Copyright © 2007 Pearson Education Canada10-1 Marketing: An Introduction Second Canadian Edition Armstrong, Kotler, Cunningham, Mitchell and Buchwitz Chapter

Copyright © 2007 Pearson Education Canada10-1

Marketing: An Introduction Second Canadian Edition

Armstrong, Kotler, Cunningham, Mitchell and Buchwitz

Chapter TenPricing Considerations and

Strategies


Looking Ahead• Identify and explain the external and internal factors

affecting a firm's pricing decisions.• Contrast the three general approaches to setting

prices.• Describe the major strategies for pricing imitative and

new products.• Explain how companies find a set of prices that

maximizes the profits from the total product mix.• Discuss how companies adjust their prices to take

into account different types of customers and situations.

• Discuss the key issues related to initiating and responding to price changes.


What is a Price?• Narrow definition.

– price is the amount of money charged for a product or service.

• Broad definition.– price is the sum of all the values that

consumers exchange for the benefits of having or using the product or service.

• Dynamic pricing.– charging different prices depending on

individual customers and situations.


Pricing Best Practices• Develop a 1 percent pricing mentality.

• Consistently deliver more value.

• Price strategically, not opportunistically.

• Know your competition.

• Make pricing a process .


Dynamic Pricing

• The practice of charging different prices depending on individual customers and situations.

• Internet and web-purchasing provides the technological capability for dynamic pricing

• Sites like eBay even add the ability to negotiate price to dynamic pricing practices.


Pricing Decision Factors

External Factors• Nature of the market.• Demand• Competitor.• Economic state.• Reseller needs.• Government actions.• Social concerns.

Internal Factors• Marketing objectives.• Marketing mix.• Costs.• Organization style.• Target market.• Positioning

objectives.


Pricing Decision Internal Factors

• Marketing objectives.– Company must decide on its strategy for the

product.

• General objectives.– Survival, current profit maximization, market

share leadership and product quality leadership.



• Price decisions must be coordinated with product design, distribution and promotion decisions to form a consistent and effective marketing program.

• Target costing.– Pricing that starts with an ideal selling price,

then targets costs that will ensure that the price is met.



• Costs.– Fixed Costs.

• Costs that do not vary with production or sales level.

– Variable Costs.• Costs that vary directly with the level of

production.



• Organizational considerations.– Must decide who within the organization

should set prices.– This will vary depending on the size and

type of company.


Pricing Decision External Factors

• The market and demand:– Costs set the lower limit of prices.– The market and demand set the upper

limit.


Pricing in Different Markets• Pure competition.

– Many buyers and sellers where each has little effect on the going market price

• Monopolistic competition.– Many buyers and sellers who trade over a range

of prices

• Oligopolistic competition.– Few sellers and sensitive to each other’s

pricing/marketing strategies

• Pure monopoly. – Market consists of a single seller


Demand and Elasticity

• Demand.– The relationship between price changes

and the number of units sold.

• Elasticity. – A way of measuring how sensitive the

market is to price changes.• Inelastic – minimal change in demand

as price increases.• Elastic – significant drop in demand as price

increases.


Price Setting Considerations

• Product costs.– Price floor – no profits below this price.

• Competitors’ prices and other internal and external factors.

• Consumer perceptions of value.– Price ceiling – no demand above this

price.


General Pricing Approaches

• Cost-based approach.– Cost-plus pricing.– Break-even analysis.– Target profit pricing.

• Value-based approach.– Consumer perceptions of value.

• Competition-based approach.– What competitors are charging.


Cost-Plus Pricing

• Adding a standard markup to the cost of the product.

• Popular because:– Sellers more certain about cost than

demand.– Simplifies pricing.– When all sellers use, prices are similar and

competition is minimized.– Some feel it is more fair to both buyers and

sellers.


Value-Based Pricing• Uses buyers’ perceptions of value, not

the seller’s cost, as the key to pricing.

• A less expensive piano might play well, but would it take you places you’ve never been before?


Competition-Based Pricing

• Going-rate pricing.– Firm bases its price largely on competitors’

prices, with less attention paid to its own costs or to demand.

• Sealed-bid pricing.– Firm bases its price on how it thinks

competitors will price rather than on its own costs or on demand.


Pricing New Products• Skimming pricing.

– High price to reap maximum profit from early adopter segments.

– Can encourage competition.

– Products must be unique and hard to copy.

• Penetration pricing.– Low price to gain maximum market share.

– May discourage competition.

– Used when the product is easily copied.


Product Mix Pricing Strategies• Product line -- pricing levels to deliver value

to different segments.

• Optional products – separate options available for the main product.

• Captive products – needed to make main product usable.

• By-products – created from the manufacture of the main product.

• Product bundles – combinations.


Product Line Pricing

• Involves setting price steps between various products in a product line based on:– Cost differences between products.– Customer evaluations of different features.

– Competitors’ prices.


Optional/Captive Product Pricing

• Optional-product.– Pricing optional or accessory products sold

with the main product (e.g., ice maker with the refrigerator).

• Product bundle pricing.– Combining several products and offering the

bundle at a reduced price (e.g., computer with software and Internet access).


Pricing Strategies

• Captive-product.– Pricing products that must be used with the

main product (e.g., replacement cartridges for Gillette razors).

• By-product pricing.– Setting a price for by-products in order to

make the main product’s price more competitive (e.g., sawdust and buttermilk).


Price-Adjustment Strategies• Discount and allowance pricing.

• Segmented pricing.

• Psychological pricing.

• Promotional pricing.

• Geographical pricing.

• International pricing.


Discounts and Allowances• Discounts – a straight reduction based

on:– Cash.– Quantity.– Function.– Season.

• Allowances – promotional money paid by manufacturer to retailer.


Segmented Pricing• Selling a product or service at two or

more prices, where the difference in prices is not based on differences in costs.– Customer-segment.– Product-form.– Location pricing.– Time pricing.


Psychological Pricing

• Considers the psychology of prices and not simply the economics.

• Consumers usually perceive higher-priced products as having higher quality.

• Consumers use price less when they can judge quality of a product.


Promotional Pricing

• Promotional pricing approaches.– Loss leaders.– Special event pricing.– Low-interest financing.– Longer warranties.– Free maintenance.– Discounts.– Cash rebates.


Geographical Pricing

• FOB-origin pricing.

• Uniform-delivered pricing.

• Zone pricing.

• Basing-point pricing.

• Freight-absorption pricing.


International Pricing• Price depends on many factors,

including:– Economic conditions.– Competitive situations.– Laws and regulations.– Development of the wholesaling and

retailing system.– Costs.– Internet.


Initiating Price Changes• Price Cuts

– Excess capacity.– Falling market

share.– Dominate market

through lower costs.

• Price Increases– Cost inflation.– Over-demand.

Cannot supply all customers’ needs.


Responding to Competitor Price Changes

• When a competitor lowers prices:– Reduce price to match the competitors’ price.– Maintain price but increase the perceived value

of the offer.– Improve quality and raise price.– Hold price and introduce a new brand at a

higher price.– Hold price and introduce a new brand at a

lower price (fighting brand).


Pricing Ethics• Competitors.

– Price-fixing.– Predatory pricing.

• Manufacturer and retailer.– Retail price maintenance.– Discriminatory pricing.

• Manufacturer/retailer and consumer.– Deceptive pricing.


Looking Back• Identify and explain the external and internal factors

affecting a firm's pricing decisions.• Contrast the three general approaches to setting

prices.• Describe the major strategies for pricing imitative and

new products.• Explain how companies find a set of prices that

maximizes the profits from the total product mix.• Discuss how companies adjust their prices to take

into account different types of customers and situations.

• Discuss the key issues related to initiating and responding to price changes.

Documents

Copyright © 2007 Pearson Education Canada10-1 Marketing: An Introduction Second Canadian Edition Armstrong, Kotler, Cunningham, Mitchell and Buchwitz Chapter