

which consumers prefer which strategy depends on how those consumers evaluate prices and quality. some prefer not to spend the extra time trying to find the lowest price so EDLP would be best for them. But some may relish the challenge of getting the lowest price or be so price sensitive that they are willing to expend the time and effort to seek out the lowest price every time.

6) Leasing

with a lease, consumers pay a fee to purchase the right to use a product for a specific amount of time. They never own the product, they are just renting it. This opens up new, less price sensitive, target markets. Some consumers like it because they get tired of the product before its useful life is over anyway.