Chapter 1 Pricing Considerations and Strategies 7 Pricing Considerations and Strategies

ROAD MAP: Previewing the Concepts Identify and explain the external and internal factors affecting a firm's pricing decisions. Contrast the three general approaches to setting prices. Describe the major strategies for pricing imitative and new products. Explain how companies find a set of prices that maximizes the profits from the total product mix. Discuss how companies adjust their prices to take into account different types of customers and situations. Discuss the key issues related to initiating and responding to price changes. Professor Takada

Synonyms for Price Special assessment Rent Bribe Tuition Dues Fee Salary Commission Wage Tax Rent Tuition Fee Fare Rate Toll Premium Honorarium Professor Takada

Possible Consumer Reference Prices “Fair price” Typical price Last price paid Upper-bound price Lower-bound price Competitor prices Expected future price Usual discounted price Professor Takada

What is a Price? Narrowly, price is the amount of money charged for a product or service. Broadly, price is the sum of all the values that consumers exchange for the benefits of having or using the product or service. Dynamic Pricing: charging different prices depending on individual customers and situations. Professor Takada

The Internet and Pricing Effects Buyers can: -Get instant price comparisons from vendors: PriceScan.com -Name their price and have it met: Priceline.com Sellers can: -Monitor customer behavior and tailor offers to individuals. -Giver certain customers access to special prices: CDNOW Both buyers and sellers can: -Negotiate prices in online auctions and exchanges: eBay Kotler and Keller (2006) Professor Takada

ROAD MAP Identify and explain the external and internal factors affecting a firm's pricing decisions. Contrast the three general approaches to setting prices. Describe the major strategies for pricing imitative and new products. Explain how companies find a set of prices that maximizes the profits from the total product mix. Discuss how companies adjust their prices to take into account different types of customers and situations. Discuss the key issues related to initiating and responding to price changes. Professor Takada

Factors Affecting Pricing Decisions Professor Takada

Internal Factors Affecting Pricing Decisions Marketing Mix Strategy: Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective marketing program. Target costing: Pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met. Marketing Objectives: Company must decide on its strategy for the product. General Objectives: Survival, current profit maximization, market share leadership, and product quality leadership. Organizational Considerations: Must decide who within the organization should set prices. This will vary depending on the size and type of company. Costs: Fixed Costs: Costs that do not vary with production or sales level. Variable Costs: Costs that vary directly with the level of production. Professor Takada

Product Quality Leadership Four Seasons starts with very high-quality service—”we await you with the perfect sanctuary.” It then charges a price to match. Professor Takada

External Factors Affecting Pricing Decisions Market and Demand Pricing in Different Types of Markets Pure Competition: Many buyers and sellers where each has little effect on the going market price Monopolistic Competition: Many buyers and sellers who trade over a range of prices Oligopolistic Competition: Few sellers who are sensitive to each other’s pricing/marketing strategies Pure Monopoly: Market consists of a single seller Professor Takada

Determining Demand Price Sensitivity Estimating Demand Curves Price Elasticity of Demand Professor Takada

Price Elasticity of Demand Demand Curve Upward Sloping Demand Curve Gibson was surprised to learn that its high-quality instruments did not sell as well at lower prices. Price Elasticity of Demand Elastic demand Inelastic demand Professor Takada

Inelastic and Elastic Demand Professor Takada

ROAD MAP Identify and explain the external and internal factors affecting a firm's pricing decisions. Contrast the three general approaches to setting prices. Describe the major strategies for pricing imitative and new products. Explain how companies find a set of prices that maximizes the profits from the total product mix. Discuss how companies adjust their prices to take into account different types of customers and situations. Discuss the key issues related to initiating and responding to price changes. Professor Takada

Major Considerations in Setting Price Cost-based pricing Cost-plus pricing Break-even pricing (Target profit pricing) Competition-based pricing Value-based pricing Professor Takada

Cost-Plus Pricing Adding a standard markup to the cost of the product. Popular because: Sellers more certain about cost than demand Simplifies pricing When all sellers use, prices are similar and competition is minimized Some feel it is more fair to both buyers and sellers Professor Takada

Step 3: Estimating Costs Types of Costs Accumulated Production Activity-Based Cost Accounting Target Costing Professor Takada

Cost Terms and Production Fixed costs Variable costs Total costs Average cost Cost at different levels of production Professor Takada

Cost per Unit as a Function of Accumulated Production Professor Takada

Target Profit Pricing (Break-Even Analysis) At break even: Total revenue=Total cost Total revenue = Price ($15)*Quantity sold Total cost = Fixed cost + Variable cost ($5 per unit)* units sold What is the sales volume to break even? If price is raised to $20, how does this change affect the above analysis? If the company decides to increase advertising by $1million, how does this affect 　　the break even point? Professor Takada

Value-Based Pricing Uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing. Wal-Mart, EDLP What does value mean? Does “value” mean the same thing as “low price”? How do these concepts differ? Professor Takada

Competition-Based Pricing Going-Rate Pricing: Firm bases its price largely on competitors’ prices, with less attention paid to its own costs or to demand. Sealed-Bid Pricing: Firm bases its price on how it thinks competitors will price rather than on its own costs or on demand. Professor Takada

Price Tiers in the Ice Cream Market Professor Takada

ROAD MAP Identify and explain the external and internal factors affecting a firm's pricing decisions. Contrast the three general approaches to setting prices. Describe the major strategies for pricing imitative and new products. Explain how companies find a set of prices that maximizes the profits from the total product mix. Discuss how companies adjust their prices to take into account different types of customers and situations. Discuss the key issues related to initiating and responding to price changes. Professor Takada

New-Product Pricing Strategies Chapter 1 New-Product Pricing Strategies Market-Skimming Set a high price for a new product to “skim” revenues layer by layer from the market. Company makes fewer, but more profitable sales. Market Penetration Set a low initial price in order to “penetrate” the market quickly and deeply. Can attract a large number of buyers quickly and win a large market share. When to use: Product’s quality and image must support its higher price. Costs of smaller volume cannot be so high they cancel the advantage of charging more. Competitors should not be able to enter market easily and undercut the high price. When to use: Market must be highly price sensitive so a low price produces more market growth. Production and distribution costs must fall as sales volume increases. Must keep out competition and maintain low price or effects are only temporary. Which strategy is employed by Sony, Dell, Wal-Mart, and Apple iPod? Why? Professor Takada

ROAD MAP Identify and explain the external and internal factors affecting a firm's pricing decisions. Contrast the three general approaches to setting prices. Describe the major strategies for pricing imitative and new products. Explain how companies find a set of prices that maximizes the profits from the total product mix. Discuss how companies adjust their prices to take into account different types of customers and situations. Discuss the key issues related to initiating and responding to price changes. Professor Takada

Product Mix Pricing Strategies Product line pricing Optional-product pricing Captive-product pricing By-product pricing Product bundle pricing Professor Takada

Product Mix Pricing Strategies Product Line Pricing Involves setting price steps between various products in a product line based on: Cost differences between products Customer evaluations of different features Competitors’ prices Optional- and Captive-Product Pricing Optional-Product Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator). Captive-Product Pricing products that must be used with the main product (e.g., replacement cartridges for Gillette razors). Professor Takada

Product Mix Pricing Strategies By-Product Pricing: Setting a price for by-products in order to make the main product’s price more competitive (e.g., sawdust and Zoo Doo) Product Bundle Pricing: Combining several products and offering the bundle at a reduced price (e.g., computer with software and Internet access). Professor Takada

ROAD MAP Identify and explain the external and internal factors affecting a firm's pricing decisions. Contrast the three general approaches to setting prices. Describe the major strategies for pricing imitative and new products. Explain how companies find a set of prices that maximizes the profits from the total product mix. Discuss how companies adjust their prices to take into account different types of customers and situations. Discuss the key issues related to initiating and responding to price changes. Professor Takada

Price-Adjustment Strategies Discounts and allowances Segmented pricing Psychological pricing Promotional pricing Geographical pricing International pricing Professor Takada

Discounts and Allowances Cash Quantity Functional Seasonal Trade-In Promotional Professor Takada

Segmented Pricing Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. Types: Customer-segment Product-form Location pricing Time pricing Professor Takada

Psychological Pricing Considers the psychology of prices and not simply the economics. Consumers usually perceive higher-priced products as having higher quality. Consumers use price less when they can judge quality of a product. Professor Takada

Promotional Pricing Approaches: Chapter 1 Promotional Pricing Temporarily pricing products below list price and sometimes even below cost to create buying excitement and urgency. Low-Interest Financing Loss Leaders Approaches: Special-Event Pricing Longer Warranties Cash Rebates Free Maintenance Discounts Professor Takada

Geographical Pricing FOB-origin pricing Uniform-delivered pricing Zone pricing Basing-point pricing Freight-absorption pricing Professor Takada

International Pricing Price depends on many factors, including: Economic conditions Competitive situations Laws and regulations Development of the wholesaling and retailing system Costs Professor Takada

ROAD MAP Identify and explain the external and internal factors affecting a firm's pricing decisions. Contrast the three general approaches to setting prices. Describe the major strategies for pricing imitative and new products. Explain how companies find a set of prices that maximizes the profits from the total product mix. Discuss how companies adjust their prices to take into account different types of customers and situations. Discuss the key issues related to initiating and responding to price changes. Professor Takada

Initiating Price Changes Price Cuts Price Increases Excess Capacity Falling Market Share Dominate Market Through Lower Costs Cost Inflation Overdemand: Cannot Supply All Customers’ Needs Professor Takada

Interactive Student Assignment Chapter 1 Choose a partner and consider the following. What would you think if Mercedes suddenly lowered its prices on its cars? What would you think if Mercedes suddenly raised its prices on its cars? Why? Professor Takada

Assessing and Responding to Competitor Price Changes Professor Takada

Price-Reaction Program for Meeting Competitor’s Price Cut Professor Takada

Public Policy and Pricing Professor Takada

Rest Stop: Reviewing the Concepts Chapter 1 Rest Stop: Reviewing the Concepts Identify and define the external and internal factors affecting a firm's pricing decisions. Contrast the three general approaches to setting prices. Describe the major strategies for pricing imitative and new products. Explain how companies find a set of prices that maximizes the profits from the total product mix. Discuss how companies adjust their prices to take into account different types of customers and situations. Discuss the key issues related to initiating and responding to price changes. Professor Takada