MKTG 480: Chapter 11 - Price and deliver the value offering

Capitive pricing

- Also called 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

Competitor based pricing

- At the competitor's price or slightly above or below. - Price war occur 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. - The logic of competitor-based pricing is quite rational unless (a) it is the only approach considered when making the ultimate pricing decisions or (b) it leads to exaggerated extremes in pricing such that on the high end a firm's products do not project customer value or on the low end price wars ensue.

Profit maximization and target ROI

- Bottom-line profit is set and then price to meet the target profit. - Price elasticity of demand (e.g., Will consumers buy at the target ROI price?). - A bottom-line profit is established first and then pricing is set to achieve the target. - Although this approach sounds straightforward, it actually brings up an important reason pricing is best cast within the purview of marketing instead of under the sole control of accountants or financial managers in a firm. - When pricing decisions on a given product are made strictly to bolster gross margins, bottom-line profits, or ROI without regard to the short- and long-term impacts of the pricing strategy on other important market- and customer-related elements of success, the product becomes strategically vulnerable. - Marketing managers are in the best position to take into account the competitor, customer, and brand image impact of pricing approaches. - The idea of pricing based on purely economic models and solely for profit maximization raises important ethical concerns, especially in cases where essential products are in short supply. - The latest wonder drugs, building materials after a major disaster, and new technologies needed for emerging markets are but three examples in which pricing for pure profit motive can damage both a firm's image and ultimately its relationships with customers.

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.

Related strategies: 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 (e.g., electronics, pharmaceuticals). - Used effectively in niche markets with few competitors. - If the product moves from a niche to a differentiated product, it is difficult to maintain skimming. - In general, skimming can be an appropriate pricing objective within the context of a focus (niche) strategy. - By definition, such an approach positions a product for appeal to a limited (narrow) customer group or submarket of a larger market. - Because niche market players typically attract fewer and less-aggressive competitors than those employing differentiation strategies within the larger market, a focus strategy can usually support higher prices and the potential for skimming can be extended. - The ability to use price skimming declines precipitously, however, if the product migrates from a niche positioning to that of a differentiated product within the larger market

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

- Pricing objectives are the desired or expected result associated with a pricing strategy. - Pricing objectives must be consistent with other marketing-related objectives (e.g., positioning and branding) as well as with the firm's overall objectives for doing business. - The decision of which pricing objective or objectives to establish is driven by many interrelated factors. As you learn about each of the approaches, keep in mind that most firms attempt to balance a range of issues through their pricing objectives, including internal organization-level goals, internal capabilities, and a host of external market and competitive factors.

related strategies: 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. 1. 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.

reference pricing

gives the buyer a comparative price. - Store brands on the shelf next to national brands. - Used heavily in B2B price lists. - is very heavily used in B2B price lists, often reflecting price level differences depending on how many items are purchased or reflecting the amount saved by a firm's special "contract rate" with a vendor versus what a noncontract rate would be.

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 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.

Price

or more specifically the customer's perception of the offering's pricing—is a key determinant of perceived value.

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.

Prestige pricing

Higher than the competition like luxury goods or ultra-premium products; leads to higher profits (e.g., Voss water). - One rationale for establishing a price skimming objective is prestige pricing—lending prestige to a product or brand by virtue of a price relatively higher than the competition. - With prestige pricing, some of the traditional price/demand curves cannot properly predict sales or market response because it violates the common assumption that increasing price decreases volume. - From the perspective of financial returns, prestige pricing is a phenomenal approach because, everything else being equal, commanding a premium price reflects directly on margins and bottom line.

One-price strategy and variable pricing

The U.S. market is virtually all one-price with the exception of products like automobiles and real estate that use variable pricing. - In many parts of the world, haggling is expected. - In the United States, B2B and the service sector often uses variable pricing. - With one-price, there is no bargaining. Everyone pays the same for most goods in the United States. - Variable pricing allows for haggling and is more common around the world.

Value pricing

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 benefit. - Toyota and Honda cars cost more initially but last long, need fewer repairs, are more fuel efficient, and have strong resale value. - Value pricing is complex and overarches the other pricing objectives discussed so far. - Through value pricing, a marketing manager seeks to ensure that the offering meets or exceeds the customer's expectations—that is, when he or she does the mental arithmetic that calculates whether the investment in the offering is likely to provide sufficient benefits to justify the cost. - Put another way, value pricing considers the whole deliverable and its possible sources of differential advantage—image, service, product quality, personnel, innovation, and many others—the whole gamut of elements that create customer benefit.

Penetration pricing

When a firm's objective is to gain as much market share as possible, a likely pricing strategy is penetration pricing, sometimes also referred to as pricing for maximum marketing share.

Stability pricing

The firm tries to find a neutral set point that is neither too low to irritate the competition or too high to risk the value proposition with customers. - Can provide a competitive advantage in markets that have rapidly changing prices. - Example: Southwest Airlines bases fares on actual distance traveled rather than load maximization formulas of other airlines. Southwest has only a few stable fares for each flight. - Southwest Airlines employs a stability pricing strategy by displaying only five or six fares to a particular destination, with price points based on when the ticket is purchased and the days of the week the customer will be traveling. - Unlike most other domestic carriers, Southwest actually bases prices more on the distance of the trip and is less tied to load-maximization formulas in which a fare can change minute by minute depending on ticket sales. - The airline's stability pricing approach has proved highly popular with customers, and it's been successful for the firm as its seat occupancy rate continues to be among the highest in the industry

Price bundling

allows customers to buy a package deal at a lower price than if items bought separately (e.g. cable TV, landline phone service, and Internet). - A potential dark side to price bundling is that, in some industries, it can become unclear just what the regular, or unbundled, price is for a given component of a package. - The cable/telecommunications industry is regulated to the point that this is less of an issue, but in unregulated industries, unscrupulous firms sometimes set artificially high prices for the sake of pushing customers into buying a package. - Beyond legalities, ethical issues sometimes arise with regard to price bundling. - For example, car shoppers often find every car on the lot within a given model has many of the same features automatically bundled as add-ons. How many of those features would you buy if you had a choice? - The extra features being bundled typically carry much larger margins than the margin on the core vehicle itself. - If you special order a car without the bundle, chances are you will be waiting months for it to be delivered to the lot—if the dealer will even order it for you. - Reference pricing is implemented in a number of ways. - Sometimes a product catalog might show a manufacturer's suggested list price next to the actual price the product is offered for in the catalog. - In retail stores, in any given product category a private-label product (say, the Walgreens brand for instance) is often purposely displayed on a shelf right next to its national brand equivalent. - The retailer hopes the savings realized by the direct price comparison of a bottle of Walgreens' mint mouthwash versus the bottle of Scope next to it will be enough to stimulate purchase.

Just noticeable difference (JND)

is the amount of price increase that can be taken without affecting customer demand.

Price war

occurs when a company purposefully makes pricing decisions to undercut one or more competitors and gain sales and net market share.