Pricing Considerations and Strategies

Chapter 9

Road Map: Previewing the Concepts

Identify and explain the external and internal factors affecting a firm's pricing decisions. Contrast the three general approaches to setting prices. Describe the major strategies for pricing imitative and new products.
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Road Map: Previewing the Concepts

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 the key issues related to initiating and responding to price changes.

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What is a Price?
Narrowly, price is the amount of money charged for a product or service. Broadly, price is the sum of all the values that consumers exchange for the benefits of having or using the product or service. Dynamic Pricing: charging different prices depending on individual customers and situations.
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Internal Factors Affecting Pricing Decisions

Marketing Objectives:
Company must decide on its strategy for the product. General Objectives:
Survival, current profit maximization, market share leadership, and product quality leadership.

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Internal Factors Affecting Pricing Decisions

Marketing Mix Strategy:

Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective marketing program. Target costing:
Pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met.

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Internal Factors Affecting Pricing Decisions

Costs:
Fixed Costs:
Costs that do not vary with production or sales level.

Variable Costs:
Costs that vary directly with the level of production.
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Internal Factors Affecting Pricing Decisions

Organizational Considerations:
Must decide who within the organization should set prices. This will vary depending on the size and type of company.

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External Factors Affecting Pricing Decisions

The Market and Demand:
Costs set the lower limit of prices. The market and demand set the upper limit.

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Pricing in Different Types of Markets

Pure competition
Monopolistic competition

Oligopolistic competition
Pure monopoly

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Cost-Plus Pricing

Adding a standard markup to the cost of the product. Popular because:

Sellers more certain about cost than demand Simplifies pricing When all sellers use, prices are similar and competition is minimized Some feel it is more fair to both buyers and sellers
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Value-Based Pricing
Uses buyers perceptions of value, not the sellers cost, as the key to pricing.

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Competition-Based Pricing

Going-Rate Pricing:
Firm bases its price largely on competitors prices, with less attention paid to its own costs or to demand.

Sealed-Bid Pricing:
Firm bases its price on how it thinks competitors will price rather than on its own costs or on demand.

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New-Product Pricing Strategies

Market-Skimming
Set a high price for a new product to skim revenues layer by layer from the market. Company makes fewer, but more profitable sales.

When to use:
Products quality and image must support its higher price. Costs of smaller volume cannot be so high they cancel the advantage of charging more. Competitors should not be able to enter market easily and undercut the high price.

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New-Product Pricing Strategies

Market-Penetration
Set a low initial price in order to penetrate the market quickly and deeply. Can attract a large number of buyers quickly and win a large market share.

When to use:
Market must be highly price sensitive so a low price produces more market growth. Production and distribution costs must fall as sales volume increases. Must keep out competition and maintain low price or effects are only temporary.
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Product-Line Pricing
Involves setting price steps between various products in a product line based on:
Cost differences between products Customer evaluations of different features Competitors prices
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Optional- and CaptiveProduct Pricing

Optional-Product
Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator).

Captive-Product
Pricing products that must be used with the main product (e.g., replacement cartridges for Gillette razors).

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Pricing Strategies
By-Product Pricing

Product Bundle Pricing

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Discounts and Allowances

Discounts
Cash Quantity Functional Seasonal

Allowances
Trade-in Promotional
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Segmented Pricing
Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. Types:
1. 2. 3. 4. Customer-segment Product-form Location pricing Time pricing
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Psychological Pricing

Considers the psychology of prices and not simply the economics.

Consumers usually perceive higherpriced products as having higher quality.

Consumers use price less when they can judge quality of a product.
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Promotional Pricing

Low-Interest Financing Longer Warranties

Free Maintenance

Discounts
Cash Rebates

Special-Event Pricing Loss Leaders

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Geographical Pricing

FOB-origin pricing
Uniform-delivered pricing

Zone pricing
Basing-point pricing

Freight-absorption pricing

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International Pricing

Price depends on many factors, including:

Economic conditions Competitive situations Laws and regulations Development of the wholesaling and retailing system Costs
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Initiating Price Changes

Price Cuts:
Excess capacity Falling market share Dominate market through lower costs

Price Increases:
Overdemand
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Public Policy and Pricing

Price fixing
Predatory pricing

Retail price maintenance

Discriminatory pricing

Deceptive pricing

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Rest Stop: Reviewing the Concepts

Identify and define the external and internal factors affecting a firm's pricing decisions. Contrast the three general approaches to setting prices. Describe the major strategies for pricing imitative and new products.
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Rest Stop: Reviewing the Concepts

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 the key issues related to initiating and responding to price changes.
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