1. Pricing Strategy 8
C H A P T E R

2. Pricing Is a key factor in producing revenue for the firm
Is the easiest of all marketing variables to change
Is an important consideration in competitive intelligence
Is considered to be the only means of differentiation in highly commoditized markets
Is among the most complex decisions in the marketing plan

3. Discussion Question
One of the key themes of today’s economy is the challenge of marketing goods and services in mature markets that are plagued by commoditization. In what ways is pricing strategy related to commoditization? How can a firm offer good value in a mature market where price is the only visible means of differentiation? Are most firms too concerned about their costs to really deliver value in other ways? Explain.

4. The Role of Pricing in Marketing Strategy (1 of 2)
The Seller’s Perspective on Pricing
Four key issues:
Costs
Demand
Customer value
Competitors’ prices
The Buyer’s Perspective on Pricing
Two key issues:
Perceived value
Price sensitivity

5. The Role of Pricing in Marketing Strategy (2 of 2)
A Shift in the Balance of Power
A buyer’s market occurs when:
Large number of sellers in the market
Many substitutes for the product
Economy is weak
A seller’s market occurs when:
Products are in short supply
Products are in high demand
Economy is strong

6. The Relationship Between Price and Revenue
Myth #1 – When business is good, a price cut will increase market share.
Myth #2 – When business is bad, a price cut will stimulate sales.
Price cutting is generally not in the best interests of the firm unless sales volume will increase.
A better strategy is to build value into the product offering at the same (or even a higher) price.

7. Key Issues in Pricing Strategy
Pricing Objectives
Supply and Demand
The Firm’s Cost Structure
Competition and Industry Structure
Pure Competition
Monopolistic Competition
Oligopoly
Monopoly
Stage of the Product Life Cycle

8. Common Pricing Objectives
Exhibit 8.1

9. Pricing Strategy Over the Product Life Cycle
Exhibit 8.2

10. Pricing Strategy in Services
Is critical because price may be the only cue to quality
Becomes more important and difficult when:
Service quality is hard to detect prior to purchase
Costs are difficult to determine
Customers are unfamiliar with the process
Brand names are not well established
Customers can perform the service themselves
Service has poorly defined units of consumption
Advertising within the service category is limited
The total price of the service is difficult to state beforehand

11. Discussion Question
Pricing strategy associated with services is typically more complex than the pricing of tangible goods. As a consumer, what pricing issues do you consider when purchasing services? How difficult is it to compare prices among competing services, or to determine the complete price of the service before purchase? What could service providers do to solve these issues?

12. Price Elasticity and Yield Management
Allows simultaneous control of capacity and demand
Control capacity by limiting available capacity at certain price points
Control demand through price changes and overbooking capacity

13. Yield Management for a Hypothetical Hotel
Exhibit 8.3

14. Price Elasticity of Demand (1 of 2)
Exhibit 8.4

15. Price Elasticity of Demand (2 of 2)
Situations that increase price sensitivity:
Availability of product substitutes
Higher total expenditure
Noticeable differences
Easy price comparison
Situations that decrease price sensitivity:
Real or perceived necessities
Lack of product substitutes
Complementary products
Product differentiation
Perceived product benefits
Situational influences

16. Discussion Question
Price elasticity often varies for the same product based on the situation. What situational factors might affect the price elasticity of these products:
sporting event or concert tickets
staple goods such as milk, eggs, or bread
an electric razor
eye surgery to correct vision

17. Pricing Strategies (1 of 2)
Base Pricing Strategies
Market Introduction Pricing (skimming and penetration)
Prestige Pricing
Value-Based Pricing (EDLP)
Competitive Matching
Non-Price Strategies
Adjusting Prices in Consumer Markets
Promotional Discounting
Reference Pricing
Odd-Even Pricing
Price Bundling

18. Marketing Strategy in Action
Chrysler’s initial price skimming strategy for the Pacifica was not successful in attracting customers. Why would customers balk at a $40,000 price tag for the Pacifica? What are the issues affecting price sensitivity in this situation?

19. Pricing Strategies (2 of 2)
Adjusting Prices in Business Markets
Trade discounts
Discounts and allowances
Geographic pricing
Transfer pricing
Barter and countertrade
Price discrimination

20. Fixed vs. Dynamic Pricing
Pricing levels in a negotiated pricing situation:
Opening position
Aspiration price
Limit
Guidelines for making concessions:
Avoid being the first side to make a concession
Start with modest concessions and make them smaller as you proceed
Avoid making concessions early in the negotiation
Do not give up anything without something in return

21. Major Online Auction Strategies
Exhibit 8.5

22. Legal and Ethical Issues in Pricing
Price Discrimination
Price Fixing
Predatory Pricing
Deceptive Pricing

23. Selling at a Loss
Sony is expected to lose money on each PlayStation 3 console due to the cost of the cell processor and the Blu-ray DVD drive. Sony plans to make up for the loss in games and accessories. Is this a sound pricing strategy? How can Sony minimize the loss on each console?
Beyond the Pages 8.2