Chapter 22 Setting Prices

22 | 3Copyright © Houghton Mifflin Company. All rights reserved. Objectives Describe six major stages of process to establish prices Explore issues in developing pricing objectives Understand importance of identifying target market’s evaluation of price Examine how marketers analyze competitors’ prices Describe bases for setting prices Explain types of pricing strategies

22 | 4Copyright © Houghton Mifflin Company. All rights reserved. Development of Pricing Objectives Pricing objectives – goals that describe what a firm wants to achieve through pricing Business Planning- Pricing

22 | 5Copyright © Houghton Mifflin Company. All rights reserved. Stages For Establishing Prices

22 | 6Copyright © Houghton Mifflin Company. All rights reserved. Pricing Objectives And Typical Actions To Achieve Them

22 | 7Copyright © Houghton Mifflin Company. All rights reserved. Pricing Objectives Survival Profit Return on Investment (ROI) Market Share Cash Flow Status Quo Product Quality

22 | 8Copyright © Houghton Mifflin Company. All rights reserved. High-quality products are usually priced to reflect the quality level © 2005 BMW of North America, LLC, used with permission. The BMW name and logo are registered trademarks.

22 | 9Copyright © Houghton Mifflin Company. All rights reserved. Assessment of the Target Market’s Evaluation of Price Price depends on: –Type of product –Type of target market –Purchase situation (e.g: price of concessions at movies)

22 | 10Copyright © Houghton Mifflin Company. All rights reserved. Examples Of Perceptions Of Product Value

22 | 11Copyright © Houghton Mifflin Company. All rights reserved. Evaluation of Competitors’ Prices Regular function of marketing research Importance of customer view of pricing and marketing mix variables –Pricing above competition – creates an exclusive image –Pricing below competition – gains market share

22 | 12Copyright © Houghton Mifflin Company. All rights reserved. Some prices are set higher than the competition to create an exclusive image FIJI ® and all other trademarks, copyrights and intellectual property used herein are the property of FIJI Water Company LLC or its affiliates." Used by permission

22 | 13Copyright © Houghton Mifflin Company. All rights reserved. Selection of a Basis of Pricing Cost Demand Competition Other

22 | 14Copyright © Houghton Mifflin Company. All rights reserved. Cost Based Pricing Cost-based pricing – a dollar amount to the cost of the product Cost-plus pricing – adding a specified dollar amount to the seller’s costs Markup – Adding to the cost of the product a predetermined percentage of that cost

22 | 15Copyright © Houghton Mifflin Company. All rights reserved. Markup as % of Cost = Markup Cost = = 33.3 % Markup as % of Selling Price = Markup Selling Price = = 25.0 %

22 | 16Copyright © Houghton Mifflin Company. All rights reserved. Demand-Based Pricing Customers pay a higher price when demand for the product is strong and a lower price when demand is weak

22 | 17Copyright © Houghton Mifflin Company. All rights reserved. Non-Price Factors Affecting Demand Product –Quality –Range –Nature- essential/luxury –Substitutes Support –Service at point of sale & after –Advertising/promotion –Distribution Methods Market –Degree of competition –Competitor action/reaction –General economic conditions “Demand based pricing”, N. Coulthurst, 4/3/02,

22 | 18Copyright © Houghton Mifflin Company. All rights reserved. Point-of-sale service affects demand Reprinted with permission of Lowe's Companies

22 | 19Copyright © Houghton Mifflin Company. All rights reserved. Competition-Based Pricing Pricing influenced primarily by competitors’ prices –method increases when: competing products are homogeneous organization is serving markets in which price is a key consideration

22 | 20Copyright © Houghton Mifflin Company. All rights reserved. Selection of a Pricing Strategy Differential Pricing – different prices to different buyers for the same product New-Product Pricing Product-Line Pricing – establishing prices of multiple products within a product line Psychological Pricing – influence customer perception to make a product’s price attractive Professional Pricing – fees set by experienced people in particular field Promotional Pricing

22 | 21Copyright © Houghton Mifflin Company. All rights reserved. Common Pricing Strategies

22 | 22Copyright © Houghton Mifflin Company. All rights reserved. Differential Pricing Techniques Negotiated – final price established through buyer/seller bargaining Secondary-market – one price for primary target market and different price for another Periodic discounting – systematic temporary price reduction Random discounting – unsystematic temporary price reduction Poll and comments on differential pricing at Amazon.com.

22 | 23Copyright © Houghton Mifflin Company. All rights reserved. Steps In Developing New Product Pricing 1)Develop Marketing Strategy 2)Make Marketing Mix Decisions 3)Estimate Demand Curve 4)Calculate Cost 5)Understand Environmental Factors 6)Set Pricing Objectives 7)Determine Pricing NetMBA, “Pricing Strategy”, 2005,

22 | 24Copyright © Houghton Mifflin Company. All rights reserved. New-Product Pricing Price skimming – charging the highest possible price that buyers who most desire the product will pay Penetration pricing – prices set below competing brands to penetrate market and gain market share quickly

22 | 25Copyright © Houghton Mifflin Company. All rights reserved. Product-Line Pricing Strategies Captive – basic product in a product line low while related items higher Premium – pricing highest-quality product higher than other models Bait – low pricing on one item in line with intention of selling higher-priced item in the line Price Lining – limited number of prices for selected lines of merchandise

22 | 26Copyright © Houghton Mifflin Company. All rights reserved. For Premium Pricing, Engage The Emotions 1)Taking Care of Me - overstressed people want to pamper selves 2)Connect with Friends & Family - serious money to nurture family, romantic getaways, cosmetic surgery, etc. 3)Questing - consumers appreciate adventure 4)Individual Style - personal taste, differentiate self from others iBizResources, “For Premium Pricing, engage the Emotions”, 2006,

22 | 27Copyright © Houghton Mifflin Company. All rights reserved. Psychological Pricing Techniques Reference pricing – moderate pricing positioned next to a more expensive brand Bundles pricing – packaging multiple products to be sold at a single price Multiple-unit pricing – packaging together two or more identical products to be sold at a single price Everyday low prices (EDLP) – pricing products low on a consistent basis

22 | 28Copyright © Houghton Mifflin Company. All rights reserved. More Psychological Pricing Techniques Odd-even pricing – ending the price with a certain number to influences buyers’ perceptions Customary pricing – on the basis of tradition Prestige pricing – setting prices at a high level to convey prestige

22 | 29Copyright © Houghton Mifflin Company. All rights reserved. Consumers associate higher prices with higher quality Reprinted with permission of Mannington Mills, Inc.

22 | 30Copyright © Houghton Mifflin Company. All rights reserved. Price Of Adult One-Day Passport To Walt-Disney World USA Today Snapshots, “The Price of Amusement”, May 12-14, 2006, p. A1.

22 | 31Copyright © Houghton Mifflin Company. All rights reserved. Sample Prestige Product Prices

22 | 32Copyright © Houghton Mifflin Company. All rights reserved. Concept of Professional Pricing Professional pricing carries the idea that professional have an ethical responsibility not to overcharge customers Aetna Physician Pricing Transparency

22 | 33Copyright © Houghton Mifflin Company. All rights reserved. Types Of Promotional Pricing Price Leader- firm prices a few products below the usual markup, near cost, or below cost Special-Event- advertised sales or price-cutting linked to a holiday, a season, or an event Comparison Discounting- price is set at a specific level and simultaneously compares it with a high price

22 | 34Copyright © Houghton Mifflin Company. All rights reserved. Special events are often seasonal and employ special-event pricing Reprinted with permission of Montage, Inc.

22 | 35Copyright © Houghton Mifflin Company. All rights reserved. Determination of Price: Pricing Strategy Yields a certain price- may need refining Helps in setting final price In absence of government price controls, remains flexible and convenient to adjust the marketing mix