Chapter 20

Comparison discounting guidelines

-If the higher price against which the comparison is made is the price formerly charged for the product, the seller must have made the previous price available to customers for a reasonable time period. -If sellers present the higher price as the one charged by other retailers in the same trade area, they must be able to demonstrate that this claim is true. -•When they present the higher price as the manufacturer's suggested retail price, the higher price must be close to the price at which a reasonable proportion of the product was sold.

Advantages of penetration pricing

-If the low price stimulates sales, the firm may be able to order longer production runs, increasing economies of scale and resulting in decreased production costs per unit. -If penetration pricing allows the marketer to gain a large market share quickly, competitors may be discouraged from entering the market.

Disadvantages of penetration pricing

-It places a firm in a less flexible pricing position. -It is more difficult to raise prices significantly than it is to lower them.

New product pricing

-Setting the base price for a new product is a necessary part of formulating a marketing strategy. -Marketers can easily adjust the base price in industries that are not subject to government price controls, and its establishment is one of the most fundamental decisions in the marketing mix. -When a marketer sets base prices, he or she considers how quickly competitors are expected to enter the market, whether they will mount a strong campaign on entry, and what effect their entry will have on the development of primary demand. -Two strategies used are: 1) Price skimming 2) Penetration pricing

The important of price varies depending on the:

-Type of product -Type of target market -Purchase situation

The 3 major dimensions on which prices can be based are:

1) Cost 2) Demand 3) Competition

Pricing objectives and typical actions taken to achieve them:

1) Survival 2) Profit 3) Return on investment 4) Market share 5) Cash flow 6) Status quo 7) Product quality

Differential pricing

Charging different prices to different buyers for the same quality and quantity of product. -For differential pricing to be effective, the market must consist of multiple segments with different price sensitivities. -Differential pricing can occur in several ways, including: 1) Negotiated pricing 2) Secondary-market pricing 3) Periodic discounting 4) Random discounting

Price skimming

Charging the highest possible price that buyers who desire the product will pay. -Provides the most flexible introductory base price. -Can generate much-needed initial cash flows to help offset development costs. -Protects the marketer from problems that arise when the price is set too low to cover costs. -Can help keep demand consistent with the firm's production capabilities. --Can also be dangerous: -They make the product appear more lucrative than it actually is to potential competitors. -A firm risks misjudging demand and facing insufficient sales at the higher price.

Pricing strategy

A course of action designed to achieve pricing objectives, which are set to help marketers solve the practical problems of setting prices.

Market share

A product's sales in relation to total industry sales. -Maintaining or increasing market share need not depend on growth in industry sales.

Survival

Achieving this objective generally involves temporarily setting prices low, at the times below cost, in order to attract more sales. -Because price is a flexible ingredient in the marketing mix, this strategy can be useful in keeping a company afloat by increasing sales volume.

Cost-based pricing

Adding a dollar amount or percentage to the cost of the product. -Does not necessarily take into account the economic aspects of supply and demand, nor must it relate to just one pricing strategy or pricing objective. -Two common forms include: 1) Cost-plus pricing 2) Markup pricing

Cost-plus pricing

Adding a specified dollar amount or percentage to the seller's cost. -It is appropriate when production costs are difficult to predict.

Markup pricing

Adding to the cost of the product a predetermined percentage of that cost. -Markups normally reflect expectations about operating costs, risks, and stock turnovers. -Wholesalers and manufacturers often suggest standard retail markups that are considered profitable. -To the extent that retailers use similar markups for the same product category, price competition is reduced. -Using rigid markups is convenient and is the major reason retailers favor this method.

Special-event pricing

Advertised sales or price cutting linked to a holiday, a season, or other event. -Used to increase sales volume. -Can be an effective strategy to combat sales lags.

Product quality

Attaining a high level of product quality is generally more expensive for the firm, as the costs of materials, research, and development may be greater. -The products and brands that customers perceive to be of high quality are more likely to survive in a competitive marketplace because they trust these products more, even if the prices are higher.

Odd-even pricing

Ending the price with certain numbers to influence buyers' perceptions of the price or product. -Odd pricing is the strategy setting prices using odd numbers that are slightly below whole-dollar amounts (e.g., $4.99 rather than $5). Seller who use odd pricing believe that odd numbers increase sales because consumers register the dollar amount, not the cents. -Even prices are often used to give a product an exclusive or upscale image. An even price is believed to influence a customer to view the product as being a high-quality, premium brand.

Negotiated pricing

Establishing a final price through bargaining between the seller and the customer. -Occurs in a umber of industries and at all level of distribution.

Product-line pricing

Establishing and adjusting prices of multiple products within a product line. -When marketers use product-line pricing, their goal is to maximize profits for an entire product line rather than to focus on the profitability of an individual product item. -Before setting prices for a product line, marketers evaluate the relationship among the products in the line. -When marketers employ product-line pricing, they have several strategies from which to choose, including: 1) Captive pricing 2) Premium pricing 3) Bait pricing 4) Price lining

Bait and switch

Occurs when retailers have no intention of selling the bait product and use the low price merely to entice customers into the store to sell them higher-priced products.

Professional Pricing

Fees set by people with great skill or experience in a particular field. -Although costs are considered when setting prices, professionals often believe their fees should not relate directly to the time and/or effort spent in specific cases. -Rather, professionals may charge a standard fee regardless of the problems involved in performing the job.

Pricing objectives

Goals that describe what a firm wants to achieve through pricing.

Tensile pricing

Involves making a broad statement about pricing reductions. (Example, "20 to 50 percent off" or "up to 75% off), as opposed to detailed specific discounts. -Often used with periodic discounting or random discounting.

Bundle Pricing

Packaging together two or more complementary products and selling them at a single price. -To be attractive to customers, the single price generally is markedly less than the sum of the prices of the individual products. -Is common for: banking and travel services, computers, automobiles with option packages, and products used in tandem, such as television, internet, and phone service. -Can help firms sell slow moving inventory and increase revenues by bundling it with products with a higher turnover.

Multiple-unit pricing

Packaging together two or more identical products and selling them at a single price. -Example: Selling two cans for 99 cents rather than 50 cents per can. -Can increase sales by encouraging consumers to purchase multiple units when they might otherwise have only purchased one at a time. -Offers cost savings and convenience to customers. -Used to attract new customers to brands and to increase consumption. -Major users of multiple-unit pricing are supermarkets, discount stores, and warehouse clubs.

Promotional pricing

Price-as an ingredient in the marketing mix-often is coordinated with promotion. -Examples: 1) Price leaders 2) Special-event pricing 3) Comparison discounting

Reference Pricing

Pricing a product at a moderate level and displaying it next to a more expensive model or brand. -Used in the hope that the customer will use the higher price as a reference price (i.e., a comparison price).

Bait pricing

Pricing an item in a product line low with the intention of selling a higher-priced item in the line. -Is acceptable as long as a retailer has sufficient quantities of the advertised low-priced model available for sale.

Demand-based pricing

Pricing based on the level of demand for the product. -Is appropriate for industries in which companies have fixed amount of available resources that are perishable. -The effectiveness depends on the marketer's ability to estimate demand accurately. -Compared with cost-based pricing, demand-based pricing places a firm in a better position to reach high profit levels, as long as demand is strong at times and buyers value the product at levels sufficiently above the product's cost.

Competition-based pricing

Pricing influenced primarily by competitors' prices. -Is a common method among producers of relatively homogenous products, particularly when the target market considers price to be an important purchase consideration. -A firm that uses competition-based pricing may choose to set their prices below competitors' or at the same level.

Customary pricing

Pricing on the basis of tradition. -Example: 25-cent gumballs sold in gumball machines.

Everyday low prices (EDLP)

Pricing products low on a consistent basis. -Though not deeply discounted, are set low enough to make customers feel confident they are receiving a good deal. -A company that uses this benefits from: 1) Reduced promotional costs 2) Reduced losses from frequent markdowns 3) More stable sales -A major issue with this approach is that, in some instances, customers believe that EDLPs are a marketing gimmick and not truly the good deal that they proclaim.

Psychological Pricing

Pricing that attempts to influence a customer's perception of price to make a product's price more attractive. -Encourages purchases based on consumer's emotional responses, rather than economically rational ones. -Used primarily for consumer products rather than business products. -Forms of psychological pricing: 1) Reference pricing 2) Bundle pricing 3) Multiple-unit pricing 4) EDLP 5) Odd-even pricing 6) Customary pricing 7) Prestige pricing

Captive pricing

Pricing the basic product line low, while pricing related items higher.

Premium pricing

Pricing the highest-quality or most versatile products higher than other models in the product line. -Other products in the line are priced to appeal to price-sensitive shoppers or to those who seek product-specific features. -Examples of product categories in which premium pricing are common are: small kitchen appliances, beer, ice cream, television cable service.

Return on Investment

Pricing to attain a specified rate of return on the company's investment is a profit-related pricing objective. -Generally requires some trial and error, as it is unusual for all data and inputs required to determine the necessary ROI to be available when first setting prices.

Price leaders

Products priced near or even blow cost. -Is used most often in super markets and restaurants to attract customers by offering them especially low prices on a few items, with the expectation that they will purchase other items as well. -Management expects that sales of regularly-priced products will more than offset the reduced revenues from the price leaders.

Price lining

Setting a limited number of prices for selected groups or lines of merchandise. -Example: Selling men's ties only at $22 and $37 -Is common in clothing and accessory stores -The basic assumption in price lining is that the demand for various groups or sets of products is inelastic. -If the prices are attractive, customers will concentrate their purchases without responding to slight changes in price.

Comparison discounting

Setting a price at a specific level and comparing it with a higher price. -The higher price may be: 1) The product's previous price 2) The price of a competing brand 3) The product's price at another retail outlet 4) A manufacturer's suggested retail price -Because this pricing strategy on occasion has led to deceptive pricing practices, the Federal Trade Commission has established guidelines for comparison discounting.

Secondary-market pricing

Setting one price for the primary target market and a different price for another market. -Often the price in the secondary market is lower. -Examples of secondary markets include: 1) A geographically-isolated domestic market 2) A market in a foreign country 3) A segment willing to purchase a product during off-peak times.

Prestige pricing

Setting prices at an artificially high level to convey prestige or quality image. -Is used especially when buyers associate a higher price with higher quality. -Typical product categories that are subject to prestige pricing include: perfumes, liquor, jewelry, cars, food items.

Penetration pricing

Setting prices below those of competing brands to penetrate a market and gain a significant market share quickly.

Cash flow

Some companies set prices so they can recover cash as quickly as possible. -Choosing this pricing objective may have the support of a marketing manager if he or she anticipates a short product life cycle.

Periodic discounting

Temporary reduction in prices on a patterned or systematic basis. -From the marketer's point of view, a major problem with periodic discounting is customers can predict when the reductions will occur and may delay their purchase until they can take advantage of the lower prices. -Is less effective in an environment where many consumers shop online because they can easily comparison shop for a better deal.

Random discounting

Temporary reduction of prices on an unsystematic basis. -Marketers use random discounting to attract new customers and to draw attention to a relatively new product.

Profit

This objective is rarely operational because its achievement is difficult to measure. -Specific profit objectives may be stated in terms of either actual dollar amounts or a percentage of sales revenue.

Status quo

This pricing objective can reduce a firm's risks by helping to stabilize demand for its products. -A firm that chooses this price objective minimizes pricing as a competitive tool, which could lead to a climate of nonprice competition.