Marketing Principles Ch 14

5 Cs of Pricing (all equal to value)

• Company Objectives

• Customers

• Costs

• Competition

• Channel Members

Company Objectives- Price Strategy Implications

• Profit Oriented

• Sales Oriented

• Competitor Oriented

• Customer Oriented

Profit Orientation

• Target Profit Pricing

• Target Return Pricing

• Maximizing Profits

Sales Orientation

Focuses on increasing sales through premium pricing and end up as more concerned with the overall market share

Competitor Orientation

Competitive Parity (similar pricing to competitors) and Status Quo Pricing (only changes prices to meet competitors’ prices)

Reminder: Value is not a direct part of this pricing strategy

Customer Orientation

Pricing Strategy based on how the firm can add value to its products and services, matching prices to customer expectation

Dynamic Pricing

Individualized pricing catered to customers

Income Effect

As people’s income increases, their spending behavior changes, shifting demands from lower priced products to higher priced products, also increasing the quantity they purchase

Substitution Effect

Consumer’s ability to substitute other products for the focal brand

The 5 Cs of Costs

• Variable Cost (vary with production volume)

• Fixed Cost (unaffected by production volume)

• Total Cost (sum of variable and fixed costs)

• Competition

Market and Target Return Pricing

• A firm might want to achieve a standard percentage markup on the costs of the product

• A target return price is then calculated based on variable costs, fixed costs, and total costs

Competition

Less Price Competition + Fewer Firms → Monopoly

More Price Competition + Fewer Firms → Oligopolistic Competition

Less Price Competition + More Firms → Monopolistic Competition

More Price Competition + More Firms → Pure Competition

Demand Curve

• Demand increases as price increases

• Demand decreases as price increases

Not all demand curves are downward sloping curves…

Price Elasticity of Demand

• Elastic (Price Sensitive)

• Inelastic (Price Insensitive)

• Consumers are less sensitive to price increases for necessities

PEd = % Changes in Quantity/ % Change in Price

Point Elasticity Formula

PED= Q2 - Q1/ Q1/ P2-P1/ P1

Channel Members

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

Pricing Strategy

A long-term approach to setting prices broadly in an integrative effort (across all the firm’s products) based on the 5 Cs of Pricing

Everyday low pricing (EDLP) vs High-low pricing

Although both create value for consumers in different ways, EDLP reduces consumers’ search costs and high-low provides the thrill of the chase

Penetration Pricing

Set the initial price low for the introduction of the new product or service

Price Skimming

Set a Higher price to appeal to consumers

Legal and Ethical Aspects of Pricing

• Deceptive or Illegal Price Advertising

• Predatory Pricing

• Price Discrimination

• Price Fixing

Deceptive/ Illegal Pricing

Deceptive Reference Prices, Loss-Leader Pricing, and Bait and Switch

Price Discrimination

• Not always illegal

• Different rules in the B2B and B2C markets

• Federal law does not apply to sales to end consumers