MKTG 5330 Ch. 11

Price Wars

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

Reverse Auctions

When sellers bid prices to buyers and the purchase typically goes to the lowest bidder. The exact opposite of an auction.

Elements of Pricing Decisions

Establishing Pricing objectives and related strategies, Select pricing tactics, Set exact price, Determine channel allowances/discounts, Execute price changes, Understand legal considerations in pricing

Southwest Airlines: A Cost Leader

First, it flies mostly the same type of plane-various series of the Boeing 737. Second, the company has a very simple process of booking passengers and does not offer assigned seats. Finally, it only has one class of cabin service and does not serve meals, mostly opting for nuts and pretzels instead. A strategic approach that the company uses is to translate part of its cost advantage into a more transparent, mileage-driven pricing structure for customers but at the same time, take a portion of the cost advantage to increase the firm's profit margins, partly to reward shareholders and partly to reinvest for the firm's growth.

Generic Price-Quality Positioning Map

For most products, as long as the customer perceives the ratio of price and benefit to be at least at equilibrium, perceptions of value will likely be favorable. Thus, a poorer-quality product offset by a super-low price can be perceived as a good value just as a higher-quality product at a high price can be,. Overpromising and underdelivering is one of the quickest ways to create poor value perceptions and thus alienate customers. In the lower-right quadrant-(high quality/low price)-a penetration strategy might be in play. Clearly, operating in the upper-left (high price/low benefits) quadrant can be problematic.

Price Is a Core Component of Value

From the customer's perspective, many but not all of those costs are reflected within the price paid for the offering. There are other types of costs, such as time invested in the purchase process or the opportunity costs of choosing one offering over another. As such, price- or more specifically, the customer's perception of the offering's pricing- is a key determinant of perceived value.

Finally, 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.

Unfortunately, price sensitivity is notoriously...

One of the most difficult issues to determine through market research. Sometimes, historical records or secondary data can provide evidence of pricing's impact on sales volume.

Most firms attempt to balance a range of issues through their pricing objectives, including...

Organizational-level goals, internal capabilities, and a host of external market and competitive factors.

Pricing Objectives

The desired or expected results associated with a pricing strategy that is consistent with other marketing-related objectives. Must be consistent with other marketing-related objectives (positioning, branding, etc.) as well as the with the firm's overall objectives (including financial objectives) for doing business.

Types of Pricing Tactics

- Auction Pricing - EDLP and High/Low Pricing - One-Price and Variable Pricing - Odd/Even Pricing - Prestige Pricing - Reference Pricing - Price Bundling - Captive Pricing - Product Line Pricing

The logic of competitor-based pricing is quite rational unless _______.

1. It is the only approach considered when making the ultimate pricing decisions or.. 2. It leads to exaggerated extremes in pricing such that A. On the high end a firm's products do not project customer or value or B. On the low end, price wars ensue.

Cost Leadership

A marketing strategy in which a firm utilizes its core cost advantages to gain an advantage over competitors due to flexibility in pricing strategies as well as its ability to translate cost savings to the bottom line.

Target Return on Investment (ROI) Pricing

A pricing strategy in which a bottom-line profit is established first and then pricing is set to achieve that target.

Stability Pricing

A pricing strategy in which a firm attempts to find a neutral set point for price that is neither low enough to raise the ire of competition nor high enough to put the value proposition at risk with customers. Can provide a source of competitive advantage.

Variable Pricing

A pricing strategy in which a firm attempts to take into account the role of price as it reflect the bundle of benefits sought by the customer. Customers are allowed - even encouraged - to haggle about prices. Ultimately, the price is whatever the buyer and seller agree to - a marked price is nothing more than a starting point for negotiation.

Value Pricing

A pricing strategy in which a firm attempts to take into account the role of price as it reflects the bundle of benefits sought by the customer. Because value is in the eyes of the beholder, affected by his or her perceptions of the offering coupled with the operative needs and wants, pricing decisions are strongly driven by the sources of differential advantage a product can realistically deliver. A marketing manager seeks to ensure that the offering meets or exceeds the customer's expectations.

Competitor-based Pricing

A pricing strategy in which a firm decides to price at some market average price in context with prices of competitors. This approach might the lead marketing manager to decide at price at some market average, price, or perhaps above or below it in the context of penetration or skimming objectives.

Price Skimming

A pricing strategy in which a firm enters a market at a relatively high price point, usually in an effort to create a strong price-quality relationship for the product. The marketing manager usually is convinced that a strong price-quality relationship exists for the product. Ex. When a new generational console like the PS5 gets released into the market, the price starts high and then typically declines over time.

Reference Pricing

A pricing strategy in which a firm gives customers comparative prices when considering purchase of a product so they are not viewing a price in isolation from prices of other choices. Ex. 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.

Penetration Pricing

A pricing strategy in which a firm's objective is to gain as much market share as possible. Can create a powerful barrier to market entry for other firms, thus protecting market share. It is common for prices to be set low initially to ward off competition and then for prices to creep up over time.

High/Low Pricing

A pricing strategy in which the retailer offers frequent discounts, primarily through sales promotions, to stated regular prices in order to build traffic and sales volume.

Product Line Pricing (Price Lining)

A pricing tactic in which a firm affords the marketing manager an opportunity to develop a rational pricing approach across a complete line of related items. Ex. Consider the different types of rooms offered by a resort hotel in Maui. This hotel has a wide range of room types you can check out on their website, including Mountainside View, Garden View, Partial Ocean View, etc. The price differences among these tiers of room classifications is a vivid example of _____ ______in which guests readily pay more (or less) to be at the same hotel based on the same hotel based on the tier of room booked.

Price Bundling

A pricing tactic in which customers are given the opportunity to purchase a package deal at a reduced price compared to what the individual components of the package would cost separately. Ex. Cable television providers want you to buy the full gamut of entertainment products from them, and the more you add to your bundle-digital television, premium channels, downloadable movies, etc., the better the deal becomes compared to the total of the individual prices of each piece of the bundle.

Auction Pricing

A pricing tactic in which individuals competitively bid against each other and the purchase goes to the highest bidder

Even Pricing

A pricing tactic in which the price is expressed in whole dollar increments. Ex. The price of $2.00

Odd Pricing

A pricing tactic in which the price is not expressed in whole dollar increments. Ex. The price of $1.99

One-Price Strategy

A pricing tactic in which the price marked on a good is what it typically sells for Ex. The Snickers bar at the convenience store is $1.25 regardless of whether you are a schoolchild or corporate CEO, and the clerk doesn't want to bargain with you about the price.

Captive Pricing (sometimes called complementary pricing)

A pricing tactic of gaining a commitment from a customer to a basic product or system that requires continual purchase of peripherals to operate. Ex. Hewlett-Packard's most profitable office products for business is the cartridges. The company does a great job of convincing users that only genuine HP cartridges can be depended on for high-quality performance.

Everyday Low Pricing (EDLP)

A pricing tactic that entails relatively low, constant prices and minimal spending on promotional efforts. The fundamental philosophy behind EDLP is to reduce investment in promotion and transfer part of the savings to lower price. Ex. Walmart.

Prestige Pricing

A pricing tactic that lends prestige to a product or brand by virtue of a price relatively higher than the competition. With this type of pricing, some of the traditional price/demand curves cannot properly predict sales or market response because it violates the common assumption that increasing price decrease volume. Ex. When Voss water entered the US market in the 2000s

Establish Pricing Objectives and Related Strategies

A product's price tends to be so visible and definitive that customers often have trouble moving past price to consider other critical benefits the product affords. This characteristic puts pressure on marketing managers to establish pricing objectives that best reflect and enhance the value proposition, while at the same time achieving the firm's financial objectives.

Price Elasticity of Demand

The measure of customer's price sensitivity, estimated by dividing relative changes in quantity sold by relative changes in price.

Market Share

The percentage of total category sales accounted for by a firm.

Price Points

The selling price by which varying levels of product and service quality are differentiated within a product line pricing strategy. Established for the various items in the line need to make sense and reflect the differences in benefits offered as the customer moves up and down the product line.

Psychological Pricing

Creating a perception about price merely from the image the numbers provide the customer.

Product line pricing helps guide customers towards..

The best purchase to match their needs while facilitating easy comparison among offerings.