Marketing: Pricing Strategies Flashcards

Price

• Amount of money charged for a product or service.
• Determines a firm’s market share and profitability.
• Generates revenue.

Considerations in Setting Price

• Price Floor: Product costs. No profits below this price.
• Price Ceiling: Consumer perceptions of value. No demand above this price.
• Ideal Pricing Strategy: Delivers both value to the customer and profits to the company.

Factors Influencing Price

• Product costs (Price floor)
• Competition and other external factors
• Competitors' strategies and prices
• Marketing strategy, objectives, and mix
• Nature of the market and demand
• Consumer perceptions of value(Price ceiling)

Pricing Strategy

• Finding the Ideal Price for a Product.

Customer Value-Based Pricing

• Based on buyers’ perceptions of value rather than on the seller’s cost.
• Price is considered before the marketing program is set.

Types of Value-Based Pricing:

• Good-value pricing: Offers the right combination of quality and good service at a fair price.
  • Introducing less expensive versions of established brands.
  • Redesigning existing brands to offer more quality for a given price or the same quality for less.
• Value-added pricing: Attaches value-added features and services to differentiate a company’s offers and then charging higher prices.
  • Example: Movie theater chains adding amenities and charging more.

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.

Cost-Based Pricing

• Based on the costs of producing, distributing, and selling the product plus a fair rate of return for effort and risk.

Types of Costs

• Fixed costs (overhead).
• Variable costs.
• Total costs.

Types of Cost-Based Pricing

• Cost-plus pricing (markup pricing): Adding a standard markup to the cost of the product.
• Break-even pricing (target return pricing): Setting price to break even on the costs of making and marketing a product, or setting price to make a target return.

Break-Even Analysis

• Setting price to break even on the costs of making and marketing a product, or setting price to make a target return. A break-even chart is used for determining target return price and break-even volume.

Competition-Based Pricing

• Setting prices based on competitors’ strategies, costs, prices, and market offerings.

Questions to Assess Competitors’ Pricing Strategies

• How does the company’s market offering compare in terms of customer value?
• How strong are current competitors?
• What are their current pricing strategies?

9-1 Summary

• The three major pricing strategies include
  • Customer value-based pricing
  • Cost-based pricing
  • Competition-based pricing
• Customer value perceptions, company costs, and competitor strategies are important considerations when setting prices.

Other Internal and External Considerations Affecting Price Decisions

Internal Factors

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

External Factors

• Market and demand
• Economy
• Impact on other parties in its environment

Overall Marketing Strategy, Objectives, and Mix

• Pricing decisions must coordinate with packaging, promotion, and distribution decisions.
• Positioning may be based on price.
  • Target costing starts with an ideal selling price, then targets costs that ensure the price is met.
• Nonprice positions can be created to differentiate the marketing offer.
  • Deemphasize price and use other marketing mix tools to create nonprice positions

Organizational Considerations

• Management decides who should set prices.
• Varies depending on the size and type of company
  • Small companies—Top management
  • Large companies—Divisional or product managers
  • Industries with price as the key factor—Pricing departments

Pricing in Different Types of Markets

• Pure competition: the market consists of many buyers and sellers trading in a uniform commodity.
• Monopolistic competition: consists of many buyers and sellers trading over a range of prices rather than a single market price
• Oligopolistic competition: consists of only a few large sellers. Because there are few sellers, each seller is alert and responsive to competitors’ pricing strategies and marketing moves.
• Pure monopoly: market is dominated by one seller. The seller may be a government monopoly, a private regulated monopoly, or a private unregulated monopoly

Demand Curve

• The demand curve shows the relationship between price and demand.
• Usually, higher prices result in lower demand.

Price Elasticity of Demand

• Measure of the sensitivity of demand to changes in price
  • Inelastic demand: Demand hardly changes with a small change in price.
  • Elastic demand: Demand changes greatly with a small change in price.

Economy

Factors Impacting Pricing Strategies

• Boom or recession
• Inflation
• Interest rates

Responses to the Frugality of Post-Recession Consumers

• Cut prices and offer discounts
• Develop more affordable items
• Redefine value propositions

Other External Factors

• Company must consider several other factors in its external environment when setting prices.
  • Resellers
  • Government
  • Social concerns

9-2 Summary

• Factors affecting a firm’s pricing decisions:
  • Internal—marketing strategy, objectives, marketing mix, and organizational considerations
  • External—nature of market, demand, economy, reseller needs, and government actions

New Product Pricing Strategies

• Market-skimming pricing (price skimming):
  • Setting a high price to skim maximum revenues from the segments willing to pay the high price
  • Company makes fewer but more profitable sales
• Market-penetration pricing:
  • Setting a low price to attract a large number of buyers and a large market share

9-3 Summary

• Strategies for pricing new products include
  • Market-skimming pricing
  • Market-penetrating pricing

Product Mix Pricing Strategies

• Product line pricing: Setting prices across an entire product line
• Optional-product pricing: Pricing optional or accessory products sold with the main product
• Captive-product pricing: Pricing products that must be used with the main product
• By-product pricing: Pricing low-value by-products to get rid of or make money on them
• Product bundle pricing: Pricing bundles of products sold together

9-4 Summary

• The firm uses the following pricing strategies to maximize the profits from the total mix:
  • Product line pricing
  • Optional products
  • Captive products
  • By-products
  • Product bundles

Price Adjustment Strategies

• Discount and allowance pricing: Reducing prices to reward customer responses such as volume purchases, paying early, or promoting the product
• Segmented pricing: Adjusting prices to allow for differences in customers, products, or locations
• Psychological pricing: Adjusting prices for psychological effect
• Promotional pricing: Temporarily reducing prices to spur short-run sales
• Geographical pricing: Adjusting prices to account for the geographic location of customers
• Dynamic pricing: Adjusting prices continually to meet the characteristics and needs of individual customers and situations
• International pricing: Adjusting prices for international markets

Discount and Allowance Pricing

• Discount: a straight reduction in price on purchases during a stated period of time or of larger quantities
  • Cash, quantity, functional, and seasonal discounts
• Allowance: promotional money paid to retailers for an agreement to feature the manufacturer’s products in some way
  • Trade-in and promotional allowances

Segmented Pricing

• Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs

Forms of Segmented Pricing:

• Customer-segment pricing: different customers pay different prices for the same product or service. Museums and movie theaters, for example, may charge a lower admission for students and senior citizens.
• Product form pricing: different versions of the product are priced differently, but not according to differences in their costs. Examples include a round-trip economy seat on a flight versus a more expensive business class seat
• Location-based pricing: involves a company charging different prices for different locations, even though the cost of offering each location is the same.
• Time-based pricing: occurs when a firm varies its price by the season, the month, the day, and even the hour. For example, movie theaters charge matinee pricing during the daytime, and resorts give weekend and seasonal discounts.

Psychological Pricing

• Considers the psychology of prices and not simply the economics
  • The price says something about the product.
• Reference prices: This is the price that the shopper believes or expects the item should cost based on past experience or knowledge about the product. The reference price might be formed by noting current prices, remembering past prices, or assessing the buying situation. Sellers can influence or use these consumers’ reference prices when setting price.

Promotional Pricing

• Temporarily pricing products below the list price to increase short-run sales

Forms of Promotional Pricing:

• Discounts and special-event pricing (winter sale)
• Limited-time offers and cash rebates (flash sale)
• Low-interest financing and longer warranties
• Free maintenance

Geographical Pricing

• FOB-origin pricing: free on board a carrier, hence FOB. At that point the title and responsibility pass to the customer
• Uniform-delivered pricing: charges the same price plus freight to all customers, regardless of their location
• Zone pricing: sets up two or more zones. All customers within a given zone pay a single total price
• Basing-point pricing: the seller selects a given city as a “basing point” and charges all customers the freight cost from that city to the customer location, regardless of the city from which the goods are actually shipped.
• Freight-absorption pricing: the seller absorbs all or part of the actual freight charges to get the desired business. Freight-absorption pricing is used for market penetration

Dynamic and Personalized Pricing

• Dynamic pricing: Adjusting prices continually to meet the characteristics and needs of individual customers and situations
• Prevalent online where the Internet introduces a new age of fluid pricing

International Pricing

• Price decisions of international companies
  • Set a uniform worldwide price
  • Adjust prices to reflect local market conditions and cost considerations
• Prices charged depend on many factors
  • Economic conditions
  • Competitive situations
  • Laws and regulations
  • Nature of the wholesaling and retailing system
  • Consumer perceptions and preferences
  • Company’s marketing objectives
  • Costs of selling in another country

9-5 Summary

• Companies apply a variety of price adjustment strategies:
  • Discount and allowance pricing
  • Segmented pricing
  • Psychological pricing
  • Promotional pricing
  • Geographical pricing
  • Dynamic pricing
  • International pricing

Initiating Price Changes

Reasons for Price Cuts:

• Excess capacity
• Falling demand
• Attempt to dominate the market

Reasons for Price Increases:

• Cost inflation
• Over-demand

Reactions to Price Changes

Buyer’s Perspective:

• Price increase:
  • Product is more exclusive or better made.
  • Company is being greedy.
• Price cut:
  • Brand wants to get a better deal on an exclusive product.
  • Product’s quality has been reduced.
  • Company’s image has tarnished.

Competitor’s Perspective:

• Price cut:
  • Company is trying to grab a larger market share.
  • Company is doing poorly and trying to boost its sales.
  • Company wants the whole industry to cut prices to increase total demand.

Responding to Competitor Price Changes

• When a competitor cuts prices, a company's first reaction may be to drop its prices as well. But that is often the wrong response. Instead, the firm may want to emphasize the "value" side of the price-value equation.

• Has competitor cut price?

  • No: Hold current price; continue to monitor competitor's price
  • Yes: Will lower price negatively affect our market share and profits?
    • No: Reduce price
    • Yes: Can/should effective action be taken?
      • No: Raise perceived value
      • Yes: Improve quality and increase price, or Launch low-price "fighter brand"

Public Policy Issues in Pricing

Major public policy issues in pricing take place at two levels:

• pricing practices within a given channel level…
  • Price-fixing
  • Predatory pricing
  • Deceptive pricing
• … and pricing practices across channel levels.
  • Retail price maintenance
  • Deceptive pricing

9-6 Summary

• Customers’ and competitors’ reactions must be considered when initiating a price change.
• Buyer reactions are influenced by the meaning customers see in the price change.
• Competitors’ reactions flow from a set reaction policy or an analysis of each situation.
• Any response to a competitor’s price change should consider many factors.