Foundations of Marketing: Pricing Concepts and Management
Foundations of Marketing: Chapter 12 - Pricing Concepts and Management
Learning Objectives
By the end of this chapter, you should be able to:
12-1 Differentiate price competition from nonprice competition.
12-2 List the seven major pricing objectives.
12-3 Describe three factors that influence the evaluation of price.
12-4 Define the price elasticity of demand.
12-5 Describe the relationships between demand, costs, and profits.
12-6 Explain how marketers analyze competitors’ prices.
12-7 Summarize the four bases used for setting prices.
12-8 Describe the five categories of pricing strategies.
12-9 Identify six methods companies can use to price products for business markets.
12-1 Price and Nonprice Competition
Price Competition
Price Competition
Emphasizing price as a competitive issue and matching or beating competitors' prices.
Firms must have the capability to produce efficiently and control costs to compete on price effectively.
Profitability depends on having the lowest costs when all firms charge the same price for similar products.
Price competition is prevalent across nearly all product categories, except high-end luxury goods where price holds less importance in purchase decisions.
Nonprice Competition
Nonprice Competition
Distinguishing a product from competitors through factors other than price, such as:
Unique product features
Higher product quality
Effective promotion
Distinctive packaging
Excellent customer service
Helps build customer loyalty toward the brand.
Buyers must perceive these distinguishing factors and deem them significant.
Companies should promote these characteristics extensively to establish brand superiority and differentiate from competitors.
Discussion Activity
Products to consider: smartphone, haircut, plumbing services.
Identify nonprice attributes and analyze their impacts on perception of the product's price.
Discussion Debrief
The role of organizations in reinforcing nonprice attributes.
Conditions under which nonprice competition is most effective.
12-2 Development of Pricing Objectives
Pricing Objectives
Goals indicating what the firm aims to achieve through pricing.
Must be explicit, measurable, and include a time frame for completion.
Consistency with the firm's marketing and overall objectives is essential, as they influence decisions across functional areas.
Marketers can utilize short- and long-term objectives and may employ multiple pricing objectives simultaneously.
Types of Pricing Objectives
Survival
Temporarily setting prices low (sometimes below costs) to attract more sales.
Aim is to boost demand to increase production volumes and reduce costs.
Profit
Profit maximization goals are often challenging to measure.
Profit objectives can be set in terms of dollar amounts or as a percentage of sales revenue.
Return on Investment (ROI)
Measures profitability in relation to investments with initial data often requiring adjustment.
Market Share
Refers to a product's sales in comparison to total industry sales; firms can increase market share even during flat or decreasing industry sales.
Cash Flow
Setting prices to recover cash quickly, suitable for products with short life cycles.
Product Quality
Pursuing high-quality products, possibly incurring higher costs; high-quality perceptions foster customer trust and market survival.
Status Quo
Objectives focusing on maintaining market share, meeting competitors' prices, achieving price stability, or sustaining a positive public image; can reduce risk but may minimize price competitiveness leading to nonprice competition.
12-3 Assessment of Target Market’s Evaluation of Price
Importance of price varies with:
Type of product
Target market characteristics
Purchase situations
Consumer evaluation of prices:
Perception of higher prices may correlate with greater perceived value, especially for desirable features.
Willingness to pay a premium for products that offer convenience or time savings.
12-4 Demand Curves and Price Elasticity
Demand Curve
Graph depicting the quantity of products a firm expects to sell at varying prices, assuming constant conditions.
Typically shows an inverse relationship: as price decreases, quantity demanded increases.
Influenced by factors such as product quality and marketing mix; exceptions exist for prestige products, which may sell better at higher prices.
Demand Fluctuations
Influencing factors:
Buyer needs
Effectiveness of the marketing mix
Availability of substitutes
Dynamic market conditions
Anticipating demand changes and adjusting product offerings and pricing strategies accordingly.
Assessing Price Elasticity of Demand
Price Elasticity of Demand
Measures sensitivity of demand relative to price changes:
Defined as the percentage change in quantity demanded divided by the percentage change in price.
Elastic demand characteristics: greater percentage changes in quantity demanded in response to price changes.
Elasticity Examples
Electricity demand tends to be inelastic; small quantity changes occur with price changes.
Recreational vehicles exhibit elastic demand; significant quantity changes occur with price adjustments.
When determining elasticity, the total revenues influenced by price changes help assess demand elasticity:
Elastic Demand: Price changes cause opposite revenue changes.
Inelastic Demand: Revenue changes align with price changes.
Formula:
\text{Price Elasticity of Demand} = \frac{\text{% change in quantity demanded}}{\text{% change in price}}
12-5 Demand, Cost, and Profit Relationships
Marginal Analysis
Examines shifts in costs and revenues associated with a one-unit change in production or sales volume.
Key cost concepts:
Fixed Costs: Costs remaining constant irrespective of production changes.
Average fixed cost: Fixed cost per production unit.
Variable Costs: Change in proportion to produced units.
Average variable cost: Variable production cost per unit.
Total Cost: Sum of fixed and variable costs multiplied by quantity produced.
Average Total Cost: Total cost divided by quantity produced.
Marginal Revenue and Profit Relationships
Marginal Cost (MC): Additional cost from producing one more unit.
Marginal Revenue (MR): Change in total revenue from selling one additional unit.
The most profitable production level occurs where MR equals MC.
Breakeven Analysis
Breakeven Point: Production level where total revenue equals total costs.
Example:
If product price = $100, variable cost = $60, fixed cost = $120,000:
12-6 Evaluation of Competitors’ Prices
Assessing competitors’ pricing is crucial for marketing research.
Pricing Strategies:
Avoid pricing significantly above competitors to mitigate poor sales.
Avoid pricing significantly below competitors to prevent negative quality perceptions.
Sometimes pricing is set slightly above competitors to project an exclusive image and perceived quality.
12-7 Selection of a Basis for Pricing
Examining factors influencing pricing basis selection:
Product type
Industry market structure
Brand market share relative to competition
Customer characteristics
Considerations in price setting:
Costs
Competitors
Consumer behavior and sensitivity
Manufacturing capabilities
Product life cycles
Pricing Methodologies
Cost-Based Pricing: Adding a dollar amount or percentage to product costs.
Markup Pricing: A predetermined percentage is added to product costs.
Profit-Based Pricing: Sets prices based on desired profit percentages.
Demand-Based Pricing: Adjusts based on demand levels; higher prices in strong demand scenarios and lower in weak demand.
Competition-Based Pricing: Primarily influenced by competitor pricing.
12-8 Selection of a Pricing Strategy
New-Product Pricing Strategies
Price Skimming: Highest possible price for early adopters willing to pay; flexible introductory pricing base.
Penetration Pricing: Initially low pricing to rapidly capture market share and discourage competition.
Differential Pricing
Differential Pricing: Varying prices for different buyers for the same quality/quantity.
Negotiated Pricing: Price established through bargaining (common across distribution levels).
Secondary-Market Pricing: Different prices for primary and secondary markets, with secondary often being lower.
Discount Pricing Strategies
Periodic Discounting: Predictable, systematic price reductions; customers may wait for discounts.
Random Discounting: Unpredictable reductions, attracts new customers.
Psychological Pricing Strategies
Psychological Pricing: Attempts to influence consumer perceptions to make pricing more appealing.
Odd-Even Pricing: Using specific numbers to sway perceptions (odd numbers often perceived better).
Additional Pricing Strategies
Multiple-Unit Pricing: Pricing for multiple product units as a single attractive price.
Reference Pricing: Moderately pricing alongside higher-priced items for comparison.
Bundle Pricing: Selling complementary products at a single lower price.
Everyday Low Pricing (EDLP): Consistent low pricing, fostering customer confidence in value.
Subscription Pricing: Recurring fee for ongoing product/services access.
Captive Pricing: Basic product priced low, related items priced higher.
Premium Pricing: Premium for high-quality or versatile products.
Price Lining: Limitations on price variations across product groups to stabilize revenue.
12-9 Pricing for Business Markets
Geographic Pricing: Price reductions based on transportation and distance factors.
F.O.B. Origin: Price set at factory before shipment.
F.O.B. Destination: Price covers seller-incurred shipping costs.
Price Discounting Types:
Trade Discount: Reduction for marketing intermediaries.
Quantity Discount: Deductions for bulk purchases.
Cash Discount: Incentives for prompt payments.
Seasonal Discount: Reductions for off-season purchases.
Allowances: Price reductions to achieve specific business objectives.
Summary of Learning Objectives
Review the above points to reinforce understanding of pricing concepts and their application in marketing strategies.