Chapter 10- Price

Saturday, September 29, 2018 12:24 PM

Audio 1

Audio recording started: 3:08 PM Tuesday, October 16, 2018

LO1 Pricing Objectives

Consumers' evaluative criteria

• The individual attributes or elements of a prod

consumers use in decision making.
• Two that are used across almost all decision:
○ Quality
○ Price
§ We've talked about product quality, but w

Price

• Includes, money, goods, services, favors, votes

value to the seller and is given to the seller
○ Contrast to cost:
○ Time, opportunity costs, effort, social risk
be consciously taken into account when evalu
 Terms
Mark-up:
Gross Margin
List Price

What to study:

duct or decision that

what is price?

s, or anything that has

in the exchange.

k, etc. may (or may not be)

uating total cost of
• Includes, money, goods, services, favors, votes
value to the seller and is given to the seller
○ Contrast to cost:
○ Time, opportunity costs, effort, social risk
be consciously taken into account when evalu
product.
○ Buyer absorbs costs without benefit to the s

Price Planning
s, or anything that has
in the exchange.

k, etc. may (or may not be)

uating total cost of

seller.
Step 1: Pricing objectives
• Profit: Set price to reach a target market
• Share: Pricing based on higher quantities
• Competitors: Price to disadvantage competitor
• Satisfaction: Price to meet customers' expectat
• Image: Price (higher) to emphasize quality

The price is right

• To set the right price, marketers must understa

influence pricing strategy success.
tion

and many factors that

Consequences

• In 1978- Airlines deregulated. Can set prices,

competitors can enter market.
○ Price Wars Vs. Price Fixing
• 1982-1992- Price wars with 25% price drops; fue
Airlines lose $10 Billion (more than they earne
air travel).
○ Investment in infrastructure?

LO2 Pricing Decisions

Step 2: demand

• Demand is the costumers' desire for a product (

can fly any routes, new

el and labor cost increase.

ed since dawn on commercial

(and varies by price).

• Demand is the costumers' desire for a product (

Shifting Demand
• Typical demand curves assume only price changes
demand "upwards" or "downward.
• External factors, such as weather (think umbrel
golfing), competition, etc. can shift demand.
• Demand can also be shifted by better advertisin
Notice, in these cases price does not shift dem
really on the Y-axis.
• Similarly, a downward shift in demand can be ca
review, or environmental or social failures.
(and varies by price).

s. Other factors can shift

llas, movie tickets,

ng or product design.
mand, some other factor is

ause by product recalls, bad

• Similarly, a downward shift in demand can be ca
review, or environmental or social failures.

Elasticity

• Elasticity- the change in item sales (%) that r

price (%).
• Elastic demand, like a rubber band, changes in
• Inelastic demand, changes little compared to th
ause by product recalls, bad

results from a change in

relation to price changes.

he price changes.
§ Elasticity is rarely a straight line
Cross-Elasticity
• Substitutes: an increase in the price of one wi
other.
• Compliments: One product is essential for the u
in the price for one decreases demand for the o

Step 3: Determine cost

• Fixed Costs: Costs that do not vary with the nu

are fixed in the "long run".
○ For example, plant and equipment depreciatio
• Variable Costs: Per-unit costs of production th
many units are produced.
○ For example, material, piece-rate labor, com
ill increase demand for the

use of a second, an increase

other.

umber of units produced and

on, salaries, property tax.

hat changes depending on how

mmissions, freight.
• "Break-Even" point tells how many you have to s
profit.

Variable Cost

• The good news is that variable costs ofte

sell to begin making a

en go down as quantity
• The good news is that variable costs ofte
goes up.

Terms

• Markup- Amount above cost that is added to arri

○ Example: Cost= $0.60, markup is $0.40, price
• Gross Margin- Difference (amount bellow) price
profit (expressed as a percentage).
○ Example: price is $2.00, cost is $1.20. Gros
40%
§ Retailer Margin- Gross margin calculated
§ Wholesaler Margin- Gross Margin calculate
• List Price- Also MSRP (Manufacturer's Suggested
suggest value to the consumer or for "price mai
anchoring).

Step 4: Pricing environment

• The pricing environment looks at influences of

○ Economy- Consumer confidence (from hints of
market) can affect sales of goods, especiall
priced goods (e.g. pleasure boats, luxury it
○ Competition- How saturated the market will a
○ Regulation- Regulated markets have prices (o
state or federal agencies
○ Consumer trends/ demographics- Toward or awa
boomers retiring)
○ International environment- Pressures vary ac
en go down as quantity

ive at list price.

e is $1.00
that represents gross

ss margin= profit ÷ revenue=

at the retail level.

ed at the wholesale level.
d Retail Price), used to
intenance" strategies (used

demand, other than price.

inflation, recession, job
ly discretionary or high-
tems).
affect pricing abilities.
or price ranges) set by

ay from your product (e.g.

cross countries and cultures

 state or federal agencies
○ Consumer trends/ demographics- Toward or awa
boomers retiring)
○ International environment- Pressures vary ac

LO3 Pricing Strategies

Step 5: Pricing Strategy

• Profit: Set price to reach a target market

• Share: Pricing based on higher quantities
• Competitors: Price to disadvantage competitor
• Satisfaction: Price to meet customers' expectat
• Image: Price (higher) to emphasize quality

Pricing Strategies and tactics

Pricing Strategies Pricing Tactic

• Based on set cost plus
• Based on demand Target
costing yield management
• Based on the competition
price leadership
• Based on customers' needs
value (EDLP) pricing
• New product pricing
penetration pricing trial
pricing.
• Pricing for individua
products
• Two part pricing
• Payment pricing
• Pricing for multiple
• Price bundle
• Captive pricing
• Distribution-based pr
• Discounting for chann
members.

Cost-based Strategies
ay from your product (e.g.

cross countries and cultures

tion

cs
al

products

ricing
nel
 pricing. members.

Cost-based Strategies

• Cost-based pricing is very common

○ Easy to calculate
○ Relatively risk-free
• But is internal-facing and does not consider, f
target market or competitors.

Cost-based Commodity

• Cost-based strategies are often found when the

commodity, as there is little value that one ve
ring vs. another.
• Jewelers try and differentiate their commodity
creativity, scarcity, prestige to their product
This is why Tiffany's thinks they can sell thei
for … $1,000

Price-based strategies

• Demand-based- Firm bases Price on estimated vol

different prices in different markets.
• Target costing- Identifies needs with product a
product based on price. Example a bottle of win
• Yield Management- Prices to maximize perishable
movie theaters).

Competitive/customers-based Strategies

• Price leadership strategy- often used in oligop

dominant firm announces its new price, and comp
for example, nature of

product is closer to a
endor can bring to a diamond

(e.g. silver) by adding

t's (and charging for it.)
ir sterling silver "tin" can

lume it can sell. Often

attribute value and designs

ne that costs $200
e resources (e.g. airlines,

polistic industries when a

petitors get in line or drop
Competitive/customers-based Strategies

• Price leadership strategy- often used in oligop

dominant firm announces its new price, and comp
out, in order to minimize competition (e.g. air
• EDLP ("Value" or Every Day Low Pricing)- consid
competitor's price.
• Hybrid EDLP- EDLP for most products but also of
service or Specialty sections.

New Product strategies

• Absence of demand data makes it difficult to us

○ Skimming price- Pricing very high to capture
before competition moves into the market. (o
HD TVs)
○ Penetration Pricing- Opposite of skimming. L
○ Trial pricing- Offers low price for short-te
stated, i.e. "limited time") to capture mark

Pricing Tactics

• Pricing for individual product examples:

○ Two-part pricing- initiation fee plus monthl
night club cover charges + drinks/food)
○ Payment pricing- Split costs over time (QVC,
• Pricing for multiple product examples:
○ Price Bundling- Discount for buying multiple
meal, Comcast).
○ Captive pricing- Low price for fixed item, h
(razor, printer).

Price Segmentation

• Companies (legally) discriminate with pricing b

polistic industries when a
petitors get in line or drop
rlines)
ders costumer's view and

ffers added levels of

se previous strategies.
e as much profit as possible
often new technology e.g.,

Low prices to gain share.

erm (with clear increase
ket then maintain margins.

ly dues (country club,

, Apple, Amazon).

e types of items (value

higher for consumable

based on different value

Price Segmentation

• Companies (legally) discriminate with pricing b

that different groups get from the product. Thi
of modern segmentation.
○ Price Segmentation- charging different price
(e.g., 10% off for seniors, 1 for $9, 2 for
○ Peak or surge pricing- price varies by deman

An Example

• Costco charges a membership fee (Two-part prici

• They have 90.3 million members paying at least
• Earning Costco $5.4 billion at almost no cost.
• Amazon prime has about 65 million members earni

LO4 Internet Pricing

Online Pricing Tactics

• Online environment provides more pricing option

○ Dynamic Pricing- Based on individuals known
predicted pricing, etc.
○ Online auctions- Price is set by buyers
○ Freemium- Some minimal functionality is free
according to value (or previously discussed

LO5 Psychological, legal, and et

based on different value
is is, in fact, the origin

es to different groups
$15)
nd (Uber).

ing)
$60 a year

ing them $6.4 billion.

ns.
interest, time-based,

e and upgrades are priced

pricing strategy.)

thical
 ○ Freemium- Some minimal functionality is free
according to value (or previously discussed

LO5 Psychological, legal, and et

Pricing Psychology 1

• Buyers form expectations of what is fair or cus

• Customary price perceptions are influenced by:
○ Internal reference prices: A price range con
evaluating a product's price. Can be affecte
shopping, or set absent of any information.
○ Price-quality inferences: when consumers use
product quality.
§ Price too high= "bad deal"
§ Price too low= "bad Quality"

Pricing Psychology 2

• Odd-even-pricing: $9.99 instead of $10, more co

○ "odd" pricing may indicate "value" but not q
• Price lining: Similar to price bundling, but of
product to create a "line" separating, say, "go
• Prestige Pricing: Status conscious consumer mor
go up.
○ Original "edition" gold apple watch up to $1
$1,399.

Scarcity

• "If you want to sell something to an American,

have it" Mark Westrom.
e and upgrades are priced
pricing strategy.)

thical

stomary prices.

nsumers have in mind when

ed by anchoring, epistemic

e price as a cue to infer

ommon in the U.S.

quality
ften varies attributes of
ood," "better," "best."
re likely to buy as prices

17,000. Now, Hermès at

just tell him that he can't

Scarcity

• "If you want to sell something to an American,

have it" Mark Westrom.

Discounts

• Ron Johnson (Target, Apple) starts as JCPenney

○ Abolish "fake prices" that make markdowns mo
all prices will be lower (up to 40%) everyda
Pricing.
○ No coupons needed, no Black Friday lines.
○ Within 12 months JCP sales fell 32% and repo
million
○ Johnson want released and JCP has coupons ag

Legal/ Ethical issues 1

• Bait-and-Switch:
○ Bait: Advertise very low-priced items to lur
○ Switch: Arriving customers find product is o
more expensive items.
• Loss leader pricing: use very low prices (Somet
costumers into the store, making up the "loss"
products.
○ Is this a problem?
○ The issue is small retailers can't afford to

Legal/ Ethical issues 2

• Illegal price discrimination: firms sell produc
different prices in a way that "lessens competi
protected class.
• Price fixing: Competitors conspire to set price
 just tell him that he can't

CEO:
ore appealing, Johnson says
ay. "Fare and square"

orted a net loss of $985

gain.

re customer to store.
out-of-stock and are offered

times under cost) to get

through sale of other

o offer these low prices.

ct to channel members at
ition" Or charges more to a

es
Legal/ Ethical issues 2
• Illegal price discrimination: firms sell produc
different prices in a way that "lessens competi
protected class.
• Price fixing: Competitors conspire to set price
○ Horizontal- When retailers collude
○ Vertical- when a manufacture requires a reta
in MSRP)
• Predatory pricing: Firms set very low prices fo
out of business.
• Price Gouging: Overcharging for essential goods
• Deceptive Pricing: Hidden costs to the consumer
ct to channel members at
ition" Or charges more to a

es

ail price (note "suggested"

or purpose of driving rival

s during an emergency
r, fake discounts, etc.