Chapter 9 - Pricing Product Decsion

Marketing Decision Making
BM032-3-3
Chapter 9
Pricing Product Decisions
LEARNING OUTCOME :
Factors to consider when setting the
prices
Pricing strategies over the PLC
General Pricing approaches
Pricing Strategies
New-Product pricing strategies
Product-Mix pricing strategies
Price Adjustment strategies
Price Changes
Module Code and Module Title Title of Slides
FACTORS TO CONSIDER WHEN
SETTING THE PRICES.

Pricing Decisions
What consumers give
Factors the firm must
up to purchase a
consider
product or service
Costs Price Variable

Time
Demand
Mental activity
Competition
Behavioral effort
Perceived value

Relating Price to Ads and
Promotion
Pricing Price must be consistent with perceptions
Considerations of the product
Higher prices communicate higher

product quality
Lower prices reflect bargain or value

perceptions
Price, advertising and distribution be

unified in
identifying product position
A product positioned as high quality while

carrying a lower price than competitors
will confuse customers
The Wheel of Consumer
Analysis: Pricing Strategy Issues
Module Code and Module Title Title of Slides 18-6

A Strategic Approach to Pricing

The Pivotal Role of Price In
Marketing Exchanges

Figure 16.1: Nine Price-Quality Strategies

Figure 16.2: Price Should Align with Value

Internal and External Factors
Affect Prices

Value-Based Pricing vs. Cost-Based Pricing

Internal Factors Affecting Pricing
Decisions
Company and Product Costs:

Fixed Costs:
Costs that do not vary with production or sales
level.
Variable Costs:
Costs that vary directly with the level of production.

Cost-Based Pricing Methods
Cost-plus pricing
Add a standard markup to the cost of the product
Break-even pricing
Pricing to break-even (Why?!)
Target-profit pricing
Pricing to meet a profit objective.
Formulas
Standard Markup
Break-even
Target Profit

Break-Even Chart for Determining Price

Internal Factors Affecting Pricing
Decisions
Marketing Mix Strategy:

Price must be coordinated with the other three
Ps (Product, Promotion and Place) to form a
consistent and effective marketing program.

External Factors Affecting Pricing
Decisions
The Market and Demand:

Costs set price floors; demand sets price
ceilings.
Supply and Demand Curves
Pricing in different types of markets:
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
Price elasticity of demand.
Cross price elasticity of demand.
External Factors Affecting Pricing
Decisions
Competitions Prices Affect Our Price
What are our competitors charging? How and Why?
Will our pricing attract, restrict, or drive out competitors?
How does our value compare to the competitions?
How strong/permanent are current competitors?
How does competition influence price sensitivity?
Avoiding price wars
Other External Factors

Economy
Inflation
Purchasing Power
Business Cycle (Boom, Recession, Depression)
Counter-cyclical products

Questions du Jour
Which products sell better in a lousy

economy?
Can companies ever raise prices in a

lousy economy?

PRICING STRATEGIES OVER
THE PLC

Setting the Price
Step 1: Selecting the pricing objective
Survival
Maximize current profits
Maximize their market share
Market-penetration pricing
Best when:
Market is highly price-sensitive, and a low price
stimulates market growth,
Production and distribution costs fall within
accumulated production experience, and
Low price discourages actual and potential
competition

Maytags homepage presents its
corporate family of brands

Setting the Price
Step 2: Determining Demand
Price sensitivity
Total Cost of Ownership (TCO)

Setting the Price
Tom Nagle offers this list of factors associated
with lower price sensitivity
The product is more distinctive
Buyers are less aware of substitutes
Buyers cannot easily compare the quality of substitutes
The expenditure is a smaller part of the buyers total income
The expenditure is small compared to the total cost of the end
product
Part of the cost is borne by another party
The product is used in conjunction with assets previously bought
The product is assumed to have more quality, prestige, or
exclusiveness
Buyers cannot store the product

Setting the Price
Estimating Demand Curves
Price Elasticity of Demand
Inelastic
Elastic
Price indifference band

Setting the Price
Step 3: Estimating Cost

Types of Cost and Levels of Production
Fixed costs (overhead)
Variable cost
Total cost
Average cost
Accumulated Production
Experience curve (Learning curve)

Setting the Price
Differentiated Marketing Offers
Activity-based cost (ABC) accounting
Target costing
Step 4: Analyzing Competitors
Cost, Prices, and Offers

Setting the Price
Step 5: Selecting a Pricing Method
Markup Pricing
Unit Cost =
variable cost + (fixed cost/unit sales)
Markup price
Markup price=
unit cost/ (1 desired return on sales)
Target-Return Pricing
Target-return price =
unit cost + (desired return X investment capital)/unit sales

Setting the Price
Break-even volume
Break-even volume = fixed cost / (price variable cost)
Perceived-Value Pricing
Perceived value
Price buyers Figure 16.8: Break-Even Chart for
Determining Target-Return Price and
Value buyers Break-Even Volume
Loyal buyers
Value-in-use price

Setting the Price
Value Pricing
Everyday low pricing (EDLP)
High-low pricing
Going-Rate Pricing
Auction-Type Pricing
English auctions (ascending bids)
Dutch auctions (descending bids)
Sealed-bid auctions
Group Pricing

Table 16.1: Effect of Different Bids
on Expected Profit
Probability
of Getting
Companys Companys Award with
Bid Profit This Bid Expected
(Assumed) Profit
$ 9,500 $ 100 0.81 $ 81
10,000 600 0.36 216
10,500 1,100 0.09 99
11,000 1,600 0.01 16

Setting the Price
Step 6: Selecting the Final Price
Psychological Pricing
Reference price
Gain-and-Risk-Sharing Pricing
Influence of the Other Marketing Elements
Brands with average relative quality but high relative
advertising budgets charged premium prices
Brands with high relative quality and high relative
advertising budgets obtained the highest prices
The positive relationship between high advertising
budgets and high prices held most strongly in the
later stages of the product life cycle for market
leaders

GENERAL PRICING
APPROACHES

Setting the Price
Brands with average relative quality but high relative
advertising budgets charged premium prices
Brands with high relative quality and high relative
advertising budgets obtained the highest prices
The positive relationship between high advertising
budgets and high prices held most strongly in the
later stages of the product life cycle for market
leaders
Company Pricing Policies
Impact of Price on Other Parties

PRICING STRATEGIES

Adapting the Price
Geographical Pricing (Cash,

Countertrade, Barter)
Countertrade
Barter
Compensation deal
Buyback arrangement
Offset
Price Discounts and Allowances

Table 16.2: Price Discounts and Allowances
Cash Discount: A price reduction to buyers who pay bills
promptly. A typical example is 2/10, net 30,
which means that payment is due within 30
days and that the buyer can deduct 2
percent by paying the bill within 10 days.
Quantity Discount: A price reduction to those who buy large
volumes. A typical example is $10 per unit
for less than 100 units; $9 per unit for 100 or
more units. Quantity discounts must be
offered equally to all customers and must
not exceed the cost savings to the seller.
They can be offered on each order placed or
on the number of units ordered over a given
period.
See text for complete table

Adapting the Price
Promotional Pricing
Loss-leader pricing
Special-event pricing
Cash rebates
Low-interest financing
Longer payment terms
Warranties and service contracts
Psychological discounting

Adapting the Price
Discriminatory Pricing
Customer segment pricing
Product-form pricing
Image pricing
Channel pricing
Location pricing
Time pricing
Yield pricing

NEW-PRODUCT PRICING
STRATEGIES

Promotional Strategy: Push or
Pull?
Push Policy Pull Policy
Producer Producer
Wholesaler Wholesaler
Retailer Retailer
Consumer Consumer
Information Flow
Adapting the Price
Product-mix pricing
Product-Line Pricing
Optional-Feature Pricing
Captive-Product Pricing
Captive products
Two-Part Pricing
By-Product Pricing
Product-Bundling Pricing
Pure bundling
Mixed bundling

Initiating and Responding to Price
Changes
Initiating Price Cuts

Drive to dominate the market
through lower costs
Low quality trap
Fragile-market-share trap
Shallow-pockets trap

New-Product Pricing Strategies
Market Skimming
Initially set a high Best used when:

price for a new
product so as to
Higher quality /
skim revenues layer premium product.
by layer from the Lower Fixed Cost
market. structure.
Lower prices over Competitors with similar
time, skimming quality cannot easily
revenue from undercut price.
different demand
tiers.
Initially make fewer,
but more profitable
sales.
New-Product Pricing Strategies
Penetration Strategy
Set a low initial price Best used when:

so the brand to Market is highly price
penetrates the sensitive.
market quickly. High fixed cost
Eventually raise structure.
prices when wide Need to keep
adoption and brand competition out or
loyalty have been effects are only
achieved. temporary.

Which pricing strategy (skimming
or penetration) is normally used
when a new prescription drug is
introduced in the U.S.?
Why?

PRODUCT-MIX PRICING
STRATEGIES

Table 16.3: Marketing-Mix Alternatives
Strategic Options Reasoning Consequences
1. Maintain price and Firm has higher Smaller market share.
perceived quality. customer loyalty. It is Lowered profitability.
Engage in selective willing to lose poorer
customer pruning. customers to
competitors.
2. Raise price and Raise price to cover Smaller market share.
perceived quality. rising costs. Improve Maintained
quality to justify higher profitability.
prices.
3. Maintain price and It is cheaper to Smaller market share.
raise perceived maintain price and Short-term decline in
quality. raise perceived quality. profitability. Long-term
increase in
profitability.

Product Mix Pricing Strategies
Product line pricing

Optional-product
pricing
Captive-product
pricing
By-product pricing
Product bundle
pricing

Product Line Pricing
Sets price steps

between various
product line items
based on:
Cost differences
between products
Customer demand for
additional/different
features
Price-Value Gradients
Optional-Product Pricing
Definition:
Pricing optional or accessory products sold
with the main product
Examples:
Cruise control added to basic car.
Computer sold with additional RAM (memory)
Rental car sold with luxury or size upgrade
Often abused in Bait and Switch tactics

Captive-Product Pricing
Definition:
Pricing products that must be used with the
main product
Base product is relatively cheap or free
Replacement product is relatively expensive
Examples:
Replacement cartridges for Gillette razors.
Toner/ink for HP printers.
Replacement car parts sold at car dealers

Product Bundle Pricing
Definition:
Multiple products sold together for one price
Creates perception of savings
Eases decision-making and ordering for
consumers
Examples:
Computer package: PC, monitor, software, and printer.
McDonalds Value Meal: Burger, Fries and Drink
Vacation package: Flight, hotel and meals

Question du Jour
When are companies better off bundling

prices?
When are companies better off charging

separate prices for each item?

PRICE ADJUSTMENT
STRATEGIES

Assessing and Responding to
Competitor Price Changes

Public Policy Issues in Pricing

Price Adjustment Strategies
Discount and allowance pricing

Price discrimination (Segmented pricing)
Psychological pricing
Promotional pricing
Dynamic pricing

Price Discrimination
(Segmented Pricing)
Definition:
Selling a product or service for
different prices to different
people, where differences in
price are not driven by different
costs.
Types: Pricing at Disney World

1. First Degree by person hotels varies by time of year.
2. Second Degree self-selection
(menus)
3. Third Degree by market

Psychological Pricing
Considers the psychological effects of

prices usually irrational responses.
Economic consideration of prices
diminished.
Standard practice among most retailers

Even-Odd Pricing
Why do marketers use the following

prices?

Price as Signal of Quality
The typical Price-Quality Inference
Effects of price changes on quality

inferences
When pricing is NOT used as a quality

signal
Extensive product knowledge/expertise
Repeat buys
Reference Prices
What is a fair price for gas?

Possible Consumer Reference Prices
Fair Price Expected future price

Average Price Usual discounted
Typical price price
Last price paid Phantom prices
Upper-bound price
Lower-bound price
Competitor prices

Promotional Pricing
Deals, Clearance Sales and 0% Financing
Promotional pricing creates

excitement and a sense of urgency.
Dynamic Pricing
Adjusting prices continually to

meet the characteristics and
needs of continuously changing
supply and demand.

Initiating Price Changes
Price cuts
Falling sales or market share demand issues
Grab market share from competitors
Lower production/service costs
Respond to competitors price drop
Consumers have less purchasing power
Price Increases
Cost inflation
Over-demand
Match competitors increase
Market leadership
Time

PRICE CHANGES

Initiating and Responding to Price Changes
Table 16.4: Profits Before and After a Price Increase
Before After
Price $ 10 $10.10 (a 1 percent price increase)
Units sold 100 100
Revenue $1000 $1010
Costs -970 -970
Profit $ 30 $ 40 (a 33 1/3 percent profit

increase)

Changes
Initiating Price Increases
Cost inflation
Anticipatory pricing
Overdemand
Delayed quotation pricing
Escalator clauses
Unbundling
Reduction of discounts

Changes
Possible responses to higher costs or overhead
without raising prices include:
Shrinking the amount of product instead of raising the price
Substituting less expensive materials or ingredients
Reducing or removing product features
Removing or reducing product services, such as
installation or free delivery
Using less expensive packaging material or larger package
sizes
Reducing the number of sizes and models offered
Creating new economy brands

Changes
Reactions to Price Changes
Customer Reactions
Competitor Reactions
Responding to Competitors Price
Changes
Maintain price
Maintain price and add value
Reduce price
Increase price and improve quality
Launch a low-price fighter line
Introduction to Pricing Issues
Basic concepts
Target costing
Price escalation
Environmental issues
Gray market goods
Dumping
Price fixing
Transfer pricing
Countertrade
11-73
How to Set Price
The global manager must develop

systems and policies that address
Price floor: minimum price
Price ceiling: maximum price
Optimum prices: function of demand
Must be consistent with global
opportunities and constraints
11-74
Basic Pricing Concepts
Law of One Price would prevail in a truly

global market
International trade helps keep prices low and
low prices keep inflation in check
Global markets exist for certain products
integrated circuits, crude oil
National markets reflect costs, regulation,
demand, competitionbeer
11-75
Global Pricing Objectives and
Strategies
Managers must determine the objectives for the
pricing objectives
Unit sales
Market share
Return on investment
They must then develop strategies to achieve
those objectives
Penetration pricing
Market skimming
11-76
Market Skimming and Financial
Objectives
Market skimming
Charging a premium
price
May occur at the
introduction stage of
product life cycle
11-77
Penetration Pricing and
Non-financial Objectives
Penetration pricing
Charging a low price
in order to penetrate
market quickly
Appropriate to
saturate market prior
to imitation by
competitors
1979 Sony Walkman 11-78

Companion Products
Products whose sale is
dependent upon the
sale of primary product
Video games are
dependent upon the sale
of the game console
If you make money on
the blades, you can give
away the razors.
X-Box Game System and Sports Game

11-79
The Target-Costing Process
11-80
Target Costing
Cost-based pricing is based on an

analysis of internal and external cost
Firms using western cost accounting
principles use the full absorption cost
method
Per-unit product costs are the sum of all
past or current direct and indirect
manufacturing and overhead costs
11-81
Target Costing
Rigid cost-plus pricing means that

companies set prices without regard to
the eight foundational pricing
considerations
Flexible cost-plus pricing ensures that
prices are competitive in the contest of
the particular market environment
11-82
Terms of the Sale
Obtain export license if required

Obtain currency permit
Pack goods for export
Transport goods to place of departure
Prepare a land bill of lading
Complete necessary customs export papers
Prepare customs or consular invoices
Arrange for ocean freight and preparation
Obtain marine insurance and certificate of the policy
11-83
Terms of the Sale
Incoterms
Ex-worksseller places goods at the disposal of the
buyer at the time specified in the contract; buyer takes
delivery at the premises of the seller and bears all
risks and expenses from that point on.
Delivery duty paidseller agrees to deliver the goods
to the buyer at the place he or she names in the
country of import with all costs, including duties, paid.
11-84
Incoterms
FAS (free alongside ship) named port of
destinationseller places goods alongside the vessel
or other mode of transport and pays all charges up to
that point
FOB (free on board)sellers responsibility does not
end until goods have actually been placed aboard
ship
CIF (cost, insurance, freight) named port of
destinationrisk of loss or damage of goods is
transferred to buyer once goods have passed the
ships rail
CFR (cost and freight)seller is not responsible at
any point outside of factory
11-85
Environmental Influences on
Pricing Decisions
Currency fluctuations
Inflationary environment
Government controls, subsidies,
regulations
Competitive behavior
Sourcing
11-86
U.S. Dollar versus Japanese Yen
January 2000 January 2002 December 2007

$1 = 101 $1 = 130 $1 = 113
11-87
Currency Fluctuations
11-88
Inflationary Environment
Defined as a persistent upward change in

price levels
Can be caused by an increase in the money
supply
Can be caused by currency devaluation
Essential requirement for pricing is the
maintenance of operating margins
11-89
Government Controls,
Subsidies, and Regulations
The types of policies and regulations that
affect pricing decisions are
Dumping legislation
Resale price maintenance legislation
Price ceilings
General reviews of price levels
11-90
Competitive Behavior
If competitors do not adjust their prices in

response to rising costs, it is difficult to
adjust your pricing to maintain operating
margins.
If competitors are manufacturing or
sourcing in a lower-cost country, it may be
necessary to cut prices to stay
competitive.
11-91
Using Sourcing as a Strategic
Pricing Tool
Marketers of domestically manufactured finished
products may move to offshore sourcing of
certain components to keep costs down and
prices competitive.
China is the worlds workshop.
Rationalize the distribution systemToys R Us
bypasses traditional intermediaries in Japan to
operate U.S.-style warehouse stores.
11-92
Global Pricing: Three Policy
Alternatives
Extension or ethnocentric
Adaptation or polycentric
Geocentric
11-93
Extension
Ethnocentric
Per-unit price of an item is the same no
matter where in the world the buyer is
located
Importer must absorb freight and import
duties
Fails to respond to each national market
11-94
Extension Pricing
In the past, Mercedes vehicles would be priced for

the European market, and that price was translated
into U.S. dollars. Surprise, surprise: youre 20
percent more expensive than the Lexus LS 400,
and you dont sell too many cars.
Joe Eberhardt, Chrysler Group Executive Vice
President for Global Sales, Marketing, and Service
11-95
Adaptation
Polycentric
Permits affiliate managers or independent
distributors to establish price as they feel
is most desirable in their circumstances
Sensitive to market conditions but creates
potential for gray marketing
11-96
Geocentric
Intermediate course of action

Recognizes that several factors are
relevant to pricing decision
Local costs
Income levels
Competition
Local marketing strategy
11-97
Gray Market Goods
Trademarked products are exported from one

country to another where they are sold by
unauthorized persons or organizations.
Occurs when product is in short supply, when
producers use skimming strategies in some
markets, and when goods are subject to
substantial markups
11-98
Gray Market Issues
Dilution of exclusivity
Free riding
Damage to channel relationships
Undermining segmented pricing schemes
Reputation and legal liability
11-99
Dumping
Sale of an imported product at a price lower than

that normally charged in a domestic market or
country of origin
Occurs when imports sold in the U.S. market are
priced at either levels that represent less than
the cost of production plus an 8% profit margin
or at levels below those prevailing in the
producing countries
To prove, both price discrimination and injury
must be shown
11-100
Price Fixing
Representatives of two or more companies
secretly set similar prices for their products
Illegal act because it is anticompetitive
Horizontal price fixing occurs when
competitors within an industry that make and
market the same product conspire to keep
prices high
Vertical price fixing occurs when a
manufacturer conspires with
wholesalers/retailers to ensure certain retail
prices are maintained
11-101
Transfer Pricing
Pricing of goods, services, and intangible

property bought and sold by operating units or
divisions of a company doing business with an
affiliate in another jurisdiction
Intra-corporate exchanges
Cost-based transfer pricing
Market-based transfer pricing
Negotiated transfer pricing
11-102
Countertrade
Countertrade occurs when payment is made
in some form other than money
Options
Barter
Counterpurchase or parallel trading
Offset
Compensation trading or buyback
Switch trading
11-103
Barter
The least complex and oldest form of

bilateral, non-monetary counter-trade
A direct exchange of goods or services
between two parties
11-104
QUESTIONS

Chapter 9 - Pricing Product Decsion

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 9 - Pricing Product Decsion

Uploaded by

Copyright:

Available Formats

Marketing Decision Making

Module Code and Module Title Title of Slides

Costs Price Variable

Module Code and Module Title Title of Slides

Higher prices communicate higher

Lower prices reflect bargain or value

Price, advertising and distribution be

A product positioned as high quality while

Module Code and Module Title Title of Slides 18-6

Module Code and Module Title Title of Slides 18-7

Module Code and Module Title Title of Slides 18-8

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Company and Product Costs:

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Marketing Mix Strategy:

Module Code and Module Title Title of Slides

The Market and Demand:

Other External Factors

Module Code and Module Title Title of Slides

Which products sell better in a lousy

Can companies ever raise prices in a

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Step 3: Estimating Cost

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Geographical Pricing (Cash,

Module Code and Module Title Title of Slides

See text for complete table

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Initiating Price Cuts

Module Code and Module Title Title of Slides

Initially set a high Best used when:

Set a low initial price Best used when:

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides

Product line pricing

Module Code and Module Title Title of Slides

Sets price steps

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides