Pricing Strategy and Management Professor Chip Besio Marketing 3340

Pricing Considerations Objectives: Enhance brand image Provide customer value Obtain an adequate ROI Maximize profits Maintain price stability in an industry or market

Factors Affecting Pricing Internal Factors Costs Product, Strategy Internal Factors Costs Product, Strategy Pricing Decisions Pricing Decisions External Factors Competitors Customers External Factors Competitors Customers

Pricing Considerations Factors Effecting Pricing: Demand sets price ceiling Cost sets price floor Consumer value perceptions Consumer price sensitivity Government regulations

Pricing Considerations Factors Effecting Pricing: Product/Service differentiation Organizations financial goals Stage of Product Life Cycle Marketing Channel margin impact Prices of other products in mix

Pricing Considerations Price as Indicator of Value Value = Perceived Benefits/Price Value may be linked to meeting expectations of consumer Price may shape the consumers perceptions of value Price may affect consumers perception of prestige

Customer Considerations PRICE SENSITIVITY Product categories are not uniformly responsive to prices -- some are more sensitive to price levels than others Customers also may respond differently than one another to price levels Price sensitivity (price elasticity) reflects how purchase behavior changes with changes in price

Pricing Considerations PRICE SENSITIVITY Price Quantity Demanded per Period A. Inelastic Demand - Demand hardly changes with a small change in price P2P2 P1P1 Q1Q1 Q2Q2 Price Quantity Demanded per Period P 2 P 1 Q 1 Q 2 B. Elastic Demand - Demand changes greatly with a small change in price

Product-Based Pricing Approaches Product Line Pricing Setting price steps between product line items i.e. $299, $399 Product Line Pricing Setting price steps between product line items i.e. $299, $399 Optional-Product Pricing Pricing optional or accessory products sold with the main product *** i.e. car options Optional-Product Pricing Pricing optional or accessory products sold with the main product *** i.e. car options Captive-Product Pricing Pricing products that must be used with the main Product***i.e. Razor Blades, Film, Software Captive-Product Pricing Pricing products that must be used with the main Product***i.e. Razor Blades, Film, Software By-Product Pricing Pricing low-value by-products to get rid of them ***i.e. Lumber Mills, Zoos By-Product Pricing Pricing low-value by-products to get rid of them ***i.e. Lumber Mills, Zoos Product-Bundle Pricing Pricing bundles Of products sold together ***i.e. season tickets, computer makers Product-Bundle Pricing Pricing bundles Of products sold together ***i.e. season tickets, computer makers Source: Prentice Hall

Cost Considerations Recall that costs may depend on the production level Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production Fixed Costs (Overhead) Costs that dont vary with sales or production levels. Executive Salaries Rent Variable Costs Costs that do vary directly with the level of production. Raw materials

Cost Based Pricing Strategies Full Cost Strategies Variable Cost Strategies New-Offering Strategies Competitive Bidding

Full Cost Strategies Markup Pricing Break-even Pricing ROR Pricing Cost Based Pricing Strategies

Variable Cost Strategies Stimulate Demand Shift Demand Cost Based Pricing Strategies

Cost-Based Pricing Approaches Cost-Plus Pricing Cost-Plus Pricing - Adds a standard mark up to the cost of the product Useful when there are a great many products or demand is hard to forecast Simple to implement Breakeven or Target Profit Pricing Breakeven or Target Profit Pricing - Price is set to meet a specific profit target Also takes consumer demand into account

Cost-Based Pricing COST-PLUS Minimizes price competition Minimizes price competition Perceived fairness for both buyers and sellers Perceived fairness for both buyers and sellers Sellers are more certain about costs than demand Sellers are more certain about costs than demand

Pricing Strategies Competitive Bidding Demand is Known & Constant Marketing Mix Variables Uncontrollable Sophisticated Mathematical Models Calculate Profit Levels Calculate Probability of Winning at Different Price Levels

New-Offering Strategies Skimming Penetration Intermediate Cost Based Pricing Strategies

New Product Intro Strategies Capture cream – less price sensitive buyers High Profit Margin – sacrifice volume Invite Competitors, Short-term Profits Sell Whole Market – no elite market High Volume – sacrifice profit margin Keep Competition Out – E.O.S. INTENT FOCUS RESULT SKIMMING PENETRATION

Skimming Strategy Price High Initially Reduce Over Time Inelastic Demand - Buyers Price Range Unique Offering New Product Intro Strategies

Skimming Strategy Production or Marketing Costs Unknown Limited Capacity to Deliver Realistic Perceived Value New Product Intro Strategies

Penetration Strategy Price Low Initially Elastic Demand Offering Not Unique Competition Entering Quickly New Product Intro Strategies

Penetration Strategy No Distinct Price Segments Volume Increases Dramatically Impact Costs Objective - Large Market Share New Product Intro Strategies

Intermediate Strategy More Prevalent Less Dramatic New Product Intro Strategies

Customer Considerations PRICE AWARENESS Mindless Shopping: Average time between arriving and departing from product category is 12 seconds In 85% of purchases only the chosen brand was handled, and 90% of shoppers inspected only one size 21% could not offer a price estimate when asked Only 50% were able to state correct price 93% did know relative price (i.e., higher, lower or the same as other brands in category) Source: Dickson and Sawyer (1990)

Customer Considerations REFERENCE PRICES Consumers do not evaluate price absolutely, but rather relative to a convenient quantity for comparison Context Matters! Two kinds of reference prices External reference price External reference price Internal reference price Internal reference price

Customer Considerations REFERENCE PRICES External Reference Prices List prices/sale prices Other products on the shelf or convenient for comparison

Customer Considerations REFERENCE PRICES Internal Reference Prices One that is recorded in consumers memory Memory of price may not be accurate If brand is frequently promoted, consumers tend to lower their internal reference point consumers have a notion of fair price acquisition utility - economic benefit of the product transaction utility - getting a good deal Asymmetric response to price changes

Customer Considerations PRICE AS A SIGNAL Price not only has the traditional economic role of negatively affecting demand but also offers the customer information about product quality When is price used as a signal? When there is little information about product quality available Primarily for experience or credence goods

Customer Considerations VALUE PRICING Product Cost Price Value Customers Customer Value Price Cost Product Cost-Based Pricing Value-Based Pricing Source: Prentice Hall

General Price Adjustment Strategies Adjusting Prices for Psychological Effect. Price Used as a Signal Temporarily Reducing Prices to Increase Short-Run Sales. i.e. Loss Leaders, Special-Events Adjusting Prices to Account for the Geographic Location of Customers. i.e. FOB-Origin, Uniform-Delivered, Zone Pricing, Basing-Point, & Freight-Absorption. Adjusting Prices for International Markets. Price Depends on Costs, Consumers, Economic Conditions & Other Factors. Psychological Pricing Promotional Pricing Geographical Pricing International Pricing Source: Prentice Hall