MKTG 370 PRICING/DISTRIBUTION Lars Perner, Instructor 1 PRICING  Often the only marketing mix variable allowing for immediate competitive response  Important part of product positioning  Long term effects of pricing decisions--your decisions may come back to haunt you!

MKTG 370 PRICING/DISTRIBUTION Lars Perner, Instructor 2 One View of Price  Price = resources given up _____________________________________ goods received  E.g., 12 bullets for $6.00 = $0.50 per bullet ----> several different ways to change ways to change prices prices

MKTG 370 PRICING/DISTRIBUTION Lars Perner, Instructor 3 Introductory Effects  In an experiment, laundry detergent was introduced at $0.49 in one condition and $0.79 in another.  After 8 weeks, price was raised to $0.79 for low price intro condition.  There were higher cumulative sales in high price intro.

MKTG 370 PRICING/DISTRIBUTION Lars Perner, Instructor 4 Ways to Change Prices  Sticker price  Quantity (e.g., smaller candy bars for same price and/or fewer products per package)  Quality (charge separately for services or “dilute” product)  Terms (e.g., charge for delivery)

MKTG 370 PRICING/DISTRIBUTION Lars Perner, Instructor 5 Some Approaches to Pricing  Cost-plus: Add fixed percentage markup  Penetration pricing: low intro price ---> volume  Skimming: high intro price ---> take advantage of price insensitive consumers  Buyer-based perceived valueperceived value going-rate (competition)going-rate (competition) ---> Balancing cost and ---> Balancing cost and market considerations market considerations GREED IS GOOD!

MKTG 370 PRICING/DISTRIBUTION Lars Perner, Instructor 6 Consumer Price Awareness  A survey revealed of consumers who had just selected a product suggested:: Avg. time spent before departing from product area: 12 secondsAvg. time spent before departing from product area: 12 seconds Avg. no. of products inspected: 1.2; only 21.6% claimed to check price of non-chosen brandAvg. no. of products inspected: 1.2; only 21.6% claimed to check price of non-chosen brand 55.6% could state price of just chosen product within 5%55.6% could state price of just chosen product within 5%

MKTG 370 PRICING/DISTRIBUTION Lars Perner, Instructor 7 Consumer Reference Prices  Consumers typically have some expectation of what they will pay. This is based on: previous experienceprevious experience common sensecommon sense perceived fairnessperceived fairness  Two kinds of reference prices: Internal: Based on consumer’s memory.Internal: Based on consumer’s memory. External: Based on environment (e.g., signs, other products in the store )External: Based on environment (e.g., signs, other products in the store ) Prices I Expect To Pay

MKTG 370 PRICING/DISTRIBUTION Lars Perner, Instructor 8 Internal Reference Prices  Consumers tend to develop some memory of prices of frequently purchased items ---> to make store prices look low, you may want to price especially salient products lower  More knowledgeable consumers typically have tighter price range expectations  Reference prices are constantly updated to some extent, but are hard to change upwards--certain unreasonable “stimuli” (prices) may be rejected as unreal  Consumer reference prices tend to be lower than actual prices ---> “sticker shock”

MKTG 370 PRICING/DISTRIBUTION Lars Perner, Instructor 9 External Reference Prices  Reference prices provided by seller or environment  E.g., “Was $100.00; now $69.95”“Was $100.00; now $69.95” “MSRP $3.99; our price $2.49”“MSRP $3.99; our price $2.49” “Sold elsewhere for $20.00; our price $14.99”“Sold elsewhere for $20.00; our price $14.99”

MKTG 370 PRICING/DISTRIBUTION Lars Perner, Instructor 10 The Promotion Signal  A segment of consumers will respond to negligible discounts--e.g., “SALE! $3.95 (Was $4.02).  However, merely placing a sign “EVERYDAY LOW PRICE” randomly also increased sales of affected products. SALE! Hurry!

MKTG 370 PRICING/DISTRIBUTION Lars Perner, Instructor 11 Odd/Even Pricing--Does It Have an Impact?  Theory: $3.00 is rounded to $3.00 while $2.99 is rounded to “$2.00 plus change”  Reality: Studies in U.S. have found some impact; no impact found in Germany  Note that odd pricing may signal receiving a bargain, which may nor may not be compatible with the desired product image  Odd pricing has typically been used by tradition (initially implemented to force cashiers to ring up purchases).

MKTG 370 PRICING/DISTRIBUTION Lars Perner, Instructor 12 Pricing Interests of Retailers and Manufacturers  Retailers generally seek to maximize category profits--for most product categories, price cuts lead to switching between brands--not higher category sales. Thus, retailers are reluctant to pass through any price cuts to consumers.  In the opposite direction, manufacturers may also resent their products being used as loss leaders (this is believed to hurt brand image).