Chapter 9: Price

Learning Outcomes

  • Identify the three major pricing strategies and discuss the importance of understanding customer-value perceptions, company costs, and competitor strategies when setting prices.

  • Identify and define other important internal and external factors that affect a firm’s pricing decisions.

  • Describe the major strategies for pricing new products.

  • Explain how companies find a set of prices that maximizes the profits from the total product mix.

  • Discuss how companies adjust their prices to take into account different types of customers and situations.

  • Discuss key issues related to initiating and responding to price changes.

What Is a Price?

  • Narrow Definition: Price is the amount of money charged for a product or service.

  • Broad Definition: Price is the sum of all the values that consumers give up in order to gain the benefits of having or using the product or service.

Considerations in Setting Price

  • Customer Perceptions of Value: Understanding how much customers value the product.

  • Price Ceiling: The maximum price before demand drops to zero.

  • Internal Considerations:

    • Marketing strategy, objectives, and mix.

    • Nature of the market and demand.

  • Competitors' Strategies and Prices: Assessing competition.

  • Product Costs:

    • Price Floor: The minimum price to cover costs without making a loss.

Major Pricing Strategies

  1. Value-Based Pricing

  2. Cost-Based Pricing

  3. Competition-Based Pricing

Value-Based Pricing vs. Cost-Based Pricing

  • Cost-Based Pricing:

    • Design a good product.

    • Determine product costs.

    • Set price based on cost.

    • Convince buyers of product's value.

  • Value-Based Pricing:

    • Assess customer needs and value perceptions.

    • Set target price to match customer perceived value.

    • Determine costs that can be incurred.

    • Design product to deliver desired value at target price.

Customer Value-Based Pricing

  • Price considered alongside other marketing mix variables before setting the marketing program.

  • Customer needs and value perceptions are essential.

  • Types of Value-Based Pricing:

    • Good Value Pricing: Quality and good service at a fair price (EDLP - Everyday Low Pricing, High-low pricing, less-expensive versions).

    • Value-Added Pricing: Enhance product differentiation and support higher prices.

Marketing in Action

  • Example 1: Wal-Mart pioneered the everyday low pricing (EDLP) concept sustaining their good-value pricing strategy.

  • Example 2: Ebrahim Currim & Sons added funky designs and valued features to their Stag umbrella line instead of cutting prices, applying a value-added pricing strategy.

Cost-Based Pricing

  • Overview: Costs set the floor for the price a company can charge.

  • Product-driven rather than value-driven.

  • Types of Costs:

    • Fixed Costs: Do not vary with production or sales level.

    • Variable Costs: Vary directly with production levels.

Types of Cost-Based Pricing

  • Cost-Plus (Markup) Pricing: Adding a standard markup to the cost of the product.

  • Break-Even Pricing: Setting price to cover total costs.

  • Target Return Pricing: Setting price based on desired return on investment.

Exercise

  • Breaking Even:

    • Given data:

    • Fixed Costs Total: 140,000

    • Percentage of all Variable Costs to Sales: 60%

  • Sales Level for Profit Target of 200,000:

    • Re-evaluate using the same Fixed Costs.

Competition-Based Pricing

  • Definition: Assumes consumers judge value based on competitor pricing.

  • Key Questions for Firms:

    • How does the firm’s offering compare in terms of customer value?

    • What are competitors’ strengths and their pricing strategies?

    • What principle should guide pricing decisions relative to competitors?

Marketing in Action

  • Example: Annie Bloom’s Books focuses on outstanding customer service and atmosphere to attract and maintain loyalty instead of competing on price.

Other Factors Affecting Pricing Decisions

  • Internal Factors:

    • Overall marketing strategy, objectives, and marketing mix considerations.

    • Organizational considerations.

  • External Factors:

    • Market and demand conditions.

    • Economic trends.

    • Other market-specific external factors.

External Factors Affecting Pricing Decisions

  • Market and Demand Analysis: Firm's pricing flexibility is influenced by market nature.

  • Types of Markets:

    • Pure competition.

    • Monopolistic competition.

    • Oligopolistic competition.

    • Pure monopoly.

Price-Demand Relationship

  • Demand Curve: Different prices lead to different demand levels.

  • Price Elasticity of Demand:

    • Measures how responsive demand changes to price changes.

    • Characteristics:

    • Small demand change: Inelastic demand.

    • Large demand change: Elastic demand.

Marketing in Action

  • Example: Home Depot focuses marketing communications on affordable items rather than cutting prices.

New-Product Pricing Strategies

1. Market-Skimming Pricing Strategy

  • Usage Conditions:

    • Product’s quality and image must support a higher price.

    • Low volume costs shouldn’t negate the benefits of a higher price.

    • Competitors should not easily enter the market to undercut price.

Marketing in Action

  • Example: Electronics, such as VCRs and HDTVs, decreased in price significantly over time, often starting from a high price and lowering it through life cycle.

2. Market-Penetration Pricing Strategy

  • Usage Conditions:

    • Highly price-sensitive market, so low price generates more growth.

    • Costs decrease as sales volume increases.

    • Competition must be restrained to ensure prolonged effects.

Product Mix Pricing Strategies

  • Overview: Pricing situation across various products:

    • Product Line Pricing: Setting prices for an entire product line.

    • Optional-Product Pricing: Pricing for optional or accessory products sold with the main product.

    • Captive-Product Pricing: Pricing for products that must accompany the main product.

    • By-Product Pricing: Pricing low-value by-products to dispose of them.

    • Product Bundle Pricing: Pricing groups of products sold together.

Marketing in Action

  • Example: Kodak plans to offer printers at regular prices but price ink cartridges inexpensively, challenging industry norms.

Price Adjustments

  • Price Adjustment Strategies:

    1. Discount and Allowance Pricing: Reward customer responses (e.g., payments made early).

    2. Segmented Pricing: Prices vary based on customer, product, or location.

    3. Psychological Pricing: Price adjustments made for psychological effects.

    4. Promotional Pricing: Temporary price reductions to boost short-term sales.

    5. Geographical Pricing: Accommodate geographic differences in pricing.

    6. Dynamic Pricing: Continuous price adjustments based on customer needs.

    7. International Pricing: Adjustments in price for global markets.

Price Adjustment Strategies

Types of Discounts

  • Cash Discounts

  • Quantity Discounts

  • Functional Discounts

  • Seasonal Discounts

Types of Allowances

  • Trade-In Allowances

  • Promotional Allowances

  • Example: Theme parks and hotels often employ seasonal pricing to manage capacity.

Types of Segmented Pricing

  1. Customer-Segment Pricing: Different customers pay different prices for the same good.

  2. Product-Form Pricing: Different versions put at different price points.

  3. Location Pricing: Different prices by location without varying costs.

  4. Time Pricing: Prices vary based on time factors (time of year, day, etc.).

Marketing in Action

  • Example: Evian water reflects varying prices depending on form and packaging, highlighting segmented pricing strategies.

Price Adjustment Strategies – Psychological Pricing

  • Price can heavily influence perceptions of quality.

  • Reference Prices: Important for understanding and establishing customer expectations.

Price Adjustment Strategies – Promotional Pricing

  • Strategies Include:

    • Discounts (Loss leaders).

    • Special-event pricing.

    • Cash rebates.

    • Low-interest financing.

    • Longer warranties and free maintenance.

  • Firms use promotional prices to incite urgency and buying excitement.

Price Adjustment Strategies – Geographical Pricing

  • Examples:

    • FOB-Origin Pricing: Pricing costs shift to the buyer upon shipment.

    • Uniform-Delivered Pricing: Same freight costs for all buyers.

    • Zone Pricing: Different prices per zone.

    • Basing-Point Pricing: Charges applied based on shipping point.

    • Freight-Absorption Pricing.

Price Adjustment Strategies – Dynamic Pricing

  • Prices adjusted continuously to meet individual customer characteristics and needs.

International Pricing

  • Price adjustments necessitate consideration of various factors like local market conditions, currency fluctuations, and market demand.

Price Changes

Reasons for Price Cuts

  • Excess capacity.

  • Decreased demand owing to strong competition or weakened economy.

  • Strategy to dominate market through lower costs.

Reasons for Price Increases

  • Rising costs (inflation).

  • Overwhelming demand.

  • Caution: Avoid the appearance of price gouging, which can lead to customer backlash.

Assessing and Responding to Competitor Price Changes

  • Assessment Flow:

    • Did a competitor cut prices? (Yes/No)

    • Evaluate potential effects on market share and profits.

    • Determine response actions (e.g., reduce price, hold current price, improve quality).

Marketing in Action

  • Example: Procter & Gamble (P&G) offers budget-based versions, such as Bounty Basic, to meet customer demand effectively at competitive price points.

Public Policy and Pricing

  • Understand pricing within channel levels regarding:

    • Price Fixing: Collusion among competitors to set prices.

    • Predatory Pricing: Setting prices low to eliminate competition.

  • Pricing Across Channel Levels:

    • Price Discrimination: Charging different prices to different buyers for the same product.

    • Retail Price Maintenance: Controlling retail prices by manufacturers.

    • Deceptive Pricing: Misleading pricing practices.

Conclusion and Review Points

  • Review key concepts discussed in pricing strategies, internal and external factors affecting pricing decisions, pricing new products, market adjustment techniques, pricing ethics, and public policy considerations.

  • Reflect on the learning outcomes to measure comprehension of the material presented.