1. Chapter Ten Pricing Considerations and Strategies
Marketing: An Introduction Second Canadian Edition Armstrong, Kotler, Cunningham, Mitchell and Buchwitz
Chapter Ten
Pricing Considerations and Strategies
Copyright © 2007 Pearson Education Canada

2. Copyright © 2007 Pearson Education Canada
Looking Ahead
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.
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.
Chapter 10, page 372
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3. Copyright © 2007 Pearson Education Canada
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 exchange for the benefits of having or using the product or service.
Dynamic pricing.
charging different prices depending on individual customers and situations.
Chapter 10, page
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4. Pricing Best Practices
Develop a 1 percent pricing mentality.
Consistently deliver more value.
Price strategically, not opportunistically.
Know your competition.
Make pricing a process .
Chapter 10, page 377
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Dynamic Pricing
The practice of charging different prices depending on individual customers and situations.
Internet and web-purchasing provides the technological capability for dynamic pricing
Sites like eBay even add the ability to negotiate price to dynamic pricing practices.
Chapter 10, page
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6. Pricing Decision Factors
Internal Factors
Marketing objectives.
Marketing mix.
Costs.
Organization style.
Target market.
Positioning objectives.
External Factors
Nature of the market.
Demand
Competitor.
Economic state.
Reseller needs.
Government actions.
Social concerns.
Chapter 10, page 379
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7. Pricing Decision Internal Factors
Marketing objectives.
Company must decide on its strategy for the product.
General objectives.
Survival, current profit maximization, market share leadership and product quality leadership.
Chapter 10, page 379
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8. Pricing Decision Internal Factors
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.
Chapter 10, page
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9. Pricing Decision Internal Factors
Costs.
Fixed Costs.
Costs that do not vary with production or sales level.
Variable Costs.
Costs that vary directly with the level of production.
Chapter 10, page
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10. Pricing Decision Internal Factors
Organizational considerations.
Must decide who within the organization should set prices.
This will vary depending on the size and type of company.
Chapter 10, page 381
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11. Pricing Decision External Factors
The market and demand:
Costs set the lower limit of prices.
The market and demand set the upper limit.
Chapter 10, page 381
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12. Pricing in Different Markets
Pure competition.
Many buyers and sellers where each has little effect on the going market price
Monopolistic competition.
Many buyers and sellers who trade over a range of prices
Oligopolistic competition.
Few sellers and sensitive to each other’s pricing/marketing strategies
Pure monopoly.
Market consists of a single seller
Chapter 10, page
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13. Copyright © 2007 Pearson Education Canada
Demand and Elasticity
Demand.
The relationship between price changes and the number of units sold.
Elasticity.
A way of measuring how sensitive the market is to price changes.
Inelastic – minimal change in demand as price increases.
Elastic – significant drop in demand as price increases.
Chapter 10, page
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14. Price Setting Considerations
Product costs.
Price floor – no profits below this price.
Competitors’ prices and other internal and external factors.
Consumer perceptions of value.
Price ceiling – no demand above this price.
Chapter 10, page 385
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15. General Pricing Approaches
Cost-based approach.
Cost-plus pricing.
Break-even analysis.
Target profit pricing.
Value-based approach.
Consumer perceptions of value.
Competition-based approach.
What competitors are charging.
Chapter 10, page
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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.
Chapter 10, page
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17. Copyright © 2007 Pearson Education Canada
Value-Based Pricing
Uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing.
A less expensive piano might play well, but would it take you places you’ve never been before?
Chapter 10, page
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18. 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.
Chapter 10, page
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Pricing New Products
Skimming pricing.
High price to reap maximum profit from early adopter segments.
Can encourage competition.
Products must be unique and hard to copy.
Penetration pricing.
Low price to gain maximum market share.
May discourage competition.
Used when the product is easily copied.
Chapter 10, page
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20. Product Mix Pricing Strategies
Product line -- pricing levels to deliver value to different segments.
Optional products – separate options available for the main product.
Captive products – needed to make main product usable.
By-products – created from the manufacture of the main product.
Product bundles – combinations.
Chapter 10, page 392
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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.
Chapter 10, page
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22. Optional/Captive Product Pricing
Optional-product.
Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator).
Product bundle pricing.
Combining several products and offering the bundle at a reduced price (e.g., computer with software and Internet access).
Chapter 10, page 393
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23. Copyright © 2007 Pearson Education Canada
Pricing Strategies
Captive-product.
Pricing products that must be used with the main product (e.g., replacement cartridges for Gillette razors).
By-product pricing.
Setting a price for by-products in order to make the main product’s price more competitive (e.g., sawdust and buttermilk).
Chapter 10, page
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24. Price-Adjustment Strategies
Discount and allowance pricing.
Segmented pricing.
Psychological pricing.
Promotional pricing.
Geographical pricing.
International pricing.
Chapter 10, page 394
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25. Discounts and Allowances
Discounts – a straight reduction based on:
Cash.
Quantity.
Function.
Season.
Allowances – promotional money paid by manufacturer to retailer.
Chapter 10, page
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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.
Customer-segment.
Product-form.
Location pricing.
Time pricing.
Chapter 10, page 395
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27. Psychological Pricing
Considers the psychology of prices and not simply the economics.
Consumers usually perceive higher-priced products as having higher quality.
Consumers use price less when they can judge quality of a product.
Chapter 10, page
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Promotional Pricing
Promotional pricing approaches.
Loss leaders.
Special event pricing.
Low-interest financing.
Longer warranties.
Free maintenance.
Discounts.
Cash rebates.
Chapter 10, page 398
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Geographical Pricing
FOB-origin pricing.
Uniform-delivered pricing.
Zone pricing.
Basing-point pricing.
Freight-absorption pricing.
Chapter 10, page
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30. International Pricing
Price depends on many factors, including:
Economic conditions.
Competitive situations.
Laws and regulations.
Development of the wholesaling and retailing system.
Costs.
Internet.
Chapter 10, page
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31. Initiating Price Changes
Price Cuts
Excess capacity.
Falling market share.
Dominate market through lower costs.
Price Increases
Cost inflation.
Over-demand. Cannot supply all customers’ needs.
Chapter 10, page
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32. Responding to Competitor Price Changes
When a competitor lowers prices:
Reduce price to match the competitors’ price.
Maintain price but increase the perceived value of the offer.
Improve quality and raise price.
Hold price and introduce a new brand at a higher price.
Hold price and introduce a new brand at a lower price (fighting brand).
Chapter 10, page 404
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33. Copyright © 2007 Pearson Education Canada
Pricing Ethics
Competitors.
Price-fixing.
Predatory pricing.
Manufacturer and retailer.
Retail price maintenance.
Discriminatory pricing.
Manufacturer/retailer and consumer.
Deceptive pricing.
Chapter 10, page
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34. Copyright © 2007 Pearson Education Canada
Looking Back
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.
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.
Copyright © 2007 Pearson Education Canada