Marketing Week 8 Chapter 11

Why is pricing important?

Only P that actually affects/generates revenue, often misunderstood

Key to successful pricing

match the product or service with the consumer’s value perceptions

Five Cs of Pricing

1. Competition

2. Cost

3. Channel Members

4. Company Objectives

5. Customers

Profit Orientation

A company objective that can be implemented by focusing on target profit pricing, maximizing profits, or target return pricing.

Maximizing profits strategy

A mathematical model that captures all the factors required to explain and predict sales and profits, which should be able to identify the price at which its profits are maximized.

Target return pricing

A pricing strategy implemented by firms less concerned with the absolute level of profits and more interested in the rate at which their profits are generated relative to their investments; designed to produce a specific return on investment, usually expressed as a percentage of sales.

Target profit pricing

A pricing strategy implemented by firms when they have a particular profit goal as their overriding concern; uses price to stimulate a certain level of sales at a certain profit per unit.

Sales Orientation

A company objective based on the belief that increasing sales will help the firm more than will increasing profits. (set price low to generate new sales)

Customer Oriented Pricing:

Pricing orientation that explicitly invokes the concept of customer value and setting prices to match consumer expectations.

Competitor Oriented Pricing:

A company objective based on the premise that the firm should measure itself primarily against its competition

• Set prices low to discourage more competitors from entering the market

• Set prices higher than competitors to signal higher quality or market leadership

• Or set prices similar

Competitive parity

A firm’s strategy of setting prices that are similar to those of major competitors

What is the most important C?

Customers

Psychological Pricing

A pricing strategy that considers the psychological impact of pricing on consumers, aiming to create a perception of greater value or attract customers by using prices that have a psychological appeal, such as pricing items at $9.99 instead of $10.

Odd-Even Pricing

• Odd numbers convey a bargain image -- $.79, $9.99, $699

• Even numbers convey a quality image -- $10, $50, $100

Demand curve

• Shows how many units of a product or service consumers will demand during a specific period at different prices.

• Prestige products have unique curved demand curves

Price Elasticity of Demand

Measures how changes in a price affect the quantity of the product demanded; specifically, the ratio of the percentage change in quantity demanded to the percentage change in price.

Income Effects

• Generally, as people’s income increases, their spending behavior changes

• Demand shifts from lower-priced products to higher-priced products

• Refers to the change in the quantity of a product demanded by consumers because of a change in their income.

Substitution Effects

• The greater the availability of substitute products, the higher the price elasticity of demand for any given product

• Refers to consumers’ ability to substitute other products for the focal brand, thus increasing the price elasticity of demand for the focal brand

dynamic pricing

Refers to the process of charging different prices for goods or services based on the type of customer; time of the day, week, or even season; and level of demand.

cross-price elasticity

The percentage change in demand for Product A that occurs in response to a percentage change in price of Product B.

complementary products

Products whose demand curves are positively related, such that they rise or fall together; a percentage increase in demand for one results in a percentage increase in demand for the other.

substitute products

Products for which changes in demand are negatively related—that is, a percentage increase in the quantity demanded for Product A results in a percentage decrease in the quantity demanded for Product B.

3rd C: Costs

Variable, fixed, total

Break-Even Point

The point at which the number of units sold generates just enough revenue to equal the total costs; at this point, profits are zero.

contribution per unit

Equals the price less the variable cost per unit; variable used to determine the break-even point in units.

Price war

Occurs when two or more firms compete primarily by lowering their prices

Grey market

Employs irregular but not necessarily illegal methods; generally, it legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer.

Cost-Based Methods

Determines the final price to charge by starting with the cost, without recognizing the role that consumers or competitors’ prices play in the marketplace.

Competitor-Based Methods

Set prices to signal information of how product compares with competitors

An approach that attempts to reflect how the firm wants consumers to interpret its products relative to the competitors’ offerings.

Value-Based Methods

Focuses on the overall value of the product offering as perceived by consumers, who determine value by comparing the benefits they expect the product to deliver with the sacrifice they will need to make to acquire the product.

Improvement value method

Represents an estimate of how much more (or less) consumers are willing to pay for a product relative to other comparable products

Cost of ownership method

A value-based method for setting prices that determines the total cost of owning the product over its useful life.

Pricing Strategies

1. Market penetratration

2. EDLP

3. High/low

4. New product pricing

Everyday Low Pricing (EDLP)

A strategy companies use to emphasize the continuity of their retail prices at a level somewhere between the regular, nonsale price and the deep-discount sale prices their competitors may offer.

EDLP saves search costs of finding lowest overall prices

High/Low Pricing

Relies on the promotion of sales, during which prices are temporarily reduced to encourage purchases

Provides thrill of the chase for lowest price

New Product Pricing Strategies

• price skimming

• market penetration pricing

Price Skimming

A strategy of selling a new product or service at a high price that innovators and early adopters are willing to pay to obtain it; after the high-price market segment becomes saturated and sales begin to slow down, the firm generally lowers the price to capture (or skim) the next most price-sensitive segment.

Market Penetration Pricing

A pricing strategy of setting the initial price low for the introduction of the new product or service, with the objective of building sales, market share, and profits quickly

experience curve effect

• Refers to the drop in unit cost as the accumulated volume sold increases; as sales continue to grow, the costs continue to drop, allowing even further reductions in the price.

Consumers’ Use of Reference Prices

The price against which buyers compare the actual selling price of the product and that facilitates their evaluation process

Shrinkflation

Companies reduce the amount of food in packages while leaving the prices unchanged

Buy Now Pay Later (BNPL)

A payment installment option that lets consumers spread the cost of purchases over weeks or months.

Pricing Tactics

Short-term methods, in contrast to long-term pricing strategies, used to focus on company objectives, customers, costs, competition, or channel members; can be responses to competitive threats

• Price Lining

• Price Bundling

• Leader Pricing

Price Lining

Consumer market pricing tactic of establishing a price floor and a price ceiling for an entire line of similar products and then setting a few other price points in between to represent distinct differences in quality.

Price Bundling

Consumer pricing tactic of selling more than one product for a single, lower price than the items would cost sold separately; can be used to sell slow-moving items, to encourage customers to stock up so they won’t purchase competing brands, to encourage trial of a new product, or to provide an incentive to purchase a less desirable product or service to obtain a more desirable one in the same bundle.

• Consumers will focus on a focal item, (positive attitude will have halo effect on bundle)

Leader Pricing

Consumer pricing tactic that attempts to build store traffic by aggressively pricing and advertising a regularly purchased item, often priced at or just above the store’s cost.

Markdowns

• An integral component of high/low pricing strategy

• Enable retailers to get rid of slow moving or obsolete merchandise

• Used to generate store traffic

• Reductions retailers take on the initial selling price of the product or service.

Rebate

A consumer discount in which a portion of the purchase price is returned to the buyer in cash; the manufacturer, not the retailer, issues the refund.

Coupons

Provides a stated discount to consumers on the final selling price of a specific item; the retailer handles the discount.

Quantity discounts for consumers

Size discount

The most common implementation of a quantity discount at the consumer level; the larger the quantity bought, the less the cost per unit (e.g., per gram).

Consumer Price Reductions

• Markdowns

• Coupons and Rebates

• Quantity Discounts

Business-to-Business Pricing Tactics & Discounts

• Seasonal

• Cash discounts

• Allowances

• Quantity discounts

• Uniform delivered vs geographic pricing

seasonal discount

Pricing tactic of offering an additional reduction as an incentive to retailers to order merchandise in advance of the normal buying season.

cash discount

Tactic of offering a reduction in the invoice cost if the buyer pays the invoice prior to the end of the discount period.

advertising allowance

Tactic of offering a price reduction to channel members if they agree to feature the manufacturer’s product in their advertising and promotional efforts

listing allowances

Fees paid to retailers simply to get new products into stores or to gain more or better shelf space for their products.

Cumulative quantity discount

Pricing tactic that offers a discount based on the amount purchased over a specified period and usually involves several transactions.

Non Cumulative quantity discount

Pricing tactic that offers a discount based on only the amount purchased in a single order.

uniform delivered pricing

The shipper charges one rate, no matter where the buyer is located.

geographic pricing

The setting of different prices depending on a geographical division of the delivery areas

Legal and ethical aspects of pricing

1. Deceptive/illegal pricing

2. Predatory pricing

3. Price discrimination

4. Price Fixing

Deceptive or illegal pricing

1. Deceptive reference prices

2. Loss leader

3. Bait and Switch

Loss leader pricing

Loss leader pricing takes the tactic of leader pricing one step further by lowering the price below the store’s cost

Bait and Switch

A deceptive practice of luring customers into the store with a very low advertised price on an item (the bait), only to aggressively pressure them into purchasing a higher-priced item (the switch) by disparaging the low-priced item, comparing it unfavourably with the higher-priced model, or professing an inadequate supply of the lower-priced item.

Deceptive Reference Prices

Reference prices create reference points for buyers such as Winners listing the price of the product elsewhere on the tag with the winners price, if inflated or made up is referred to as deceptive.

Predatory Pricing

When a firm sets a very low price for one or more of its products with the intent to drive its competition out of business

illegal under the Competition Act

• Hard to prove

Price Discrimination

When firms sell the same products to different resellers (wholesalers, distributors, or retailers) at different prices, it can be considered price discrimination; usually, larger firms receive lower prices

not all, forms of price discrimination are illegal

Price Fixing

Practice of colluding with other firms to control prices.

Horizontal : competitors collude

Vertical: diff parties at diff levels of marketing channel to fix prices passed on to consumers

manufacturer’s suggested retail price (MSRP)

Manufacturers encourage retailers to sell their merchandise at a specific price.