1. McGraw-Hill/Irwin Copyright © 2008 by the McGraw-Hill Companies, Inc. All rights reserved. Marketing Dhruv Grewal Michael Levy Chapter 14 Strategic Pricing Methods

2. 14-2 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Texas Instruments, Digital Light Processing To make big screen possible requires Digital Light Processing (DLP) Texas Instruments (TI) developed this technology and had to price it Pricing this type of product is extremely difficult

3. 14-3 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Pricing Strategies

4. 14-4 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 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

5. 14-5 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Competitor-Based Methods Set prices to signal information of how product compares with competitors Premium pricing

6. 14-6 Test Your Knowledge When a firm deliberately prices a product above the prices set for competing products to capture those consumers who always shop for the best, this is known as ____________. A)snobbery B)premium pricing C)value-based pricing D)price discrimination

7. 14-7 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Value-Based Methods Setting prices that focus on the overall value of the product Consumer perceptions

8. 14-8 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Improvement Value Method

9. 14-9 Should a firm raise prices if it determines that the customer values the item more than the current price? © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin How Can Firms Use Value Pricing?

10. 14-10 Case in Point: Amazon.com and the Mystery of Changing Prices Challenge Answer Results To use a value-based pricing strategy without alienating consumers. Amazon.com now discloses to consumers what items in their wish list or save basket have increased or decreased in price since their last visit. Consumers are skeptical of Amazon’s motives for the changing price. Amazon refuses to discuss its pricing strategy but states that “Prices change; some go up and some go down.”

11. 14-11 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Costs of Ownership Method Consumer maybe willing to spend more initially If, over the lifetime the product will eventually cost less to own Discussion question How do marketers justify the high cost of solar energy panels to homeowners?

12. 14-12 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Psychological Factors Affecting Value- Based Pricing Strategies Psychology pricing strategies Reference pricing Everyday low pricing (EDLP) Odd prices Price- quality relationship

13. 14-13 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Entrepreneurial Marketing 14.1: Turning $1 into a Million Cal Turner Sr. (Dollar General) and Leon Levine ( Family Dollar) invented a new type of retail format – extreme value Target low income consumers but increasingly higher income consumers Focus on value and convenience

14. 14-14 Consumers’ Use of Reference Prices Reference price External reference price Internal reference price External reference prices influence internal references prices

15. 14-15 Test Your Knowledge 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

16. 14-16 Everyday Low Pricing versus High/Low Pricing © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin versus Everyday low pricing (EDLP) High/low pricing Create value in different ways EDLP saves search costs of finding lowest overall prices High/low provides the thrill of the chase for the lowest price

17. 14-17 Odd Prices © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Odd prices may be so traditional that sellers are afraid to round them off May suggest a good deal May suggest low quality

18. 14-18 The Price-Quality Relationship © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Discussion question Wine ranges in price from under $5 a bottle to over $100K a bottle. How do you know which to choose? Lacking experience, consumers use price as an indicator of quality Products/brands that consumers have little knowledge about, price becomes crucial

19. 14-19 New Product Pricing © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Price skimming Penetration Pricing

20. 14-20 Adding Value 14.1: Price Skimming versus Market Penetration in the World of High Fashion © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Fashion designers have been able to use both strategies Karl Lagerfeld, chief designer for Chanel couture also designs a line of clothes for budget fashion retailer H&M

21. 14-21 Pricing Tactics © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Pricing strategy Pricing tactics

22. 14-22 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Business to Business Pricing Tactics and Discounts B-to-B Pricing Tactics and Discounts Seasonal discounts Cash discounts Allowances Quantity discounts Uniform delivered versus zone pricing

23. 14-23 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Seasonal Discounts Designed to spur buyers into purchasing merchandise early

24. 14-24 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 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

25. 14-25 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Allowances Lowers the final cost in return for specific behavior Advertising allowance Slotting allowance

26. 14-26 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Quantity Discounts Cumulative quantity discount Noncumulative quantity discount

27. 14-27 Test Your Knowledge When a car dealership offers great deals at the end of a fiscal period to boost sales, they are most likely trying to take advantage of _______________. A)advertising allowances B)a cumulative quantity discount C)zone pricing D)a noncumulative quantity discount

28. 14-28 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Uniform Delivered versus Zone Pricing Addresses the impact of shipping, which is often a major cost for manufacturers

29. 14-29 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Pricing Tactics Aimed at Consumers Pricing Tactics for Consumers Price lining Price bundling Leader pricing

30. 14-30 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Price Lining Marketers establish a price floor and a price ceiling and set prices in between Allows for easy comparison

31. 14-31 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Price Bundling Encourage sales of slow moving items Encourage stock up Encourage trial of new brand Incentive to purchase

32. 14-32 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Leader Pricing Enticing consumers into the store with the popular aggressively priced item and hoping they will pick up other items while shopping

33. 14-33 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Consumer Price Reductions Coupons and rebates Markdowns Quantity discounts for consumers Seasonal discounts

34. 14-34 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 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.

35. 14-35 Quantity Discounts for Consumers Size discount The more you buy the cheaper the unit cost

36. 14-36 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Seasonal Discounts Encourage consumers to use services or purchase products year round

37. 14-37 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Coupons and Rebates Coupons – Retailer handles Rebate – Manufacturer issues

38. 14-38 How should firms respond when couponing no longer seems to work to increase sales? To Coupon or Not to Coupon?

39. 14-39 Case in Point: Cereal and the End of Couponing Challenge Answer Results To re-invigorate sale of Ready-to-Eat cereal. Reduce the price of cereal and put an end to constant couponing to make cereal more attractive to consumers. Sales of the cereal category were decreasing due to consumers perception of high price and increasing competition from alternatives such as breakfast pastries and bagels. Consumers liked the lower prices but were hooked on the coupons which are still a key to cereal sales.

40. 14-40 Test Your Knowledge 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

41. 14-41 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Legal Aspects and Ethics of Pricing Legal Aspects and Ethics of Pricing Deceptive or illegal price advertising Predatory pricing Price discrimination Price fixing

42. 14-42 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Deceptive or Illegal Price Advertising Deceptive reference prices Loss leader pricing Bait and switch

43. 14-43 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Predatory Pricing Prices set low with the intent to drive competitor out of business Illegal Difficult to prove

44. 14-44 Is it permissible for firms to use an aggressive pricing strategy and not be considered predatory? © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Does Predatory Pricing Exist?

45. 14-45 Case in Point: Google Checkout Challenge Answer Results To make a dramatic move into a new market. Google Checkout allows users to make payments to online merchants using payment and shipping information kept on file with Google. To lower prices to merchants beneath the competition and offer the service as an add on if the merchant advertises with Google. Google is actually going to take a loss on each transaction, but will receive increased revenue from advertising.

46. 14-46 Price Discrimination Is not always illegal Different rules in the B2B and B2C markets Federal law does not apply to sales to end consumers

47. 14-47 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Price Fixing Horizontal price fixing Vertical price fixing

48. 14-48 Test Your Knowledge According to a decision rendered by Justice Sandra Day O’Connor, vertical price fixing is _______________. A)clearly illegal B)legal when used in conjunction with horizontal price fixing C)not always illegal D)considered discriminatory under the Clayton Act

49. 14-49 © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Ethical Dilemma 14.1: Oh Yes, It’s Ladies’ Night…No More Ladies offered no cover and discounted drinks one night a week Coastline bar was sued for discrimination Discrimination or effective price strategy?

50. 14-50 Chapter 14 Glossary Advertising allowance: Tactic of offering a price reduction to channel members if they agree to feature the manufacturer’s product in their advertising and promotional efforts. Bait and switch: A deceptive practice of luring customers into the store with a very low advertised price on an item (the bait), only to aggressively pressure them into purchasing a higher-priced model (the switch) by disparaging the low-priced item, comparing it unfavorably with the higher-priced model, or professing an inadequate supply of the lower-priced item. Cumulative quantity discount: Pricing tactic that offers a discount based on the amount purchased over a specified period and usually involves several transactions; encourages resellers to maintain their current supplier because the cost to switch must include the loss of the discount. Deceptive reference prices: External reference price: A higher price to which the consumer can compare the selling price to evaluate the deal. Everyday low pricing (EDLP): A strategy companies use to emphasize the continuity of their retail prices at a level somewhere between the regular, nonsale price and the deep-discount sale prices their competitors may offer. High/low pricing: A pricing strategy that relies on the promotion of sales, during which prices are temporarily reduced to encourage purchases. Internal reference price: Price information stored in the consumer’s memory that the person uses to assess a current price offering-perhaps the last price he or she paid or what he or she expects to pay. Loss leader pricing: Loss leader pricing takes the tactic of leader pricing one step further by lowering the price below the store’s cost. Markdowns: Reductions retailers take on the initial selling price of the product or service.

51. 14-51 Chapter 14 Glossary (continued) © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Noncumulative quantity discount: Pricing tactic that offers a discount based on only the amount purchased in a single order; provides the buyer with an incentive to purchase more merchandise immediately. Premium pricing: A competitor-based pricing method by which the firm deliberately prices a product above the prices set for competing products to capture those consumers who always shop for the best or for whom price does not matter. Price penetration: A pricing strategy of setting the initial price low for the introduction of the new product or service, with the objective of building sales, market share, and profits quickly. Price skimming: A strategy of selling a new product or service at a high price that innovators and early adopters are willing to pay in order to obtain it; after the high-price market segment becomes saturated and sales begin to slow down, the firm generally lowers the price to capture (or skim) the next most price sensitive segment. Pricing strategy: A long-term approach to setting prices broadly in an integrative effort (across all the firm’s products) based on the five Cs (company objectives, costs, customers, competition, and channel members). Pricing tactics: Short-term methods, in contract to long-term pricing strategies, used to focus on company objectives, costs, customers, competition, or channel members; can be responses to competitive threats (e.g., lowering price temporarily to meet a competitor’s price reduction) or broadly accepted methods of calculating a final price for the customer that is short term in nature. Reference price: The price against which buyers compare the actual selling price of the product and that facilitates their evaluation process. Size discount: The most common implementation of a quantity discount at the consumer level; the larger the quantity bought, the less the cost per unit (e.g., per ounce). Slotting allowance: Fees firms pay to retailers simply to get new products into stores or to gain more or better shelf space for their products.