Pricing
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Pricing
Discussion Question
1.1. What are some examples of products or What are some examples of products or services that use price discrimination in services that use price discrimination in marketing to consumers?marketing to consumers?
2.2. Are there any dangers associated with Are there any dangers associated with implementing a price discrimination implementing a price discrimination strategy for consumer goods or services? strategy for consumer goods or services?
Selling Selling identicalidentical products or services at different products or services at different prices to different customers (price discrimination) prices to different customers (price discrimination) is illegal in business-to-business marketingis illegal in business-to-business marketing except except under certain conditions. However, price under certain conditions. However, price discrimination (also called flexible pricing) is not discrimination (also called flexible pricing) is not illegal in business-to-consumer marketing.illegal in business-to-consumer marketing.
- Russell S. Winer
““Customer or perceived value is a Customer or perceived value is a measure of how much a customer measure of how much a customer is willing to pay for a product or is willing to pay for a product or service. Economists call this service. Economists call this concept the reservation price, the concept the reservation price, the most someone is willing to pay for most someone is willing to pay for a product (or the price at which the a product (or the price at which the product is eliminated from the product is eliminated from the customercustomer’’s budget).”s budget).”
Perceived Value
Customers perceive good or bad pricePrice vis a vis the benefits
derivedReference point – past price
perceived value > Price > costCharging less than the producer could obtainCustomers see this as a bargain price
Perceived Value
Price > perceived value > costCustomers won’t buy unless a monopoly exists.Price reductions or an increase in value are needed.
Price > cost > perceived valueUtter failure. Products are usually withdrawn.
Strategic Pricing Gap
Measuring Customer Value
Value in use
Useful for industrial products and services A reference point is chosenIncremental benefits are calculated
Measuring Customer ValueThe Economic Value Concept
Dollarmetric Scales
Measuring Customer Value
Pricing Experiments
Willingness to pay
Measuring Customer Value
Pricing Experiments
Measuring Customer ValueUsing the perceived value
concept:A functional relationship exists between market share, perceived value and price.
Market share = f (perceived value/price).
Improve the product Value added services - financing
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Copyright ©2011 Pearson Education, Inc., Publishing as Prentice Hall
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Perceived ValueTechniques for Increasing
Perceived ValueImprove the product quality.Invest in advertising the brand.Institute value-added services.Improve the sales effort by training the sales force to sell on value versus price.
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Competition and Pricing
Estimating competitors’ relative cost position allows managers to understand:
How low competitors can price their brands.Margins in the category or industry.
Several cost estimation methods exist.
Reverse engineeringUsing publicly available dataUsing efficiency ratios and other data to estimate service costsApplying the experience curve.
Copyright ©2011 Pearson Education, Inc., Publishing as Prentice Hall
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Cost based pricing
Costs are best used in the pricing decision to determine the price floor.Using costs to set price is problematic:
Totally ignores the customer.Which kind of cost should be used in setting price?Costs are often a function of volume, as dictated by the experience curve.
Factors in the Pricing Decision
Copyright ©2011 Pearson Education, Inc., Publishing as Prentice Hall
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Deciding How Much of the Deciding How Much of the Strategic Gap to CaptureStrategic Gap to Capture
Penetration PricingPenetration PricingLeaves less of the Leaves less of the market for the market for the competition competition Low margins less Low margins less attractive to new attractive to new entriesentriesStrong choice Strong choice when scale when scale effects existeffects exist
Not appropriate for Not appropriate for products characterized products characterized by perceived price-by perceived price-quality relationshipsquality relationshipsA strong competitive A strong competitive advantage neutralized advantage neutralized by low pricesby low pricesLimited flexibilityLimited flexibility
Copyright ©2011 Pearson Education, Inc., Publishing as Prentice Hall
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Deciding How Much of the Deciding How Much of the Strategic Gap to CaptureStrategic Gap to Capture
Skimming PricingSkimming PricingAppropriate for Appropriate for product categories product categories that are characterized that are characterized by perceived price-by perceived price-quality relationshipsquality relationshipsAppropriate when Appropriate when little chance of future little chance of future competition existscompetition exists
High margins increase High margins increase the likelihood of the likelihood of competitioncompetitionAppropriate when costs Appropriate when costs are unrelated to volume are unrelated to volume and when managers are and when managers are less concerned about less concerned about building significant building significant market sharemarket shareAppropriate early in PLCAppropriate early in PLC
Deciding How Much of the Strategic Gap to Capture
Pricing policies accomplish many objectives.
Penetration or market share pricingSkimming or prestige pricingReturn on sales or investment pricingPricing for stabilityCompetitive pricing
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Deciding How Much of the Strategic Gap to CaptureFactors Favoring Price WarsNew market entrantsExcess manufacturing capacitySlow sales growthFew, but large competitors
High exit barriersLow product differentiationHigh customer price sensitivityStrategic importance of a product or company
- Russell S. Winer
“A reference price is any standard of comparison against which a potential transaction or purchase price is compared.”
Specific Pricing Tactics
Product-line pricing tactics:Price bundling/unbundling (hamper/happy meal)Product-line pricing (lxi, vxi)Complementary pricing (videobox & game; printer & cartridge)
Visit infibeam.com to see various pricing tactics
Specific Pricing Tactics
Value pricingDiffers from penetration pricingRelates to customer expectations
EDLP
Ethical Considerations
Price is often a focus of ethical issues, particularly in a global context.Firms are frequently criticized for pricing policies.The motive for price increases matters to consumers.Price should be viewed as akin to the communications mix.
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