Pricing Chapters 10 and 11

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PricingChapters 10 and 11

• Week 7, Bus 352X
• Margaret Cornish

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Creative Introduction PRICING STRATEGIE

• S. Liu, V. Ramlall, A. Farace, J. Gutcher and K.
  Gaskell

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June 14 Chapter 10Objectives

• Identify and define internal factors affecting a
  firms pricing decisions
• Identify and define external factors affecting
  pricing decisions incl impact of consumer
  perceptions of price and value
• Contrast 3 approaches to setting prices

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June 14 Chapter 11Objectives

• Describe strategies for pricing new products
  (both imitative and innovative)
• Describe method for maximizing profits from total
  product mix
• Discuss segmented pricing
• Discuss initiating and responding to price
  changes

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June 10 Mid-termBUS352 X Class Results
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Pricing ApproachesMost common mistakes

• Too cost-oriented
• Not revised to reflect changes in market
• Pricing inconsistent with marketing mix
• Pricing not varied enough across product line to
  reflect differences in products, market segments
  and purchase occasions

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Pricing Internal Factors

• Marketing objectives
• Marketing mix strategy
• Costs
• Organizational considerations

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Pricing Marketing Objectives

• Pricing strategy should flow from previous
  decisions on market positioning
• Additional objectives include survival, current
  profit maximization market-share leadership and
  product quality leadership
• More short-term pricing objectives incl
  preventing competition from entering market or
  stabilizing a market by matching competitor price

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Pricing Marketing ObjectivesNon-Profit and
public entities

• Partial cost recovery
• Full cost recovery or user pay system
• Social pricing is based on ability to pay

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Internal FactorsMarketing mix strategy

• The clearer the market positioning, the more
  straight forward the pricing decision
• Price is inherently the most flexible element of
  the marketing mix
• Some companies start with price and base other
  mix decisions on that price
• Target costing or design to price starts with
  the ideal price and works backward
• Pricing will have a strong impact on other 3 Ps
  quality, promotion and distribution

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Internal FactorsMarketing mix strategy

• Other firms seek to differentiate the product.
  They focus on non-price aspects of marketing mix
  i.e. quality, promotion and distribution and on
  augmented product.
• Decisions on these factors will strongly
  influence pricing
• Both approaches must recognize that consumer
  seeks best value in terms of benefits received
  for the price paid

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Internal FactorsCosts

• Costs determine the price floor. Over time, price
  must cover cost of producing, distributing,
  promoting and selling the product as well as cost
  of capital
• Fixed costs do not vary with output
• Variable costs do vary with output
• Total cost is sum of fixed and variable for a
  given level of output

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Internal FactorsExperience Curve Costs

• If costs per unit fall significantly as volumes
  rise this is called experience or learning curve
  effect
• This cost-volume relationship can be very
  dramatic
• To take advantage of this, market must growing
  fast enough or firm must increase its market
  share enough to absorb the added production
• Assumes competitors are weak or behind. Risks
  competitor finds lower cost technology or lower
  price reduces image in consumers mind

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Internal Factors OrganizationalWho sets prices?

• In small firm, often the CEO
• In most firms, top mgmt at least sets pricing
  objectives and policies
• Where individual sale is relatively large, top
  mgmt usually confirms prices proposed by sales
  force
• In industries where pricing is complex, firm may
  have pricing dept

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External Factors Affecting Price

• Nature of the market and demand
• Competition
• Other factors economy, resellers, governments

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External Factors Affecting PriceMarket and Demand

• Pure competition
• Monopolistic competition
• Oligopolistic competition
• Pure monopoly

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Market and DemandPure competition

• Many buyers and sellers
• Uniform commodity money,wheat, copper
• Pricing flexibility virtually nil
• Research, product devt, pricing, advert and
  sales promotion have little role
• At same time, vulnerable to new seller trying to
  change basis of competition by differentiated
  product or service

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Market and DemandMonopolistic competition

• Many buyers and sellers
• Differentiated product
• Pricing flexibility quite high
• Product devt, pricing, branding, advert and
  sales promotion may have big role

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Market and DemandOligopolistic competition

• Many buyers and few sellers high barriers to
  entry
• Sellers highly sensitive to competitor pricing
  and marketing
• Pricing flexibility low usually is a market
  leader
• Research, product devt, advert and sales
  promotion have little role

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Market and DemandPure monopoly

• Many buyers one seller huge barriers to entry
• Different types price differently govt,
  private- regulated, and private non-regulated
  monopoly
• Pricing flexibility high
• Research, product devt, and sales promotion may
  have minor role
• Other advertise to persuade public of benefits to
  avoid additional regulation/govt intervention

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Market and DemandConsumer Perceptions of Value

• Buyer oriented pricing depends on fully
  understanding how much value consumers place on
  the various benefits they receive from the
  product and then setting a price that fits that
  value
• This varies from consumer to consumer need to
  grasp the sum as well as the parts

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Price-Demand Relationship

• In all but prestige goods, price and demand are
  at least somewhat inversely related the higher
  the price the lower the demand.
• However, demand may range from elastic to
  inelastic. If demand changes sharply with a
  relatively small change in price, it is elastic
  if it doesnt change much, or at all, it is
  inelastic
• The more inelastic the more it pays to raise
  prices

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Price-Demand Relationship

• Sales of Fleischmanns gin increased when sales
  were raised 22 over a 2-yr period. Explain what
  this tells you about the demand curve and the
  elasticity of demand for Fleishchmanns gin.
  What does this suggest about using
  perceived-value pricing in marketing alcoholic
  beverages?

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Price-Demand RelationshipDiffers by type of
market

• Monopoly Curve reflects total demand at each
  price level
• Competitive market for a specific firm, curve
  depends on whether competitor(s) prices stay
  constant or rise
• In measuring price-demand relationship, must not
  let other factors affecting demand vary

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Competitors costs, prices and offers

• Need to establish relative costs of firm to each
  competitor in production, financing, promotion,
  distribution and after market service
• Pricing needs to be relative to consumers
  perception of relative qualtiy

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External Factors other

• Economic conditions boom, recession, inflation,
  stable rates etc
• Reaction of resellers to pricing
• Fair profit and support in selling will impact
  allocated shelf space
• Government/regulatory agencies
• Possible social concerns

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Cost-based pricingProduct not consumer driven

• Simplifies but ignores consumer, competitors and
  demand
• If all firms use it and all firms have similar
  costs, price competition is avoided
• More stable pricing
• Very vulnerable to competitor shifting basis of
  competition to price from non-price factors

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Breakeven Analysis Target profit pricing

• Breakeven Volume
• Fixed Cost/(Price-Variable Cost)
• Table 10-1 Analytic framework for Breakeven
  volume and profits at different prices

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Value-Based PricingConsumer not product-based

• Setting price based on buyers perception of
  value rather than on sellers cost
• Setting price based on right combination of
  quality and good service at a fair price

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Value-Based Pricing

• Price must be considered together with other
  marketing mix variables (product, promotion and
  place) before the marketing program is set
• Pricing begins with analyzing consumer needs and
  value perceptions
• Targeted price drives decisions about design and
  what costs can be incurred

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Value Pricing

• Consumer shift through 1990s toward value
  (combination of price and quality)
• Response
• redesigning existing brands to increase perceived
  value for the same price
• Introduction of less expensive, value line
• everyday low prices stabilize price
  variability from sales and discounts or hi-low
  pricing

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Value Pricing EDLPEconomic basis

• Stabilizes and hence increases predictability of
  demand for maker
• Eliminates need for resellers to buy on discounts
  and store to sell later
• Busy consumer doesnt need to wait for sales
• Consumer gets lower price all the time
• Restores credibility in everyday shelf prices

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Competition-based pricing

• Going rate pricing
• Focus on competitor price rather than own costs
  also constant rate difference
• Holding competitor price also avoids price wars
• Sealed bid pricing
• Firm bids above its costs and just below point
  where it believes next lowest bid will be
• Expected profit is an alternative method for
  companies who make many bids

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Procter Gamble

• P G replaced its 450 gram pkgs of regular
  Folgers coffee with 365 gram pkgs of
  fast-roasted. Fast roasted allows for use of few
  coffee beans per pack with impact on number of
  services per package or on flavor. Which pricing
  approach was most appropriate for fast roasted
  Folgers cost-based, buyer-based or competition-
  based pricing?

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Car Dealerships

• The sticker price is generally higher than the
  actual selling price of a car.
• How do car dealers actually set their prices?
• What is the approach of no haggle pricing?

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Life cycle and unit pricing

• Some products achieve low price by providing
  fewer servings per pkg, or requiring higher
  maintenance through use of lower quality inputs
  or a variety of other methods. How could a
  marketer make use of this information in pricing
  and promoting a competitive product?

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Break-even exercise

• You just inherited an automatic car wash where
  fixed costs are 50,000 and variable costs are
  0.50 per car washed. You think people would be
  willing to pay 1 to have their car washed.
  Determine what the break-even volume would be at
  that price.

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Financial Analysis

• Financial Analysis Borden Problem (1) and
  (2)
• Break into small groups of 4-5 people Answer
  questions assigned to your group. Write answers
  on transparencies.

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New Product Pricing Strategies

• Price-Quality strategies See Figure 11-1
• Premium higher quality price
• Good Value strategy - hi quality lower price
• Overcharging higher price lower quality
• Economy strategy lower price quality

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Pricing of innovative patent protected products

• Market skimming
• Set high initial price to skim revenues layer by
  layer from the market
• Right conditions include high quality image,
  costs cannot be so high they cancel out advantage
  of higher price clear competitive advantage
• Market penetration
• Set lower price in order to increase demand and
  gain dominant market share which is obstacle to
  potential entrants e.g. Dell, Home Depot

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Pricing of innovative patent protected products

• Market penetration
• Set lower price in order to increase demand and
  gain dominant market share which is obstacle to
  potential entrants e.g. Dell, Home Depot
• Needed conditions highly price sensitive market
  product ion and distribution costs must fall as
  volumes rise cost structure must be lower than
  competitors

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Pricing StrategiesMarket Skimming or
Penetration?

• McDonalds
• Intel
• Future Shop
• Bic Corp (pens, lighters)
• IBM

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Genetech Pharmaceutical

• Genetech developed a clot dissolving drug called
  TPA which will halt a heart attack in progress.
  Saves lives, minimizes hospital stays and reduces
  damage to heart. Initially priced at 3060 per
  done. What pricing approach is Genetech using.
  What pricing strategy might it adopt? Is demand
  likely to be elastic?

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June 14 Chapter 11Objectives

• Describe strategies for pricing new products
  (both imitative and innovative)
• Describe method for maximizing profits from total
  product mix
• Discuss segmented pricing
• Discuss initiating and responding to price
  changes

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Product-Mix Strategies

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

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Product Line Pricing

• Firms typically offer a product line rather than
  a single product or service
• Usually each successive item offers more feature
  or benefits (eg Kodak film different qualities
  from Funtime to Kodak Gold and each in different
  sizes, speeds and formats

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Product Line Pricing

• Seller must decide on price steps between the
  various products in a line
• If price between steps is high it will discourage
  trading up and converse if price step is small
• Seller must then establish the perceived quality
  differences to support price steps between
• In many cases, there are well established price
  points which will correspond in consumers minds
  with low, average and high quality

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Other product mix pricing strategies

• Optional pricing options and accessories is
  difficult. GMs stripped down models did not meet
  average drivers needs. Japanese competed by
  offering more items in base car which competitors
  sold as options. Had the effect of making
  competitor cars appear to offer less value

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Other product mix pricing strategies

• Captive products that must be used along with the
  main product (blades with a razor). Typical
  tactic is to price main item low and put higher
  margin on captive product which must be
  frequently replaced
• In services this is called two part pricing.
  Fixed price for regular service and variable
  usage rate ( Bell monthly fee for local usage
  plus variable fee for long distance).

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Other product mix pricing strategies

• By-product pricing
• Aggregates from blast furnace (road building)
• Zoo Doo animal manure for farms
• Add revenue and eliminate disposal costs
• Reduces costs of main product

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Price Adjustment Strategies (1)

• Cash discount improves sellers cash reduces
  bad debt
• Quantity discount inventive to customer to buy
  more from one seller sellers selling inventory
  and delivery costs are lower
• Functional (or trade) discount offered to trade
  channel member in recognition of service they
  perform most offer same discount to all members
  at same level in trade

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Price Adjustment Strategies (2)

• Seasonal discount off season discounts
  encourage advance buying by retailers out of
  season sales helps clear inventory balance
  production
• Allowances
• Trade-ins which can be refurbished and re-sold)
• Promotional allowances - price reductions to
  reward dealers for participating in advertising
  and sales-support programs (See pp 341-342 for
  major change implemented by P G in 1992-1993)

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Segmented Pricing

• Customer segment pricing
• By customer class (seniors, children) retail
  versus commercial
• Product form, features pricing
• Location pricing
• City centre vs suburb vs small town
• Time pricing
• Toll highways, utilities peak/off peak

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Segmented Pricing

• Offering the right product to the right customer
  at the right time for the right price
• Difference is rooted in differences in perceived
  value not in differences in cost to seller

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Segmented PricingConditions for effectiveness

• Segments must show different degrees of demand
• Segmented prices must reflect real differences in
  customers perceived value or practice will lead
  to ill-will
• Competitors wont be able to undersell in a given
  market
• Must be legal

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Segmented Pricing a.k.a. yield management

• Adv to Sellers
• Lower prices from discounts
• Have different needs
• Can choose which service/product to buy
• Reduce cost by buying off-peak

• Adv to Buyers
• Maximizes revenues from consumer perceived
  benefit
• Shift demand to better suit capacity
• Increase cash flow
• Lower distribution costs

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Psychological Pricing

• Psychological pricing considers the psychology of
  prices not merely the economics
• Price is an important quality signal where
  consumers cannot otherwise judge the quality by
  examining it or relying on past experience
• Reference prices prices that buyers carry in
  their minds and refer to when considering a given
  product. Sellers can influence reference price by
  stating a high manufacturers price

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Promotional Pricing

• Pricing below list and possibly below cost to
  increase sales in short term

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Geographical Pricing

• FOB-origin pricing
• Uniform delivered price (freight averaging)
• Zone pricing
• Basing point price
• Freight absorption or equalizing

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International Pricing

• Products can be sold for same price in all
  markets (when cost structure of buyer is global
  eg selling planes to airlines)
• More often prices differ from market to market to
  reflect local demand and costs considerations

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Initiating Price ChangesPrice Cuts Why make
them?

• Seller needs more revenue. Other avenues
  exhausted, i.e. greater sales effort, product
  improvement, etc
• Seller faces falling market share due to tougher
  competition consumer perceives competitor
  product to have greater value therefore seller
  must reduce price
• Seller seeks market dominance either starts with
  low costs or wants to lower cost via inc output.
  Low price-low cost strategy

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Initiating Price ChangesPrice Hikes Why ?

• Want more profit If net margin is 3 a 1 inc in
  price will increase profits by 33. If net margin
  is 6, a 3 price will increase profits 50.
• Seller faces cost inflation price usually rises
  by more than actual inflation temporary boost
  to profit. Must explain price increase to
  consumer
• Alternatives economize on inputs rightsize or
  shrink product unbundle product and price
  separately service previously included in offer
  

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Initiating Price Changes

• Anticipating reactions of both buyer and
  competitors

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Competitor Reaction to Price Chg

• Most likely to react when relatively few
  sellers, product is uniform, buyers are
  well-informed (ie an efficient market like
  gasoline)
• Price change may and will be interpreted in many
  ways. Is seller in financial trouble, is the
  seller trying to lead an industry wide price
  change? Also interpretations of various
  competitors may be different.
• Different reactions likely if competitors differ
  in size, markets share, and strategy. Typically
  if one matches price the others do as well.

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Responding to Price Changes

• Reduce price
• Raise perceived quality
• Improve quality and increase price
• Launch a fighting brand ( brand extension
  positioned against new competitor brand in price
  and quality).

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Mercedes and Porsche

• When dollar is weak, import prices rise and
  Mercedes and Porsche pricess rise with them. Yet
  the dollar strengthens, the prices for these cars
  are kept high yielding unusually large profits.
  Should Mercedes and Porsche drop prices when
  dollar rises? What would effect be on used car
  and trade in values?

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Mens suits

• A retailer sells mens jackets at 180, 250 and
  340. If shoppers use these price points as
  reference prices, what will be the effect of
  adding a new line of suits priced at 280? Would
  sales of the retailers 250 line increase,
  decrease or stay the same?

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Baseball tickets

• How could greater segmentation help sell more
  baseball tickets? Considerations are same for
  opera tickets.

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Tonights case Swatchmobile

• There are six questions. We will divide Quest 3
  into two halves.
• Please form seven groups and each answer one
  question.
• Write your answer on a transparency. This is
  great opportunity for someone who wants more
  experience

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Next week Chapters 12, 13 17

• Distribution Decisions
• Retailing Wholesaling
• Direct and On-line Marketing
• Case 12 Icon Acoustics
• Handout Barrow Booster