Chapter 16

Pricing
Objectives and
Policies

Copyright © 2014 by The McGraw­Hill Companies, Inc. All rights reserved

16-2

Marketing Strategy Planning
Process

16-3

Strategy Planning and Pricing Objectives
and Policies
(Exhibit 16-1)

CH 16: Pricing
Objectives and
Policies

Pricing
objectives

Pricing
policies

Pricing and
customer value

CH 17: Price Setting
in the Business
World

Legal issues and
pricing policies

16-4

Price Has Many Strategy
Dimensions
Price Levels Over
Product Life
Cycle

Price Flexibility

Key
Pricing
Policies
Transportation
Costs—Who Pays
& How

Discounts &
Allowances—To
Whom & When

The Importance of Price
To
To the
the seller,
seller,
Price
Price is
is revenue
revenue

To
To the
the consumer,
consumer,
Price
Price is
is the
the cost
cost of
of
something
something

Price
Price allocates
allocates resources
resources
In
In aa free-market
free-market economy
economy

LO1

What Is Price?

Price
Price

LO1

Price is that which is
given up in an exchange
to acquire a good or
service.

What is Price?
• Sacrifice Effect of Price
– What is sacrificed to get a good or service
• Money, Time, Dignity

• Information Effect of Price
– Infer quality information based on price
• Higher quality = higher price
• Convey status

• Value Based upon Perceived Satisfaction
– Reasonable Price = perceived reasonable
Value
• Exchange based on expectation of satisfaction

LO1

The Importance of Price to
Marketing Managers

Revenue
Revenue

Profit
Profit

LO1

The
Theprice
pricecharged
chargedto
to
customers
customersmultiplied
multipliedby
bythe
the
Number
Numberof
ofunits
unitssold.
sold.

Revenue
Revenueminus
minusexpense.
expense.

Trends Influencing Price
Flood
Floodof
ofnew
newproducts
products
Increased
Increasedavailability
availabilityof
ofbargain-priced
bargain-pricedprivate
private
and
andgeneric
genericbrands
brands
Price
Pricecutting
cuttingas
asaastrategy
strategyto
tomaintain
maintainor
or
regain
regainmarket
marketshare
share
Internet
Internetused
usedfor
forcomparison
comparisonshipping
shipping

LO1

U.S.
U.S.recession
recessionfrom
fromlate
late2007
2007to
to2009.
2009.

Price Exchanged for Something of
Value—View of Consumer or User
(Exhibit 16-2)

16-10

Something of
Value

Price
List Price
Less: discounts
• Quantity
• Seasonal
• Cash
• Temporary sales
Less: allowances
• Trade-ins
• Damaged goods
Less: rebate & coupon
Plus: transportation and
taxes

Exchange

Product
• Physical good
• Service
• Assurance of quality
• Repair facilities
• Packaging
• Credit Warranty
Place of delivery or when
available

Price Exchanged for Something of Value
—View of Channel Members (Exhibit 163)

16-11

Something of
Value

Price
List Price
Less: discounts
• Quantity
• Seasonal
• Cash
• Trade or functional
• Temporary “deals”
Less: allowances
• Damaged goods
• Advertising
• Push money
• Stocking fees
Plus: transportation, taxes,
tariffs, and costs of
handling or disposal

Exchange

Product
• Branded—well known
• Guaranteed & warranted
• Service/repair facilities
• Convenient packaging
Place
• Availability/when/where
Promotion
• Promotion aimed at enduser customers
Price
• Price-level guarantee
• Sufficient margin &
inventory turns to allow
for profit

16-12

Objectives Should Guide Strategy
Planning for Price (Exhibit 16-4)
Target return
Profit oriented
Maximize profits

Pricing
objectives

Sales oriented

Dollar or unit
sales growth
Growth in market
share

Status quo
oriented

Meeting
competition
Nonprice
competition

16-13

Most Firms Set Specific
Pricing Policies to Reach
Objectives
One-Price
Policy

Flexible Price
Policy

• The same for
everyone
• frequently
purchased items
• Convenient
• Low cost
• Maintains goodwill

• Different
customers,
different prices
• databases make it
easier
• salespeople can
adjust prices
• Too much cutting
can hurt profits

OR

16-14

Too Much Price-Cutting
Erodes Profits (Exhibit 16-5)
$100 list price
$100

10% price cut
 new price = $90

Cost per unit = $80
50% profit
margin cut

$60
$40
$20

$20

$10

16-15

Price-Level
Policies Over
the Product
Life Cycle

16-16

Skimming vs. Penetration
(Exhibit 16-6)

Discount Policies: Reductions
from List Prices

16-17

Quantity

Seasonal

From
List Price
Sale

Cash

Trade

Allowance Policies—Off List
Prices

16-18

Advertising

Stocking
Common
Types of
Allowances

Trade-Ins

Push Money

16-19

List Price May Depend on
Geographic Pricing Policies
F.O.B.

Zone
Common
Geographic
Policies

Freight
Absorption

Uniform
Delivered

16-20

Pricing Policies Combine to
Impact Customer Value
Look at customers
viewppoint
Value pricing fits with
market-oriented strategy

Define target market
and competition
Value pricing =
customer value

16-21

Legality of Pricing Policies
Unfair Trade
Practice Acts

Dumping

Key
Issues

Price Fixing

Phony List
Prices