Chapter TwelveChapter Twelve

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Pricing StrategiesPricing Strategies

Chapter ObjectivesChapter Objectives

Define pricing and examine the external Define pricing and examine the external and internal influences on pricing and internal influences on pricing decisionsdecisions

Examine the different price objectivesExamine the different price objectives Address the various pricing strategiesAddress the various pricing strategies Address strategic marketing Address strategic marketing

applications in relation to pricingapplications in relation to pricing Address strategies that companies to Address strategies that companies to

use change pricesuse change prices

Influences on Pricing Influences on Pricing DecisionsDecisions

External influencesExternal influences Consumer influencesConsumer influences Economic influencesEconomic influences Intermediaries’ Intermediaries’

influencesinfluences Competitive influencesCompetitive influences Government influenceGovernment influence

Internal influencesInternal influences

External Influences on External Influences on

PricePrice Consumer InfluenceConsumer InfluenceLaw of Demand: Consumers purchase more products Law of Demand: Consumers purchase more products at lower prices than at higher prices. Companies can at lower prices than at higher prices. Companies can influence demand, e.g., by promoting. The price is influence demand, e.g., by promoting. The price is equal to a consumers willingness to pay.equal to a consumers willingness to pay. (WTP) (WTP)

Price Price

Quantity Demanded

Quantity Demanded

D'DWhen

increasing promotion

External Influences on External Influences on PricePrice::

Economic Influences on Costs and Economic Influences on Costs and

PricePrice Economic Economic Factors:Factors:

- Inflation Inflation - Recession Recession - Interest Interest

RatesRates- TaxesTaxes

influence Cost of producing a product

Change Pricing decisions

External Influences on External Influences on PricePrice: :

Intermediaries’ Influences on Intermediaries’ Influences on PricePrice

Intermediaries are trying to have some Intermediaries are trying to have some level of control over their own mark-up. level of control over their own mark-up. The following are ways to accomplish it:The following are ways to accomplish it: Just-in-Time delivery methodsJust-in-Time delivery methods Quick Response Inventory SystemsQuick Response Inventory Systems Electronic Data InterchangeElectronic Data Interchange

Goal is to lower inventory Goal is to lower inventory carrying costs and accelerate the carrying costs and accelerate the flow of products.flow of products.

External Influences on External Influences on Price:Price:

Competitive Influences on Competitive Influences on PricePrice Companies need to consider the competitive Companies need to consider the competitive

environment and the firm’s position relative to environment and the firm’s position relative to competitors when making pricing decisions.competitors when making pricing decisions.

A company can only control the priceA company can only control the price

at the beginning of the product life at the beginning of the product life cycle, or when it is the market leader.cycle, or when it is the market leader.

During the maturity stage companies normally During the maturity stage companies normally start competing on price and profits go down. start competing on price and profits go down.

External Influences on External Influences on Price: Price:

Government’s Influence on Government’s Influence on PricePrice

The government has enacted legislation to The government has enacted legislation to protect competitors, channel members, and protect competitors, channel members, and consumers from unfair pricing strategiesconsumers from unfair pricing strategies..

PoliciesPoliciesPrice discriminationPrice discrimination Predatory pricingPredatory pricing

Price fixingPrice fixing Bait-and-SwitchBait-and-Switch

Resale price maintenanceResale price maintenance etc.etc.

Internal Influences on Internal Influences on PricePrice

Depending on the size, the organizational Depending on the size, the organizational structure, and the industry focus, either structure, and the industry focus, either the company owner, the brand managers, the company owner, the brand managers, or a board of executives make the pricing or a board of executives make the pricing decisions.decisions.

Fixed Costs,Variable Costs:Fixed Costs,Variable Costs: Total Costs = Fixed + Variable Total Costs = Fixed + Variable

CostsCosts(At a particular level of production) (At a particular level of production)

Setting Pricing ObjectivesSetting Pricing Objectives

Pricing objectives have to be set in Pricing objectives have to be set in line with company goals.line with company goals.

Profit-based pricingProfit-based pricing

Sales-based pricingSales-based pricing

Status Quo pricing*Status Quo pricing*

Others* e.g., survival, cash flow, social, Others* e.g., survival, cash flow, social, imageimage

Pricing StrategiesPricing Strategies

Cost-based pricingCost-based pricing Demand-based pricingDemand-based pricing Competition-based pricingCompetition-based pricing Combination pricingCombination pricing

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Cost-plus pricingCost-plus pricing Markup pricingMarkup pricing Breakeven Breakeven pricingpricing Target profit Target profit pricingpricing

Cost-Based PricingCost-Based Pricing

Demand-Based Pricing*Demand-Based Pricing*

Demand-based pricing:Demand-based pricing: Considers Considers customer’s perceptions of value, rather customer’s perceptions of value, rather than the seller’s cost, as the fundamental than the seller’s cost, as the fundamental component of the pricing decision component of the pricing decision

a.k.a. Psychological pricinga.k.a. Psychological pricing Reference priceReference price Prestige pricingPrestige pricing Odd-Even pricingOdd-Even pricing

“What the market will bear”

Competition-Based Competition-Based

PricingPricing Price can be above, below, Price can be above, below,

or equal to competition.or equal to competition. Best for brands in similar Best for brands in similar

markets, similar demand markets, similar demand patterns, and similar costs.patterns, and similar costs.

Price leadership (oligopoly markets)Price leadership (oligopoly markets) Bid-pricing Bid-pricing

(note “Demand-Backward Pricing*”)(note “Demand-Backward Pricing*”)

Combination PricingCombination Pricing

Often used in practiceOften used in practice

Typical scenario:Typical scenario:-Cost-based often use to -Cost-based often use to establish price floorestablish price floor-Use demand and competition -Use demand and competition pricing strategies to estimate pricing strategies to estimate priceprice-Use markup to calculate actual -Use markup to calculate actual selling priceselling price

Strategic Marketing Strategic Marketing Applications*Applications*

Price variability and marketing Price variability and marketing strategystrategy

New product pricingNew product pricing Product and pricingProduct and pricing Promotion and pricingPromotion and pricing Place and pricingPlace and pricing

Price Variability and Price Variability and Marketing StrategyMarketing Strategy

Customary pricingCustomary pricing Flexible pricingFlexible pricing No-haggle pricing (Everyday low No-haggle pricing (Everyday low

prices*)prices*) Price discounting*Price discounting*

QuantityQuantity TradeTrade SeasonalSeasonal Promotional/AdvertisingPromotional/Advertising CashCash

Allowances* (e.g., Trade-in, Rebate)Allowances* (e.g., Trade-in, Rebate)

Initial Pricing StrategiesInitial Pricing Strategies Penetration Pricing: Initially price the Penetration Pricing: Initially price the

product below competition to quickly product below competition to quickly gain market sharegain market share

Skimming Pricing: Product priced Skimming Pricing: Product priced above competition (high perceived above competition (high perceived quality and high profit-margins)quality and high profit-margins)

Introductory Pricing*: VeryIntroductory Pricing*: Very short term short term deep price reduction to induce trialdeep price reduction to induce trial

Initial Price Setting*Initial Price Setting* List pricesList prices Keystone and variationsKeystone and variations

New Product PricingNew Product Pricing

The Product and PricingThe Product and Pricing

Product line pricingProduct line pricing Accessory pricingAccessory pricing Captive-product Captive-product

(Complementary*) (Complementary*) pricingpricing

BundlingBundling Transfer pricing*Transfer pricing*

Promotion and PricingPromotion and Pricing

Multiple-unit Multiple-unit pricingpricing

Promotional pricingPromotional pricing Loss-leader pricingLoss-leader pricing Comparison Comparison

pricing*pricing*

Place and Pricing Place and Pricing Distribution and PricingDistribution and Pricing

Geographic pricing*Geographic pricing* FOB OriginFOB Origin FOB Destination, i.e., Delivered FOB Destination, i.e., Delivered

PricingPricing Uniform (Single Zone)Uniform (Single Zone) Zone (Multiple Zone)Zone (Multiple Zone)