Chapter 11 Pricing Concepts

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Chapter 11 Pricing Concepts
Professor Jason C. H. Chen, Ph.D. School of
Business Administration Gonzaga
University Spokane, WA 99223 chen_at_jepson.gonzaga.e
du
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After studying this chapter you should be able to

• Realize the importance of price and understand
  its role in the marketing mix.
• Understand the characteristics of the different
  pricing objectives that companies can adopt.
• Identify many of the influences on marketers
  pricing decisions.
• Explain how consumers form perceptions of quality
  and value.
• Understand price/quality relationships and
  internal and external reference prices.

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OPENING VIGNETTE

• WWW.EDMUNDS.COM
• How do auto manufacturers and dealers feel about
  outsiders making pricing information available to
  car shoppers?
• How do Web sites like Edmunds.com promote the
  marketing process?

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The Role of Price

• Objective Price
• The amount of money a buyer pays to a seller in
  exchange for products and services.

• Countertrade
• Barter, or trading goods for goods without using
  money.

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Prices Have Other Labels

• Tuition
• Fees
• Interest Payments
• Fines
• Rents
• Premiums
• Taxes
• Donations
• Time
• List Prices
• Partitioned Prices

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Key Factors that Influence Price Setting
Pricing objectives
Pricing flexibility
Price of other products in the line
Discounts and allowances
Demand
Price Setting
Legal environment
Cost
Geographic pricing terms
Competition
Markup chain in channels
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Basic Price Mix Versus Price Promotion Mix
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Price as Seen by Consumers or Users
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Price as Seen by Channel Members
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Ragged Mountain ad
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Strategy Planning for Price
Target Market
Promotion
Price
Place
Product
Price objectives
Geographic Term -- who pays transportation and
how
Discounts and allowances -- to whom and when
Price levels over product life cycle
Price flexibility
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The Importance of Price and Pricing Decisions

• Price Elasticity of Demand
• The responsiveness of demand to price changes.

Price promotions and reductions are so common
that the sales price is the norm!
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Benefits of Price Promotions

• Stimulate retailer sales and store traffic.
• Adjustment to variations in supply and demand
  without changing list prices.
• Enable regional businesses to compete against
  brands with large ad budgets.
• Reduce retailers risk in stocking new brands.
• Satisfy trade agreements.
• Stimulate demand for promoted and complementary
  (non-promoted) products.
• Customers can feel they are smart shoppers by
  taking advantage of price specials.

Exhibit 11-2 (p.245)
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Limits to Price Setting
Price Ceiling (Demand Limits)
Competitive Factors
Corporate Objectives
Price Floor (Direct Variable Costs)
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Internet Pricing Effects

• Questions??
• If price sensitivity will increase from this
  easier access to information?
• Will easier access to other information that
  differentiates products will offset these
  pressures toward price sensitivity?

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Internet Pricing Effects

• For goods that are common across stores or
  business-to-business sellers, price sensitivity
  will undoubtedly increase.
• For sellers, savings come from lower real-estate
  and rental costs and reduced outlays for
  advertising, inventory, and transportations.

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Global Pricing Considerations

• Exchange Rate
• The price of one countrys currency in terms of
  another countries currency.
• Protective Tariffs
• Taxes put on imported products to raise their
  price to keep local products competitive.

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Pricing Change Model

• Environmental
• Conditions
• Foreign competition
• Legal environment
• change
• - Technology change
• More informed
• consumers

Profitability
Sales
Successfulness
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Exchange Rates for Various Currencies against the
U.S. Dollar Over Time
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II. Pricing Objectives

• Five Objectives Guide Pricing Decisions
• Ensuring market survival.
• Enhancing sales growth.
• Maximizing company profits.
• Deterring competition from entering a companys
  niche or market position.
• Establishing or maintaining a particular product
  quality image.

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Market Survival

• A firm must set prices to ensure its short-term
  survival.
• Frequent end-of-season deals by retailers are
  efforts to move inventory and recover cash.

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Sales Growth

• Penetration Pricing
• Prices set low to encourage initial trial and
  generate sales growth as a market entry strategy.
• Market Share
• The firms portion or percentage of the total
  market or of total industry sales.

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Optimal Pricing Decisions
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Profitability

• Maximization of profits is a frequently stated
  objective for many companies.
• Price Skimming
• Setting prices high to appeal to customers who
  are not price sensitive.
• Return on Investment (ROI)
• The ratio of income before taxes to total
  operating assets associated with a product.

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Competitive Pricing
Price Competition
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Quality and Image Enhancement

• Prestige Pricing
• Setting a high price based on the idea that the
  higher the price, the greater the quality of the
  product.

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Possible Pricing Objectives
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Alternative Introductory Pricing Policies
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III. Influences on Pricing Decisions The Five Cs
of Pricing
Exhibit 11-5
Influences on pricing decisions
Pricing decisions
Costs
Customers
Channels
Competition
Compatibility
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Customers

• Customer expectations and willingness
• to pay are important influences on
• pricing decisions.

• Target costing
• The profit margin the company desires.
• The features sought by customers.
• The prices that will be attractive to potential
  buyers.

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Channels of Distribution

• Prices must be set so that other members of the
  channel of distribution earn adequate returns on
  sales of the firms products.
  

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Competition

• Prices charged by competing firms and the
  reaction of competitors to price changes
  influence pricing decisions.

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Compatibility

• The price of a product must be compatible with
  the overall objectives of the firm.

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IV. Ethical Legal Restraints on Pricing

• Significant U.S. Legislation Influencing Price
  Decisions
• Sherman Act, 1890
• Federal Trade Commission Act, 1914
• Clayton Act, 1914
• Robinson-Patman Act, 1936
• Wheeler-Lea Act, 1938
• Consumer Goods Pricing Act, 1975

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International Pricing Issues

• Dumping
• Selling a product in a foreign country at a price
  lower than its price in the domestic country, and
  lower than its marginal cost of production - is a
  form of price discrimination.
• Predatory Dumping
• Pricing intended to drive rivals out of business.

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Implications for Pricing Decisions

• Horizontal price fixing is illegal.
• Retailers are free to establish their own final
  selling prices, but prices charged by
  manufacturer or wholesaler-owned retailers may
  still be restricted by the owner.
• Some states have enacted minimum price laws.
• Prices must not deceive customers.

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Implications for Pricing Decisions

• Some states have enacted minimum price laws.
• Prices must not deceive customers.
• Discrimination to eliminate competition may be
  illegal.
• In industries with a few large firms, it is
  generally acceptable for the pricing behavior of
  smaller firms to parallel that of larger firms.

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International Agreements Organizations

• General Agreement on Tariffs and Trade (GATT).
• The Organization of Petroleum Exporting Countries
  (OPEC).
• The European Union (EU).
• The North American Free Trade Agreement (NAFTA).

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V. Customer Price Evaluations

• Judgments of Perceived Value
• Price/Quality Relationships describe how the
  consumer associates the products price with
  higher quality.

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Price, perceived value, and willingness to buy
Exhibit 11-8
Relationships among price, perceived value, and
willingness to buy
Perceived benefits
Objective price
Perception of price
Perceive value
Willingness To buy
Perceived Monetary sacrifice
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Customer Price Evaluations

• Consumer Use of Price Information
• Best-value Strategy
• Price-seeking Strategy
• Price-aversion Strategy
• Price Signaling Strategy

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How Are Price Judgments Made?

• External Reference Prices
• Those charged by other retailers or comparison
  prices that a retailer provides to enhance
  perceptions of the published price.
• Internal Reference Prices
• Comparison standards that consumers remember and
  use to make their judgments.
• Reservation Price
• The highest price a person is willing to pay.

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Consumer Evaluations of Prices
Exhibit 11-9
Consumers evaluation of prices
Expected price Range Is the price different from
the price I expected?
Acceptable price Range Am I willing To pay the
price?
Expected future price trend Will prices
next period be different from this price?

• Budget constraints
• Price/quality judgments
• Purchase situation factors (time pressure)
• Usage situation factors
• Expected price range of substitutes
• Cost of search

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Advertised Comparison Prices
Exhibit 11-10
A model of comparison reference price effects
Consumer reads comparison price claim
Beliefs about available prices change in
response to reference price offering price
Offering price compared to upwardly
revised beliefs about previous prices
Perceived savings transaction value increase
Shopping/purchase Intention occurs
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Discounts
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Discount Policies

• DISCOUNTS are reductions from list price that are
  given by a seller to a buyer who either gives up
  some marketing function or provides the function
  himself
• Quantity discounts
• Cumulative quantity discounts encourage repeat
  purchases and relationships
• Noncumulative encourage large orders
• Seasonal discounts smooth out demand
• Cash discounts encourage early payment
• Trade (functional) discounts go to middlemen

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Cargill and CoolBid discount ads
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Geographic Pricing Policies

• "Free on Board" (F.O.B) at some place
• Examples
• F.O.B. seller's factory
• F.O.B. delivered
• F.O.B. factoryfreight prepaid
• Zone Pricing an average freight charge to all
  buyers within specific geographic areas
• Uniform Delivered Pricing the same (average)
  freight charge to all buyers
• Freight Absorption Pricing seller pays freight
  cost so delivered price matches competition

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Pricing Policies Combine to Impact Customer Value

• Customer value considers total costs and benefits
• Costs and benefits are impacted not only by list
  price but by
• Discounts
• Allowances
• Delivery terms and geographic pricing policies
• Sales and deals
• Price flexibility (and transaction costs)
• Value pricing leads to superior customer value
• Value pricing is setting a fair price level for a
  marketing mix that really gives the target market
  superior customer value

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Photos of Goodyear and ThunkDesign discount ads
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Autobytel ad
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Photo of Kodak Billboard
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Robinson-Patman Act

• Regulates price discriminationselling the same
  products to different buyers at different prices
• if it injures competition
• Cost differences can justify prices differences
• analysis must have been done in advance
• You can match a competitor's prices
• Functional discounts are usually ok
• Does not apply to sales to final consumers