Chapter 11 - Pricing strategies

Potentially a short-answer question

Psychological pricing

Even though the price difference is little, subconsciously we tend to think the prices are cheaper based on the first number we read. 

Odd-even pricing

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

• Even numbers can convey quality --> $5, 10, 15, 20 

The importance of pricing

• A strategic opportunity to create value  

• Not an after thought to the rest of the marketing mix  

• Pricing signals quality or a lack of quality 

The role of price in the marketing mix

• One of the most important factors in purchase decisions  

• The only element in the marketing mix that generates revenue  

• The most challenging of the four Ps to manage, partly because it is often the least understood.  

• Misunderstood by managers 

The 5 C's of Pricing 

• Company objectives

• Customers

• Costs

• Compeitition

• Channel members

The 5 C's of Pricing : Company objectives

• Profit Orientation  

  • Target profit pricing  

  • Maximize profits  

  • Target return pricing  

• Sales Orientation  

• Competitor Orientation  

• Customer Orientation 

Example of company objectives: Tiffany & Co.

Tiffy & Co. keeps its prices high even during a recession to protect its prestigious image, symbolized by its famous blue box

The 5 C's of Pricing: Customers

• The most important C!!!  

• It’s all about understanding consumers reactions to different prices  

• Consumers want value  

• Price is half of the value equation 

Demand curves and pricing

Knowing demand curves enables to see the relationship between price and demand

Price elasticity of demand

• How do consumers respond to price increases or decreases?  

• Based on:

  • Income effect

  • Substituion effect

• Equation: % Change in Qd/ % Change in Price

Factors influencing Price elasticity of demand: Income effect

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

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

Factors influencing Price elasticity of demand: Substitution effect

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

• Many substitutes = very responsive to change

Demand Curves and Pricing (cross elasticity of demand) 

• Substitute goods

  • Coca-cola vs Pepsi

• Complementary goods

  • Printer and ink jet

Demand Curves and Pricing (Prestige Products) 

Prestige products have a unique demand curve

Graph:

• Demand increases as the price decreases

• Demand also decreases as price decreases

The 5 C's of Pricing: Costs

Includes:

• Fixed Costs

• Variable Costs

• Total Costs

Costs: Fixed Costs

• Does not change with output or production volume

• Example: Rent, insurance, salaried manager

• The same whether you make 10 or 1000 units

Costs: Variable Costs

• Changes directly wth production volume

• Examples: Raw materials, packaging and hourly wages

• Increases as you make/sell more

Costs: Total costs

• Sum of all costs

  • (TC = FC + VC)

• Increases with production, but not proportionally

Costs: break-even point

• The number of units we should sell to recover TC

• At this point, the profit is zero and the total revenue = total costs

The 5 C's of Pricing: Competition

• Monopoly

  • On firm controls the market

• Oligopoly

  • A handful of firms control the market

• Monopolistic competition

  • Many firms sell differentiated products at different prices

• Pure / Perfect competition

  • Many firms selling commodities for the same price (no market control)

The 5 C's of Pricing: Channel members

• Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies  

• Manufactures must protect against grey market transactions 

Pricinig strategies

• Cost

• Value

• Competitor

Cost-based pricing

• Start with cost  

• All costs are calculated on a per-unit basis  

• Assumes costs don’t vary for different levels of production 

Competitor-based pricing

• Set prices to signal information on how the product compares with competitors

• Premium pricing

Value-based pricing

• Setting prices that focus on the overall value of the product

• Consumer perceptions

Psychological Factors Affecting Value-based pricing stratgies 

• Everyday low pricing (EDLP)

• High/Low

Everyday Low Pricing (EDLP) 

• Saves search costs of finding the lowest overall pricing

High/Low pricing

• Provides the thrill of the chase for the lowest price

• Relies on the promotio of sales

  • Prices at this time are temporarily reduced to encourage purchases

New Product pricing strategies  

• Price skimming

• Market penetration pricing

Price skimming

• Sets new product prices high and lowers them as competitors enter the market

(High —> Low)

Market penetration pricing

• Newly launched products are low to build a big customer base at the outset

(Low —> High)

Pricing tactics

• Price lining

• Price bundling

• Leader pricing

Price lining

• Marketers establish a price floor & a price ceiling & set prices in between  

• Allows for easy comparison 

Price bundling

• Encourage sales of slow-moving items  

• Encourage stock up  

• Encourage trial of a new brand  

• Incentive to purchase 

Leader Pricing 

Enticing consumers into the store with the popular aggressively priced item and hoping they will pick up other items while shopping 

Consumer Price Reduction 

• Markdowns 

• Coupons and rebates 

• Quantity discounts for consumers 

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. 

**** Usually a retail tactic, not a typical pricing tool firms use 

• It’s a reduction in price to clear out slow-moving or outdated inventory  

Quantity Discounts for Consumers  

• Size discount  

• The more you buy the cheaper the unit cost 

Coupons and Rebates 

• Coupons 

  • Retailer handles 

• Rebate 

  • Manufacturer issues 

B2B Pricing tactics

• Seasonal discounts

• Cash discounts

• Allowances

• Quantity discouts

• Uniform delivered vs geographic pricing

Seasonal discounts

Designed to spur buyers into purchasing merchandise early 

Cash discount

• Reduced invoice cost if buyer pays prior to the end of the discount period  

• Encourages buyers to pay before the discount period ends 

• Seller benefits either way 

Allowances

• Lowers the final cost in return for specific behaviour  

• Advertising allowance  

• Listing allowance 

Uniform Delivered vs Geographic pricing 

Addresses the impact of shipping, which is often a major cost for manufacturer 

Quantity Discounts 

 

• Cumulative quantity discount 

• Noncumulative quantity discount  

Legal and ethical aspects of pricing

• Deceptive/illegal price advertising

• Predatory pricing

• Price discrimination

• Price fixing

Legal & Ethical aspects of pricing: Deceptive or illegal price advertising  

• Deceptive refrence prices

• Bait & Switch

• Loss leader pricing

Legal and ethical aspects of pricing – 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 

Legal and ethical aspects of pricing – Price discrimination 

When firms sell the same product to different resellers (Wholesalers, distribuors or retailers) at different prices, usually larger firms receive lower price

Legal and ethical aspects of pricing – Price Fixing 

Practice of colluding with other firms to control prices

Examples of monetary sacrifices included in the overall price

• Travel Costs

• Shipping

The overall sacrifice a consumer makes to acquire a product or service is known as:

Price

BMW offers free scheduled maintenance on its cars for the first four years. BMW expects that consumers will pay more for its cars because the cars are less expensive to drive over their lifetimes than competitors' cars. BMW is using a(n) ______ pricing method.

Cost of ownership

Shrinkflation

When items shrink in size or quantity while their price remains the same or increases

Which of the following is not a type of price tactic typically aimed at consumers?

Cash discount

The cost-of-ownership pricing method involves setting prices based on…

How expensive it will be to use the product throughout its lifetime

Price discrimination is illegal under all conditions (true/false)

False!