Marketing in the Digital World
MN7182SR
Marketing, Marketing Communications and Operations
Lesson 6: Pricing Strategies
Module Overview
Application
1. Introduction
2. The Global Marketplace
3. Segmentation, Targeting, Positioning (Connected consumers )
4. Developing Value
7. Delivering Value (Channelnomics)
8. Market Entry Strategies
9. International Sales (Producrts v Services ) B2C & B2B
10. Marketing and the impact of Digital
11. The New Customer Path
12. Summary & Planning
5.Communicating Value
6.Pricing Value
Factors Affecting Pricing Decisions
External Factors…
Buyer’s perceptions – Value for money.
Competition
Channel member expectations
Environmental issues - legal, regulatory etc.
Elasticity of demand
Reference prices:
If we are to be able to price a good or service according to customer needs, we
must have some idea of what customers think is a fair price to pay for that good or service, or what they expect to pay, or what they think others might pay.
There is usually a price band against which
customers judge the purchase price of goods and services in their own minds.
For example, If you would like to buy a perfume, would you pay $10 or $100 dollar for a perfume?
How consumers set the price on their minds?
Reference prices can be viewed as predictive price expectations in the consumers’ own minds, brought about through prior experience with those products and services or through word-of-mouth discussions with others. This can answer why a certain people willing to pay more and some less.
Chinese New Year🡪 expect biscuits, snacks will go up. Prawn, Pork, Meat, Chicken.
Do you have a good understanding of prices in a particular category?
If I tell you that the cost of making an iPhone is $490.50, would you pay $1099 and $1449 for an iPhone?
https://www.investopedia.com/financial-edge/0912/the-cost-of-making-an-iphone.aspx#:~:text=Depending%20on%20the%20storage%20size,phone%20amounts%20to%20approximately%20%24490.50.
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With this approach, companies set prices based on competitors’ prices—the so-called ‘going rate’.
(2) The advantage of this approach is that when your prices are lower than your competitors, customers are more likely to purchase from you, provided that they know that your prices are lower. Calculating and anticipating competitor response is important when price-setting. We should analyse consumer responses when a competitor starts to cut prices, but if purchase behaviour changes only modestly or temporarily, other marketing mix elements (for example, promotion, distribution or product differentiation) may be more likely to help us to win back customers (van Heerde et al., 2008)
Pricing illustration
Pair A- $79 to $65
Pair B- $83- $69
The difference in prices is actually the same (both $14)
Purchase context in pricing
Gym- annual membership, they do have monthly price.
Monthly price drives a higher level of gym attendance, because customers are more regularly reminded of their purchase. So the way in which you set your price does not only influence demand, but it also drives how buyers use your product and service (Gourville and Soman, 2002).
“Yes, but What Does It Cost?”
Price relates to value, or the amount the consumer must exchange to receive the offering.
Includes money, goods, services, favours, votes (!), or anything else that has value to the other party
Opportunity costs must also be considered.
LECTURE NOTES:
When you think of price, you probably think of the amount of money you have to pay to purchase a product, or enjoy a service. Price certainly includes the cost of an item, but it also includes other things that must be exchanged as part of a transaction as well. For example, many international business transactions are characterized by various forms of barter or countertrade that don’t involve an exchange of money at all. Even in the United States, the purchase of a car may include trade-in of your existing vehicle along with a cash payment.
Opportunity costs refer to the something that we have to give up in order to obtain something else. For example, think about the “price” that must be paid by an individual for a two-week-long vacation at an all-inclusive resort. What else must be given up the individual besides the monetary cost of the vacation?
DISCUSSION NOTE:
Students may need some prompting to realize that there could also be a substantial opportunity cost. For part-time employees who are paid by the hour, the income they lose by not working during the vacation period represents an opportunity cost. The situation with full-time employees is a little different. While one can assume that the employee is paid for their vacation time, there is still an opportunity cost in that they can’t “return” the vacation and get their days “back” to use again, if they don’t like the resort, or if the weather is bad.
You might also pose the question about the price paid by children who participate in a family vacation. In this example, a substantial monetary cost is very unlikely as children aren’t expected to contribute to the cost of the resort room or travel. However, children may spend some of their allowance or gift money on souvenirs or special activities during the course of the vacation, which could be considered a monetary cost. The opportunity cost for children may include missed learning opportunities (if the parents take the children out of school for the trip), or missed opportunities for other recreational activities that may be occurring at home during the same time span (football games, parties with friends, etc.).
Elements of Price Planning
LECTURE NOTES:
Firms undertake price planning in six steps, as shown in Figure 10.1. The process begins by setting objectives. This is followed by estimating demand and determining relevant costs. Examination of the pricing environment precedes the choice of a pricing strategy and the implementation of pricing tactics. Each of these steps will be discussed in more detail as we work through the chapter material.
Pricing Objectives
LECTURE NOTES:
Pricing objectives take five major forms: sales or market share, profit, image enhancement, competitive effect, or customer satisfaction. Examples of each strategy are summarized in Figure 10.2.
Profit objectives are typically used in the pricing of B2B goods. For consumer goods firms, profit objectives may focus on a product line or portfolio of products.
The text mentions that profit objectives are crucial for fad products, because fads tend to be short-lived. But sometimes sales objectives are set for fad products instead. For example, who knew that Pepsi marketed a drink called Ice Cucumber soda? The drink wasn’t available in the United States, but 4.8 million bottles were sold within a two-week time span in Japan. Once the existing inventory was depleted, the product was killed—on purpose— having met it sales objectives. Most students will be surprised to hear this, especially because product development took over two years to complete. Yet this is but one example of a systematic strategy on Pepsi’s part to raise their overall share of the market by playing to cultural differences related to a love of fads. In particular, the Japanese are intrigued by limited edition or fad items, and flock to the stores when new limited edition items become available. Pepsi’s strategy has paid off. According to Business Week, their share of the Japanese beverage market increased from 10% in the late 1990’s to around 20% in August 2007, while chief rival Coca-Cola’s market share has been declining over the same time period. {(SOURCE: “Fad Marketing’s Balancing Act,” Business Week Online, August 6, 2007. Retrieved from http://www.businessweek.com/magazine/content/07_32/b4045055.htm on October 30, 2008.)}
When pricing objectives feature sales or market share, marketers often use sales promotions or pricing discounts to meet these objectives. Such strategies must be approached with caution however, as the case of the U.S. airline industry illustrates.
However, if a product has a competitive advantage, it may well be able to accomplish market share or sales objectives without resorting to the use of discounts or sales promotions.
Sometimes the firm consciously prices its products in a way that negatively impacts competitors marketing efforts. Established brands often react to new market entrants by cutting prices (sometimes even below the cost of the product or service) in an attempt to drive the newcomer out of business or out of the geographic market. Small business marketers often do the same thing.
But marketers must be cautious when implementing such a strategy as predatory pricing practices may be viewed by a given country as anti-competitive, and thus illegal. We’ll discuss predatory pricing in more detail later on in the chapter.
Quality-focused firms believe that profit stems from customer satisfaction, and some firms price their products in a manner that satisfied customers. This philosophy was behind Saturn’s no haggle pricing strategy, as then parent company GM recognized that many car buyers are dissatisfied or even intimidated by the negotiation process that accompanies car buying.
Consumers who lack experience in buying a certain type of product (such as carpet, for example) and who are unfamiliar with brand names within a product category will often rely on price as a cue to product quality. Brands that are marketed on the basis of status or prestige should correspondingly charge higher prices to reflect that image to consumers.
PRICING OBJECTIVES
Survival pricing
Maximise current profit
Maximise market share
Maximise market skimming
Product-quality leadership
Getting to the Right Price
It is very rare for someone to agree to buy something without knowing the price.
Non-monetary costs are also of great significance for marketers.
Price planning follows a sequence of steps that begins with setting pricing objectives.
What is you view ??
DISCUSSION NOTE:
Instructor may ask students to contrast tuition and corresponding pricing objectives across different types of higher education institutions/models.
Public universities
Small private colleges
Community colleges and technical schools
“Ivy League” colleges and universities (e.g., Harvard)
For-Profit Online Universities (e.g., University of Phoenix)
MOOCS
Costs, Demand, Revenue, & the Pricing Environment
In order to set the right price, marketers must understand quantitative and qualitative factors that can influence pricing strategy success.
LECTURE NOTES:
Once objectives are set, marketers begin the actual process of setting the price of a brand. This requires estimations of demand, costs, revenues, and an understanding of the pricing environment.
Estimate Demand
Demand refers to customers’ desire for a product.
How much are customers willing to pay as the price of the product goes up or down?
Economists use demand curves to illustrate the effect of price on quantity of a product demanded.
The law of demand: As price goes up, quantity demanded goes down.
LECTURE NOTES:
The next step is to estimate demand.
Demand refers to customers’ collective desire for a particular product.
A key question is how much does this desire fluctuate with changes in pricing levels, a concept known as a demand curve.
Economists use a graph of a demand curve to illustrate the effect of price on the quantity demanded of a product.
The demand curve, which can be a curved or straight line, shows the quantity of a product that customers will buy in a market during a period of time at various prices if all other factors remain the same.
DISCUSSION NOTE:
In the real world, factors other than the price and marketing activities influence demand.
If it rains, the demand for umbrellas increases and the demand for tee times on a golf course is a wash.
The development of new products may also influence demand for old ones. For instance, even though a few firms may still produce phonographs, the introduction of cassette tapes and then CDs and iPods has all but eliminated the demand for new vinyl records and turntables on which to play them.
Shifts in Demand
A shift is a change in direction or position.
Marketers can stimulate shifts through effective marketing.
An upward shift is when a greater demand for a product occurs.
A downward shift is when demand suddenly drops.
DISCUSSION NOTES:
Shifts can occur naturally, such as when the paparazzi catch a celebrity using a company’s products.
Sometimes “viral” social media postings can cause upward or downward shifts in products, depending if the posts are positive or negative.
What shift would occur in demand if your favorite movie star was photographed drinking a Starbucks beverage? Why?
What shift would occur in demand if a YouTube video showed a particular brand of cellphone catching fire all by itself? Why?
SET PRICING OBJECTIVES
Must support :
1. Organisational objectives and
2. Marketing objectives
Profit
Positioning
Sales or Market Share
Competitive Effect
Customer Satisfaction Image Enhancement
LECTURE NOTES:
When setting pricing objectives, marketers should consider profit, sales, market share, competitive effect, customer satisfaction, and image enhancement.
Factors Affecting Pricing Decisions
Internal Factors…
Organisational and marketing objectives
Costs
Other marketing mix variables
Pricing objectives
How a company prices its products depends on what its pricing objectives are. These can be financial, with offerings priced to maximize profit or sales, or to achieve a satisfactory level of profits or sales, or a particular return on investment. Companies may price by offering discounts for quick payment. A firm’s pricing objectives could be marketing-based: for example, pricing to achieve a particular market share or to position the brand so that it is perceived to be of a certain quality. Sometimes, companies price their offerings simply to survive: for example, pricing to maintain sales volumes when competitors lower their prices.
PRICING APPROACHES
Cost oriented (or Mark up) Pricing
Cost plus: specific £ or % added to cost (focus on profit)
Demand oriented Pricing
Simply based on level of demand
Competition oriented Pricing
Price relative to the competition
Marketing oriented Pricing
Most complex reflects marketing strategy
(2) the firm sets prices according to how much customers are prepared to pay.
Estimating Demand for Pizza
| Number of families in market | 180,000 |
| Average number of pizzas per family per year | 6 |
| Total annual market demand | 1,080,000 |
| Company’s predicted share of the total market | 3 percent |
| Estimated annual company demand | 32,400 pizzas |
| Estimated monthly company demand | 2,700 pizzas |
| Estimated weekly company demand | 675 pizzas |
LECTURE NOTES:
Estimating demand accurately is critical as demand estimates influence production scheduling, marketing planning, budgeting, and more.
Table 10.1 illustrates the demand estimation process in the context of how a new business such as a pizza parlor might estimate demand for the market it expects to serve.
The process begins by identifying the number of potential buyers of the product, and multiplying that number by the average number of purchases each is likely to make over a particular time period. In this example, the geographic area being served by the pizza firm contained 180,000 pizza eating families who on averaged ordered out or dined in at pizza parlors six times a year. Multiplying these two factors yielded a total annual market demand of 1,080,000 pizzas.
The next step to estimating company demand is to multiply the total annual demand by the firm or brand’s forecast market share. Thus 3% of the total market yields an estimated annual company demand of 32,400 pizzas, which divided by 12 and 52, yields monthly and weekly pizza demands of 2,700 and 675, respectively.
While this process may sound simple, marketers must be realistic at each phase of the demand estimation process. For example, using census data to project the number of families in the market would overestimate demand, as not all families eat pizza. Similarly, failing to take into account current economic conditions could cause inaccurate projections. When the economy is in a recession, fewer families may go out for pizza, instead choosing to buy a grocery store pizza. Or, families may eat out less frequently. Furthermore, the level of competition and consumer trends can also influence the accuracy of demand estimates.
What other factors might cause monthly or weekly demand levels to vary?
DISCUSSION NOTE:
Marketers may need to adjust monthly or weekly demand levels when certain factors have a direct or indirect influence on demand levels. Some factors to consider include the impact of special events (e.g., “back to school”; “Black Friday”, the day after Thanksgiving; January inventory clearance sales), and holidays (Christmas, Fourth of July). But many other factors can complicate demand calculations, including seasonal influences, whether the product in question is a durable good (such as a lawn mower), or a non-durable consumer (such as pizza), and the region of the country for which the forecast is being made.
Markups and Margins: Pricing through the Channel
Markup is an amount added to the cost of the product to create a price at which the channel member will sell the product.
Gross margin
Retailer margin
Wholesaler margin
List price or manufacturer’s suggested retail price (MSRP)
LECTURE NOTES:
Most products are not sold directly from the manufacturer to the consumer; thus channel pricing considerations are often part of the marketer’s job. Marketers must make certain that they price the product in a way that will allow each member of the distribution channel to earn a profit before selling the product in turn to the next member of the distribution channel, or to the ultimate consumer. Of course, the final price to the ultimate consumer cannot be so high that will refuse to purchase the product.
Several terms must be understood as each has a place in pricing the product. Markup is defined on the slide.
The markup amount is often called the gross margin, which not only covers the profit expected by the channel member, but also the fixed costs of the retailer or wholesaler. Retailer margin and wholesaler margin are just two different names for gross margin, but specific, as the names imply, to either retailers or wholesalers.
The markup should never exceed the list price, or manufacturer’s suggested retail price (MSRP), as this is the price the manufacturer has estimated that the end customer should be willing to pay.
This means that even if the customer is willing to pay $10 for a product, the manufacturer must sell the product for less than this amount to the retailer. If a distributor or wholesaler is also used, the price charged by the manufacturer will be lower still to ensure that both the distributor and retailer can add adequate markups to make handling the product viable.
Markup can be calculated as a percentage of the final selling price, or as a percentage of the price paid for the product. For simplicity sake, let’s assume markup is calculated on the basis of final price.
$10 – final price to consumer. Retailer margin = 30%. 1 – 0.3 = 0.7 $10 x 0.7 = $7 price to retailer if manufacturer sells directly to them.
Assuming that a wholesaler is also in the picture, and that the wholesaler’s margin is 20%, 1 – 0.2 = 0.8 $7 x 0.8 = $5.40. Thus the manufacturer would price the product at $5.40 to the wholesaler.
Markups Through the Channel
LECTURE NOTE:
This figure illustrates channel pricing. It shows how the each facet of the channel (manufacturer, wholesaler, and retailer) must price the good in order to make a profit for that particular organization.
SETTING PRICING POLICY
1. Selecting the pricing
objective
2. Determining demand
3. Estimating costs
4. Analyzing competitors’
costs, prices, and offers
5. Selecting a pricing
method
6. Selecting final price
Examine the Pricing Environment
Firm must also consider external influences upon pricing decisions.
Economy
Competition
Government regulation (s)
Consumer trends
International environment
LECTURE NOTES:
The fourth step is to examine the pricing environment.
Marketers also try to anticipate how the competition will react to pricing changes.
Pricing wars can be disastrous, so it’s not always smart to continually lower prices. During price wars, consumers’ perceptions of a “fair price” may change, leaving a target market who is unwilling to pay “normal” prices once the war is over.
The industry structure can influence pricing a great deal. Oligopolies, such as the airline industry, typically attempt to avoid price competition and are more likely to price similarly in order to remain profitable. Restaurants and other industries characterized by monopolistic competition -vary their prices, and focus on non price competition as each sells at least a somewhat different product. This type of pricing strategy is aided by the fact that consumers are less likely to comparison shop as they offerings between different firms within an industry are usually different enough to make comparisons difficult. And of course, there is typically little opportunity to alter price in a purely competitive market such as is found with most agricultural products and commodities.
Government regulation impacts pricing in two ways: First of all, the various regulations enforced at the federal and state levels increase the costs of production. Secondly, the President and government has the ability to freeze or regulate prices, including credit card fees, interest rate charges, etc.
Consumer cultural and demographic trends can strongly influence prices. One example is that even consumers who are well-off see nothing wrong with bargain-hunting, particularly in tough economic times.
A special economic consideration in international price setting is the exchange rate and exchange rate volatility. Changes in the exchange rate can substantially influence the profitability of a brand sold in a foreign market. Furthermore, the marketing environment varies widely between countries. Very often unique environmental factors force marketers to adapt their pricing strategies. For example, in developing countries, consumers often cannot afford the cost of a bottle of detergent or shampoo. Instead, marketers create one-use packages called sachets that sell for just a few cents, and make the product affordable to consumers of that country. The competitive environment and government regulation also impact international prices.
STRATEGIES
Based on Cost : Cost plus
Based on Demand : Target Costing
Based on Competition
New Product Pricing
Skimming
Penetration
Trial
PRICING STRATEGIES AND TACTICS
TACTICS
For individual products
Two part
Payment pricing
For Multiple products
Bundling
Captive e.g. consoles + games
Distribution based
Discounting for channel members
TYPES OF COSTS
Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production
FIXED COSTS
(Overhead)
Costs that don’t
vary with sales or
production levels.
Executive Salaries
Rent
VARIABLE COSTS
Costs that do vary
directly with the
level of production.
Raw materials
The 5 most common pricing strategies. (2023, August 16). BDC.ca. https://www.bdc.ca/en/articles-tools/marketing-sales-export/marketing/pricing-5-common-strategies
The Three C’s Model for Price Setting
Costs
Competitors’
prices and
prices of
substitutes
Customers’
assessment
of unique
product
features
Low Price
No possible
profit at
this price
High Price
No possible
demand at
this price
Pricing Strategies Based on Cost
Cost-based pricing is very common.
Most frequently used cost-based is cost-plus pricing.
Easy to calculate
Relatively risk free
But not without drawbacks …
Cost-based approaches do not factor in key considerations, such as nature of target market and competitors.
LECTURE NOTES:
Marketers often choose cost-based strategies because they are simple to calculate and relatively risk free in that they promise a price which will at least cover the costs of producing and marketing the product.
However, cost-based pricing strategies are limited, in that demand, competition, and the nature of the target market are not considered as part of the pricing process. Furthermore, it is often surprisingly difficult to accurately estimate costs.
Still, the most common cost-based approach to price the product using the cost-plus pricing strategy is one in which product per unit costs are totaled and markup is added to arrive at the final price. Retailers and wholesalers are fond of this pricing strategy due to its simplicity.
Dell.com allows consumers, business people, and government buyers to build their own computer using a cost-oriented model. Buyers customize their computers by selecting the model, processor speed, RAM configuration, hard drive capacity, sound card, speed, and number of CD or DVD drives, monitor size, etc. Because each component is treated as an individual element in the building process, Dell can easily change component prices to meet changes in their own cost structure, ensuring that Dell’s costs will be covered and the desired profit-level achieved.
Price Strategies Based on Demand
Demand-based pricing: firm bases selling price on an estimate of volume it can sell in different markets at different prices.
Target costing
Yield management
LECTURE NOTES:
Demand-based pricing means that the firm bases the selling price on an estimate of the quantity that it can sell in different markets at different times. Target costing and yield management are two examples of demand-based pricing strategies.
Target costing allows marketers to match price with demand, by first identifying the level of quality and functionality customers need and the price they’re willing to pay before designing product. Then they work backwards to design a product that meets the targeted level of cost.
Yield management pricing is very popular in the service industry to the perishable nature of services. The essence of yield management is that capacity is managed by charging different prices to different customers. A simple example is the “early bird special” pricing offered by many restaurants for those who are willing to dine during the early or mid afternoon. Another example would be how movie theatres price the early show cheaper than those that begin after 5 pm.
Technology has only enhanced service providers ability to maximize profit using yield management pricing techniques. Most airlines have e-mail notification systems that alert customers who have subscribed to their service about the availability of low-priced travel alternatives a few days (to several hours) prior to flight departure. Interested travelers typically book their flight directly through the airlines’ web site at a rate below any published fares. Web sites such as Priceline.com allow consumers to submit their own bid for airfare, which may or may not be accepted by the airline. Either of these systems is more efficient than the “standby” method of yield management, which was commonly used prior to the growth in popularity of the Internet. (Airlines used to sell standby tickets at a huge discount to people who just showed up at the airport the same day they wished to fly. Tickets were honored only if there were empty seats on a plane, otherwise, the consumer was bumped to the next flight, and so on, until a flight operating under capacity was encountered.)
New Product Pricing
New products present unique pricing challenges!
In absence of reliable demand estimates and pricing norms, common pricing tactics include:
Skimming price : high to low
Penetration pricing : start low
Trial pricing
LECTURE NOTES:
New product pricing represents a unique challenge. Skimming, penetration, or trial pricing strategies may be followed.
Under a skimming pricing strategy, a very high premium price is charged by the manufacturer when the product first hits the market, with the intention of reducing price in the future. Thus each unit sold incurs a huge profit, though initially, fewer units are sold. As demand at a given price level disappears, the price is dropped, bringing new buyers to the market.
Skimming is often used with new, highly desirable products with unique benefits, particularly if the item in question creates a new product category. For skimming to work, there should be little chance that competitors can get their products to market quickly. Past examples include the VCR (once priced as high as $1200), high-definition TVs (one-time as high as $32,000), and even the iPhone (priced initially at $599 in 2007). However, price drops can enrage those who paid higher prices, as Apple found to its detriment when it dropped the price $200 only months after the initial product introduction.
A penetration pricing strategy is just the opposite. The marketer prices the product very low in order to build unit sales very quickly. By building a large market share quickly, the manufacturer hopes to discourage competitors from entering the market as the profit margin per unit is very small.
Trial pricing sets a low price initially, but only for a limited period of time, after which the price is raised to “normal” levels. The purpose of trial pricing is gain consumer acceptance firm, and defer profits until later. Microsoft used such a strategy when it first introduced Access for $99, although the suggested retail price was $499. Once the short introductory period passed, Microsoft raised the price of the product.
LECTURE NOTES:
New product pricing represents a unique challenge. Skimming, penetration, or trial pricing strategies may be followed.
Under a skimming pricing strategy, a very high premium price is charged by the manufacturer when the product first hits the market, with the intention of reducing price in the future. Thus each unit sold incurs a huge profit, though initially, fewer units are sold. As demand at a given price level disappears, the price is dropped, bringing new buyers to the market.
Skimming is often used with new, highly desirable products with unique benefits, particularly if the item in question creates a new product category. For skimming to work, there should be little chance that competitors can get their products to market quickly. Past examples include the VCR (once priced as high as $1200), high-definition TVs (one-time as high as $32,000), and even the iPhone (priced initially at $599 in 2007). However, price drops can enrage those who paid higher prices, as Apple found to its detriment when it dropped the price $200 only months after the initial product introduction.
A penetration pricing strategy is just the opposite. The marketer prices the product very low in order to build unit sales very quickly. By building a large market share quickly, the manufacturer hopes to discourage competitors from entering the market as the profit margin per unit is very small.
Trial pricing sets a low price initially, but only for a limited period of time, after which the price is raised to “normal” levels. The purpose of trial pricing is gain consumer acceptance firm, and defer profits until later. Microsoft used such a strategy when it first introduced Access for $99, although the suggested retail price was $499. Once the short introductory period passed, Microsoft raised the price of the product.
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!
Examples: new-product pricing
Market-skimming pricing: high to low
Market-penetration pricing :start low
Market-skimming pricing
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 makes fewer but more profitable sales.
The conditions:
A sufficient number of buyers have a high current demand;
The unit costs of producing a small volume are not so high that they cancel the advantage of charging what the traffic will bear;
The high initial price does not attract more competitors to market;
The high price communicates the image of a superior product.
Market-penetration pricing
Setting a low price for a new product in order to attract a large number of buyers and a large market share.
The conditions:
The market is highly price sensitive,and a low price stimulates market growth;
Production and distribution costs fall with accumulated production experience;
A low price discourages actual and potential competition.
Examples: product mix pricing
Product line pricing
Optional-product pricing
Captive-product pricing
By-product pricing
Cash rebates
Low-interest,longer warranties,free maintenance
PRICING-ADJUSTMENT STRATEGIES
Discount and allowance pricing
Segmented pricing
Psychological pricing
Promotional pricing
Geographical pricing
Discount and allowance pricing
Cash discount
Quantity discount
Functional discount
Seasonal discount
allowance
Geographical pricing
FOB-origin pricing
Uniform-delivered pricing
Zone pricing
Basing-point pricing
Freight-absorption pricing
Promotional Pricing
Loss-leader pricing
Special-event pricing
Cash rebates
Low-interest financing
Longer payment terms
Warranties & service contracts
Psychological discounting
3. Pricing changing
Initiating price cuts
Initiating price increases
Discussion
Please explain the reasons for price cuts.
Please explain the reasons for price increases.
Please describe the advantage and disadvantage of price cuts and increases.
The reasons for price cuts
Excess capacity
Price competition
The reasons for price increases
Cost inflation
overdemand
Reactions to price changes
Customers’ reactions
Competitor’s reactions
Responding to competitors’ price changes
Maintain price
Maintain price and add value
Reduce price
Increase price and improve quality
Launch a low-price fighter line
PRICE-REACTION PROGRAM FOR MEETING A COMPETITOR’S PRICE CUT
Has competitor
cut his price?
No
Hold our price
at present level;
continue to watch
competitor’s
price
Is the price
likely to
significantly
hurt our sales?
Yes
Is it likely to be
a permanent
price cut?
Yes
By more than 4%
Drop price to
competitor’s
price
By 2-4%
Drop price by
half of the
competitor’s
price cut
How much has
his price been
cut?
Yes
No
No
By less than 2%
Include a
cents-off coupon
for the next
purchase
PRICING STRATEGIES AND TACTICS
How do you know whether you’ve charged too much or not enough?
Pricing moves and countermoves require ongoing planning.
Appropriateness of pricing strategy and tactics may vary based upon:
number of products, product newness, B2C/B2B.
What is the pricing strategy of the product you buy most often ??
LECTURE NOTES:
Summary slide for Chapter 10, learning objective 3.
DISCUSSION NOTE:
Based on a review of the chapter, students should be able to find examples of various pricing strategies and tactics in place at their university.
Pricing and e-Commerce
Online environment provides even more pricing options.
Technology and market efficiency
Dynamic pricing
Internet price discrimination
Online auctions
“Freemium” pricing models
LECTURE NOTES:
Technology available via e-commerce and the Internet in particular makes it easy for pricing to change quickly.
Dynamic pricing strategies are those in which the Internet seller can easily adjust the price to meet changes in the marketplace. The cost of changing prices on the Internet is practically zero, and firms can respond quickly and frequently to changes in costs, supply, and/or demand.
Some people refer to dynamic pricing as “real-time pricing”. For example, electricity prices might change as often as hourly and occasionally even more often based on the time of day and time of year. Another example of dynamic pricing can be found in the mortgage industry, where mortgage interest rates also vary to meet changes in the marketplace.
The link provided leads to a recent article discussing Ticketmaster’s plans to implement dynamic pricing in an effort to thwart scalpers.
Online auctions are familiar to most consumers and allow shoppers to purchase products through online bidding. B2B auction sites also exist. Skoreit.com is one of the newer bid sites targeting consumers. While the site is promoted as making it possible to purchase items for as much as 99% off of retail, the site itself requires users to purchase “bidpacks,” beginning as low as $9.90 Each bidpack contains a limited number of bids which can be used during auctions. The cost of each bid in early 2011 was around 60 cents a piece.
The freemium ((a mix of “free” and “premium”) pricing model is a business strategy in which a product in its most basic version is provided free of charge but the company charges money (the premium) for upgraded versions of the product with more features, greater functionality, or greater capacity. The freemium pricing strategy has been most popular in digital offerings such as software media, games, or web services where the cost of one additional copy of the product is negligible. The idea is that if you give your product away, you will build a customer base of consumers willing to pay for the added benefits.
DISCUSSION NOTE:
Ask students whether they use or are familiar with companies that use a “freemium” model. Companies that have followed this pricing model include Dropbox, Inc., SurveyMonkey, Spotify, and Skype.
Ask students who have experience with “freemium” service whether they have or would consider upgrading to the premium service. If not, why not?
Use this discussion to illustrate that while some products such as Skype have been highly successful, others have found that customers never upgrade to the premium version of the product. For example, Pandora, the firm we met in Chapter 1, has found that many consumers were unwilling to pay for their service. As a result, they changed their business model to include a free service supported by paid advertising plus their Pandora One paid service without the ads.
Pricing Advantages for Online Shoppers
The Internet provides consumers and business buyers more control over the purchase process.
Increased consumer price sensitivity and negotiating power
What do you think are the implications of increased price transparency for marketers (and marketing)?
DISCUSSION NOTE:
With increased price transparency, there will be fewer opportunities for business to take advantage of consumers lacking complete information.
Potential implications for marketers include:
More adaptive pricing models (e.g., dynamic pricing, price-matching).
More innovative pricing models (e.g., pay as you wish).
Firms findings way to differentiate and compete more strongly on non-price factors.
PSYCHOLOGICAL, LEGAL, AND ETHICAL ASPECTS OF PRICING
LECTURE NOTES:
Marketers must also understand and deal with psychological, legal, and ethical issues when attempting to maximize the effectiveness of their pricing plans. We’ll begin with a discussion of psychological issues in pricing, and the psychological pricing strategies which often result.
Prior to this point, pricing has been discussed primarily from the standpoint of economics, which assumes that consumers make logical, rational evaluations of price. Of course it doesn’t always work that way, as certain psychological factors play havoc with “rational” evaluations.
PSYCHOLOGICAL ISSUES IN SETTING PRICES
Buyers form expectations of what is fair or customary prices for goods and services.
Price too high = Bad deal
Price too low = Suspect quality
Customary price perceptions are influenced by:
Internal reference prices: A set price or price range consumers have in mind when evaluating a product’s price.
Price–quality inferences : When consumers use price as a cue to infer product quality
LECTURE NOTES:
Buyers form expectations of the fair or customary price that should be charged for a given product or service. When a product or service is priced above what the buyer believes to be fair, he or she may refuse to buy, believing the product to be a bad deal. Conversely, while some buyers may gleefully purchase items priced below the fair or customary price, a price too low may send a negative signal to the buyer, raising suspicions that product quality is not up to par.
Therefore, it is important that the marketer understands consumers’ expectations in setting price. It’s also important to recognize that price expectations can vary by country, culture, or even zip code. Victoria’s Secret has learned to send catalogs featuring the same merchandise, but with different prices, to those residing in different zip codes. Those in higher income areas often expect to pay more, and thus receive a catalog that fulfills that expectation.
Internal reference prices sometimes influence consumers’ perceptions of the customary price of a product. Internal reference prices are a set price, or price range, that consumers have in mind when evaluating a product’s price. Marketers often try to influence consumers’ internal reference prices by comparing their price to the competition’s in marketing communications, while retailers may stock a product, such as a store brand, next to higher priced versions of the same or different product. When this occurs, consumers may react in one of two ways. If the price is similar (not too far apart), many consumers experience an assimilation effect in that they come to believe the quality of the two items must also be similar, and with this in mind, ultimately choose the item that is lower priced. On the other hand, a contrast effect occurs when the price gap is too large, and the consumer comes to believe that a true difference in quality between brands exists.
Price–quality inferences are made by consumers about a product when they use price as a cue or indicator of quality. If consumers are unable to judge the product quality by direct examination or experience, they usually assume the higher priced item is of greater quality. This is particularly true for items that are bought infrequently. Furthermore, price becomes an even greater indicator of quality when brand names are unknown. Carpet is an example of a high-cost purchase that most consumers make rarely. Brand names are likely to be relatively unknown. Left with a choice between two similar products, the consumer may very well choose the higher priced option believing it to be of higher quality than the alternative.
PSYCHOLOGICAL PRICING STRATEGIES
Odd–even pricing
Odd-even pricing is a psychological pricing tactic in which numeric value is utilised to impact the customer’s perceptions of product value.
The “odd” part of this tactic refers to a price ending in 1,3,5,7,9—or any number just below an even number. The “even” part refers to a price ending in a whole number in tenths, such as £0.20 or £50.
Price lining
Products or services within a specific group are set at different price points. The higher the price, the higher the perceived quality / value to the consumer.
Prestige or premium pricing
Prices are kept higher than normal, recognising that lower prices will inhibit sales and that buyers will associate a high price for the product with superior quality and therefore value
LECTURE NOTES:
How do marketers deal with these psychological issues? Odd–even pricing, price lining, and prestige pricings are some of the more common psychological pricing strategies that are used.
Odd–even pricing is common throughout the United States where prices usually include both dollars and cents rather than even dollar amounts. Is $199.99 really “less” than $200.00? Logically, a penny separates these prices, but psychologically the two prices are worlds apart. Prices ending in 99 lead to increased sales.
However, in some instances having a price end in 99 can be detrimental. Professional service providers such as lawyers, dentists, or doctors who priced their service in this fashion may suffer from the perception that their quality of care is inferior. High-end restaurants have found that prices ending in 9 ($19.99) are more indicative of value than quality.
Price lining is a practice in which a limited number of price points (different specific prices) are set for items in a product line. From a marketer’s viewpoint, price lining maximizes profits by allowing the firm the opportunity to charge the highest price most customers would be willing to pay at each level. Price lining can also be applied to services. For example, many car washes offer different “packages” from which patrons may choose. The low-priced alternative may include a vacuum and quick run through the automatic car wash. A higher-end package might add window cleaning, air fresheners, tire scrubbing, waxing, etc. Price lining is also present in the hospitality industry. Walt Disney World maintains a number of different properties on-site, each having a different price point. As would be expected, the different price points appeal to different segments of the target market.
Prestige pricing turns the relationship between price and demand upside down. Under this scenario, status conscious consumers buying luxury goods become more likely to purchase an item as price increases. The fact that not everyone can afford to purchase an item is exactly what makes it desirable—the more exclusive, the better in many cases.
LEGAL AND ETHICAL CONSIDERATIONS IN B2C PRICING
Bait-and-switch
Advertise very low-priced item to lure customers to store (bait)
Arriving customers find product is out of stock and are offered more expensive item (switch)
Loss-leader pricing
Use very low prices to get customers into the store
Making up the “loss” through sale of other products
Some states have “unfair sales acts” forbidding loss-leader pricing.
LECTURE NOTES:
While the free enterprise system should ideally regulate itself, the fact remains that some businesses are greedy and unscrupulous. As a result, government has found it necessary to enact legislation to protect consumers and businesses from these types of business practices.
Both the FTC (Federal Trade Commission) and the Better Business Bureau have developed pricing rules and guidelines to help protect consumers from unscrupulous businesses. For example, “going out of business” sales must indeed be reserved for the final sale held by a store before it goes out of business. “Fire sale” can only be used following an actual fire and retailers cannot falsely claim to offer lower prices than the competition.
A common form of deceptive pricing and advertising practice that often occurs at the local level is called the bait-and-switch tactic. This occurs when a retailer will advertise an item at a very low price to lure consumers to the store (the bait), who then find it virtually impossible to buy the advertised product that is mysteriously out-of-stock. The sales people then try their utmost to get the consumer to buy a different, more expensive item (the switch). Sometimes salespeople lie and tell customers that the item is of poor quality. If a firm refuses to show, demonstrate, or sell the advertised product, if they disparage it or penalize salespeople who do sell the advertised brand, the FTC is likely to find the ad and pricing to be a bait-and-switch scheme.
Ethical retailers should always offer a rain check for advertised items that are out-of-stock, and should also attempt to order sufficient quantities to meet demand.
Loss-leader pricing is commonly used in the grocery industry when retailers advertise items at very low prices (sometimes even below cost), knowing that consumers who come to buy the item will likely shop for many items which will more than make-up for the money lost on the loss-leader item. Sometimes loss leaders are specific to the season or holiday. The text mentions an example in which an office supply store might sell eight pencils for a penny.
However, some states frown on this practice and have passed legislation which prevents wholesalers and retailers from selling items below cost. The purpose is to protect smaller retailers from the larger competition, as they know small stores can match the bargain prices.
Supplemental discussion:
An interesting question that could add a little spice to class discussion relates to pricing ethics. You might begin this portion of lecture by asking whether students think it’s illegal for mail-order marketers to send catalogs with higher prices to more affluent zip codes, while less economically advantaged areas receive catalogs promoting the exact same item at a lower price.
Although this tactic is not illegal (price discrimination only operates in B2B commerce), some students will invariably argue that it is unethical, while others will claim that it’s just good business.
LEGAL ISSUES IN B2B PRICING
Illegal B2B price discrimination: Firms sell products to channel members at different prices in a way that “lessens competition.”
Price-fixing: Two or more companies conspire to keep prices at a certain level.
Horizontal vs. vertical price fixing
Predatory pricing: Firm sets very low price for purpose of driving rival out of business.
LECTURE NOTES:
Three of the more significant illegal pricing practices in the B2B world include price discrimination, price-fixing, and predatory pricing.
Price discrimination is regulated by the Robinson-–Patman Act. The purpose is to prevent firms from selling the same product to different retailers and wholesalers at differ prices, IF such practices “lessen competition.” This act also prohibits offering “extras” some retailers and note others, such as discounts, allowances, etc. However, there are few exceptions to this rule. If marketers could prove that price differences resulted from differences based on order quantity and economies of scale (perhaps in relationship to shipping charges), then price discrimination would not have occurred. Also, differences in the product itself (new model year, “second” quality vs. prime quality, etc.) would warrant charging different prices. Finally, it should be noted that price discrimination is only applicable in B2B pricing—consumers may very well pay different prices for identical items based on their negotiating skills, zip code, or a host of other factors.
Price fixing occurs when two or more companies conspire to keep prices at a certain level. This level of collaboration is entirely different from the situation previously discussed in which a dominant firm within an oligopoly may take a price leadership role. True price fixing can take two forms: horizontal or vertical.
Horizontal price fixing occurs when competitors making the same product collude by sharing price information and jointly determine what they will charge for the product. If all of the gas stations within a given town all charged the exact same price for unleaded and diesel gasoline, one might suspect that price fixing had occurred (though proving it may be difficult with evidence that all of the sellers had exchanged information and agreed to charge the prices set). In industries with few sellers, there may not be a formal agreement to charge a given price; rather, each firm may independently agree to price to meet the competition. Still, without the exchange of pricing information between sellers, this action would not be consider price fixing.
Vertical price fixing occurs when a manufacturer or wholesaler attempts to force retailers to charge a certain price for their product, usually the “suggested retail price.”. This is illegal, as the Consumer Goods Pricing Act of 1976 leaves retailers free to set whatever price they choose without interference by the manufacturer or wholesaler.
Predatory pricing occurs when a firm sets a very low price for purpose of driving competitors out of business, then later raise prices once the competitor is gone and they have a monopoly again. Both the Robinson–Patman Act and the Sherman Act prohibit predatory pricing.
THE PSYCHOLOGY OF PRICE
Many pricing frameworks are based on the notion of a highly rational consumer.
In the real world, consumer perceptions and judgments of price aren’t nearly so logical!
Psychological aspects of price raise a number of ethical and legal considerations.
Restaurants have found odd–even pricing influences spending. Do you have examples of such tactics?
DISCUSSION NOTES:
Instructor can re-introduce material from the book on odd–even pricing (page 307).
Restaurants (and the menu engineers who work with them) have discovered that how prices for menu items are presented has a major influence on what customers order—and how much they pay.
When prices are given with dollar signs or even the word dollar, customers spend less. Thus, a simple 9 is better on a menu than $9.
For high-end restaurants, the formats that end in 9, such as $9.99, indicate value but not quality.
Have students seen evidence of odd–even pricing and other types of psychologically rooted pricing practices (e.g., price lining, prestige pricing) in place at local restaurants and fast-food dining establishments they go to?
Do they feel like they are being manipulated or taken advantage of when this happens? In other words, does use of odd–even pricing by the restaurant create an ethical issue?
- A data analytics pricing model provides a clear, consolidated view of the company’s sales history and will facilitate strategic pricing decisions.
- Data analytics helps the organization to include a variety of factors into their pricing model such as product life cycle, competition, and customer perceptions.
ROLE OF MARKETING ANALYTICS IN PRICING DECISIONS
What is a data analytics pricing model? (2023, July 25). https://www.phocassoftware.com/resources/blog/how-pricing-strategies-work-better-with-data-analytics#:~:text=A%20data%20analytics%20pricing%20model%20provides%20a%20clear%2C%20consolidated%20view,%2C%20competition%2C%20and%20customer%20perceptions.
Kheraj, S. A. (2021, December 15). Pricing and Marketing Analytics — Key to Organization growth engine. Medium.
ROLE OF MARKETING ANALYTICS IN PRICING DECISIONS
Some of the top organizations e.g. Amazon take advantage of the dynamic pricing based on customer demand and behavior.
Companies like Uber charge higher prices during peak time, these prices are modeled according to the algorithm which manages supply and demand.
Kheraj, S. A. (2021, December 15). Pricing and Marketing Analytics — Key to Organization growth engine. Medium.
ROLE OF MARKETING ANALYTICS IN PRICING DECISIONS
ANALYTICS IN PRICING EXAMLPES:
PRICE SKIMMING
This pricing strategy involves setting initial premium prices expecting it to get lower as rival comes in. The goal here is to gather as much revenue as possible when the demand is high, and no competitor has stepped in.
Examples: Latest iPhone/iPad/Mac. Apple keeps their prices usually very high at the start due to strong
branding and high quality
ANALYTICS IN PRICING EXAMPLES: PENETRATION PRICE
This type of pricing is generally used by the latecomers in the market so that they can attract customers away from the competitors by setting a low price at the start.
Price optimization is the process of using data and analytics to determine the optimal price point for a product or service. It takes into account a wide range of factors, including customer behavior, market trends, and competitor pricing.
e.g. a retailer might use AI and advanced analytics to analyze customer data to identify patterns in purchasing behavior. By understanding which products are most frequently purchased together, the retailer can adjust prices in real-time to maximize revenue.
Another example of price optimization is the airline industry, where prices fluctuate constantly based on a range of factors, such as the time of day, the day of the week, and the season. Airlines use advanced analytics to optimize prices based on demand, availability, and competitor pricing.
ANALYTICS IN PRICING EXAMPLES:
PRICE OPTIMISATION
Kheraj, S. A. (2021, December 15). Pricing and Marketing Analytics — Key to Organization growth engine. Medium. https://towardsdatascience.com/pricing-and-marketing-analytics-key-to-organization-growth-engine-d5032df4b54a