Marketing

Chapter 13 Pricing Concepts for Establishing Value

Dhruv Grewal Michael Levy

McGraw-Hill/Irwin Copyright 2008 by the McGraw-Hill Companies, Inc. All rights reserved.

13-2

Panera Bread

Patrons spend on average $4 more Offers upscale food and ambiance Consumers willing to pay more will choose Panera, others will choose other options

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Price

Benefits vs. Sacrifice

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Price is a Signal

Prices can be both too high and too low Price too low may signal poor quality Price set too high might signal low value

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Prices Role in the Marketing Mix

Price is usually ranked as one of the most important factors in purchase decisions

Price is the only marketing mix element that generates revenue

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Test Your Knowledge

The key to successful pricing is to match the product or service with the consumers _______________. A) income level B) value perceptions C) shopping habits D) brand consciousness

The 5 Cs of Pricing

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1st C: Company Objectives

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Profit Orientation
Target return pricing

Profit Orientation Maximizing profits Target profit pricing

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Sales Orientation

Focus on increasing sales More concerned with overall market share Does not always imply low setting low prices

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Competitor Orientation

Competitive parity Status quo pricing Value is not part of this pricing strategy

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Customer Orientation

Focus on customer expectations by matching prices to customer expectations

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Test Your Knowledge

Which of the following is NOT an example of how a firm might invoke the concept of value? A) Set a no-haggle price B) Set prices to match consumer expectations C) Change prices to meet those of the competition D) Offer very high-priced, state-of-the-art products or services

Implementing Pricing Strategies to Achieve Objectives

How can a consumers perception of value affect a firms pricing strategy?

Case in Point: Ursinus College

Challenge

College was losing applicants.

Answer

Raise tuition. A consultant had found that the tuition was too low compared to other schools of similar quality and thus signaling lower quality.

Results

Tuition was raised by 17.6 percent and within 4 years the size of the freshman class had increased 35%.

2nd C: Customers

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Demand Curves and Pricing

Demand curves Knowing demand curve enables to see relationship between price and demand.

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Demand Curves

Not all are downward sloping Prestige product or services have upward sloping curves.

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Price Elasticity of Demand

Elastic (price sensitive) Inelastic (price insensitive) Consumers less sensitive to price increases for necessities

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Price Elasticity of Demand

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Entrepreneurial Marketing 13.1: JetBlue Provides Value

Founder David Neelam decided to focus on creating value Emphasize those services that mattered most New model = low prices + high customer service

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Factors Influencing Price Elasticity of Demand

Crossprice elasticity

Income effect

Substitution effect
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Test Your Knowledge

Consumers are generally less sensitive to price increases for which of the following items? A) milk B) steak C) cars D) clothing

Substitution Effect

Consider Pete, college student on a budget Old Spice Sport Deodorant user At the store he notices that Old Spice is more expensive Pete decides to give another brand a try and save money

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Substitution Effect

How can a firm win market share in the highly competitive technology arena?

Case in Point: HD DVD Players

To win the market for this new technology.

Challenge

Answer

Toshiba introduces a $500 HD DVD player to compete with Sonys Blu-ray technology DVD players retailing for $1000 - $1800.

Results

Toshiba has undercut the market on price and has convinced some companies to produce HD DVDs rather than Blu-ray versions. The winner is not yet determined.

Cross-Price Elasticity

Consider Kendra, selfsupporting college student Buys a new printer on sale for a great price Learns it requires special ink cartridges* that cost more than the printer

*complementary products
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3rd C: Costs

Variable Costs

Vary with production volume Unaffected by production volume Sum of variable and fixed costs

Fixed Costs

Total Cost

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Test Your Knowledge

In general, prices should not be based on cost because consumers make purchase decisions based on their _______________. A) cross-price elasticity B) Internet research C) substitution effect D) perceived value

Break Even Analysis and Decision Making

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Break Even Analysis

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Break Even to Achieve Target Profit

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Test Your Knowledge

When a firms profits hits the break-even point, their profits are _____________. A) less than expected B) more than expected C) zero D) undetermined

4th C: Competition

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Ethical Dilemma 13.1: Do Protectionist Laws Hurt or Help Consumers

Keep some companies from conducting business in a particular region The Wright Amendment Prohibits Southwest from flying directly from Dallas Love Field to certain places

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5th C: Channel Members

Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies Manufactures must protect against gray market transactions

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Macro Influences on Pricing

The Internet Increased price sensitivity Growth of online auctions

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Economic Factors
Increasing disposable income Increasing status consciousness

Local economic conditions

Economic factors
Increasing globalization Crossshopping

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Economic Factors

How can a large retailer gain market share in an environment where even status-conscious shoppers want to shop cheap?

Case in Point: Wal-Mart Answers the Need for Lower Priced Drugs
Challenge
Stem the rising cost of prescription drugs for consumers.

Answer

Wal-Mart announced that it had lowered the cost on 291 generic drugs to $4/prescription.

Results

Initially launched in Florida, Wal-Mart plans to expand the program throughout the US. Target matched the program and KMart has launched a competing program that may in fact be cheaper.

Chapter 13 Glossary

Competitive parity: A firms strategy of setting prices that are similar to those of major competitors. Complementary products: Products whose demand curves are positively related, such that they rise or fall together. Cross-price elasticity: The percentage change in demand for product A that occurs in response to a percentage change in price of product B. Cross-shopping: The pattern of buying both premium and low-priced merchandise or patronizing both expensive, status-oriented retailers and price-oriented retailers. Demand curves: Shows how many units of a product or service consumers will demand during a specific period at different prices. Gray market: Employs irregular but not necessarily illegal methods; generally, it legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer. Income effect: Refers to the change in the quantity of a product demanded by consumers due to a change in their income.
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Chapter 13 Glossary (continued)

Maximizing profit: A pricing strategy that relies primarily on economic theory; identifies the price at which profits are maximized by using a specific mathematical model that captures all the factors required to explain and predict sales and profits. Prestige products or services: Those that consumers purchase for status rather than functionality. Status quo pricing: A competitor-oriented strategy in which a firm changes prices only to meet those of competition. Substitution effect: Refers to consumers ability to substitute other products for the focal brand, thus increasing the price elasticity of demand for the focal brand. Target profit pricing: A pricing strategy implemented by firms when they have a particular profit goal as their overriding concern; uses price to stimulate a certain level of sales at a certain profit per unit. Target return pricing: A pricing strategy implemented by firms less concerned with the absolute level of profits and more interested in the rate at which their profits are generated relative to their investments; designed to produce a specific return on investment, usually expressed as a percentage of sales.

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