ADM 2315 - CHAP 11

PRICING

• Negotiations between buyers and sellers

• One price for all buyers

• Internet pricing allows buyers to make

instant price comparisons

• Consumers can pool resources to get better

pricing

CONSUMER PSYCHOLOGY & PRICING

• Reference prices-consumers compare price to an

internal reference or what they remember from past

experience

• Image pricing-some use price as indication of quality

• Price cues- people believe 299 is closer to 200 than

to 300. items ending in 9 are more popular

PSYCHOLOGICAL PRICING

• Charm—removing one cent $ 4 to 3.99. people

remember the lower #..the 3

• Odd-even- people buy more when price ends in an

odd#.

• Slashing msrp

• Artificial time constraints-one time only! Limited time

offer!

• Innumeracy- BOGO vs. buy 1 get 50% off the second.

We register the BOGO

SETTING THE PRICE

6 STEPS

1. DEFINING THE PRICING OBJECTIVE

2. DETERMINING DEMAND

3. ESTIMATING COSTS

4. ANALYZING COMPETITORS’ COSTS, PRICES, OFFERS

5. SELECTING A PRICING METHOD

6. SETTING THE FINAL PRICE

1. DEFINING THE PRICING OBJECTIVE

– Short-term profit-setting price to maximize profits

– Market penetration-maximizing market share by

setting very low price

– Market skimming-setting a high price to ‘skim the

cream’ and prices drop over time (used a lot in tech)

– Quality leadership-aiming to be the quality leader,

positioned as affordable luxuries, priced higher, but

not out of target market reach

2. DETERMINING DEMAND

• Price elasticity of demand

– The degree to which a change in price leads to a

change in quantity sold

– The lower the elasticity, the less sensitive consumers

are to price increases

– Some consumers take the higher price to signify a

better product. However, if the price is too high,

demand may fall.

CONDITIONS WHERE ELASTRICITY IS LOW

• (1) the product is distinctive and there are few or no

substitutes or competitors;

• (2) consumers do not readily notice the higher price;

• (3) consumers are slow to change their buying habits;

• (4) consumers think the higher prices are justified by

factors such as the cost of creating the product, product

scarcity, and government taxation;

• (5) the expenditure is a smaller part of the buyer’s total

income or of the total cost of the end product; and

• (6) part or all of the cost is borne by another party

3. ESTIMATING COSTS

To price intelligently, management needs to know how its

costs vary with different levels of production.

• Fixed costs

– Costs that do not vary with production level or sales

revenue (rent, interest on debt, salaries, overhead

etc.)

• Variable costs

– Vary directly with the level of production(hourly

wages, raw materials, packaging etc)

• Total costs

– The sum of the fixed and variable costs

4. ANALYZING COMPETITORS’ COSTS, PRICES, OFFERS

• Firm must take competitors’ costs, prices, and reactions

into account

• If the competitor’s offer contains some features not

offered by the firm, the firm should subtract their value

from its own price. Now the firm can decide whether it

can charge more, the same, or less than the competitor.

5. SELECTING PRICING METHOD

Three major considerations in price

1. Costs

▪Set a price floor (the lowest price that will cover

costs)

2. Competitors’ prices

▪Provide an orienting point

3. Customers’ assessment of unique features

▪Establish a price ceiling( the highest price before

consumer won’t purchase

Markup pricing

– Add a standard markup to the product’s cost

– The most elementary pricing method is to add a

standard markup to the product’s cost.

– Markup pricing remains popular because 1)sellers are

more certain about costs than about demand. By tying

the price to cost, sellers simplify pricing. 2) when all

firms in the industry use this pricing method, prices

tend to be similar and price competition is minimized.

Target-return pricing

– Price that yields its target rate of return on investment

Economic value-to-customer pricing

– Based on buyer’s image of product, channel

deliverables, warranty quality, customer support, and

softer attributes

– Based on perceived value

Competitive pricing

– The firm bases its price largely on competitors’ prices

• All firms in industries that sell a commodity such as steel, paper, or fertilizer normally charge the same price.

• Smaller firms “follow the leader,” changing their prices when the market leader’s prices change, rather than when their own demand or costs change. Some may charge a small premium or discount, but they preserve the difference.

• Competitive pricing is quite popular. Where costs vary and/or are difficult to measure, when the demand fluctuates, or when competitive response is uncertain, firms feel competitive pricing is a good solution because they believe it reflects the industry’s collective wisdom.

6. SETTING THE FINAL PRICE

• Price discrimination

– Occurs when a company sells a product or service at

two or more prices that do not reflect a proportional

difference in costs

▪First degree-each consumer a different price

▪Second degree-charges less to buyers of large

volumes

▪Third degree-different price for different segments

• Third degree price discrimination:

– Customer segment pricing-student/senior rates

– Product form pricing-different versions priced

differently

– Channel pricing-coke price versus high end restaurant

or at a fast food joint

– Location pricing-different costs at different locations

– Time pricing-prices vary by season/day/hour—early

bird specials, hotels less on weekdays

PRODUCT MIX PRICING

• Loss-leader pricing-sold below cost to get consumer in

the door in hopes they buy other items

• Optional feature pricing-restaurants use low food prices

and higher drink prices

• Captive pricing-razors low price but the blades priced

very high

• Two-part pricing-base price plus addons (cell data plus

overage amount)

RESPONDING TO PRICE CHANGES

• Anticipating competitive responses

• One way is to assume the competitor reacts in the standard way to a price being set or changed. Another is to assume the competitor treats each price

  difference or change as a fresh challenge and reacts according to self-interest at the time.

• Responding to competitors’ price changes

• It depends on the situation. The company must

  consider the product’s stage in the life cycle, its importance in the company’s portfolio, the

  competitor’s intentions and resources, the market’s price and quality sensitivity, the behavior of costs

  with volume, and the company’s alternative opportunities.

MANAGING INCENTIVES

• Incentives

– Sales promotion tools, mostly short-term, designed to

stimulate quicker or greater purchase of particular

products or services by consumers or the trade

INCENTIVES AS A MARKETING DEVICE

• Sales promotions

– Can produce a high sales response in the short run

but little permanent gain over the longer term

– Can prompt consumers to engage in stockpiling

– Can devalue the company’s offering in buyers’ minds

MAJOR INCENTIVES DECISIONS

• Defining the size and approach for incentives

– Determine size

– Establish conditions for participation

– Decide on duration

– Choose a distribution vehicle

– Establish timing

– Set total sales promotion budget

• Selecting Consumer Incentives

Price reductions

Coupons

Cash refunds

Price packs

Premiums

Frequency programs

Prizes

Tie-in promotions

Seasonal discounts

Financing

• Selecting sales force incentives

– Aim to encourage the sales force to support a new

product or model, boosting prospecting and

stimulating off-season sales

COMPETITIVE PRICING

Competitive pricing

– The firm bases its price largely on competitors’ prices

• All firms in industries that sell a commodity such as steel, paper, or fertilizer normally charge the same price.

• Smaller firms “follow the leader,” changing their prices when the market leader’s prices change, rather than when their own demand or costs change. Some may charge a small premium or discount, but they preserve the difference.

• Competitive pricing is quite popular. Where costs vary and/or are difficult to measure, when the demand fluctuates, or when competitive response is uncertain, firms feel competitive pricing is a good solution because they believe it reflects the industry’s collective wisdom.

PRICE DISCRIMINATION

• Price discrimination

– Occurs when a company sells a product or service at

two or more prices that do not reflect a proportional

difference in costs

▪First degree-each consumer a different price

▪Second degree-charges less to buyers of large

volumes

▪Third degree-different price for different segments