Ch. 11 Pricing Concepts and Strategies: Establishing Value

Price is

• usually ranked as one of the most important factors in purchase decisions

• only element in marketing mix that generates revenue

• most challenging of the four P’s to manage

• misunderstood by managers

5 C’s of pricing

• competition

• costs

• company objectives

• customers

• channel members

company objectives

• profit orientation

  • maximize profits, target return pricing, target profit pricing

• sales orientation

• competitor orientation

• customer orientation (value)

customers (2nd C)

• most important C

• about understanding consumers reactions to different prices

• consumers want value

• price is half of the value equation

price elasticity of demand

• measuring how consumers respond to prices increases or decsreases

income effect

• generally, as people’s income increases, their spending behaviour changes

• demand shifts from lower priced products to higher priced products

substitution effects

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

costs (3rd C)

• variable costs: vary with production volume

• fixed costs: unaffected by production volume

• total cost: sum of variable and fixed costs

• break-even point: when number of units sold generates just enough revenue to equal the total costs

competition (4th C)

• monopoly: one firm controls the market (less price competition, fewer firms)

• monopolistic competition: many firms selling differentiated products at different prices (less price competition, many firms)

• oligopoly: a handful of firms control the market (more price competition, fewer firms)

• pure competition: many firms selling commodities for the same price (more price competition, many firms)

channel members (5th C)

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

• manufacturers must protect against grey market transactions

pricing methods

• competitor

• value

• cost

pricing method - determining price through cost

• method starts with cost

• all costs calculated on a per unit basis

• assumes costs don’t vary for different levels of product

pricing method - set prices relative to competitors

• firms hope to influence consumer perceptions of themselves and competitors

• premium pricing: a firm deliberately prices above the level of competing products to appeal to consumers who shop for the best or for whom price doesn’t matter

pricing method - focus on consumers’ perceptions of overall value

• sellers must figure out a way to determine consumers’ value perceptions

• the improvement value method estimates how much more (or less) consumers will pay for a product relative to comparable products

pricing strategies

• new product

  • skimming

  • penetration

• everyday low pricing

• high/low

everyday low pricing (EDLP)

• value is created in different ways

• 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 the thrill of the chase for the lowest price

new product strategies - price skimming

• selling at high price that innovators and early adopters are willing to pay to obtain it

• once the high price market segment becomes saturated and sales begin to slow, the firm generally lowers the price to capture (or skim) the next most price sensitive segment

new product strategies - market penetration

• 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

consumer pricing tactics - price lining

establishing a price floor and ceiling for an entire line of similar products and then setting price points in between to represent differences in quality

consumer pricing tactics - price bundling

pricing of more than one product for a single, lower price

consumer pricing tactics - leader pricing

building store traffic by aggressively pricing and advertising a regularly purchased item, often prices at or just above the store’s cost

consumer price reductions

• markdowns

• quantity discounts for consumers

• coupons and rebates

B2B pricing tactics

• seasonal discounts

• cash discounts

• allowances

• quantity discounts

• uniform delivered vs geographic pricing

price fixing

the practice of colluding with other firms to control prices

deceptive or illegal price advertising

• deceptive reference prices

• loss leader pricing (below cost)

• bait and switch: when sellers advertise items for a very low price, then aggressively pressure customers into purchasing a higher priced model

predatory pricing

setting a very low price for one or more products with the intent of driving its competition out of business

price discrimination

selling the same product to different resellers at different prices