CHAPTER 12

Strategic Pricing Management Price Elasticity of Demand

 A measure of the sensitivity of demand to changes in price
Price  Percentage change in quantity demanded relative to a
The value paid for a product in a marketing exchange percentage change in price
 Buyers decide whether the utility gained from an exchange  Assessing the price elasticity of demand
is worth the buying power sacrificed  Elastic Demand: A change in price causes an opposite
 Price does not always take the form of money paid change in total revenue (e.g. Recreational Vehicles)
Barter • Inelastic Demand: A change in price results in a
 The oldest form of trade; money may not be involved parallel change in total revenue (e.g. Electricity)
The Importance of Price to Marketers
Factors Affecting Elasticity of Demand
 Price is the only marketing mix variable that can be changed
 Availability of substitutes
quickly
 Can consumers replace coffee with tea for caffeine?
 Price is related to total revenue and profit
 Amount of income available to spend on a good
• Profit = Total Revenue – Total Costs
 With an increase in price, will the consumer on a fixed
• Profit = (Price x Quantity Sold) – Total Costs income be forced to buy less?
 Time
 Price has a psychological impact on customers
 Over time will a consumer cutback/quit smoking if price of
• A high price can emphasize the quality of a product
cigarettes goes up?
Price Competition
Marginal Analysis
Emphasizing price as an issue and matching or beating competitors’
Examines what happens to a firm’s costs and revenues when
prices
production or sales changes by one unit
 Flexibility is a major advantage
 Fixed Costs: Do not vary with changes in the number of
 To compete effectively, firm must be the low-cost seller
units produced or sold
 Price war with competitors is a danger
 Average Fixed Cost: The fixed cost per unit produced
 Variable Costs: Vary with changes in the number of units
Non-Price Competition
produced or sold
Emphasizing factors other than price to distinguish a product from
 Average Variable Cost: The variable cost per unit
competing brands
produced
• Can help a firm build customer loyalty
 Total Costs: The sum of average fixed cost and the average
 A firm must be able to distinguish its brand
variable cost, times the quantity produced
 Unique features
 Average Total Cost: The sum of the average fixed cost and
 High quality
the average variable cost
 Promotion
 Marginal Cost (MC): The extra cost a firm incurs when it
 Packaging
produces one more unit of a product
 Excellent customer service
 Marginal Revenue (MR): The change in total revenue that
 Even in nonprice competition, marketers must be aware of
occurs when a firm sells an additional unit of a produced
competitors’ brands
Break-Even Analysis
Analysis of Demand
Break-Even Point
 For most products, there is an inverse relationship
 The point at which the costs of producing a product equal the
between price and demand
revenue made from selling the product
• The marketer should determine the break-even point
The Demand Curve
for several alternative prices
 A graph of the quantity of products expected to be sold at
various prices, if other factors remain constant
 Not all types of demand conform to the classic demand
curve
 Prestige products sell better at high prices than low

Demand Fluctuations Factors That Affect Pricing Decisions

 Changes in Buyers’ Needs  Organizational and marketing objectives
 Variations in Effectiveness of Marketing  Pricing objectives
 Presence of Substitutes  Costs
 Dynamic Environmental Factors  Other marketing mix variables
 Seasonality  Channel member expectations
 Customer interpretation and response
 Competition
  Legal and regulatory issues

Organizational and Marketing Objectives Competition

 Marketers should set prices that are consistent with the  Must know competitors’ prices so it can adjust prices
organization’s goals and mission accordingly
 Pricing decisions should be compatible with the firm’s  Price adjustments must be assessed in terms of competitor’s
marketing objectives response
• Regulated industries limit competitive pricing
Costs
• Unregulated monopolies can set any price
 Costs are a crucial issue when establishing price
• Price cuts in oligopolies are not an effective strategy
 Ideally goods are sold above cost, exceptions (in the short-
• In monopolistic competition, nonprice competition is
term) are:
most effective
 To match competition
• In perfectly competitive markets, there is no flexibility
 To generate cash flow
in setting prices
 To increase market share
 Marketers must be certain to include all costs when calculating
Legal and Regulatory Issues
price
 To control inflation, the U.S. federal government may enact:
 Cost reduction has been be a major focus for marketers
• Price Controls
Other Marketing Mix Variables • Price Freezes
 All marketing mix variables are highly interrelated o To control rate of price increases
 Price can affect demand  The U.S. has many laws affecting pricing
• Perceived price/quality relationships influence image • Sherman Antitrust Act
of products or brands • Protections against deceptive pricing
 Price is linked to how it is distributed o Federal Trade Commission Act
 Promotions vary by price of goods o Wheeler-Lea Act
Channel Member Expectations
Price Discrimination
 Channel members often expect to receive discounts for large  The practice of providing price differentials that injure
orders and prompt payments competition by giving one or more buyers a competitive
 Resellers expect producers to provide support activities such as advantage
sales and service training and cooperative advertising  Legal protections again price discrimination:
 Producers must consider the associated costs of discounts and • The Robinson-Patman Act
support activities • The Clayton Act

Customer’s Interpretation and Response Pricing for Business Markets

 Customer Interpretation  Price discounts fall into five categories:
 What price means or communicates to customers  Trade
 Customer Response  Quantity
 Whether the price moves the customer closer to purchase and  Cash
the degree to which the price enhances satisfaction with the  Seasonal
purchase experience and product  Allowance
 Customers’ interpretation and response are influenced by their  Discounts can be a significant factor in marketing strategy
assessment of value
• They evaluate product attributes, benefits and status Discounts Used for Business Markets
associated with the product  Trade (Functional) Discounts
 A reduction off the list price a producer gives to an
Reference Prices
intermediary for performing certain functions
 Internal Reference Price
 Quantity Discount
 A priced developing in the buyer’s mind through
 A reduction from the list price for purchasing in large
experience with product
quantities
 External Reference Price
 Cumulative Discounts: Are aggregated over a stated time
 A comparison price provided by others
period
Categorizations of Buyers  Non-Cumulative Discounts: Are onetime price reductions
 Value-Conscious based on the number of units purchased, the dollar value
 Concerned about both price and quality of a product of the order, or the product mix purchased
 Price-Conscious  Cash Discounts
 Strive to always pay low prices  Price reductions given to buyers for prompt payment or
 Prestige-Sensitive cash payment
 Focus on products that signify prominence and status  Seasonal Discount
  Price reduction given to buyers for purchasing goods or
services out of season
 Allowance
 A concession in price to achieve a desired goal
Geographic Pricing
A reduction for transportation costs or other costs associated with
the physical distance between the buyer and the seller

Different types of Geographic Pricing

 Free on Board (F.O.B.) Factory: The price of the merchandise at
the factory
 F.O.B. Destination: The producer absorbs the cost of shipping
the merchandise to the customer
 Uniform Geographic (Postage-Stamp Pricing): The same price is
charged to customers in all geographic locations
 Zone Pricing: Uniform prices for each major geographic zone
 Base-Point Pricing: Includes the price at the factory, plus freight
to the nearest buyer
• Mostly abandoned because of questionable legality
 Freight Absorption Pricing: The seller absorbs the freight costs

Transfer Pricing
 Occurs when one unit in an organization sells a product to
another unit
 Price is determined by a number of methods:
 Actual Full Cost: Dividing all fixed and variable
expenses by the number of units produced
 Standard Full Cost: What it would cost to produce the
goods at full plant capacity
 Cost Plus Investment: Full cost plus a portion of the
selling unit’s assets
 Market-Based Cost: The market price less a discount
to reflect expenses