pricing copyright 2010 sage publications, inc. 6-1

Pricing

Copyright 2010 SAGE Publications, Inc.6-1

Priceline.comReverse auction – 1997 – Jay

WalkerTravel industryCustomer bidsSelling unused space and seatsWilliam Shatner –

spokespersonTurbulent stock pricesFuture questionable

Copyright 2010 SAGE Publications, Inc.

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Price ConsiderationsAmount charged for good or servicePrice reflects complicated set of

circumstancesImpact on customer relationshipsEmotional factorsSituational factors



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Copyright 2010 SAGE Publications, Inc. 6-6

CustomerValue


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PricingObjectives

Setting PricesCost-oriented approachDemand-oriented approachCompetition-oriented approachProfit-oriented approach


Cost-Oriented ApproachCosts form the price floorMust cover fixed costs and variable

costsTwo most common approaches

Cost-plus pricingMarkup pricing



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Demand-Oriented ApproachInverse relationship between supply and

demandEquilibrium pointCalculating exact impact is very difficultCalculating demand at different price points

challengingPrice elasticity of demand



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Price Elasticity of DemandUnitary elasticityInelastic price pointElastic price pointProvide information about demand when price is

alteredExtraneous factors must be consideredPrice increase – inelastic price curvePrice decrease – elastic price curve



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Customer-Oriented ApproachOften used during mature stage of PLCHighly competitive industriesLarge array of brands and substitutesPrices are highly elasticBasic approaches

Below the industry averageAt the industry averageAbove the industry average


Profit-Oriented ApproachSet price highConsideration is maximum customers will

payDemand exceeds supply

Music concertsPrestige or “snob appeal”High quality goods or services


Pricing WithinComparable Brand SetsConsideration or evoked parity setCustomers expect to pay same for brands

within setBrand comparison perceptual map



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Pricing New ProductsPrice ceiling – Skimming price strategy

Product difficult to copyLevel of prestigeCopyright or patent protection

Price floor – Penetration price strategyStimulate demand quicklyBuild market shareDiscourages new entrants



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Factors in Pricing NewProducts

Incremental ApproachInitial price sets reference pricePrice based on incremental costsDoes not account for consumer benefit and

valuePortable bar code readers

Can lead to lost revenue and profits



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Factors to ConsiderWhen Changing thePricing of ExistingProducts

Changing Prices of Existing ProductsDecreasing price easier than increasing

pricePrice often declines

During growth and mature stage of PLCIntroduction of new technologies

First or followerWeber’s Law

Change must be greater than 10%Price increase – less than 10%Price decrease – greater than 10%


Price ReductionsDifferent than price discountConditions for reducing price

Lower production costsIncreased competitionMeet competitor’s price reductionDecline in demand


Price IncreasesMost common reason – increase in costsChallenge in deciding howIndustry leader often firstReaction of competitors and customersChallenge of being first


Methods for Increasing PriceIncrease all at once

Used in b-to-b marketsCustomers notifiedStrive to keep increase under 10%

Raise in small incrementsUsed in consumer marketsCustomer not notifiedEasy to drop prices if others do not followAvoids negative publicity because price change not

noticed


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LegalIssues inPricing

Deceptive Pricing – FTC Test

1. Did a substantial number of people or is the “typical person” left with a false impression or misrepresentation that relates to the product.

2. Did the misrepresentation induce people or the “typical person” to make a purchase?


Bait and Switch – FTC Test1. Inventory level – Did retailer order

sufficient additional merchandise for the sale.

2. Was undue pressure exerted by salespeople on customers to upgrade?

3. Where customers offered a “rain check” for the advertised model?


Predatory Pricing – FTC Designed to eliminate competition. Difficult to prove Okay to reduce prices to

Gain market share Increase sales Loss-leader pricing

FTC considerations Intent of price reduction Cost of merchandise



• Valuable skills for• finalizing sales• Making personal purchases• Negotiating salary packages• Bargaining for job and task assignments

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• Effective negotiator processes• Common interests• Conflicting interests• Criteria• Compromise•International Skills


How does Doris feel about the incident? Does Doris have a right to be upset? What should Doris do?

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How would you handle Doris? Which employee is right? How would you handle each employee? How can you prevent a re-occurrence?

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1. Describe emotional and situation factors impacting the price of cookies.2. Would the presence of independent bakery 2 blocks away change your

answer to Question 1?3. Has Susan completed all the necessary research? If not, what else?4. Based on the perceptual map, what prices would you suggest?5. If an error is made on the reference price, is it better for the error to be

too high or too low?6. Based on Table 6.9, what price would Susan charge if objective is

market share maximization? Sales maximization? Profit maximization?

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pricing copyright 2010 sage publications, inc. 6-1

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