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Chapter 11

Pricing Concepts
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McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
 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.

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 After studying this chapter you
should be able to:
• Explain how consumers form
perceptions of quality and value.

• Understand price/quality relationships

and internal and external reference
prices.

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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
Tuition
•• Fees
Fees
•• Interest
Interest Payments
Payments
•• Fines
Fines
•• Rents
Rents
•• Premiums
Premiums
•• Taxes
Taxes
•• Donations
Donations
•• Time
Time
•• List
List Prices
Prices
•• Partitioned
Partitioned Prices
Prices
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 Basic
Basic Price
Price Mix
Mix Versus
Versus Price
Price
Promotion
Promotion Mix
Mix

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 The
The Importance
Importance of
of Price
Price and
and
Pricing
Pricing Decisions
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 retailer’s 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.

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 Limits to Price Setting
Price Ceiling (Demand Limits)

Competitive Factors

Final Pricing
Discretion

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
Exchange Rate:
Rate:
–– The
Theprice
priceofofone
onecountry’s
country’s
currency
currencyininterms
termsof
of
another
anothercountries
countries
currency.
currency.

•• Protective
Protective Tariffs:
Tariffs:
–– Taxes
Taxesput
puton
onimported
imported
products
productstotoraise
raisetheir
their
price
priceto
tokeep
keeplocal
local
products
productscompetitive.
competitive.

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 Pricing Objectives
Five
FiveObjectives
ObjectivesGuide
GuidePricing
PricingDecisions:
Decisions:
1.1.Ensuring
Ensuringmarket
marketsurvival.
survival.

2.2.Enhancing
Enhancingsales
salesgrowth.
growth.

3.3.Maximizing
Maximizingcompany
companyprofits.
profits.

4.4.Deterring
Deterringcompetition
competitionfrom
fromentering
enteringaacompany’s
company’s
niche
nicheor
ormarket
marketposition.
position.

5.5.Establishing
Establishingor
ormaintaining
maintainingaaparticular
particularproduct
product
quality
qualityimage.
image.

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 Market Survival
•• AA firm
firm must
must set
set prices
prices to
to ensure
ensure its
its short-
short-
term
term survival.
survival.

•• Frequent
Frequent end-of-season
end-of-season deals
deals by
by retailers
retailers
are
are efforts
efforts to
to move
move inventory
inventory and
and recover
recover
cash.
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 firm’s 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

Non-price Competition

Competitive Strategy-positioning
Continuum

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 Quality and Image Enhancement

•• Prestige Pricing:
Prestige Pricing:
–– Setting
Settingaahigh
highprice
pricebased
basedononthe
theidea
ideathat
that “the
“the
higher the
higher the price,
price,the
thegreater
greaterthe
thequality”
quality” of
of the
the
product.
product.

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 Influences
Influences on
on Pricing
Pricing Decisions:
Decisions:
The
The Five
Five Cs
Cs of
of Pricing
Pricing

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 Customers

• Target costing:
Customer expectations and willingness
1. The profit margin the
to pay are important influences on
company desires.
pricing decisions.

2. The features sought

by customers.

3. 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 firm’s 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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 Ethical & Legal Restraints on Pricing

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

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 International Pricing Issues
•• Dumping:
Dumping:
–– Selling
Sellingaaproduct
productin inaa
foreign
foreigncountry
countryat ataaprice
price
lower
lowerthan
thanits
itsprice
priceininthe
the
domestic
domesticcountry,
country,andand
lower
lowerthan
thanits
itsmarginal
marginalcostcost
of
ofproduction
production--isisaaform
formofof
price
pricediscrimination.
discrimination.

•• Predatory
Predatory Dumping:
Dumping:
–– Pricing
Pricingintended
intendedtotodrive
drive
rivals
rivalsout
outofofbusiness.
business.
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 Implications for Pricing Decisions
•• Horizontal
Horizontal price
price fixing
fixing is
is illegal.
illegal.

•• Retailers
Retailers areare free
free to
to establish
establish their
their own
own final
final
selling
selling prices,
prices, but
but prices
prices charged
charged by by
manufacturer
manufacturer or or wholesaler-owned
wholesaler-owned retailers
retailers may
may
still
still be
be restricted
restricted byby the
the owner.
owner.

•• Some
Some states
states have
have enacted
enacted minimum
minimum price
price laws.
laws.

•• Prices
Prices must
must not
not deceive
deceive customers.
customers.

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 Implications for Pricing Decisions
•• Some
Some states
states have
have enacted
enacted minimum
minimum price
price laws.
laws.

•• Prices
Prices must
must not
not deceive
deceive customers.
customers.

•• Discrimination
Discrimination to
to eliminate
eliminate competition
competition may
may be
be
illegal.
illegal.

•• In
In industries
industries with
with aa few
few large
large firms,
firms, itit is
is
generally
generally acceptable
acceptable forfor the
the pricing
pricing behavior
behavior of
of
smaller
smaller firms
firms to
to parallel
parallel that
that of
of larger
larger firms.
firms.

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 International Agreements &
Organizations
•• General
GeneralAgreement
Agreementon
onTariffs
Tariffsand
andTrade
Trade
(GATT).
(GATT).

•• The
TheOrganization
Organizationof
ofPetroleum
PetroleumExporting
Exporting
Countries
Countries(OPEC).
(OPEC).

•• The
TheEuropean
EuropeanUnion
Union(EU).
(EU).

•• The
TheNorth
NorthAmerican
AmericanFree
FreeTrade
TradeAgreement
Agreement
(NAFTA).
(NAFTA).

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 Customer Price Evaluations
•• Judgments
Judgments of
of
Perceived Value
Perceived Value

•• Price/Quality
Price/Quality
Relationships
Relationships
describe how
describe how the
the
consumer associates
consumer associates
the product’s
the product’s price
price
with higher
with higher quality.
quality.

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 Customer Price Evaluations
•• Consumer
Consumer Use
Use of
of Price
Price Information:
Information:
––Best-value
Best-value Strategy
Strategy
––Price-seeking
Price-seeking Strategy
Strategy
––Price-aversion
Price-aversion Strategy
Strategy
––Price
Price Signaling
Signaling Strategy
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

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 Advertised Comparison Prices

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