CH T 11 Chapter 11: Learning Goals

14/11/2011
Ch t 11 Chapter
Pricing
Copyright2008PearsonEducationCanada
PrinciplesofMarketing,SeventhCanadian Edition
LearningGoals
Identifyanddefinetheinternalfactorsaffectinga firmsp pricing gdecisions Identifyanddefinetheexternalfactorsaffecting pricingdecisions,includingtheimpactofconsumer perceptionsofpriceandvalue Contrastthetwogeneralapproachestosetting prices Discusshowcompaniesadjusttheirpricestotake intoaccountdifferenttypesofcustomersand situations Discussthekeyissuesrelatedtoinitiatingand respondingtopricechanges
Copyright2008PearsonEducationCanada 112 PrinciplesofMarketing,SeventhCanadian Edition
Marketing - chapter 11 - 22 pages
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CaseStudy priceline.com
Launchedin1998asanew service i to t empowerconsumers tonametheirownprices. Theideacaughtonand Pricelinehasbecomethe leadingnameyourownprice Internetservice Dealsprimarilyintime sensitivetravelrelated products d Theconcepthasrealappealto consumers IfyougetitislikeIwon! Buysunsoldrooms,seatsor vacation ti packages k at theavily h il discountedrates Unevensuccessingrowing beyondtravelservices Sellingproductsandservices thatarenttimesensitiveis difficult. Pricelinehashundredsor thousandsofhappyrepeat customers.Howevernotall customersarethrilledwith theironlineexperience.
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LearningGoals
Identifyanddefinetheinternalfactorsaffectinga firmsp pricing gdecisions Identifyanddefinetheexternalfactorsaffecting pricingdecisions,includingtheimpactofconsumer perceptionsofpriceandvalue Contrastthetwogeneralapproachestosetting prices Discusshowcompaniesadjusttheirpricestotake intoaccountdifferenttypesofcustomersand situations Discussthekeyissuesrelatedtoinitiatingand respondingtopricechanges
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WhatIsPrice?
Theamountofmoneychargedfora product d torservice, i orth thesumof fth the valuesthatconsumersexchangeforthe benefitsofhavingorusingtheproductor service.
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PriceHasManyNames
Rent F Fare Fee, F Rate Commission Assessment Tuition Toll Premium R t i Retainer Bribe Salary Wage Interest Tax
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TodaysNewPricingEnvironment
DynamicPricing,chargingdifferentprices dependingonindividualcustomersand situations DynamicpricingontheWeballowsSELLERSto:
Monitorcustomerbehaviorandtailoroffers. Changepricesontheflytoadjustforchangesin demandorcosts. Aidconsumerswithpricecomparisons. Negotiatepricesinonlineauctionsandexchanges.
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Pricing:AnImportantbut DifficultDecision
PriceandtheMarketingMix
Onlyelementtoproducerevenues Mostflexibleelement Canbechangedquickly
CommonPricingMistakes
Reducingpricestooquicklytogetsales Pricingbasedoncosts,notcustomervalue
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FactorstoConsiderWhen SettingPrice
InternalFactors
Marketingobjectives Marketingmixstrategy Costs Productconsiderations Organizational considerations
Marketpositioning influencespricing strategy Otherpricing objectives:

Survival Currentprofit maximization Marketshare leadership Productquality leadership
119 PrinciplesofMarketing,SeventhCanadian Edition
InternalFactors
Marketingobjectives Marketingmixstrategy Costs Productconsiderations Organizationalconsiderations
Pricingmustbecarefully coordinatedwiththe othermarketingmix elements Targetcostingisoften usedtosupportproduct positioningstrategies based a e o onp price i e Nonpricepositioning canalsobeused
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DiscussionQuestion
Youarethemarketer ofanewhighend coffeemaker.What shouldyouconsider whenplanningyour:
1. 2. 3 3. 4. Price Product Place Promotion
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InternalFactors
Costssetthefloor,or lowestamountthat should h ldbe b charged h d Ideally,pricescharged coverallcostsandleave somethingleftoverfor profit Typesofcosts:
Variable Fixed Totalcosts
Howcostsvaryat differentproduction levelswillinfluenceprice setting

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InternalFactors
Marketskimmingpricing
Usedwhentheproductis newtechnology,andnot easilycopied
Marketpenetration pricing
Usedwhenthereare advantagestobegainedby l large volumes l early l in i the th lifecycle
Productlinepricing
Settingthepricesteps betweenproductsinaline
InternalFactors
Marketingobjectives Marketingmixstrategy Costs Productconsiderations Organizational considerations
Whosetstheprice?
Smallcompanies: CEOortop management Largecompanies: Divisionalorproduct linemanagers
Pricenegotiation g is commoninindustrial settingswherepricing departmentsmaybe created

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LearningGoals
Identifyanddefinetheinternalfactorsaffecting pricing gdecisions afirmsp Identifyanddefinetheexternalfactorsaffecting pricingdecisions,includingtheimpactof consumerperceptionsofpriceandvalue Contrastthetwogeneralapproachestosetting prices p adjust j theirp pricesto Discusshowcompanies takeintoaccountdifferenttypesofcustomers andsituations Discussthekeyissuesrelatedtoinitiatingand respondingtopricechanges
ExternalFactors
Natureofmarketanddemand Competitorscosts,prices, andoffers Otherenvironmentalelements
Typesofmarkets
Purecompetition Monopolisticcompetition Oligopolisticcompetition Puremonopoly
Consumerperceptionsof priceandvalue Pricedemand relationship

Demandcurve Priceelasticityofdemand
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ExternalFactors
Natureofmarketanddemand Competitorscosts,prices,and offers Otherenvironmentalelements
Considercompetitorscosts, prices,andpossiblereactions whendeveloping de elopingapricing strategy Pricingstrategyinfluencesthe natureofcompetition

Lowpricelowmargin strategiesinhibitcompetition Highpricehighmargin strategiesattractcompetition
B Benchmarking h ki costs t against i t thecompetitionis recommended
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ExternalFactors
Natureofmarketanddemand Competitorscosts,prices, andoffers Otherenvironmentalelements
Economicconditions
Affectproductioncosts Affectbuyerperceptionsof priceandvalue
Resellerreactionsto pricesmustbeconsidered Governmentmayrestrict orlimitpricingoptions Socialconsiderationsmay betakenintoaccount
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LearningGoals
GeneralPricingApproaches
CostBasedPricing:CostPlusPricing
Addingastandardmarkuptocost Ignoresdemandandcompetition Popularpricingtechniquebecause:
Itsimplifiesthepricingprocess Pricecompetitionmaybeminimized Itisperceivedasmorefairtobothbuyersand sellers
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CostBasedPricingExample
Variablecosts:$20
Expectedsales:100,000units Fixedcosts:$500,000 DesiredSalesMarkup:20%
VariableCost+FixedCosts/UnitSales=UnitCost $20+$500,000/100,000=$25perunit UnitCost/(1 DesiredReturnonSales)=MarkupPrice $25/(1 .20)=$31.25
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CostBasedPricing:BreakEvenAnalysis and dT Target tP Profit fitP Pricing i i
Breakevenchartsshowtotalcostandtotal revenuesatdifferentlevelsofunitvolume. Theintersectionofthetotalrevenueandtotal costcurvesisthebreakevenpoint. Companieswishingtomakeaprofitmust exceedthebreakevenunitvolume.
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BreakEvenAnalysisandTargetProfitPricing
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ValueBasedPricing:
U Uses e buye buyers perceptions e e tio ofvalue aluerather athe than tha sellerscoststosetprice. Measuringperceivedvaluecanbedifficult. Consumerattitudestowardpriceandquality haveshiftedduringthelastdecade. Valuepricingattheretaillevel
Everydaylowpricing(EDLP)vs.highlowpricing
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LearningGoals
PriceAdjustmentStrategies
Discount/allowance S Segmented td Psychological Promotional Geographical International Typesofdiscounts
Ca Cash hdiscount di ou t Quantitydiscount Functional(trade) discount Seasonaldiscount
Allowances
Tradeinallowances Promotional allowances
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Discount/allowance Segmented Psychological Promotional Geographical International Typesofsegmented pricingstrategies:
Customersegment Productformpricing Locationpricing Timepricing
Alsocalledrevenueor yieldmanagement yie a age e Certainconditionsmust existforsegmented pricingtobeeffective
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ConditionsNecessaryforSegmented P i i Eff Pricing Effectiveness ti
Marketmustbesegmentable Segmentsmustshowdifferentdemand Pricingmustbelegal Costsofsegmentationcannotexceedrevenues earned Segmentedpricingmustreflectreal differencesincustomersperceivedvalue
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Discount/allowance Segmented Psychological Promotional Geographical International Thepriceisusedtosay somethingaboutthe product.
Pricequalityrelationship Referenceprices Differencesassmallasfive centscanbeimportant Numericdigitsmayhave symbolic b l and dvisual l qualitiesthat psychologicallyinfluence thebuyer
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Discount/allowance Segmented Psychological Promotional Geographical International Temporarilypricing productsbelowthelist priceorevenbelowcost
Lossleaders Specialeventpricing Cashrebates Lowinterestfinancing, longerwarranties,free maintenance
Promotionalpricingcan haveadverseeffects
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PriceAdjustment Strategies
PromotionalPricingProblems
Easilycopiedbycompetitors Createsdealproneconsumers Mayerodebrandsvalue Notalegitimatesubstituteforeffective g planning p g strategic Frequentuseleadstoindustrypricewars whichbenefitfewfirms
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Discount/allowance S Segmented td Psychological Promotional Geographical International Typesofgeographic pricingstrategies:
FOBoriginpricing Uniformdelivered pricing Zonepricing Basing gp pointp pricing g Freightabsorption pricing
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Discount/allowance Segmented Psychological Promotional Geographical International Priceschargedina specificcountry dependonmany factors
Economicconditions Competitivesituation Laws/regulations Distributionsystem Consumerperceptions Corporatemarketing objectives Costconsiderations
LearningGoals
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PriceChanges
Initiatepricecuts whena firm: Hasexcesscapacity Facesfallingmarket shareduetoprice competition Desirestobeamarket shareleader Initiatepriceincreases whenafirm canincreaseprofit facescostinflation facesgreaterdemand thancanbesupplied
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PriceChanges
AlternativestoIncreasingPrice
Exploremorecosteffectiveproductionor distribution Reduceproductsize Removefeatures product Unbundlethep
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PriceChanges
Buyerreactionstopricechangesmustbe considered. id d Competitorsaremorelikelytoreactto pricechangesundercertainconditions.
Numberoffirmsissmall Productisuniform Buyersarewellinformed
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RespondingtoCompetitors PriceChanges
Respondingtocompetitorspricechanges
Evaluatethecompetitorsreasonfortheprice change Evaluatemarketplaceresponsetotheprice change Considersownproductsstrategy
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PublicPolicyandPricing
Pricefixing
Co Competitors etito cannot a otwork o kwith ithea each hothe otherto setprices
Pricediscrimination
Customersmustbeofferedproportionally equaldiscountswhenused
Deceptivepricing
Cannotmisleadcustomersastovalue received.
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EthicalIssuesinPricing
Compliancewiththelawistheminimum standard t d dwhen h judging j d i whether h th pricing i i practicesareethical Canconsumersunderstandpricesand comparethem? Consumersareunawaretheycan negotiatesomeprices Abilitytonegotiateprices
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LearningGoals
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14/11/2011

Marketing - chapter 11 - 22 pages

Marketpositioning influencespricing strategy Otherpricing objectives:

Howcostsvaryat differentproduction levelswillinfluenceprice setting

Pricenegotiation g is commoninindustrial settingswherepricing departmentsmaybe created

Consumerperceptionsof priceandvalue Pricedemand relationship

Considercompetitorscosts, prices,andpossiblereactions whendeveloping de elopingapricing strategy Pricingstrategyinfluencesthe natureofcompetition

B Benchmarking h ki costs t against i t thecompetitionis recommended

Resellerreactionsto pricesmustbeconsidered Governmentmayrestrict orlimitpricingoptions Socialconsiderationsmay betakenintoaccount

VariableCost+FixedCosts/UnitSales=UnitCost $20+$500,000/100,000=$25perunit UnitCost/(1 DesiredReturnonSales)=MarkupPrice $25/(1 .20)=$31.25

Alsocalledrevenueor yieldmanagement yie a age e Certainconditionsmust existforsegmented pricingtobeeffective

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