Section 6 - Pricing

The Determinants of Pricing

Gillette Commands a Price Premium

Synonyms for Price

Rent Tuition Fee Fare Rate Toll Premium Honorarium

Special assessment

Bribe Dues Salary Commission Wage Tax

Pure CompetitionPure CompetitionMany Buyers and Sellers

Who Have Little Effect on the Price

Pure CompetitionPure CompetitionMany Buyers and Sellers

Who Have Little Effect on the Price

Monopolistic Monopolistic CompetitionCompetition

Many Buyers and Sellers Who Trade Over a

Range of Prices

Monopolistic Monopolistic CompetitionCompetition

Many Buyers and Sellers Who Trade Over a

Range of Prices

Pricing in Different Types of Markets

Market and Demand Factors Affecting Pricing Decisions

Oligopolistic Oligopolistic CompetitionCompetition

Few Sellers Who AreSensitive to Each Other’s

Pricing/ Marketing Strategies

Oligopolistic Oligopolistic CompetitionCompetition

Few Sellers Who AreSensitive to Each Other’s

Pricing/ Marketing Strategies

Pure MonopolyPure MonopolySingle Seller

Pure MonopolyPure MonopolySingle Seller

CHPT: 14-5

The Components of Total Cost Used in Determining Pricing

Total CostsSum of the Fixed and Variable Costs for a Given

Level of Production

Total CostsSum of the Fixed and Variable Costs for a Given

Level of Production

Fixed Costs(Overhead)

Costs that don’tvary with sales or production levels.

Rent on the ArenaTransportation

Salaries

Fixed Costs(Overhead)

Costs that don’tvary with sales or production levels.

Rent on the ArenaTransportation

Salaries

Variable Costs

Costs that do varydirectly with the

level of production.

Raw materialsPackagingMaterials

Variable Costs

Costs that do varydirectly with the

level of production.

Raw materialsPackagingMaterials

The Three C’s Modelfor Price Setting

Costs Competitors’prices andprices ofsubstitutes

Customers’assessmentof uniqueproductfeatures

Low Price

No possibleprofit at

this price

High Price

No possibledemand atthis price

Elastic Demand

Small change in price causes a significant change in quantity demanded Ferrari

Inelastic Demand

Change in price leads to little affect or change on quantity demanded Gasoline, Milk

Objectives in Setting Price

Increase profits Attract new customersMaintain current customersIncrease profit per customerIntroduce new product

Generate cash Improve Return On Investment

Attract New Customers

Introductory coupons / discounts provide incentive maintain reference price

Trial offers increase familiarity reduce risk

Problem perceived as unfair

Pricing Common Mistakes

Number one problem facing marketing executivesToo cost orientedNot revised enough to reflect

changes in marketDo not take entire marketing mix into

accountNot varied enough for different

products, different market segments, different purchase occasions

Price Cues

“Left to right” pricing ($299 vs. $300)

Odd number discount perceptions

Even number value perceptions

Ending prices with 0 or 5 “Sale” written next to price

Copyright © 2009 Pearson Education, Inc.  Publishing as

Prentice Hall 14-15

When to Use Price Cues

Customers purchase item infrequently

Customers are new Product designs vary

over time Prices vary

seasonally Quality or sizes vary

across stores

Pricing strategies change as the product passes through its life cycle

•PREMIUM STRATEGY • Producing a high-quality product and charging the highest price

•ECONOMY STRATEGY

•Producing a lower quality product but charging a low price

Rolex vs Timex watches

• GOOD VALUE STRATEGY

• “We have high quality, but at a lower price”

•OVERCHARGING STRATEGY•Company overprices its product in relation to its quality

•GM uses combination of strategies, offering various automobiles

Hummer – Cadillac - Pontiac

Marriott – Courtyard Marriott – Residence Inn

P/Q Higher Price Lower Price

HigherQuality

 

Premium Strategy 

Good Value Strategy

LowerQuality Overcharging

Strategy 

Economy Strategy

Pricing Strategies for New Products

“Penetration” is a market share maximization strategy

Penetration Pricing•Setting a low initial price

•Attract large number of buyers

•Win large market share

•Low price serves as barrier to entry for competitors

“Skimming” is a profit maximization strategy

Market Skimming – •Setting initial high prices for a short time before lowering prices to more competitive levels

•Ex: iPhone, new albums, movies

•As sales slow or competitors introduce similar products, price is lowered

•Follow-the-leader pricing strategy

•uses a particular competition as a model

•Variable pricing strategy

•offer price concessions to certain customer

•Flexible pricing strategy

•take into consideration special market conditions

•What the traffic will bear

•only used when there is little or no competition

Pricing Strategies

Differential Pricing Strategies Discriminatory pricing

• Selling same product/service to different buyers at different price

• Movies tickets sold to children/over 65 for discount

• Priceline.com

Second-market discounting

• Students get in free at Vanderbilt football games

• Golf courses weekend versus weekday pricing

When you name your price, the seller has already told Priceline what minimum price he is willing to accept. The difference from traditional retailing is that you, the buyer, don't know what that price is. That's a breakthrough, all right. For sellers. Priceline offers them a clever way to charge different prices to different customers, based on their willingness to pay.

Psychological Pricing Price is based on

consumer’s emotion and image rather than economy

Prestige Pricing Setting an artificially

high price to provide a distinct image

Reference Pricing Lesser know brands

featured next to name brands to reflect value

$999.99

VS

Product Line Pricing

Setting price steps between items in the same product line

Each product offers more features John Deere tractors 1200.00 – 5000.00 Armani Sports Coats 250 – 500 – 850

Prices should consider Differences between products, customer

evaluations of features, and benefits & competitors prices

Psychological Pricing Odd-Even Pricing

$9.95 vs $10.00 Traditional Pricing

Keep prices close to historical costs

Optional Product Pricing

Pricing optional or accessory products sold with the main product

Which products to include in base price, and which to offer as optionsCar – power windows, cruise

control, radio with CD player, DVD player

By-product Pricing

Pricing low-value by-products to get rid them, or to reduce the price of the main product Chicken processors sell feathers

to mattress and pillow makers Lumber mills sell bark and

sawdust as decorative mulch for home and commercial landscaping

Allows producer to reduce main product price and become more competitive

Captive Product Pricing

Pricing products that must be used with main productRazor blades used with special handleCamera film that is camera specificComputer software

Main products are priced low Set high markup on captive product

Two-part Pricing

The price of the service is broken into a fixed fee and a variable usage feeTelephone charges monthly rate – fixed

feeCharges for calls beyond certain amount of

minutes – variable usage fee Fixed amount must be low enough to

induce usage of service Profit is made on variable fees

Product Bundle Pricing

Combining several products and offering the combination at a price below that of buying the products individuallyTheatres & sports teams selling season

ticketsHotel packages that include room, meals,

and entertainmentRestaurants offer complete meals rather

than individual items from a la carte menu Promotes sale of products that might not

purchased otherwise

Bundling at Disney World

Products:

Each Park Entrance

“Hopper” Option

Where is the 1 day hopper?

(These are the 2005 prices)

Overcharging Pricing Cost is more than it is really worth.

Marketing Debate

Is the right price a fair price?

Take a position:1. Prices should reflect the value that consumers are willing to pay.

or

2. Prices should primarily just reflect the costinvolved in making a product.

Marketing Discussion

Think of all the pricing methods described in this lecture.

As a consumer, which pricing methods have you personally experienced? Which pricing method do you personally prefer to deal with?