Marketing plan 3

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Marketing: An Introduction

Thirteenth Edition

Chapter 9

Pricing: Understanding and Capturing Customer Value

Learning Objectives (1 of 4)

9-1. Identify the three major pricing strategies and discuss the importance of understanding customer value perceptions, company costs, and competitor strategies when setting prices.

9-2. Identify and define the other important external and internal factors affecting a firm’s pricing decisions.

9-3. Describe the major strategies for pricing new products.

This chapter identified the three major pricing strategies and discusses the importance of understanding customer value perceptions, company costs, and competitor strategies when setting prices. It identified and defined the other important external and internal factors affecting a firm’s pricing decisions, and also described the major strategies for pricing new products.

Learning Objectives (2 of 4)

9-4. Explain how companies find a set of prices that maximizes the profits from the total product mix.

9-5. Discuss how companies adjust their prices to take into account different types of customers and situations.

9-6. Discuss the key issues related to initiating and responding to price changes.

This chapter further explains how companies find a set of prices that maximizes the profits from the total product mix and discusses how companies adjust their prices to take into account different types of customers and situations. Finally, the chapter discusses the key issues related to initiating and responding to price changes.

First Stop: Amazon Versus Walmart A Price War for Online Supremacy

Achieving online supremacy will take more than winning an online price war.

Walmart, the world’s largest retailer, and Amazon, the world’s largest online merchant, are fighting a war for online supremacy. The weapon of choice? Prices, at least for now. But in the long run, winning the war will take much more than low prices. The spoils will go to the company that delivers the best overall online customer experience and value for the price.

Learning Objective 9-1

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

Price

Amount of money charged for a product or service

Determines a firm’s market share and profitability

Produces revenue

Price is the amount of money charged for a product or a service. It is the sum of all the values that customers give up to gain the benefits of having or using a product or service. Price is one of the most important elements that determines a firm’s market share and profitability. Price is the only element in the marketing mix that produces revenue; all other elements represent costs.

Figure 9.1 - Considerations in Setting Price

This figure summarizes the major considerations in setting prices and suggests three major pricing strategies: customer value–based pricing, cost-based pricing, and competition-based pricing. If customers perceive that a product’s price is greater than its value, they won’t buy the product. If the company prices the product below its costs, profits will suffer. Between the two extremes, the right pricing strategy is the one that delivers both value to the customer and profits to the company.

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

Customer value-based pricing uses buyers’ perceptions of value as the key to pricing. Price is considered along with all other marketing mix variables before the marketing program is set. The company first assesses customer needs and value perceptions. It then sets its target price based on customer perceptions of value. There are two types of value-based pricing: good-value pricing and value-added pricing.

Good-value pricing offers just the right combination of quality and good service at a fair price. This pricing method involves introducing less expensive versions of established, brand name products or new lower-price lines. It also involves redesigning existing brands to offer more quality for a given price or the same quality for less.

Value-added pricing involves attaching value-added features and services to differentiate a company’s offers and then charging higher prices. For example, even as frugal consumer spending habits linger, some movie theater chains are adding amenities and charging more rather than cutting services to maintain lower admission prices.

Value-Added Pricing

AMC’s Cinema Suites are adding amenities and charging more.

Rather than cutting services to maintain lower admission prices, premium theaters such as AMC’s Cinema Suites are adding amenities and charging more. “Once people experience it, . . . they don’t want to go anywhere else.”

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

This figure compares value-based pricing with cost-based pricing. Although costs are an important consideration in setting prices, cost-based pricing is often product driven. The company designs what it considers to be a good product, adds up the costs of making the product, and sets a price that covers costs plus a target profit. Value-based pricing reverses this process. The company first assesses customer needs and value perceptions. It then sets its target price based on customer perceptions of value.

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

Cost-based pricing involves setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for the company’s effort and risk. Companies with lower costs can set lower prices that result in smaller margins but greater sales and profits. Other companies pay higher costs so that they can add value and claim higher prices and margins.

A company’s costs take two forms: fixed and variable. Fixed costs (also known as overhead) are costs that do not vary with production or sales level. Variable costs vary directly with the level of production. Although these costs tend to be the same for each unit produced, they are called variable costs because the total varies with the number of units produced.

Total costs are the sum of the fixed and variable costs for any given level of production. Management wants to charge a price that will at least cover the total production costs at a given level of production.

Types of Cost-Based Pricing

Cost-plus pricing (markup pricing)

Adding a standard markup to the cost of the product

Break-even pricing (target return pricing)

Setting price to break even on the costs of making and marketing a product, or setting price to make a target return

The simplest pricing method is cost-plus pricing (or markup pricing)—adding a standard markup to the cost of the product. Markup pricing remains popular for many reasons. First, sellers are more certain about costs than about demand. By tying the price to cost, sellers simplify pricing. Second, when all firms in the industry use this pricing method, prices tend to be similar and price competition is minimized.

Another cost-oriented pricing approach is break-even pricing, or a variation called target return pricing. The firm tries to determine the price at which it will break even or make the target return it is seeking. Target return pricing uses the concept of a break-even chart, which shows the total cost and total revenue expected at different sales volume levels.

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

This figure shows a break-even chart for a flash drive manufacturer. Fixed costs are $6 million regardless of sales volume, and variable costs are $5 per unit. Variable costs are added to fixed costs to form total costs, which rise with volume. The slope of the total revenue curve reflects the price. Here, the price is $15. For example, the company’s revenue is $12 million on 800,000 units, or $15 per unit.

At the break-even point, 600,000 units, total revenue equals total cost. To make a target return of $2 million, the company must sell 800,000 units. But will customers buy that many units at the $15 price?

Although break-even analysis and target return pricing can help the company to determine the minimum prices needed to cover expected costs and profits, they do not take the price-demand relationship into account.

Competition-Based Pricing (1 of 2)

Setting prices based on competitors’ strategies, costs, prices, and market offerings

Company should ask several questions to assess competitors’ pricing strategies:

How does the company’s market offering compare in terms of customer value?

How strong are current competitors?

What are their current pricing strategies?

Competition-based pricing involves setting prices based on competitors’ strategies, costs, prices, and market offerings. In assessing competitors’ pricing strategies, the company should ask several questions. First, how does the company’s market offering compare with competitors’ offerings in terms of customer value? Next, how strong are current competitors and what are their current pricing strategies?

Competition-Based Pricing (2 of 2)

Caterpillar dominates the heavy equipment industry despite charging premium prices.

Caterpillar makes high-quality, heavy-duty construction and mining equipment. It dominates its industry despite charging higher prices than competitors such as Komatsu. When a commercial customer once asked a Caterpillar dealer why it should pay $500,000 for a big Caterpillar bulldozer when it could get an “equivalent” Komatsu dozer for $420,000. The Caterpillar dealer was able to explain that although the customer pays an $80,000 price premium for the Caterpillar bulldozer, it’s actually getting $150,000 in added value over the product’s lifetime in the form of superior reliability and durability, lower lifetime operating costs, superior service, and a longer parts warranty.

Learning Objective 9-1 Summary

The three major pricing strategies include

Customer value-based pricing

Cost-based pricing

Competition-based pricing

Customer value perceptions, company costs and competitor strategies are important considerations when setting prices.

The three major pricing strategies include customer value-based pricing, cost-based pricing, and competition-based pricing. Good pricing begins with a complete understanding of the value that a product or service creates for customers and setting a price that captures that value.

Customer perceptions of the product’s value set the ceiling for prices. If customers perceive that the price is greater than the product’s value, they will not buy the product. At the other extreme, company and product costs set the floor for prices. If the company prices the product below its costs, profits will suffer. Between these two extremes, consumers will base their judgments of a product’s value on the prices that competitors charge for similar products. Thus, in setting prices, companies need to consider all three factors: customer perceived value, costs, and competitors’ pricing strategies.

Learning Objective 9-2

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

Considerations Affecting Pricing Decisions

Internal factors

Overall marketing strategy, objectives, and mix

Organizational considerations

External factors

Market and demand

Economy

Impact on other parties in its environment

Beyond customer value perceptions, costs, and competitor strategies, the company must consider several additional internal and external factors. Each of these factors are discussed in greater detail in the following slides.

Overall Marketing Strategy, Objectives, and Mix

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

Positioning may be based on price.

Target costing starts with an ideal selling price, then targets costs that ensure the price is met.

Nonprice positions can be created to differentiate the marketing offer.

Pricing may play an important role in helping to accomplish company objectives at many levels. Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective integrated marketing mix program. For example, a decision to position the product on high-performance quality will mean that the seller must charge a higher price to cover higher costs. And producers whose resellers are expected to support and promote their products may have to build larger reseller margins into their prices.

Companies often position their products on price and then tailor other marketing mix decisions to the prices they want to charge. Many firms support price-positioning strategies with a technique called target costing. Target pricing starts with an ideal selling price, then targets costs that will ensure that the price is met.

Other companies deemphasize price and use other marketing mix tools to create nonprice positions. Often, the best strategy is not to charge the lowest price but rather to differentiate the marketing offer to make it worth a higher price. For example, luxury smartphone maker Vertu puts very high value into its products and charges premium prices to match that value.

Organizational Considerations

Management decides who should set prices.

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

Management must decide who within the organization should set prices. Companies handle pricing in a variety of ways. In small companies, prices are often set by top management rather than by the marketing or sales departments. In large companies, pricing is typically handled by divisional or product managers. In industries in which pricing is a key factor, companies often have pricing departments to set the best prices or help others set them. These departments report to the marketing department or top management.

Pricing in Different Types of Markets

Pure competition

Monopolistic competition

Oligopolistic competition

Pure monopoly

Before setting prices, the marketer must understand the relationship between price and demand for the company’s product. The seller’s pricing freedom varies with different types of markets.

Under pure competition, the market consists of many buyers and sellers trading in a uniform commodity. No single buyer or seller has much effect on the going market price. Sellers in these markets do not spend much time on marketing strategy.

Under monopolistic competition, the market consists of many buyers and sellers trading over a range of prices rather than a single market price. A range of prices occurs because sellers can differentiate their offers to buyers. Sellers try to develop differentiated offers for different customer segments and, in addition to price, freely use branding, advertising, and personal selling to set their offers apart.

Under oligopolistic competition, the market consists of only a few large sellers. Because there are few sellers, each seller is alert and responsive to competitors’ pricing strategies and marketing moves.

In a pure monopoly, the market is dominated by one seller. The seller may be a government monopoly, a private regulated monopoly, or a private unregulated monopoly. Pricing is handled differently in each case.

Pricing in Oligopolistic Markets

Price is an important competitive tool for DirecTV and other cable providers.

Pricing in an oligopolistic market is an important competitive tool for DirecTV and other cable/satellite television providers. Here, DirecTV invites customers to “switch & save.”

Figure 9.4 - Demand Curve

Each price the company might charge will lead to a different level of demand. This figure shows the relationship between the price charged and the resulting demand level. The demand curve shows the number of units the market will buy in a given time period at different prices that might be charged. In a normal case, demand and price are inversely related—that is, the higher the price, the lower the demand. Thus, the company would sell less if it raised its price from P1 to P2. In short, consumers with limited budgets probably will buy less of something if its price is too high. Understanding a brand’s price-demand curve is crucial to good pricing decisions. Most companies try to measure their demand curves by estimating demand at different prices. The type of market makes a difference in demand curves.

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.

Price elasticity refers to the measure of the sensitivity of demand to changes in price. If demand hardly changes with a small change in price, we say demand is inelastic. If demand changes greatly, we say the demand is elastic.

Economy

Factors impacting pricing strategies

Boom or recession

Inflation

Interest rates

Responses to the frugality of post recession consumers

Cut prices and offer discounts

Develop more affordable items

Redefine value propositions

Economic conditions can have a strong impact on the firm’s pricing strategies. Factors such as a boom or recession, inflation, and interest rates affect pricing decisions. In the aftermath of the recent Great Recession, many consumers have rethought the price-value equation. As a result, many marketers have increased their emphasis on value-for-the-money pricing strategies.

The most obvious response to the new economic realities is to cut prices and offer discounts. Lower prices make products more affordable and help spur short-term sales. However, such price cuts can have undesirable long-term consequences. Once a company cuts prices, it’s difficult to raise them again when the economy recovers.

Rather than cutting prices, many companies have instead developed “price tiers,” adding both more affordable lines and premium lines. Other companies are holding prices but redefining the “value” in their value propositions.

Other External Factors

Company must consider several other factors in its external environment when setting prices.

Resellers

Government

Social concerns

Beyond the market and the economy, the company must consider several other factors in its external environment when setting prices. It must know what impact its prices will have on other parties in its environment. How will resellers react to various prices? The company should set prices that give resellers a fair profit, encourage their support, and help them to sell the product effectively. The government is another important external influence on pricing decisions. Finally, social concerns may need to be taken into account. In setting prices, a company’s short-term sales, market share, and profit goals may need to be tempered by broader societal considerations.

Learning Objective 9-2 Summary

Factors affecting a firm’s pricing decisions:

Internal – marketing strategy, objectives, marketing mix, and organizational considerations

External – nature of market, demand, economy, reseller needs, and government actions

Other internal factors that influence pricing decisions include the company’s overall marketing strategy, objectives, and marketing mix as well as organizational considerations. If the company has selected its target market and positioning carefully, then its marketing mix strategy, including price, will be fairly straightforward.. Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective marketing program.

Other external pricing considerations include the nature of the market and demand and environmental factors such as the economy, reseller needs, and government actions. So the company must understand concepts like demand curves (the price-demand relationship) and price elasticity (consumer sensitivity to prices).

Economic conditions can have a major impact on pricing decisions. Marketers have responded by increasing their emphasis on value-for-the-money pricing strategies. Even in tight economic times, however, consumers do not buy based on prices alone. Thus, no matter what price they charge—low or high—companies need to offer superior value for the money.

Learning Objective 9-3

Describe the major strategies for pricing new products.

New Product Pricing Strategies (1 of 2)

Market-skimming pricing (price skimming)

Setting a high price to skim maximum revenues from the segments willing to pay the high price

Company makes fewer but more profitable sales

Market-penetration pricing

Setting a low price to attract a large number of buyers and a large market share

Companies bringing out a new product face the challenge of setting prices for the first time. They can choose between two broad strategies. These are market-skimming pricing and market-penetration pricing.

Market-skimming pricing or price skimming refers to 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. This strategy works only under certain conditions. First, the product’s quality and image must support its higher price, and enough buyers must want the product at that price. Second, the costs of producing a smaller volume cannot be so high that they cancel the advantage of charging more. Finally, competitors should not be able to enter the market easily and undercut the high price.

Market-penetration pricing refers to setting a low price for a new product in order to attract a large number of buyers and a large market share. The high sales volume results in falling costs, allowing companies to cut their prices even further. Several conditions must be met for this low-price strategy to work. First, the market must be highly price sensitive so that a low price produces more market growth. Second, production and distribution costs must decrease as sales volume increases. Finally, the low price must help keep out the competition, and the penetration pricer must maintain its low-price position. Otherwise, the price advantage may be only temporary.

New Product Pricing Strategies (2 of 2)

Samsung has used low initial prices in emerging mobile device markets.

Samsung has used penetration pricing to make quick and deep inroads into emerging mobile device markets such as Africa and India.

Learning Objective 9-3 Summary

Strategies for pricing new products include

Market-skimming pricing

Market-penetrating pricing

Pricing is a dynamic process. Companies design a pricing structure that covers all their products. They change this structure over time and adjust it to account for different customers and situations. Pricing strategies usually change as a product passes through its life cycle. In pricing innovative new products, a company can use market-skimming pricing by initially setting high prices to “skim” the maximum amount of revenue from various segments of the market. Or, it can use market-penetrating pricing by setting a low initial price to penetrate the market deeply and win a large market share.

Learning Objective 9-4

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

Product Mix Pricing Strategies

Product line pricing

Optional-product pricing

Captive-product pricing

By-product pricing

Product bundle pricing

This slide summarizes the five product mix pricing strategies.

Product line pricing refers to determining the price steps to set between various products in a product line based on cost differences between the products,

customer evaluations of different features, and competitors’ prices.

Optional-product pricing refers to the pricing of optional or accessory products along with a main product.

Captive-product pricing refers to setting a price for products that must be used along with a main product, such as blades for a razor and games for a video-game console.

By-product pricing refers to setting a price for by-products in order to make the main product’s price more competitive.

Product bundle pricing refers to combining several products and offering the bundle at a reduced price.

Product Mix Pricing

Nearly 77 percent of Keurig’s sales come from its K-Cup portion packs.

As an example of captive product pricing, nearly 77 percent of Keurig’s sales come from its K-Cup portion packs. The brand must find the right balance between main-product and captive-product prices.

Learning Objective 9-4 Summary

The firm uses the following pricing strategies to maximize the profits from the total mix:

Product line pricing

Optional products

Captive products

By-products

Product bundles

When the product is part of a product mix, the firm searches for a set of prices that will maximize the profits from the total mix. In product line pricing, the company decides on price steps for the entire set of products it offers. In addition, the company must set prices for optional products (optional or accessory products included with the main product), captive products (products that are required for use of the main product), by-products (waste or residual products produced when making the main product), and product bundles (combinations of products at a reduced price).

Learning Objective 9-5

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

Price Adjustment Strategies

Discount and allowance pricing

Segmented pricing

Psychological pricing

Promotional pricing

Geographical pricing

Dynamic pricing

International pricing

This slide summarizes the seven price adjustment strategies detailed in Table 9.2. Each of these strategies are discussed in greater detail in the following slides.

Discount and Allowance Pricing

Discount - a straight reduction in price on purchases during a stated period of time or of larger quantities

Cash, quantity, functional, and seasonal discounts

Allowance - promotional money paid to retailers for an agreement to feature the manufacturer’s products in some way

Trade-in and promotional allowances

Most companies adjust their basic price to reward customers for certain responses, such as paying bills early, volume purchases, and off-season buying. These price adjustments—called discounts and allowances—can take many forms.

A discount is a straight reduction in price on purchases during a stated period of time or of larger quantities. One form of discount is a cash discount, a price reduction to buyers who pay their bills promptly. A quantity discount is a price reduction to buyers who buy large volumes. A seller offers a functional discount, also called a trade discount, to trade-channel members who perform certain functions, such as selling, storing, and record keeping. A seasonal discount is a price reduction to buyers who buy merchandise or services out of season.

An allowance is promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturer’s products in some way. For example, trade-in allowances are price reductions given for turning in an old item when buying a new one. Promotional allowances are payments or price reductions that reward dealers for participating in advertising and sales-support programs.

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

In segmented pricing, the company sells a product or service at two or more prices, even though the difference in prices is not based on differences in costs. Segmented pricing takes several forms.

With customer-segment pricing, different customers pay different prices for the same product or service. Museums and movie theaters, for example, may charge a lower admission for students and senior citizens.

With product form pricing, different versions of the product are priced differently, but not according to differences in their costs. Examples include a round-trip economy seat on a flight versus a more expensive business class seat and different prices for seats in a theater based on their location.

Location-based pricing involves a company charging different prices for different locations, even though the cost of offering each location is the same.

Time-based pricing occurs when a firm varies its price by the season, the month, the day, and even the hour. For example, movie theaters charge matinee pricing during the daytime, and resorts give weekend and seasonal discounts.

For segmented pricing to be an effective strategy, certain conditions must exist. The market must be able to be segmented, and segments must show different degrees of demand. The costs of segmenting and reaching the market cannot exceed the extra revenue obtained from the price difference. Segmented pricing should also be legal.

Psychological Pricing

Considers the psychology of prices and not simply the economics

The price says something about the product.

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

Psychological pricing refers to pricing that considers the psychology of prices and not simply the economics. The price is used to say something about the product.

Another aspect of psychological pricing is reference prices, which are the prices that buyers carry in their minds and refer to when looking at a given product. The reference price might be formed by noting current prices, remembering past prices, or assessing the buying situation. Sellers can influence or use these consumers’ reference prices when setting price.

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

With promotional pricing, companies will temporarily price their products below list price to create buying excitement and urgency. Promotional pricing takes several forms. A seller may simply offer discounts from normal prices to increase sales and reduce inventories. Sellers also use special-event pricing in certain seasons to draw more customers. Limited-time offers, such as online flash sales, can create buying urgency and make buyers feel lucky to have gotten in on the deal. Manufacturers sometimes offer cash rebates to consumers who buy the product from dealers within a specified time. Some manufacturers offer low-interest financing, longer warranties, or free maintenance to reduce the consumer’s price.

Promotional pricing, however, can have adverse effects. Used too frequently, price promotions can create “deal-prone” customers who wait until brands go on sale before buying them. In addition, constantly reduced prices can erode a brand’s value in the eyes of customers. Marketers sometimes become addicted to promotional pricing, especially in tight economic times. They use price promotions as a quick fix instead of sweating through the difficult process of developing effective longer-term strategies for building their brands.

Geographical Pricing

FOB-origin pricing

Uniform-delivered pricing

Zone pricing

Basing-point pricing

Freight-absorption pricing

There are five geographical pricing strategies.

FOB-origin pricing means that the goods are placed free on board a carrier, hence FOB. At that point the title and responsibility pass to the customer, who pays the freight from the factory to the destination.

Uniform-delivered pricing is the opposite of FOB pricing. Here, the company charges the same price plus freight to all customers, regardless of their location. The freight charge is set at the average freight cost.

Zone pricing falls between FOB-origin pricing and uniform-delivered pricing. The company sets up two or more zones. All customers within a given zone pay a single total price; the more distant the zone, the higher the price.

Using basing-point pricing, the seller selects a given city as a “basing point” and charges all customers the freight cost from that city to the customer location, regardless of the city from which the goods are actually shipped.

Using freight-absorption pricing, the seller absorbs all or part of the actual freight charges to get the desired business. Freight-absorption pricing is used for market penetration and to hold on to increasingly competitive markets.

Dynamic and Online Pricing (1 of 2)

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

Prevalent online where the Internet introduces a new age of fluid pricing

Dynamic pricing refers to adjusting prices continually to meet the characteristics and needs of individual customers and situations. It is especially prevalent online, where the Internet seems to be taking us back to a new age of fluid pricing. Such pricing offers many advantages for marketers. These days, online offers and prices might well be based on what specific customers search for and buy, how much they pay for other purchases, and whether they might be willing and able to spend more.

Dynamic pricing is legal as long as companies do not discriminate based on age, gender, location, or other similar characteristics. The practice of online pricing, however, goes both ways, and consumers often benefit from online and dynamic pricing. Thanks to the Internet, consumers can get instant product and price comparisons from thousands of vendors at price comparison sites. For example, the RedLaser mobile app lets customers scan barcodes or QR codes while shopping in stores. It then searches online and at nearby stores to provide thousands of reviews and comparison prices.

Dynamic and Online Pricing (2 of 2)

With Amazon’s Price Check, consumers can get instant product and price comparisons.

An example of dynamic and Internet (Online) pricing is Amazon’s Price Check. Using their mobile app, consumers can get instant product and price comparisons. Consumers can just “Scan it,” “Snap it,” or “Say it.”

International Pricing

Price decisions of international companies

Set a uniform worldwide price

Adjust prices to reflect local market conditions and cost considerations

Prices charged depend on many factors

Economic conditions

Competitive situations

Laws and regulations

Nature of the wholesaling and retailing system

Consumer perceptions and preferences

Company’s marketing objectives

Costs of selling in another country

Companies that market their products internationally must decide what prices to charge in different countries. In some cases, a company can set a uniform worldwide price. The price that a company should charge in a specific country depends on many factors, including economic conditions, competitive situations, laws and regulations, and the nature of the wholesaling and retailing system. Consumer perceptions and preferences also may vary from country to country, calling for different prices. Or the company may have different marketing objectives in various world markets, which require changes in pricing strategy. Costs play an important role in setting international prices. Travelers abroad are often surprised to find that goods that are relatively inexpensive at home may carry outrageously higher price tags in other countries.

Price has become a key element in the international marketing strategies of companies attempting to enter emerging markets. Typically, entering such markets has meant targeting the exploding middle classes in developing countries. As the weakened global economy has slowed growth in both domestic and emerging markets, many companies are shifting their sights to include a new target—the so-called “bottom of the pyramid,” the vast untapped market consisting of the world’s poorest consumers.

Learning Objective 9-5 Summary

Companies apply a variety of price adjustment strategies:

Discount and allowance pricing

Segmented pricing

Psychological pricing

Promotional pricing

Geographical pricing

Dynamic pricing

International pricing

Companies apply a variety of price adjustment strategies to account for differences in consumer segments and situations. One is discount and allowance pricing, whereby the company establishes cash, quantity, functional, or seasonal discounts or varying types of allowances. A second strategy is segmented pricing, where the company sells a product at two or more prices to accommodate different customers, product forms, locations, or times. Sometimes companies consider more than economics in their pricing decisions, using psychological pricing to better communicate a product’s intended position. In promotional pricing, a company offers discounts or temporarily sells a product below list price as a special event, sometimes even selling below cost as a loss leader. Another approach is geographical pricing, whereby the company decides how to price to near or distant customers. In dynamic pricing, companies adjust prices continually to meet the characteristics and needs of individual customers and situations. Finally, international pricing means that the company adjusts its price to meet different conditions and expectations in different world markets.

Learning Objective 9-6

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

Initiating Price Changes

Reasons for price cuts:

Excess capacity

Falling demand

Attempt to dominate the market

Reasons for price increases:

Cost inflation

Over-demand

Several situations may lead a firm to consider cutting its price. One such circumstance is excess capacity. Another is falling demand in the face of strong price competition or a weakened economy. A company may also cut prices in a drive to dominate the market through lower costs. Either the company starts with lower costs than its competitors, or it cuts prices in the hope of gaining market share that will further cut costs through larger volume.

A successful price increase can greatly improve profits. A major factor in price increases is cost inflation. Rising costs squeeze profit margins and lead companies to pass cost increases along to customers. Another factor leading to price increases is over-demand, however, when raising prices, the company must avoid being perceived as a price gouger.

Reactions to Price Changes

Buyer’s perspective

Price increase:

Product is more exclusive or better made.

Company is being greedy.

Price cut:

Brand wants to get a better deal on an exclusive product.

Product’s quality has been reduced.

Company’s image has tarnished.

Competitor’s perspective

Price cut:

Company is trying to grab a larger market share.

Company is doing poorly and trying to boost its sales.

Company wants the whole industry to cut prices to increase total demand.

Customers do not always interpret price changes in a straightforward way. A price increase, which would normally lower sales, may have some positive meanings for buyers. For example, what would you think if Rolex raised the price of its latest watch model? On the one hand, you might think that the watch is even more exclusive or better made. On the other hand, you might think that Rolex is simply being greedy by charging what the traffic will bear.

Similarly, consumers may view a price cut in several ways. For example, what would you think if Rolex were to suddenly cut its prices? You might think that you are getting a better deal on an exclusive product. More likely, however, you’d think that quality had been reduced, and the brand’s luxury image might be tarnished.

A firm considering a price change must worry about the reactions of its competitors as well as those of its customers. The competitor can interpret a company price cut in many ways. It might think the company is trying to grab a larger market share or that it’s doing poorly and trying to boost its sales. Or it might think that the company wants the whole industry to cut prices to increase total demand.

Figure 9.5 - Responding to Competitor Price Changes

This figure shows the ways a company might assess and respond to a competitor’s price cut.

If a company learns that a competitor’s price cut that is likely to harm company sales and profits, it might make any of the following four responses:

Reduce its price to match the competitor’s price.

Maintain its price but raise the perceived value of its offer.

Improve quality and increase price, moving its brand into a higher price–value position.

Launch a low-price fighter brand—adding a lower-price item to the line or creating a separate lower-price brand.

Figure 9.6 - Public Policy Issues in Pricing

This figure shows the major public policy issues in pricing. These include potentially damaging pricing practices within a given level of the channel (price-fixing and predatory pricing) and across levels of the channel (retail price maintenance, discriminatory pricing, and deceptive pricing).

For pricing within channel levels, federal legislation on price-fixing states that sellers must set prices without talking to competitors. Price-fixing is illegal, and the companies found guilty of these practices can receive heavy fines. Sellers are also prohibited from using predatory pricing. Predatory pricing means selling below cost with the intention of punishing a competitor or gaining higher long-run profits by putting competitors out of business. This protects small sellers from larger ones that might sell items below cost temporarily or in a specific locale to drive them out of business.

For pricing across channel levels, the Robinson-Patman Act seeks to prevent unfair price discrimination by ensuring that sellers offer the same price terms to customers at a given level of trade. Laws also prohibit retail or resale price maintenance, that is, a manufacturer cannot require dealers to charge a specified retail price for its product. Deceptive pricing occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers. This might involve bogus reference or comparison prices, as when a retailer sets artificially high regular prices and then announces “sale” prices close to its previous everyday prices.

Learning Objective 9-6 Summary

Customers’ and competitors’ reactions must be considered when initiating a price change.

Buyer reactions are influenced by the meaning customers see in the price change.

Competitors’ reactions flow from a set reaction policy or an analysis of each situation.

Any response to a competitor’s price change should consider many factors.

When a firm considers initiating a price change, it must consider customers’ and competitors’ reactions. There are different implications to initiating price cuts and initiating price increases. Buyer reactions to price changes are influenced by the meaning customers see in the price change. Competitors’ reactions flow from a set reaction policy or a fresh analysis of each situation.

There are also many factors to consider in responding to a competitor’s price changes. The company that faces a price change initiated by a competitor must try to understand the competitor’s intent as well as the likely duration and impact of the change. If a swift reaction is desirable, the firm should pre-plan its reactions to different possible price actions by competitors. When facing a competitor’s price change, the company might sit tight, reduce its own price, raise perceived quality, improve quality and raise price, or launch a fighting brand.

Learning Objectives (3 of 4)