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D.V. Madhusudan Rao Dept. MBA, School of Graduate Studies, Jigjiga University ETHOPIA MARKETING MANAGEMENT Developing Pricing Strategies 18-2-2013 10.00 PM 1

Learning Objectives:

Learning Objectives After studying this chapter, you should be able to: Describe the major strategies for pricing initiative and new products Explain how companies find a set of prices that maximize 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 18-2-2013 10.00 PM 2

Pricing Products:

Pricing Products New-Product Pricing Strategies Product Mix Pricing Strategies Price Adjustment Strategies Price Changes Topic Outline

What Is a Price?:

Price is the only element in the marketing mix that produces revenue; all other elements represent costs. So Cost = FACT ; Price ( cost+Margin ) = POLICY What Is a Price? 18-2-2013 10.00 PM 4

PowerPoint Presentation:

Pricing Puzzle Production costs Indirect costs Advertising costs Distribution costs Manufacturer’s margin Distributor’s margin Seller’s margin Product performance Usefulness & Quality Image / Aspirations Brand Equity Availability Distribution Strategy Service Before/During & After sales Minimize Optimize Maximize Costs + Margins = PRICE VALUE


Value is a ratio between what customer gets and what he gives Value = Benefits/Costs How to increase its Value? Raise benefits Reduce costs Raise benefits and reduce costs Raise benefits by more than the raise of costs Lower benefits by less than the reduction of costs VALUE

A Secret Pie:

A Secret Pie Impact of a 1 % price increase on profits Coca-Cola 6,4 % Nestlé 17,5 % Ford 26,0 % Philips 28,7 %

Synonyms for Price:

Synonyms for Price Rent Tuition Fee Fare Rate Toll Premium Honorarium Wage Special assessment Bribe Dues Salary Interest Donation Commission Tax 18-2-2013 10.00 PM 8

Common Pricing Mistakes:

Common Pricing Mistakes Determine costs and take traditional industry margins Failure to revise price to capitalize on market changes Setting price independently of the rest of the marketing mix Failure to vary price by product item, market segment, distribution channels, and purchase occasion 18-2-2013 10.00 PM 9

Pricing Puzzle:


Pricing Puzzle:

Pricing Puzzle 4 P’s PRODUCT PRICE PLACE PROMOTION 4 C’s CUSTOMER VALUE COST CONVENIENCE COMMUNICATION “ Tomorrow’s winner companies will be those who offer distinct products at comparatively low market prices ”

Key = Differentiation:

Physical Differences Features, performance, durability, conformance, design, etc… Availability Differences Distribution channels ; Stores, mail-order, internet, etc… Service Differences Delivery, installation, training, consulting, maintenance, etc… Price Differences Price positioning (Very high / High / Medium / Low / Very Low) Image Differences Symbols, atmosphere, events, media, etc… Key = Differentiation The key to drive value is to offer relevant and distinctive product differentiation

Key = Differentiation:

Physical Differences Levi’s Engineered Jeans (Ergonomic construction, durability, style) Availability Differences Dell Computer’s customized production, Volkswagen “ e.lupo ” Service Differences Ac ıbadem Hospital – Mother Care Division, Nissan “5-year Warranty” Image Differences Audi vs Mercedes, DuPont (Innovation Leader) Differentiation : Examples Key = Differentiation

Key = Differentiation:

Perdue Chicken (USA) Guaranteed tenderness (30 % market-share, 10 % premium pricing) Flora Drinking Water (Turkey – Sabanc ı Holding ) Service, packaging, attributes, operation Starbuck’s Coffee (USA) Atmosphere, standard service Differentiating commodities… Key = Differentiation Everything can be differentiated !...

Pricing Decisions:

Pricing Decisions INTERNAL FACTORS Marketing Objectives Positioning Target Group Marketing Mix Strategy 4 P’s Costs Fixed & Variable Management Approach Responsibility Perspective EXTERNAL FACTORS Market Pure Competition Monopolistic Competition Oligopolistic Competition Pure Monopoly Demand Elastic / Inelastic Competition Competitors’ offers Competitiors’ reactions Economy Buying power Government Influence Laws & Regulations

Consumer Psychology and Pricing:

Consumer Psychology and Pricing Reference Prices Price-quality inferences Price endings Price cues 18-2-2013 10.00 PM 16

Table 14.1 Possible Consumer Reference Prices:

Table 14.1 Possible Consumer Reference Prices “Fair price” Typical price Last price paid Upper-bound price Lower-bound price Competitor prices Expected future price Usual discounted price 18-2-2013 10.00 PM 17

Price–Quality Inferences: An Image pricing for ego-sensitive products. Eg: Perfumes, cars (over-valued and under-valued) When information about true quality is known, price becomes a less significant indicator of quality. When information is not available, price acts as a signal of quality.:

Price–Quality Inferences: An Image pricing for ego-sensitive products. Eg : Perfumes, cars (over-valued and under-valued) When information about true quality is known, price becomes a less significant indicator of quality. When information is not available, price acts as a signal of quality. Price endings: Price tags end with 0 and 5 or 9 are commonly seen examples.

Price Cues:

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 18-2-2013 10.00 PM 19

Steps in Setting the Price :

20 Steps in Setting the Price 18-2-2013 10.00 PM

Pricing Strategies:

Pricing Strategies 18-2-2013 10.00 PM 21

Internal Factors Affecting Pricing Decisions: Marketing Objectives:

Marketing Objectives Survival Low Prices to Cover Variable Costs and Some Fixed Costs to Stay in Business. Current Profit Maximization Choose the Price that Produces the Maximum Current Profit, Etc. Market Share Leadership Low as Possible Prices to Become the Market Share Leader. Product Quality Leadership High Prices to Cover Higher Performance Quality and R & D. Internal Factors Affecting Pricing Decisions: Marketing Objectives

Internal Factors Affecting Pricing Decisions: Marketing Mix :

Price Product Design Distribution Promotion Nonprice Positions Internal Factors Affecting Pricing Decisions: Marketing Mix Customers Seek Products that Give Them the Best Value in Terms of Benefits Received for the Price Paid.

External Factors Affecting Pricing Decisions:

Market and Demand Competitors’ Costs, Prices, and Offers Other External Factors Economic Conditions Reseller Needs Government Actions Social Concerns External Factors Affecting Pricing Decisions

Market Skimming:

Market Skimming 18-2-2013 10.00 PM 25

New-Product Pricing Strategies:

New-Product Pricing Strategies Market-skimming pricing Market-penetration pricing Intermediate Pricing

Market Skimming:

Market Skimming Market-skimming pricing is a strategy for setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price, the company make fewer (low volume) but more profitable sales. Product quality and image must support the price Buyers must want the product at the price Costs of producing the product in small volume should not cancel the advantage of higher prices Competitors should not be able to enter the market easily Suitable for products that have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out) Examples include: Playstation , jewellery, digital technology, new DVDs, Bic , Biro etc

Market-skimming pricing:

For example when Sony introduced the world first high definition television ( HDTV ) to the Japanese market , the high tech sets cost 43,000$ . These televisions were purchased only by customers who really wanted the new technology and afford to pay high prices. Market-skimming pricing 18-2-2013 10.00 PM 28

Penetration Pricing:

Penetration Pricing 18-2-2013 10.00 PM 29

Market Penetration Contd..:

Market Penetration Contd.. Market-penetration pricing sets a low initial price in order to penetrate the market quickly and deeply to attract a large number of buyers quickly to gain market share Price sensitive market Production and distribution costs must fail as sales volume increases. Low prices must keep competition out of the market

Market-penetration pricing:

For example ,Dell used penetration pricing to enter the personal computer market, selling high quality computer products through lower cost direct channels. Market-penetration pricing 18-2-2013 10.00 PM 31

PowerPoint Presentation:

32 Price-Quality Strategies Philip Kotler identified 9 price-quality strategies Premium High Value Super Value Over Charging Mid Value Good Value Rip-off False Economy Economy High Quality Low Quality High Price Low Price 18-2-2013 10.00 PM Middle Quality Mid Price

Product Mix Pricing Strategies:

Product Line Pricing Setting Price Steps Between Product Line Items i.e. $299, $399 Optional-Product Pricing Pricing Optional or Accessory Products Sold With The Main Product i.e. Car Options Captive-Product Pricing Pricing Products That Must Be Used With The Main Product i.e. Razor Blades, Film, Software By-Product Pricing Pricing Low-Value By-Products To Get Rid of Them i.e. Lumber Mills, Zoos Product-Bundle Pricing Pricing Bundles Of Products Sold Together i.e. Season Tickets, Computer Makers Product Mix Pricing Strategies Product Mix Pricing Strategies 18-2-2013 10.00 PM 33

Product line pricing:

Product line pricing Product line pricing takes into account the cost differences between products in the line, customer evaluation of their features, and competitors’ prices * For example channel offers 20 different collections of bags of all shapes and sizes at price that range from under $50 to more than $1,250.

Optional Product pricing:

Optional Product pricing Optional-product pricing takes into account optional or accessory products along with the main product For example : a car buyer may choose to order a GPS navigation system & Bluetooth wireless communication. Refrigerators come with optional ice maker

Captive-product pricing:

Captive-product pricing Captive-product pricing involves products that must be used along with the main product Examples of Captive products are razor blade cartridges , Gillette once you bought the razor, you are committed to buying replacement cartridges at $25 an eight pack

Two-part pricing:

Two-part pricing Two-part pricing involves breaking the price into: Fixed fee Variable usage fee For example : Jawwal company charge a flat rate for a basic calling plan, then charge for minutes over what the plan allows. The service firm must decide how much to charge for the basic service and how much for the variable usage. Another example is when you visit a park , you pay a ticket charge + fee for food and additional feature

By-product pricing:

By-product pricing By-product pricing refers to products with little or no value produced as a result of the main product. Producers will seek little or no profit other than the cost to cover storage and delivery. Petroleum products often results in by-products.

Product bundle pricing:

Product bundle pricing Product bundle pricing combines several products at a reduced price For example : fast food restaurants bundle a burger , fries and a soft drink at a combo price

Step 2: Determining Demand:

Step 2: Determining Demand 1.Price Sensitivity 2. Estimating Demand Curves 3. Price Elasticity of Demand 18-2-2013 10.00 PM 40

Fig 14.2 Inelastic and Elastic Demand:

Fig 14.2 Inelastic and Elastic Demand 18-2-2013 10.00 PM 41 1.Price sensitivity

Table 14.3 Factors Leading to Less Price Sensitivity:

Table 14.3 Factors Leading to Less Price Sensitivity The product is more distinctive Buyers are less aware of substitutes Buyers cannot easily compare the quality of substitutes Expenditure is a smaller part of buyer’s total income Expenditure is small compared to the total cost Part of the cost is paid by another party Product is used with previously purchased assets Product is assumed to have high quality and prestige Buyers cannot store the product 18-2-2013 10.00 PM 42

Influence of Elasticity:

Influence of Elasticity Any pricing decision must be mindful of the impact of price elasticity The degree of price elasticity impacts on the level of sales and hence revenue Elasticity focuses on proportionate (percentage) changes PED = % Change in Quantity demanded/% Change in Price 18-2-2013 10.00 PM 43

Price Elasticity of Demand:

Price Elasticity of Demand

Influence of Elasticity:

Influence of Elasticity Price Inelastic: % change in Q < % change in P e.g. a 5% increase in price would be met by a fall in sales of something less than 5% Revenue would rise A 7% reduction in price would lead to a rise in sales of something less than 7% Revenue would fall 18-2-2013 10.00 PM 45

Influence of Elasticity contd..:

Influence of Elasticity contd.. Price Elastic: % change in quantity demanded > % change in price e.g. A 4% rise in price would lead to sales falling by something more than 4% Revenue would fall A 9% fall in price would lead to a rise in sales of something more than 9% Revenue would rise 18-2-2013 10.00 PM 46

Step 3: Estimating Costs:

Step 3: Estimating Costs Types of costs Cost Terms and Production Fixed costs Variable costs Total costs Average cost Cost at different levels of production Accumulated production Activity-Based Cost accounting Target costing 18-2-2013 10.00 PM 47

Figure 14.3 Cost Per Unit at Different Levels of Production:

Figure 14.3 Cost Per Unit at Different Levels of Production 18-2-2013 10.00 PM 48

Figure 14.4 Estimating Cost per Unit as a Function of Accumulated Production:

Figure 14.4 Estimating Cost per Unit as a Function of Accumulated Production 18-2-2013 10.00 PM 49

Target Costing:

Target Costing 18-2-2013 10.00 PM 50

Step 4: Analysing Competitors’ Costs, Prices and Offers:

Step 4: Analysing Competitors’ Costs, Prices and Offers

Step 5: Selecting a Pricing Method:

Step 5: Selecting a Pricing Method Markup pricing Target-return pricing Perceived-value pricing Value pricing Going-rate pricing Auction-type pricing

Markup /Cost-Plus Pricing :

Markup /Cost-Plus Pricing 18-2-2013 10.00 PM 53

Markup/ Cost-Plus Pricing contd..:

Markup / Cost-Plus Pricing contd.. Calculation of the average cost (AC) plus a mark up AC = Total Cost/Output Eg : An Immersion Rod mfg. costs are: Variable C=$10, FC=$300,000, Expected unit sales = 50,000. A Unit Cost = VC + FC/Unit sales =10+300k/50k = $16. IF mfr. Wants to earn a 20% markup on sales, Markup price = Unit cost/ 1-desired return on sales = $16/1-0.2 = $20 per unit Hence Mfr can sell to Dealers at $ 20 and earn $4 as profit 18-2-2013 10.00 PM 54

BEP / Target-return pricing:

BEP / Target-return pricing An expected percentage of profit on mfr’s investment (Return on Investment) Target-return pricing = Unit Cost + Desired return x Invested Capital Unit Sales Break-Even Volume = Fixed Cost (Price - Variable Cost)

Figure 14.6 Break-Even Chart:

Figure 14.6 Break-Even Chart 18-2-2013 10.00 PM 56


BE= Fixed Costs/Contribution (SP-VC) Example - Meal - SP = $20, VC = $8 Fixed costs are $2400 a day BE=$2400/$12 = 200 Need to sell 200 meals @ $20 to break-even VC = 40%, contribution = 60% BE = $2400/.6 = $4000 Break-Even

Break-even Analysis or Target Profit Pricing:

Break-even Analysis or Target Profit Pricing

Perceived Value Pricing Table 14.2 Consumer Perceptions vs. Reality for Cars:

Perceived Value Pricing Table 14.2 Consumer Perceptions vs. Reality for Cars Overvalued Brands Land Rover Kia Volkswagen Volvo Mercedes Undervalued Brands Mercury Infiniti Buick Lincoln Chrysler

Some important pricing definitions:

Some important pricing definitions Utility: The attribute that makes it capable of want satisfaction Value: The worth in terms of other products Price: The monetary medium of exchange. Value Example : Caterpillar Tractor is $100,000 vs. Market $90,000 $90,000 if equal 7,000 extra durable 6,000 reliability 5,000 service 2,000 warranty $110,000 in benefits - $10,000 discount!

Value Pricing:

Value Pricing 18-2-2013 10.00 PM 61

Value Pricing contd..:

Value Pricing contd.. Price set in accordance with customer perceptions about the value of the product/service Examples include status products/exclusive products Companies may be able to set prices according to perceived value. Copyright: 18-2-2013 10.00 PM 62

Going Rate (Price Leadership):

Going Rate (Price Leadership) 18-2-2013 10.00 PM 63

Going Rate (Price Leadership):

Going Rate (Price Leadership) In case of price leader, rivals have difficulty in competing on price – too high and they lose market share, too low and the price leader would match price and force smaller rival out of market May follow pricing leads of rivals especially where those rivals have a clear dominance of market share Where competition is limited, ‘going rate’ pricing may be applicable – banks, petrol, supermarkets, electrical goods – find very similar prices in all outlets 18-2-2013 10.00 PM 64

Auction / Tender Pricing:

Auction / Tender Pricing 18-2-2013 10.00 PM 65

Auction-Type Pricing:

Auction-Type Pricing English auctions Dutch auctions Sealed-bid auctions

Step 6: Selecting the Final Price:

Step 6: Selecting the Final Price Impact of other marketing activities Company pricing policies Gain-and-risk sharing pricing Impact of price on other parties

Price-Adjustment/ Adaption Strategies :

Price-Adjustment/ Adaption Strategies Price Adaptation Strategies Discount & Allowance Reducing Prices to Reward Customer Responses such as Paying Early or Promoting the Product. Segmented Adjusting Prices to Allow for Differences in Customers, Products, or Locations. Cash Discount Quantity Discount Functional Discount Seasonal Discount Customer Product Form Location Time Trade-In Allowance 18-2-2013 10.00 PM 68

Price-Adjustment Strategies :

Price-Adjustment Strategies Adjusting Prices for Psychological Effect. Price Used as a Quality Indicator. Temporarily Reducing Prices to Increase Short-Run Sales. i.e. Loss Leaders, Special-Events Adjusting Prices to Account for the Geographic Location of Customers. i.e. FOB -Origin, Uniform-Delivered, Zone Pricing, Basing-Point, & Freight-Absorption. Adjusting Prices for International Markets. Price Depends on Costs, Consumers, Economic Conditions & Other Factors. Psychological Pricing Promotional Pricing Geographical Pricing International Pricing 18-2-2013 10.00 PM 69

Price-Adjustment Strategies contd..:

Price-Adjustment Strategies contd.. Geographical pricing is used for customers in different parts of the country or the world FOB pricing Uniformed-delivery pricing Zone pricing Basing-point pricing Freight-absorption pricing Counter trade ( Barter,Compensation deal, Buyback arrangement, Offset)

Price Adjustment Strategies:

Price Adjustment Strategies FOB (free on board) pricing means that the goods are delivered to the carrier and the title and responsibility passes to the customer Uniformed-delivery pricing means the company charges the same price plus freight to all customers, regardless of location

Price Adjustment Strategies:

Price Adjustment Strategies Zone pricing means that the company sets up two or more zones where customers within a given zone pay a single total price Basing-point pricing means that a seller selects a given city as a “basing point” and charges all customers the freight cost associated from that city to the customer location, regardless of the city from which the goods are actually shipped

Price-Adjustment Strategies:

Price-Adjustment Strategies Freight-absorption pricing means the seller absorbs all or part of the actual freight charge as an incentive to attract business in competitive markets

Price-Adjustment Strategies:

Price-Adjustment Strategies Dynamic pricing is when prices are adjusted continually to meet the characteristics and needs of the individual customer and situations Ex. Alaska airlines creates unique prices and advertisements for people as they surf the web

Price Adjustment Strategies:

Price Adjustment Strategies International pricing is when prices are set in a specific country based on country-specific factors Economic conditions Competitive conditions Laws and regulations Infrastructure Company marketing objective

International pricing:

For example : Boeing sells its jetliners at about the same price everywhere, whether in the United states , Europe or the third world A pair of Levi’s selling for $30 in Canada might go for $ 63 in Tokyo and $ 88 in Paris International pricing 18-2-2013 10.00 PM 76

Discount and allowance pricing:

Discount and allowance pricing Discount and allowance pricing reduces prices to reward customer responses such as paying early or promoting the product Discounts Allowances

Price-Adjustment Strategies:

Price-Adjustment Strategies Price Discounts and Allowances Quantity discount : The more you buy, the cheaper it becomes-- cumulative and non-cumulative. Trade discounts” functional” : Reductions from list for functions performed-- storage, promotion. Cash discount : A deduction granted to buyers for paying their bills within a specified period of time , ( after first deducting trade and quantity discounts from the base price ) 18-2-2013 10.00 PM

Price Adjustment Strategies:

Price Adjustment Strategies Functional discount : discount offered by a manufacturer to trade-channel members if they will perform certain functions. Seasonal discount : a price reduction to those who buy out of season. Allowance : an extra payment designed to gain reseller participation in special programs. Trade in allowances: are price reductions given for turning in an old item when buying a new one ( Automobiles industry) Promotional allowances: are payments or price reductions to reward dealer for participating in advertising and sales support program 18-2-2013 10.00 PM

Promotional Pricing Tactics:

Promotional Pricing Tactics Loss-leader pricing Special-event pricing Cash rebates Low-interest financing Longer payment terms Warranties and service contracts Psychological discounting

Price-Adjustment Strategies:

Price-Adjustment Strategies Promotional pricing is when prices are temporarily priced below list price or cost to increase demand Loss leaders Special event pricing Cash rebates Low-interest financing Longer warrantees Free maintenance

Price-Adjustment strategies:

Price-Adjustment strategies Promotional Pricing Loss-leader pricing : supermarkets and department stores often drop the price on well known brands to stimulate additional store traffic Special-event pricing : sellers well establish special pricing in certain seasons to draw in more customers Cash rebates : companies offer cash rebates to encourage purchase of the manufacturers products within a specified time period Low-interest financing : the company can offer customers low-interest financing 18-2-2013 10.00 PM

Price-Adjustment strategies:

Price-Adjustment strategies Longer payment terms : sellers especially mortgage banks and auto companies stretch loans over longer periods and thus lower the monthly payment Warranties and service contracts : companies can promote sales by adding a free or low cost warranty or service contract 18-2-2013 10.00 PM

Price-Adjustment Strategies:

Price-Adjustment Strategies Risks of promotional pricing Used too frequently, and copies by competitors can create “deal-prone” customers who will wait for promotions and avoid buying at regular price Creates price wars

Differentiated/segmented Pricing:

Differentiated/segmented Pricing Customer-segment pricing Product-form pricing Image pricing Channel pricing Location pricing Time pricing Yield pricing 18-2-2013 10.00 PM 85

Price-Adjustment Strategies:

Price-Adjustment Strategies Segmented pricing is used when a company sells a product at two or more prices even though the difference is not based on cost

Segmented pricing:

Customer segment pricing: different customers pay different prices for the same product or service . For ex. Museums charge a lower admission for students . Product from pricing: different versions of the product are priced differently but not according to differences in their costs Location pricing: company charges different prices for different locations Time pricing : a firm varies it prices by the season , the month , the day and even the hour Segmented pricing 18-2-2013 10.00 PM 87

Price-Adjustment Strategies:

Price-Adjustment Strategies To be effective: Market must be segmentable Segments must show different degrees of demand Watching the market cannot exceed the extra revenue obtained from the price difference Must be legal Segmented Pricing

Price-Adjustment Strategies:

Price-Adjustment Strategies Psychological pricing occurs when sellers consider the psychology of prices and not simply the economics” the price is used to say something about the product” Reference prices are prices that buyers carry in their minds and refer to when looking at a given product Noting current prices Remembering past prices Assessing the buying situations For example : a company could display its product next to more expensive ones in order to imply that it belongs in the same class

Initiating and Responding to Price Changes:

Initiating and Responding to Price Changes Initiating Price Increases Competitor Reactions to Price Changes Initiating Price Cuts Buyer Reactions to Price Changes Price Changes 18-2-2013 10.00 PM 90

Traps in Price Cutting Strategies:

Traps in Price Cutting Strategies Low-quality trap Fragile-market-share trap Shallow-pockets trap Price-war trap 18-2-2013 10.00 PM 91

Should We Raise Prices?:

Should We Raise Prices? 18-2-2013 10.00 PM 92

Methods for Increasing Prices:

Methods for Increasing Prices Delayed quotation pricing Escalator clauses Unbundling Reduction of discounts 18-2-2013 10.00 PM 93

Price Changes:

Price Changes Initiating Pricing Changes

Price Changes contd..:

Price Changes contd.. Buyer Reactions to Pricing Changes

Price Changes:

Price Changes Questions Why did the competitor change the price? Is the price cut permanent or temporary? What is the effect on market share and profits? Will competitors respond? Responding to Price Changes

Price Changes contd…:

Price Changes contd … Solutions Reduce price to match competition Maintain price but raise the perceived value through communications Improve quality and increase price Launch a lower-price “fighting” brand Responding to Price Changes

PowerPoint Presentation:

Brand Leader Responses to Competitive Price Changes Hold Current Price; Continue to Monitor Competitor’s Price. Reduce Price Raise Perceived Quality Improve Quality & Increase Price Launch Low-Price “Fighting Brand” Has Competitor Cut Price? Will Lower Price Negatively Affect Our Market Share & Profits? Can/ Should Effective Action be Taken? Yes No No No 18-2-2013 10.00 PM 98

A frame work for responding to Low-Cost Rivals:

A frame work for responding to Low-Cost Rivals

Public Policy and Pricing:

Public Policy and Pricing Price fixing : Sellers must set prices without talking to competitors Predatory pricing : Selling below cost with the intention of punishing a competitor or gaining higher long-term profits by putting competitors out of business , this will protect small sellers from larger ones Pricing Within Channel Levels

Public Policy and Pricing contd..:

Public Policy and Pricing contd.. Robinson- Patman Act prevents unfair price discrimination by ensuring that the seller offer the same price terms to customers at a given level of trade Pricing Across Channel Levels

Public Policy and Pricing contd…:

Public Policy and Pricing contd … Robinson- Patman Act Price discrimination is allowed: If the seller can prove that costs differ when selling to different retailers If the seller manufactures different qualities of the same product for different retailers Pricing Across Channel Levels

Public Policy and Pricing:

Public Policy and Pricing Retail (or resale) price maintenance is when a manufacturer requires a dealer to charge a specific retail price for its products

Public Policy and Pricing contd…:

Public Policy and Pricing contd … Deceptive pricing occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers Scanner fraud failure of the seller to enter current or sale prices into the computer system Price confusion results when firms employ pricing methods that make it difficult for consumers to understand what price they are really paying Pricing Across Channel Levels

Loss Leader:

Loss Leader 18-2-2013 10.00 PM 105

Loss Leader contd..:

Loss Leader contd.. Goods/services deliberately sold below cost to encourage sales elsewhere Typical in supermarkets, e.g. at Christmas, selling bottles of gin at £3 in the hope that people will be attracted to the store and buy other things Purchases of other items more than covers ‘loss’ on item sold e.g. ‘Free’ mobile phone when taking on contract package 18-2-2013 10.00 PM 106

Psychological Pricing:

Psychological Pricing 18-2-2013 10.00 PM 107

Psychological Pricing contd..:

Psychological Pricing contd.. Used to play on consumer perceptions Classic example - £9.99 instead of £10.99! Links with value pricing – high value goods priced according to what consumers THINK should be the price 18-2-2013 10.00 PM 108

Price Discrimination:

Price Discrimination 18-2-2013 10.00 PM 109

Price Discrimination contd..:

Price Discrimination contd.. Charging a different price for the same good/service in different markets Requires each market to be impenetrable Requires different price elasticity of demand in each market Prices for rail travel differ for the same journey at different times of the day Copyright: 18-2-2013 10.00 PM 110

Destroyer Pricing/Predatory Pricing:

Destroyer Pricing/Predatory Pricing 18-2-2013 10.00 PM 111

Destroyer/Predatory Pricing:

Destroyer/Predatory Pricing Deliberate price cutting or offer of ‘free gifts/products’ to force rivals (normally smaller and weaker) out of business or prevent new entrants Anti-competitive and illegal if it can be proved 18-2-2013 10.00 PM 112

Absorption/Full Cost Pricing:

Absorption/Full Cost Pricing 18-2-2013 10.00 PM 113

Absorption/Full Cost Pricing contd..:

Absorption/Full Cost Pricing contd.. Full Cost Pricing – attempting to set price to cover both fixed and variable costs Absorption Cost Pricing – Price set to ‘absorb’ some of the fixed costs of production 18-2-2013 10.00 PM 114

Marginal Cost Pricing:

Marginal Cost Pricing 18-2-2013 10.00 PM 115

Marginal Cost Pricing contd..:

Marginal Cost Pricing contd.. Marginal cost – the cost of producing ONE extra or ONE fewer item of production MC pricing – allows flexibility Particularly relevant in transport where fixed costs may be relatively high Allows variable pricing structure – e.g. on a flight from London to New York – providing the cost of the extra passenger is covered, the price could be varied a good deal to attract customers and fill the aircraft 18-2-2013 10.00 PM 116

Marginal Cost Pricing contd...:

Marginal Cost Pricing contd... Example: Aircraft flying from Bristol to Edinburgh – Total Cost (including normal profit) = £15,000 of which £13,000 is fixed cost* Number of seats = 160, average price = £93.75 MC of each passenger = 2000/160 = £12.50 If flight not full, better to offer passengers chance of flying at £12.50 and fill the seat than not fill it at all! *All figures are estimates only 18-2-2013 10.00 PM 117

Contribution Pricing:

Contribution Pricing 18-2-2013 10.00 PM 118

Contribution Pricing contd..:

Contribution Pricing contd.. Contribution = Selling Price – Variable (direct costs) Prices set to ensure coverage of variable costs and a ‘contribution’ to the fixed costs Similar in principle to marginal cost pricing Break-even analysis might be useful in such circumstances 18-2-2013 10.00 PM 119

Target Pricing:

Target Pricing 18-2-2013 10.00 PM 120

Target Pricing contd..:

Target Pricing contd.. Setting price to ‘target’ a specified profit level Estimates of the cost and potential revenue at different prices, and thus the break-even have to be made, to determine the mark-up Mark-up = Profit/Cost x 100 18-2-2013 10.00 PM 121

Chapter Questions:

Chapter Questions How do consumers process and evaluate prices? How should a company set prices initially for products or services? How should a company adapt prices to meet varying circumstances and opportunities? When should a company initiate a price change? How should a company respond to a competitor’s price challenge? 18-2-2013 10.00 PM 122

One Final Word:

One Final Word “ A product is not a product unless it sells. Otherwise, it’s just a museum piece…” Ted Levitt

Marketing Debate:

Marketing Debate Is the right price a fair price? Take a position: Prices should reflect the value that consumers are willing to pay. or 2. Prices should primarily just reflect the cost involved in making a product.

Marketing Discussion:

Marketing Discussion Think of all the pricing methods described in the chapter. As a consumer, which pricing method do you personally prefer to deal with? Why?


Reference Kotler , Kelly, Koshy and Jha (2009) Marketing Management: A South Asian Perspective, 14 th ed. Pearson Prentice Hall, pp.368-99

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