Chapter 9
Explain how companies find a set of prices that maximizes the profits from the total product mix
When the product is part of a product mix, the firm searches for a set of prices that will maximize the profits from the total mix. In product line pricing, the company decides on price steps for the entire set of products it offers. In addition, the company must set prices for optional products, captive products, by products, product bundles
demand curve
a curve that shows the number of units that market will buy in a given time period at different prices that might be charged
price elasticity
a measure of the sensitivity of demand to change in price
Cost-plus pricing
adding a standard markup to the cost of the product
dynamic pricing
adjusting prices continually to meet the characteristics and needs of individual customers and situations
Value-added pricing
attaching value-added features and services to differentiate a company offers and charging higher prices.
product bundle pricing
combining several products and offering the bundle at a reduced price
Fixed costs
costs that do no vary with production or sales level.
Variable costs
costs that vary directly with the level of production
Good-value pricing
offering just the right combination of quality and good service at a fair price
reference prices
prices that buyers carry in their minds and refer to when they look at a given product
psychological pricing
pricing that considers the psychology of prices and not simply the economics; the price is used to say something about the product
target costing
pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met
allowance
promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturers products in some way.
Market-penetration pricing
setting a low price for a new product in order to attract a large number of buyers and large market share.
by-product pricing
setting a price for by-products in order to make the main products price more competitive
captive-product pricing
setting a price for products that must be used along with a main product, such as blades for a razor and games for a video-game console
Discuss the key issues related to initiating and responding to price changes
when a firm considers initiating a price change, it must consider customers and competitors reactions. There are different implications to initiating price cuts and increases. Buyer reactions to price changes are influenced by the meaning customers see in the price change. Competitors reactions flow from a set reaction policy or a fresh analysis of each situation. There are also many factors to consider in responding to a competitors price changes. The company that faces a price change initiated by a competitor must try to understand the competitors intent as well as the likely duration and impact of the change. of a swift reaction is desirable, the firm should preplan its reactions to different possible price actions by competitors. when facing a competitors price change, the company might sit tight, reduce its own price, raise perceived quality, improve quality and raise price, or launch a fighting brand.
discount
a straight reduction in price on purchases during a stated period of time or of larger quantities
segmented pricing
selling a product or service at two or more prices, where the difference in prices is not based on differences in costs.
Market-skimming pricing
setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price: the company makes fewer but more profitable sales
product line pricing
setting the price steps between various products in a product line based on cost differences between the products, customer evaluations of different features, and competitors prices.
promotional pricing
temporarily pricing products below the list price, and sometimes even below cost, to increase short-run sales
total costs
the sum of the fixed and variable costs for any given level of production
Discuss how companies adjust to their prices to take into account different types of customers and situations
Companies apply a variety of price adjustment strategies to account for differences in consumer segments and situations. One is discount and allowance pricing, whereby the company establishes cash, quantity, functional, or seasonal discounts or varying types of allowances. A second strategy is segmented pricing, where the company sells a product at two or more prices to accommodate different customers, product forms, locations, or times. Sometimes companies consider more than economics in their pricing decisions, using psychological pricing to better communicate a products intended position. In promotional pricing, a company offers discounts or temporarily sells a product below cost as a loss leader. Another approach is geographical pricing, whereby the company decides how to price to near or distant customers. In dynamic pricing companies adjust prices continually to meet the characteristics and needs of individual customers and situations. Finally, international pricing, means that the company adjusts its price to meet different conditions and expectations in different world markets.
Identify the three major pricing strategies and discuss the importance of understanding customer-value perceptions, company costs, and competitor strategies when setting prices.
Customer value pricing, cost-based pricing, and competition-based pricing. Good pricing begins with a complete understanding of the value that a product or service creates for customers and setting a price that captures that value. Customer perceptions of the products value set the ceiling for prices. If customers perceive that the price is greater than the product value, they will not buy the product. At the other extreme, company and product costs set the floor for prices. If the company prices the product below its costs, its profits will suffer. Between these two extremes, consumers will base their judgements of a products value on the prices that competitors charge for similar products. Thus, in setting prices, companies need to consider all three factors: customer perceived value, costs, and competitors pricing strategies. Costs are an important consideration in setting prices. However, cost-based pricing is often product driven. The company designs what it considers to be a good product and sets a price that covers costs plus a target profit. If the price turns out to be too high, the company must settle for lower markups or lower sales, both resulting in disappointing profits. Value-based pricing reserves this process. The company assesses customer needs and value perceptions and then sets a target prices to match targeted value. The targeted value and price then drive decisions about product design and what costs can be incurred. As a result, price is set to match customers perceived value.
Describe the major strategies for pricing new products
Pricing is a dynamic process. Companies design a pricing structure that covers all their products. They change this structure over time and adjust it to account for different customers and situations. Pricing strategies usually change as a product passes through its life cycle. In pricing innovative new products, a company can use market-skimming pricing by initially setting high prices to "skim" the maximum amount of revenue from various segments of the market. Or it can use market penetrating pricing by setting a low initial price to penetrate the market deeply and win a large market share.
Identify and define the other important external and internal factors affecting a firms pricing decisions
internal factors tha tinfluence pricing decisions include the company overall marketing strategy, objectives, and marketing mix as well as organizational considerations. Price is only one element of the company's broader marketing strategy. If the company has selected its target market and positioning carefully, then its marketing mix strategy, including price, will be fairly straightforward. Common pricing objectives might include customer retention and building profitable customer relationships, preventing competition, supporting resellers and gaining their support, or avoiding government intervention. Price decisions must be coordinated with product design, distribution, and promotion decisions to forma consistent and effecting marketing program. Finally, in order to coordinate pricing goals and decisions, management must decide who within the organization is responsible for setting price. External pricing considerations include the nature of the market and demand and environmental factors such as the economy, reseller needs, and governmental actions. Ultimately the customer decides whether the company has set the right price. The customer weighs the price against the perceived values of using the product-if the price exceeds the sum of the values, consumers will not buy. So the company must understand concepts like demand curves and price elasticity. Economic conditions can have major impact on pricing decisions. The great recession caused consumers to rethink the price-value equation. Marketers have responded by increasing their emphasis on value-for-the-money pricing strategies. Even in tight economic times, however, consumers do not buy based on prices alone. Thus, no matter what price they charge-low or high-companies need to offer superior value for the money.
Customer value-based pricing
setting price based on buyers perceptions of value rather than on the sellers cost.
Competition-based pricing
setting prices based on competitors strategies, prices, costs, and market offerings.
cost-based pricing
setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for effort and risk.
Break-even pricing
setting to break even on the costs of making and marketing a product or setting price to make a target return
Price
the amount charged for a product or service, or the sum of the values that customers exchange for the benefits of having or using the product or service.
optional-product pricing
the pricing of optional or accessory products along with a main product