Chapter Nine
Roadmap:
Previewing the Concepts
1. Discuss the importance of understanding
customer value perceptions and company costs when setting prices.
2. Identify and define the other important internal and external factors affecting a firm’s pricing decisions.
3. Describe the major strategies for pricing imitative and new products.
4. Explain how companies find a set of prices that maximizes the profits from the total product mix.
5. Discuss how companies adjust their prices to take into account different types of customers and situations.
The Past
1970s: Toys ‘R’ Us
emerges as a toy retailing category killer, offering
greater product selection and lower prices than its small store competition.
Explosive growth occurs. Late 1990s: Wal-Mart
uses toys as a loss
leader, pricing lower than Toys ‘R’ Us and becomes
Toys ‘R’ Us – Pricing for Success
Toys ‘R’ Us – Pricing for Success
Case Study
Case Study
The Present
Toys ‘R’ Us tries price
matching and fails
miserably, losing sales, profit, and market share.
New ownership closes
stores, cut costs, and steps away from the price war.
Efforts focus on top-selling,
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
Major Considerations in
Setting Price
Customer perceptions of value
Other internal and external
considerations
– Marketing strategy, objectives, mix – Nature of the market and demand – Competitors’ strategies and prices
Customer Value Perceptions
Customer-oriented pricing:
– Involves understanding how much value consumers place on the benefits they
receive from the product and setting a price that captures that value.
Value-based pricing:
– Uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing.
• Good value pricing
Internal Factors Affecting
Pricing Decisions
Company and Product Costs:
– Fixed Costs:
• Costs that do not vary with production or sales level.
– Variable Costs:
Cost-Based Pricing
Cost-plus pricing
– Adding a standard markup to the cost of the product
Internal Factors Affecting
Pricing Decisions
Marketing Objectives:
– Company must decide on its strategy for the product.
– General pricing objectives:
• Survival
• Current profit maximization • Market share leadership
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:
Internal Factors Affecting
Pricing Decisions
Organizational Considerations:
– Must decide who within the organization should set prices.
External Factors Affecting
Pricing Decisions
The Market and Demand:
– Costs set the lower limit of prices while the market and demand set the upper limit.
– Pricing in different types of markets:
• Pure competition
• Monopolistic competition
• Oligopolistic competition
• Pure monopoly
External Factors Affecting
Pricing Decisions
Competitors’ Strategies and Prices
– How does the market offering compare? – How strong is competition and what is
their pricing strategy?
– How does competition influence price sensitivity?
New-Product Pricing Strategies
When to Use:
– Product’s quality and image must support its higher price.
– Costs of low volume cannot be so high they cancel the advantage of charging more.
– Competitors should not be able to enter market easily and
Market Skimming:
– Set a high price for a new product to
“skim” revenues layer by layer from the market.
New-Product Pricing Strategies
When to Use:
– Market is highly price sensitive so a low
price produces more growth.
– Costs must fall as sales volume
increases.
– Need to keep
competition out or effects are only
Market Penetration:
– Set a low initial price in order to
“penetrate” the
market quickly and deeply.
Product Mix Pricing Strategies
Product line pricing
Optional-product pricing
Captive-product pricing
By-product pricing
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
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
By-Product and Product
Bundle Pricing Strategies
By-Product Pricing
– Pricing low-value by-products to get rid of them (e.g., animal manure from zoo).
Product Bundle Pricing
Price Adjustment Strategies
Discount and allowance pricing
Segmented pricing
Psychological pricing
Promotional pricing
Geographical pricing
Dynamic pricing
Discounts and Allowances
Discounts
– Cash
– Quantity – Functional – Seasonal
Allowances
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:
1. Customer-segment 2. Product-form
Psychological Pricing
Considers the psychology of prices
and not simply the economics.
Consumers usually perceive
higher-priced products as having higher
quality.
Promotional Pricing
Cash Rebates
Special-Event
Pricing
Loss Leaders
Low-Interest
Financing
Longer
Warranties
Geographical Pricing
FOB-origin pricing
Uniform-delivered pricing
Zone pricing
Basing-point pricing
Dynamic Pricing
Adjusting prices continually to meet
the characteristics and needs of
International Pricing
Price depends on many factors,
including:
– Economic conditions – Competitive situations – Laws and regulations
– Development of the wholesaling and retailing system
Initiating Price Changes
Price Cuts:
– Excess capacity
– Falling market share
– Dominate market through lower costs
Price Increases:
Responses to Price Changes
Buyer reactions to price changes
Competitor reactions to price changes
Firm responses to price changes:
– Reduce price to match competition
– Raise the perceived quality of its offer – Improve quality and increase price
Public Policy and Pricing
Price fixing
Predatory pricing
Price discrimination
Retail price maintenance
Deceptive pricing
– Promotion price reductions – Scanner fraud
Rest Stop: Reviewing the Concepts
1. Discuss the importance of understanding
customer value perceptions and company costs when setting prices.
2. Identify and define the other important internal and external factors affecting a firm’s pricing decisions.
3. Describe the major strategies for pricing imitative and new products.
4. Explain how companies find a set of prices that maximizes the profits from the total product mix.
