Pricing Decisions Jeremy Kees, Ph.D.

Pricing Overview Price: the exchange value of a good or service Robinson-Patman Act Federal legislation prohibiting price discrimination that is not based on a cost differential Fair Trade Laws Allow manufacturers to stipulate minimum prices for their products and force retailers to adhere to them

The Importance of Pricing… Prices, and the resulting sales, determine how much revenue a company receives Prices thus influence a firm’s profits Prices also influence the firm’s employment of the factors of production: Natural resources Capital Human Resources Entrepreneurship

Just a few strategic issues… How much focus should be on costs? Should we always strive for the industry’s traditional margins How often should we revise price? (often enough to capitalize on market changes) Should pricing decisions happen independently or as an intrinsic element of market-positioning strategy? How much should we vary price for different products, segments, channels, and purchase occasions?

Strategies “Freemium” strategy —giving some offering away for free while profiting from extras that are priced appropriately Skype Ryanair parody

Consumer Psychology and Pricing Reference Prices Internal External Price-Quality Inferences Moderated by category/product knowledge Price Cues “Psychological Pricing” Odd Pricing Unit Pricing

Setting the Price Select the objective Determine demand Estimate costs Analyze competitors Select the final price

Objective Purpose Example Profitability Objectives Profit Maximization Target Return Low introductory interest rates on credit cards with high standard rates after 6 months. Market Share Objectives      Sales Maximization Market Share Dell’s low-priced PCs increase market share and sales of services Value Objectives   Value Pricing Per-song charges for music downloads Prestige Objectives   Lifestyle Image High-priced luxury autos such as BMW and watches by Piaget NFP Objectives Cost Recovery Market Incentives Market Suppression High prices for tobacco and alcohol to reduce consumption

Determining Demand Price sensitivity Estimating demand curves Implications for branding!! Estimating demand curves Done primarily through marketing research Price elasticity of demand Elastic vs. Inelastic

Estimating Costs Types of Costs Fixed Variable Total Average

Competitive Analysis Only after we determine market demand and company costs We need to examine… Product features Perceived value

Select Pricing Method “3 Cs” Customer Demand Cost Function Competitors Prices

Pricing Strategies Skimming Penetration Pricing High-End Products Introduction Stage of the PLC Adidas / Fathead Penetration Pricing Generates Trials

Pricing Strategies Value Pricing - EDLP Competitive Pricing Wal-Mart Compete on other product attributes

Select Pricing Method Markup pricing (cost-plus) Target-return pricing (breakeven analysis) Perceived-value pricing Going-rate pricing (customary) Auction-type pricing

Select Final Price Factors to consider: Impact of other marketing activities Company pricing policies Gain-and-risk sharing pricing Impact of price on other parties

Adapting the Price By geographic area Discounts and Allowances Cash Discount Trade Discount Quantity Discount Allowances Rebates Promotional Pricing Loss Leaders Differentiated Pricing Product Mix Pricing (Product-Line Pricing) Bundling

Risks of Making Price Adjustments Customers assume quality is low A low price buys market share but not loyalty (remember relationship marketing?) Higher-priced competitors match the lower prices but have longer staying power because of deeper cash reserves Trigger a price war

Responding to Low-Price Competitors