Pricing Strategy

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MARKETING STRATEGYO.C. FERRELL MICHAEL D.
HARTLINE
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Pricing Strategy
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The Role of Pricing inMarketing Strategy (1 of 2)

• The Sellers Perspective on Pricing
• Four key issues
• (1) Costs
• (2) Demand
• (3) Customer value
• (4) Competitors prices
• The Buyers Perspective on Pricing
• Two key issues
• (1) Perceived value
• (2) Price sensitivity

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The Role of Pricing inMarketing Strategy (2 of 2)

• A Shift in the Balance of Power
• Buyers market
• Large number of sellers in the market
• Many substitutes for the product
• Economy is weak
• Sellers market
• Products are in short supply
• High demand
• Economy is strong
• The Relationship Between Price and Revenue
• Myth 1 When business is good, a price cut will
  increase market share.
• Myth 2 When business is bad, a price cut will
• stimulate sales.

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Major Determinants ofPricing Strategy

• Pricing Objectives
• Supply and Demand
• The Firms Cost Structure
• Competition and Industry Structure
• Four basic competitive market structures
• Pure Competition
• Monopolistic Competition
• Oligopoly
• Monopoly
• Stage of the Product Life Cycle
• Other Elements of the Marketing Mix

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Regulated Utilities as Monopolies
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Description of Common Pricing Objectives
Exhibit 8.1
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Pricing Strategy Over theProduct Life Cycle
Exhibit 8.2
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Price Elasticity of Demand (1 of 2)

• Formula for calculating price elasticity
• Situations That Increase Price Sensitivity
• Availability of product substitutes
• Higher total expenditure
• Noticeable differences
• Easy price comparison

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Price Elasticity of Demand
Exhibit 8.3
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Price Elasticity of Demand (2 of 2)

• Situations That Decrease Price Sensitivity
• Real or perceived necessities
• Lack of product substitutes
• Complementary products
• Product differentiation
• Perceived product benefits
• Situational influences
• Price Elasticity and Yield Management
• Allows simultaneous control of capacity and
  demand
• Control capacity by limiting available capacity
  at certain price points
• Control demand through price changes and
  overbooking capacity

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Yield Management fora Hypothetical Model
Exhibit 8.4
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Discussion Question

• Discuss the variety of situational factors that
  could come into play and impact elasticity in the
  purchase of each of the following products a)
  sporting event or concert tickets, b) staple
  goods such as milk, eggs, or bread, c) an
  electric razor, d) eye surgery to improve vision.

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Pricing Strategies (1 of 2)

• Base Pricing Strategies
• Price Skimming
• Penetration Pricing
• Prestige Pricing
• Value-Based Pricing (EDLP)
• Competitive Matching
• Non-Price Strategies
• Adjusting Prices in Consumer Markets
• Promotional Discounting
• Reference Pricing
• Odd-Even Pricing
• Price Bundling

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Marketing Strategy in Action

• Chryslers price skimming strategy for the
  Pacifica model has not been successful in
  attracting customers. Why do you think the
  40,000 price tag has not been successful for the
  Pacifica? What do you think Chrysler should do
  in rethinking its pricing strategy for this model?

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Price Bundling
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Pricing Strategies (2 of 2)

• Adjusting Prices in Business Markets
• Pricing techniques unique to business markets
• Trade discounts
• Discounts and allowances
• Geographic pricing
• Transfer pricing
• Barter and countertrade
• Price discrimination

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Fixed vs. Negotiated Pricing

• Three pricing levels in a negotiated price
  situation
• (1) Opening position
• (2) Aspiration price
• (3) Limit
• Guidelines for making concessions
• Avoid being the first side to make a concession
• Start with modest concessions and make them
  smaller as you proceed
• Avoid making concessions early in the negotiation
• Do not give up anything without something in
  return

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Discussion Question

• If you were trying to sell your used car through
  the newspaper, what factors would determine how
  you might set your opening position, your
  aspiration price, and your limit during the
  negotiation process?

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Major Online Auction Strategies
Exhibit 8.5
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Legal and Ethical Issues in Pricing

• Price Discrimination
• Price Fixing
• Predatory Pricing
• Deceptive Pricing

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Discussion Question

• One of the key decisions that managers often make
  is to change prices that have been set
  inappropriately. What issues should be
  considered in deciding whether it is the price
  that is wrong, or whether the problem lies in
  another element of the marketing mix?

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Role of Pricing

• Segments markets
• Defines products
• Creates customer incentives
• Sends signals to competitors
• Determines success or failure

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• To enter crowded field, use penetration strategy
• E.g. Sears Discover card with its low price no
  membership fee

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How to Set Price

• Establish marketing objectives
• Survival, maximum current profit, maximum current
  revenue, maximum sales growth, maximum market
  skimming or product-quality leadership
• Determine the elasticity of demand
• More inelastic the demand, the higher the company
  can set the price

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How to Set Price

• 1. Establish marketing objectives
• Determine the elasticity of demand
• Estimate the costs depending on production level,
  marketing strategies, etc.
• Examine competitors prices as basis for
  positioning it own price
• Select pricing method
• Markup
• Target return
• Perceived-value
• Value
• Going-rate
• Sealed-bid
• 6. Determine final price

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Setting Final Price

• Conforms to company pricing policies
• OK with distributors and dealers
• In sync with sales force, competitors, suppliers,
  and government

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Adapting the Price(To various conditions in
Marketplace)

• Geographical Conditions
• Price Discounts Allowances
• Cash discounts, quantity discounts, trade
  discounts, seasonal discounts, allowances,
  trade-ins
• Promotional Pricing
• Loss-leader - to stimulate traffic
• Special event pricing to draw customers
• Cash rebates to encourage purchase within a
  specified time period
• Low-interest financing to facilitate purchase
• Longer payment terms for lower monthly payments
• Warranties and service contracts added value
• Psychological discounting set an artificially
  high initial price

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Adapting the Price

• Discriminatory Pricing
• Product-line pricing
• Optional feature pricing
• Captive product pricing main products that
  require ancillary products
• Two-part pricing fixed fee plus variable fee
  based on usage

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Adapting the Price

• Discriminatory Pricing
• Customer segment pricing different prices for
  different groups
• Product-form pricing different versions priced
  differently
• Image pricing
• Location pricing- same product priced differently
  at different locations
• Time Pricing same product priced differently at
  different locations

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Pricing DecisionsSummary

• Consider Costs break-even analysis
• Demand - elasticity
• Competition

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Pricing Objectives

• Survival short term used to combat
  overcapacity, intense competition or changing
  consumer wants
• Maximum current profit set prices to obtain
  highest profit, cash flow or return on investment
  given demand and costs may encounter competitive
  or legal reaction
• Maximum market share (market penetration)
  higher sales volume will lead to lower unit costs
• Market highly price sensitive
• Production distribution costs fall with
  accumulated production experience
• Low price discourages competition

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Pricing Objectives

• Maximum market skimming set prices high to skim
  the market
• Sufficient number of buyers have a high current
  demand
• Unit costs of producing a small volume are not so
  high that they cancel advantage charging what
  traffic will bear
• High initial price does not attract more
  competitors to the market
• High price communicates image of a superior
  product
• Product-quality leadership Offer top quality,
  innovation at premium prices

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Price less elastic or inelastic if

• There are few or no substitutes or competitors
• Buyers do not readily notice the higher price
• Buyers are slow to change their buying habits
  search for lower prices
• Buyers think the higher prices are justifies by
  quality differences

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Will price discrimination work?

• Market segmentable with different intensities of
  demand?
• Can members in lower price segment resell product
  to higher price segment?
• Can competitors undersell firm in the
  higher-price segment?
• Does the cost of segment the market exceed the
  extra revenue derived from price
  discrimination???
• Does the practice breed customer resentment?
• Is form of price discrimination legal (selling
  below cost)??