Marketing Chapter 9

Competitor's perspective

*Price cut:* Company is trying to grab a larger market share. Company is doing poorly and trying to boost its sales. Company wants the whole industry to cut prices to increase total demand.

Buyer's perspective

*Price increase:* Product is more exclusive or better made. Company is being greedy. *Price cut:* Brand wants to get a better deal on an exclusive product. Product's quality has been reduced. Company's image has tarnished.

product form pricing

, different versions of the product are priced differently, but not according to differences in their costs. Examples include a round-trip economy seat on a flight versus a more expensive business class seat and different prices for seats in a theater based on their location.

basing-point pricing

, the seller selects a given city as a "basing point" and charges all customers the freight cost from that city to the customer location, regardless of the city from which the goods are actually shipped.

price

-Amount of money charged for a product or service -Determines a firm's market share and profitability -Produces revenue

Prices charged depend on many factors

-Economic conditions -Competitive situations -Laws and regulations -Nature of the wholesaling and retailing system -Consumer perceptions and preferences -Company's marketing objectives -Costs of selling in another country

cost-plus pricing (markup 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 Prevalent online where the Internet introduces a new age of fluid pricing

Customer Value-Based Pricing

Based on buyers' perceptions of value rather than on the seller's cost Price is considered before the marketing program is set.

Cost-Based Pricing

Based on the costs of producing, distributing, and selling the product plus a fair rate of return for effort and risk

Factors impacting pricing strategies

Boom or recession Inflation Interest rates

Other External Factors

Company must consider several other factors in its external environment when setting prices. Resellers Government Social concerns

Psychological Pricing

Considers the psychology of prices and not simply the economics The price says something about the product.

Reasons for price increases:

Cost inflation Over-demand

The three major pricing strategies include

Customer value-based pricing Cost-based pricing Competition-based pricing Customer value perceptions, company costs and competitor strategies are important considerations when setting prices.

Responses to the frugality of post recession consumers

Cut prices and offer discounts Develop more affordable items Redefine value propositions

Which of the following statements is true regarding initiating price​ cuts?

Cutting prices in an industry loaded with excess capacity may lead to price wars.

elastic demand

Demand changes greatly with a small change in price.

inelastic demand

Demand hardly changes with a small change in price.

Forms of promotional pricing:

Discounts and special-event pricing Limited-time offers and cash rebates Low-interest financing and longer warranties Free maintenance

Which of the following statements is true regarding oligopolistic​ competition?

Each seller is alert and responsive to​ competitors' pricing strategies and marketing moves

Reasons for price cuts:

Excess capacity Falling demand Attempt to dominate the market

geographical pricing

FOB origin pricing Uniform- delivered pricing Zone pricing Basing-point pricing Freight- absorption pricing

types of costs

Fixed costs (overhead) Variable costs Total costs

types of value based pricing

Good-value pricing Value-added pricing

Company should ask several questions to assess competitors' pricing strategies:

How does the company's market offering compare in terms of customer value? How strong are current competitors? What are their current pricing strategies?

resellers

How will resellers react to various prices? The company should set prices that give resellers a fair profit, encourage their support, and help them to sell the product effectively.

Which of the following is true regarding the​ price-demand relationship?

If demand is​ elastic, sellers will consider lowering their price.

Organizational Considerations

Management decides who should set prices. Varies depending on the size and type of company Small companies - Top management Large companies - Divisional or product managers Industries with price as the key factor - Pricing departments

External factors

Market and demand Economy Impact on other parties in its environment

price elasticity of demand

Measure of the sensitivity of demand to changes in price

nonprice positions

Other companies deemphasize price and use other marketing mix tools to create nonprice positions. Often, the best strategy is not to charge the lowest price but rather to differentiate the marketing offer to make it worth a higher price. For example, luxury smartphone maker Vertu puts very high value into its products and charges premium prices to match that value.

Internal factors

Overall marketing strategy, objectives, and mix Organizational considerations

Reference prices:

Prices that buyers carry in their minds and refer to when looking at a given product

The firm uses the following pricing strategies to maximize the profits from the total mix:

Product line pricing Optional products Captive products By-products Product bundles

Product Mix Pricing Strategies

Product line pricing Optional-product pricing Captive-product pricing By-product pricing Product bundle pricing

Which of the following is a potentially effective action a company could take in response to a​ competitor's price​ cut?

Reduce price

Segmented Pricing

Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs Forms of segmented pricing: Customer-segment pricing Product form pricing Location-based pricing Time-based pricing

Price decisions of international companies

Set a uniform worldwide price Adjust prices to reflect local market conditions and cost considerations

Market-skimming pricing (price skimming)

Setting a high price to skim maximum revenues from the segments willing to pay the high price Company makes fewer but more profitable sales

Market-penetration pricing

Setting a low price to attract a large number of buyers and a large market share

Break-even pricing (target return pricing)

Setting price to break even on the costs of making and marketing a product, or setting price to make a target return

Competition-Based Pricing

Setting prices based on competitors' strategies, costs, prices, and market offerings

Promotional Pricing

Temporarily pricing products below the list price to increase short-run sales

Which of the following statements is true regarding initiating price​ increases?

Wherever​ possible, the company should consider ways to meet higher costs or demand without raising prices.

Discount -

a straight reduction in price on purchases during a stated period of time or of larger quantities -Cash, quantity, functional, and seasonal discounts

Gillette charges a fairly low price for its razors​ (relative to​ costs) and a high price for razor blades. It is using a strategy of​ ___________ pricing.

captive product

segmented pricing

company sells a product or service at two or more prices, even though the difference in prices is not based on differences in costs. Segmented pricing takes several forms.

customer-segment pricing

different customers pay different prices for the same product or service. Museums and movie theaters, for example, may charge a lower admission for students and senior citizens.

Companies that use​ ________ continually adjust prices to meet the characteristics and needs of individual customers and situations.

dynamic pricing

Zone pricing

falls between FOB-origin pricing and uniform-delivered pricing. The company sets up two or more zones. All customers within a given zone pay a single total price; the more distant the zone, the higher the price.

pricing within channel levels

federal legislation on price-fixing states that sellers must set prices without talking to competitors. Price-fixing is illegal, and the companies found guilty of these practices can receive heavy fines. Sellers are also prohibited from using predatory pricing. Predatory pricing means selling below cost with the intention of punishing a competitor or gaining higher long-run profits by putting competitors out of business.

Location-based pricing

involves a company charging different prices for different locations, even though the cost of offering each location is the same.

Value-added pricing

involves attaching value-added features and services to differentiate a company's offers and then charging higher prices. For example, even as frugal consumer spending habits linger, some movie theater chains are adding amenities and charging more rather than cutting services to maintain lower admission prices.

Uniform-delivered pricing

is the opposite of FOB pricing. Here, the company charges the same price plus freight to all customers, regardless of their location. The freight charge is set at the average freight cost.

social concerns

may need to be taken into account. In setting prices, a company's short-term sales, market share, and profit goals may need to be tempered by broader societal considerations.

FOB-origin pricing

means that the goods are placed free on board a carrier, hence FOB. At that point the title and responsibility pass to the customer, who pays the freight from the factory to the destination.

Time-based pricing

occurs when a firm varies its price by the season, the month, the day, and even the hour. For example, movie theaters charge matinee pricing during the daytime, and resorts give weekend and seasonal discounts.

Good-value pricing

offers just the right combination of quality and good service at a fair price. This pricing method involves introducing less expensive versions of established, brand name products or new lower-price lines. It also involves redesigning existing brands to offer more quality for a given price or the same quality for less.

Positioning may be based

on price.

Pricing decisions must coordinate with

packaging, promotion, and distribution decisions.

Over the​ years, U.S. air carriers have been accused numerous times of collusion when setting prices. This illegal practice is called​ _______.

price fixing

external factors

pricing considerations include the nature of the market and demand and environmental factors such as the economy, reseller needs, and government actions. So the company must understand concepts like demand curves (the price-demand relationship) and price elasticity (consumer sensitivity to prices).

Allowance -

promotional money paid to retailers for an agreement to feature the manufacturer's products in some way -Trade-in and promotional allowances

pricing in different types of markets

pure competition monopolistic competition oligopolistic competition pure monopoly

Product bundle pricing

refers to combining several products and offering the bundle at a reduced price.

Product line pricing

refers to determining the price steps to set between various products in a product line based on cost differences between the products, customer evaluations of different features, and competitors' prices.

By-product pricing

refers to setting a price for by-products in order to make the main product's price more competitive.

Captive-product pricing

refers to 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.

Optional-product pricing

refers to the pricing of optional or accessory products along with a main product.

Target costing

starts with an ideal selling price, then targets costs that ensure the price is met. Nonprice positions can be created to differentiate the marketing offer.

internal factors

that influence pricing decisions include the company's overall marketing strategy, objectives, and marketing mix as well as organizational considerations.

pricing across channel levels

the Robinson-Patman Act seeks to prevent unfair price discrimination by ensuring that sellers offer the same price terms to customers at a given level of trade. Laws also prohibit retail or resale price maintenance, that is, a manufacturer cannot require dealers to charge a specified retail price for its product

pure competition

the market consists of many buyers and sellers trading in a uniform commodity. No single buyer or seller has much effect on the going market price. Sellers in these markets do not spend much time on marketing strategy.

monopolistic competition,

the market consists of many buyers and sellers trading over a range of prices rather than a single market price. A range of prices occurs because sellers can differentiate their offers to buyers. Sellers try to develop differentiated offers for different customer segments and, in addition to price, freely use branding, advertising, and personal selling to set their offers apart.

oligopolistic competition

the market consists of only a few large sellers. Because there are few sellers, each seller is alert and responsive to competitors' pricing strategies and marketing moves.

pure monopoly

the market is dominated by one seller. The seller may be a government monopoly, a private regulated monopoly, or a private unregulated monopoly. Pricing is handled differently in each case.

freight-absorption pricing,

the seller absorbs all or part of the actual freight charges to get the desired business. Freight-absorption pricing is used for market penetration and to hold on to increasingly competitive markets.