Armstrong mai12 inppt_09

Learning Objectives

• Identify the three major pricing strategies and discuss the importance of understanding customer value perceptions, company costs, and competitor strategies when setting prices.

• Identify and define the other important external and internal factors affecting a firm’s pricing decisions.

• Describe the major strategies for pricing new products.

Learning Objectives

• Explain how companies find a set of prices that maximizes the profits from the total product mix.

• Discuss how companies adjust their prices to take into account different types of customers and situations.

• Discuss the key issues related to initiating and responding to price changes.

First Stop: Trader Joe’s: A Special Twist on the Price—Value Equation—Cheap Gourmet

• Combination of a gourmet and discount food store

• Experiential shopping for customers• Lean operations and a focus on saving money

• Has relatively frugal prices than its competitors• Locates its stores in low-rent, out-of-the-way

locations• Spends very little for advertising

• Amount of money charged for a product or service

• Determines a firm’s market share and profitability

• Produces revenue

Figure 9.1 - Considerations in Setting Price

Customer Value-Based Pricing

• Based on buyers’ perceptions of value rather than on the seller’s cost

• Price is considered before the marketing program is set.

• Types of value-based pricing:• Good-value pricing• Value-added pricing

Figure 9.2 - Value-Based Pricing versus Cost-Based Pricing

Cost-Based Pricing

• Based on the costs of producing, distributing, and selling the product plus a fair rate of return for effort and risk

• Types of costs:• Fixed costs (overhead)• Variable costs• Total costs

Types of Cost-Based Pricing

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Figure 9.3 - Break-Even Chart for Determining Target Return Price and Break-Even Volume

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Competition-Based Pricing

• Based on competitors’ strategies, prices, costs, and market offerings

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Considerations Affecting Pricing Decisions

• Internal factors• Overall marketing strategy, objectives, and mix• Organizational considerations

• External factors• Nature of the market and demand• Economy• Parties in the external environment

• Resellers, government, and social concerns

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Overall Marketing Strategy, Objectives, and Mix

• Pricing decisions must coordinate with packaging, promotion, and distribution decisions.

• Positioning may be based on price.• Target costing: Start with an ideal selling price,

then targets costs that ensure the price is met

• Non-price positions can be created to differentiate the marketing offer.

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Organizational Considerations

• Determine who should set the price• Varies depending on the size and type of

company• Small companies - Top management• Large companies - Divisional or product

managers• Industries with price as the key factor - Pricing

departments

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Pricing in Different Types of Markets

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Figure 9.4 - Demand Curve

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Price Elasticity of Demand

• Measure of the sensitivity of demand to changes in price• Inelastic demand: Demand hardly changes with a

small change in price.• Elastic demand: Demand changes greatly with a

small change in price.

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Economy

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New Product Pricing Strategies

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Table 9.1 - Product Mix Pricing

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Table 9.2 - Price Adjustments

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Discount and Allowance Pricing

• Discount pricing - Reducing prices to reward customer responses such as paying early or promoting the product• Cash, quantity, functional, and seasonal

discounts• Allowances: Paid by manufacturers to retailers in

return for an agreement to feature the manufacturer’s products in some way• Trade-in and promotional allowances

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Segmented Pricing

• Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs

• Forms of segmented pricing:• Customer-segment pricing • Product form pricing• Location-based pricing• Time-based pricing

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Psychological Pricing

• Considers the psychology of prices and not simply the economics• Price says something about the product.

• Reference prices: Prices that buyers carry in their minds and refer to when looking at a given product

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Promotional Pricing

• Temporarily pricing products below the list price to increase short-run sales

• Forms of promotional pricing:• Discounts and special-event pricing• Limited-time offers and cash rebates • Low-interest financing and longer warranties• Free maintenance

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Geographical Pricing

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Dynamic and Internet Pricing

• Dynamic pricing: Adjusting prices continually to meet the characteristics and needs of individual customers and situations

• Prevalent online where Internet introduces fluid pricing

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International Pricing

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Initiating Price Changes

• Reasons for price cuts: • Excess capacity• Falling demand due to strong price competition

or a weakened economy• Attempt to dominate the market

• Reasons for price increases:• Cost inflation• Over-demand

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Reactions to Price Changes

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Figure 9.5 - Assessing and Responding to Competitor Price Changes

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Figure 9.6 - Public Policy Issues in Pricing

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Learning Objectives

• Identify the three major pricing strategies and discuss the importance of understanding customer value perceptions, company costs, and competitor strategies when setting prices.

• Identify and define the other important external and internal factors affecting a firm’s pricing decisions.

• Describe the major strategies for pricing new products.

9 - 34

Learning Objectives

• Explain how companies find a set of prices that maximizes the profits from the total product mix.

• Discuss how companies adjust their prices to take into account different types of customers and situations.

• Discuss the key issues related to initiating and responding to price changes.

9 - 35

mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

Armstrong mai12 inppt_09

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