Copyright © 2012 McGraw-Hill Ryerson Limited Ajax Persaud Shirley Lichti Dhruv Grewal Michael Levy Week Seven Pricing Concepts and Strategies for Establishing Value

10-2 Chapter Objectives LO1 Explain what price is and its importance in establishing value in marketing LO2 Illustrate how the 5Cs – company objectives, customers, costs, competition, and channel members – influence pricing decisions LO3 Describe various pricing strategies and tactics and their use in marketing (e.g. cost-based pricing, competition-based pricing, value-based pricing, psychological pricing, new product pricing, and pricing tactics targeted to consumers and channel members) LO4 Summarize the legal and ethical issues involved in pricing LEARNING OBJECTIVES

10-3 Chapter Objectives

10-4 Price is a Signal Prices can be both too high and too low Price too low may signal poor quality Price set too high might signal low value LO1

10-5 Role of Price in the Marketing Mix Price is the only element in the marketing mix that generates revenue Price is usually ranked as one of the most important factors in purchase decisions LO1

10-6 The key to successful pricing is to match the product or service with the consumer’s _______________. A)income level B)value perceptions C)shopping habits D)brand consciousness Test Your Knowledge

10-7 The 5 Cs of Pricing LO2

st C: Company Objectives Profit Orientation Maximize profits Target return pricing Target profit pricing Sales Orientation Competitor Orientation Customer Orientation LO2

nd C: Customers Price elasticity of demand Elastic (price sensitive) Inelastic (price insensitive) Consumers less sensitive to price increases for necessities LO2

10-10 Demand Curves Knowing demand curve enables to see relationship between price and demand LO2

10-11 Elasticity Affected by Cross-price elasticity Substitution effect Income effect LO2

10-12 Factors Influencing Price Elasticity of Demand: Substitution & Income Effects Meet Pete, college student on a budget Old Spice Sport Deodorant user At the store he notices that Old Spice is more expensive Pete decides to give another brand a try and save money LO2

10-13 Factors Influencing Price Elasticity of Demand: Cross-Price Elasticity Effect Meet Kendra, self- supporting college student Buys a new printer on sale for a great price Learns it requires special ink cartridges* that cost more than the printer *complementary products LO2

rd C: Costs Variable Costs Vary with production volume Fixed Costs Unaffected by production volume Total Cost Sum of variable and fixed costs LO2

10-15 Break Even Analysis and Decision Making LO2

10-16 Break Even Analysis LO2

th C: Competition Subway Commercial LO2

10-18 Ethical Dilemma 11.1 White Label ABM Fees 35,000 non-bank machines handling about 135 million transactions a year Surcharges vary between $1.50 and $6.15 Canadians charged over $420 million last year to access their own money LO2

th C: Channel Members Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies Manufactures must protect against grey market transactions LO2

10-20 Other Influences on Pricing The Internet Increased price sensitivity Growth of online auctions Economic Factors Economic factors Local economic conditions Increasing disposable income Increasing status consciousness Cross- shopping Increasing globalization

10-21 Pricing Strategies LO3

10-22 Pricing Strategies: 1. Cost-Based Methods Cost-base pricing methods start with cost All costs calculated on a per unit basis Assumes costs don’t vary for different levels of production LO3

10-23 Pricing Strategies: 2. Competitor-Based Methods Set prices to signal information of how product compares with competitors Premium pricing LO3

10-24 Pricing Strategies: 3. Value-Based Methods Setting prices that focus on the overall value of the product Consumer perceptions LO3

10-25 New Product Pricing Strategies Market Penetration Pricing Price skimming LO3

10-26 Psychological Factors Affecting Pricing Strategies LO3 Psychological pricing strategies Reference Pricing Everyday low pricing (EDLP) Odd prices Price- quantity relationship

10-27 Reference Prices External reference price Internal reference price LO3

10-28 Reference Pricing How do consumers use reference pricing when shopping for cars? How does this ad help the consumer? LO3

10-29 Which of the following would NOT be associated with an internal reference price? A)The last price a consumer paid for an item B)What a consumer expects to pay for an item C)Consumer price perception regarding an item D)The overall cost of ownership of an item Test Your Knowledge

10-30 versus Everyday low pricing (EDLP) High/low pricing Value is created in different ways EDLP saves search costs of finding lowest overall prices High/low provides the thrill of the chase for the lowest price LO3 Everyday Low Pricing

10-31 Groupon How do you move from EDLP to higher prices? Payless Website LO3

10-32 Odd Prices Odd prices may be so traditional that sellers are afraid to round them off May suggest a good deal May suggest low quality LO3

10-33 Wine ranges in price from under $5 a bottle to over $100K a bottle. How do you know which to choose? The Price-Quality Relationship Most inexperienced consumers use price as an indicator of quality Price becomes crucial when consumers have little knowledge about certain products/brands LO3

10-34 Pricing Tactics Pricing strategy Long term Pricing tactics Short term vs. LO3

10-35 Business to Business Pricing Tactics and Discounts LO3 Seasonal Discounts Cash DiscountsAllowances Quantity discounts Uniform delivered vs. geographic pricing

10-36 Seasonal Discounts Designed to spur buyers into purchasing merchandise early LO3

10-37 Cash Discounts Reduced invoice cost if buyer pays prior to the end of the discount period Encourages buyers to pay before the discount period ends Seller benefits either way LO3

10-38 Allowances Lowers the final cost in return for specific behaviour Advertising allowance Listing allowance LO3

10-39 Quantity Discounts Cumulative quantity discount Noncumulative quantity discount LO3

10-40 Uniform Delivered vs. Geographic Pricing Addresses the impact of shipping, which is often a major cost for manufacturers LO3

10-41 Consumer Pricing Tactics LO3 Price lining Price bundling Leader pricing

10-42 Price Lining Marketers establish a price floor and a price ceiling and set prices in between Allows for easy comparison LO3

10-43 Price Bundling Encourage sales of slow moving items Encourage stock up Encourage trial of new brand Incentive to purchase LO3

10-44 Leader Pricing Enticing consumers into the store with the popular aggressively priced item and hoping they will pick up other items while shopping LO3

10-45 Consumer Price Reductions Coupons and rebates Markdowns Quantity discounts for consumers Seasonal discounts LO3

10-46 Markdowns An integral component of high/low pricing strategy Enable retailers to get rid of slow moving or obsolete merchandise Used to generate store traffic. LO3

10-47 Quantity Discounts for Consumers Size discount The more you buy the cheaper the unit cost LO3

10-48 Seasonal Discounts Encourage consumers to use services or purchase products year round © LO3

10-49 Coupons and Rebates Coupons – Retailer handles Rebate – Manufacturer issues LO3

10-50 The redemption rate on coupons averages _____________. A)less than 2 percent B)5 percent to 10 percent C)20 percent to 30 percent D)over 30 percent Test Your Knowledge

10-51 Legal and Ethical Aspects of Pricing Deceptive Pricing Predatory Pricing Price Discrimination Price Fixing LO4