Introduction to Pricing Decisions. 2 Preview Importance of understanding customer value perceptions and company costs when setting prices Important internal.

Introduction to Pricing Decisions

2

Preview• Importance of understanding customer value

perceptions and company costs when setting prices• Important internal and external factors affecting a firm’s

pricing decisions• The major strategies for pricing imitative and new

products• How companies find a set of prices that maximizes the

profits from the total product mix• How companies adjust their prices to account for

different types of customers and situations• Issues related to initiating and responding to price

changes

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What Is a Price?

• Narrowly, price is amount of money charged for a product or service

• Broadly, price is sum of all the values that consumers exchange for benefits of having or using a product or service

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Major Considerations in Setting Price• Customer perceptions of value• Other internal and external considerations

• Marketing strategy, objectives, mix• Nature of the market and demand• Competitors’ strategies and prices

• Product costs

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Customer Value Perceptions• Customer-oriented pricing

• Involves understanding how much value consumers place on benefits they receive from a product and setting a price that captures that value

• Value-based pricing• Uses buyers’ perceptions of value, not the seller’s

cost, as the key to pricing• Good value pricing• Value-added pricing

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Internal Factors Affecting Pricing Decisions• Company and Product Costs

• Fixed Costs• Costs that do not vary with production or sales

level• Variable Costs

• Costs that vary directly with level of production

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Cost-Based Pricing

• Cost-plus pricing• Adding standard markup to product’s cost

• Break-even pricing• Target-profit pricing

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Internal Factors Affecting Pricing Decisions• Marketing Objectives

• Company must decide on its product strategy• General pricing objectives

• Survival• Current profit maximization• Market share leadership • Product quality leadership

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Internal Factors Affecting Pricing Decisions• Marketing Mix Strategy

• 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

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External Factors Affecting Pricing Decisions• The Market and Demand

• Costs set the lower limit of prices; the market and demand set the upper limit of prices

• Pricing in different types of markets• Pure competition• Monopolistic competition• Oligopolistic competition• Pure (non)regulated monopoly

• Price elasticity of demand

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External Factors Affecting Pricing Decisions• Competitors’ Strategies and Prices

• How does the market offering compare?• How strong is competition and what is their pricing

strategy?• How does competition influence price sensitivity?

• Other External Factors• Economic conditions, government regulation, social

environment

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New-Product Pricing Strategies

• When to Use• Product’s quality and image

must support its higher price

• Costs of low volume cannot be so high they cancel the advantage of charging more

• Competitors should not be able to enter market easily and undercut the price

• Market Skimming• Set high price for new

product to “skim” revenues layer by layer from the market

• Company makes fewer, but more profitable sales

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New-Product Pricing Strategies

• When to Use• Market is highly price

sensitive so a low price produces more growth

• Costs must fall as sales volume increases

• Need to keep competition out or effects are only temporary

• Market Penetration• Set low initial price to

“penetrate” the market quickly and deeply

• Can attract large number of buyers quickly and win large market share

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Product Mix Pricing Strategies• Product line pricing• Optional-product pricing• Captive-product pricing• By-product pricing• Product bundle pricing

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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

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Optional- and Captive-Product Pricing• Optional-Product

• Pricing optional or accessory products sold with the main product (e.g., ice maker with the refrigerator)

• Captive-Product• Pricing products that must be used with the main

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

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By-Product and Product Bundle Pricing Strategies

• By-Product Pricing• Pricing low-value by-products to get rid of them (e.g.,

animal manure from zoo)• Product Bundle Pricing

• Pricing bundles of products sold together (software, monitor, PC, and printer)

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Price Adjustment Strategies• Discount and allowance pricing• Segmented pricing• Psychological pricing• Promotional pricing• Dynamic pricing

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Discounts and Allowances

• Discounts• Cash• Quantity• Seasonal

• Allowances• Trade-in• Promotional (for retailer)

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Segmented Pricing

• Selling product or service at two or more prices, where price difference not based on cost difference

• Called yield-management in hospitality industry• Types

• Customer-segment• Product-form• Location pricing• Time pricing

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Psychological Pricing

• Considers psychology of prices and not simply economics

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

• Consumers use price less when they can judge product quality by examining it or recalling experiences

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Promotional Pricing

• Cash Rebates• Special-Event Pricing• Loss Leaders

• Low-Interest Financing• Longer Warranties• Free Maintenance

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Dynamic Pricing

Adjusting prices continually to meet characteristics and needs of individual customers and situations

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Initiating Price Changes

• Price Cuts• Excess capacity• Falling market share• Dominate market through lower costs

• Price Increases• Cost inflation• Over-demand

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Responses to Price Changes• Buyer reactions to price changes• Competitor reactions to price changes• Firm responses to price changes

• Reduce price to match competition• Raise perceived quality of its offer• Improve quality and increase price• Launch a low-price “fighting brand”

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Public Policy and Pricing

• Price fixing• Predatory pricing• Price discrimination• Retail price maintenance• Deceptive pricing

• Promotion price reductions• Scanner fraud• Price confusion

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Recap—What was Covered?• Importance of understanding customer value

perceptions and company costs when setting prices

• Important internal and external factors affecting a firm’s pricing decisions

• The major strategies for pricing imitative and new products

• How companies find a set of prices that maximizes the profits from the total product mix

• How companies adjust their prices to account for different types of customers and situations

• Issues related to initiating and responding to price changes