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1-2 McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 11 Pricing Concepts

1-3 After studying this chapter you should be able to: Realize the importance of price and understand its role in the marketing mix. Understand the characteristics of the different pricing objectives that companies can adopt. Identify many of the influences on marketers’ pricing decisions.

1-4 Explain how consumers form perceptions of quality and value. Understand price/quality relationships and internal and external reference prices. After studying this chapter you should be able to:

1-5 The Role of Price Objective Price: –The amount of money a buyer pays to a seller in exchange for products and services. Countertrade: –Barter, or trading goods for goods without using money.

1-6 Prices Have Other Labels Tuition Fees Interest Payments Fines Rents Premiums Taxes Donations Time List Prices Partitioned Prices Tuition Fees Interest Payments Fines Rents Premiums Taxes Donations Time List Prices Partitioned Prices

1-7 Basic Price Mix Versus Price Promotion Mix

1-8 The Importance of Price and Pricing Decisions Price Elasticity of Demand: –The responsiveness of demand to price changes. Price promotions and reductions are so common that the sales price is the norm!

1-9 Benefits of Price Promotions Stimulate retailer sales and store traffic. Adjustment to variations in supply and demand without changing list prices. Enable regional businesses to compete against brands with large ad budgets. Reduce retailer’s risk in stocking new brands. Satisfy trade agreements. Stimulate demand for promoted and complementary (non-promoted) products. Customers can feel they are smart shoppers by taking advantage of price specials.

1-10 Limits to Price Setting Competitive Factors Final Pricing Discretion Corporate Objectives Price Floor (Direct Variable Costs) Price Ceiling (Demand Limits)

1-11 Internet Pricing Effects Questions?? –If price sensitivity will increase from this easier access to information? –Will easier access to other information that differentiates products will offset these pressures toward price sensitivity?

1-12 Internet Pricing Effects For goods that are common across stores or business-to-business sellers, price sensitivity will undoubtedly increase. For sellers, savings come from lower real-estate and rental costs and reduced outlays for advertising, inventory, and transportations.

1-13 Global Pricing Considerations Exchange Rate: –The price of one country’s currency in terms of another countries currency. Protective Tariffs: –Taxes put on imported products to raise their price to keep local products competitive. Exchange Rate: –The price of one country’s currency in terms of another countries currency. Protective Tariffs: –Taxes put on imported products to raise their price to keep local products competitive.

1-14 Pricing Objectives Five Objectives Guide Pricing Decisions: 1.Ensuring market survival. 2.Enhancing sales growth. 3.Maximizing company profits. 4.Deterring competition from entering a company’s niche or market position. 5.Establishing or maintaining a particular product quality image.

1-15 Market Survival A firm must set prices to ensure its short- term survival. Frequent end-of-season deals by retailers are efforts to move inventory and recover cash. A firm must set prices to ensure its short- term survival. Frequent end-of-season deals by retailers are efforts to move inventory and recover cash.

1-16 Sales Growth Penetration Pricing: –Prices set low to encourage initial trial and generate sales growth as a market entry strategy. Market Share: –The firm’s portion or percentage of the total market or of total industry sales.

1-17 Optimal Pricing Decisions

1-18 Profitability Maximization of profits is a frequently stated objective for many companies. Price Skimming: –Setting prices high to appeal to customers who are not price sensitive. Return on Investment (ROI): –The ratio of income before taxes to total operating assets associated with a product.

1-19 Competitive Pricing Price Competition Non-price Competition Competitive Strategy-positioning Continuum

1-20 Quality and Image Enhancement Prestige Pricing: –Setting a high price based on the idea that “the higher the price, the greater the quality” of the product. Prestige Pricing: –Setting a high price based on the idea that “the higher the price, the greater the quality” of the product.

1-21 Influences on Pricing Decisions: The Five Cs of Pricing

1-22 Customers Target costing: 1.The profit margin the company desires. 2.The features sought by customers. 3.The prices that will be attractive to potential buyers. Customer expectations and willingness to pay are important influences on pricing decisions.

1-23 Channels of Distribution Prices must be set so that other members of the channel of distribution earn adequate returns on sales of the firm’s products.

1-24 Competition Prices charged by competing firms and the reaction of competitors to price changes influence pricing decisions.

1-25 Compatibility The price of a product must be compatible with the overall objectives of the firm.

1-26 Ethical & Legal Restraints on Pricing Significant U.S. Legislation Influencing Price Decisions: –Sherman Act, 1890 –Federal Trade Commission Act, 1914 –Clayton Act, 1914 –Robinson-Patman Act, 1936 –Wheeler-Lea Act, 1938 –Consumer Goods Pricing Act, 1975 Significant U.S. Legislation Influencing Price Decisions: –Sherman Act, 1890 –Federal Trade Commission Act, 1914 –Clayton Act, 1914 –Robinson-Patman Act, 1936 –Wheeler-Lea Act, 1938 –Consumer Goods Pricing Act, 1975

1-27 International Pricing Issues Dumping: –Selling a product in a foreign country at a price lower than its price in the domestic country, and lower than its marginal cost of production - is a form of price discrimination. Predatory Dumping: –Pricing intended to drive rivals out of business. Dumping: –Selling a product in a foreign country at a price lower than its price in the domestic country, and lower than its marginal cost of production - is a form of price discrimination. Predatory Dumping: –Pricing intended to drive rivals out of business.

1-28 Implications for Pricing Decisions Horizontal price fixing is illegal. Retailers are free to establish their own final selling prices, but prices charged by manufacturer or wholesaler-owned retailers may still be restricted by the owner. Some states have enacted minimum price laws. Prices must not deceive customers. Horizontal price fixing is illegal. Retailers are free to establish their own final selling prices, but prices charged by manufacturer or wholesaler-owned retailers may still be restricted by the owner. Some states have enacted minimum price laws. Prices must not deceive customers.

1-29 Implications for Pricing Decisions Some states have enacted minimum price laws. Prices must not deceive customers. Discrimination to eliminate competition may be illegal. In industries with a few large firms, it is generally acceptable for the pricing behavior of smaller firms to parallel that of larger firms. Some states have enacted minimum price laws. Prices must not deceive customers. Discrimination to eliminate competition may be illegal. In industries with a few large firms, it is generally acceptable for the pricing behavior of smaller firms to parallel that of larger firms.

1-30 International Agreements & Organizations General Agreement on Tariffs and Trade (GATT). The Organization of Petroleum Exporting Countries (OPEC). The European Union (EU). The North American Free Trade Agreement (NAFTA).

1-31 Customer Price Evaluations Judgments of Perceived Value Price/Quality Relationships describe how the consumer associates the product’s price with higher quality. Judgments of Perceived Value Price/Quality Relationships describe how the consumer associates the product’s price with higher quality.

1-32 Customer Price Evaluations Consumer Use of Price Information: –Best-value Strategy –Price-seeking Strategy –Price-aversion Strategy –Price Signaling Strategy Consumer Use of Price Information: –Best-value Strategy –Price-seeking Strategy –Price-aversion Strategy –Price Signaling Strategy

1-33 How Are Price Judgments Made? External Reference Prices: –Those charged by other retailers or comparison prices that a retailer provides to enhance perceptions of the published price. Internal Reference Prices: –Comparison standards that consumers remember and use to make their judgments. Reservation Price: –The highest price a person is willing to pay.

1-34 Consumer Evaluations of Prices

1-35 Advertised Comparison Prices