MT450 DB6

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Pricing

Chapter Nine

Need for consistency between price and the marketing strategy The concept of perceived value and how it is critical to setting price Integrating competition and costs into the pricing decision Deciding how much of the strategic pricing gap between cost and perceived value to capture Specific pricing tactics The Internet’s effect on pricing decisions

Key Learning Points

The Role of Marketing Strategy in Pricing

Price must be consistent with the marketing strategy. Targeting decisions affect pricing:

Pricing discrimination Price bands or tiers

Figure 9.1 Price Tiers in GPS Products

Illustration

Digital video camera firms use price tiers to capture buyers from different market segments.

Reasons for Price Variation

Price sensitivity lessened by customer loyalty Low price visibility in some industries

Variability in competitive intensity Desire to keep competitors from gaining shelf space

The Role of Marketing Strategy in Pricing

Discussion Question

1. What are some examples of products or services that use price discrimination in marketing to consumers?

2. Are there any dangers associated with implementing a price discrimination strategy for consumer goods or services?

Selling identical products or services at different prices to different customers (price discrimination) is illegal in business-to-business marketing except under certain conditions. However, price discrimination (also called flexible pricing) is not illegal in business-to-consumer marketing.

- Russell S. Winer

“Customer or perceived value is a measure of how much a customer is willing to pay for a product or service. Economists call this concept the reservation price, the most someone is willing to pay for a product (or the price at which the product is eliminated from the customer’s budget).”

Illustration

The BMW Z3 and Z4 offer a lot of value.

Figure 9.2 The Cost of Online Music

Perceived Value

Price > perceived value > cost Customers won’t buy unless a monopoly exists. Price reductions or an increase in value are needed.

Price > cost > perceived value Utter failure. Products are usually withdrawn.

Perceived Value

Price Elasticity

E = % change in price % change in demand

If the absolute value of E is < 1.0, price is inelastic If the absolute value of E is > 1.0, price is elastic

Figure 9.3 Strategic Pricing Gap

Perceived Value

Calculating customer value Value-in-use:

Useful for industrial products and services Benefits are put into monetary terms Helpful in closing sales

Figure 9.4 The Economic Value Concept

Table 9.1 Dollarmetric Example

Figure 9.5 Price Experiment for a Mobile Phone

Perceived Value

Using the perceived value concept: A functional relationship exists between market share, perceived value and price.

Market share = f (perceived value/price).

Table 9.2 Profit Impact of Price Cuts

Perceived Value

Techniques for Increasing Perceived Value

Improve the product quality. Invest in advertising the brand. Institute value-added services. Improve the sales effort by training the sales force to sell on value versus price.

Competition and Pricing

Estimating competitors’ relative cost position allows managers to understand:

How low competitors can price their brands. Margins in the category or industry.

Several cost estimation methods exist. Reverse engineering Using publicly available data Using efficiency ratios and other data to estimate service costs Applying the experience curve.

Figure 9.6 Market Share vs. Price and Cost

The Role of Costs

Costs are best used in the pricing decision to determine the price floor. Using costs to set price is problematic:

Totally ignores the customer. Which kind of cost should be used in setting price? Costs are often a function of volume, as dictated by the experience curve.

Figure 9.7 Factors in the Pricing Decision

Deciding How Much of the Strategic Gap to Capture

Penetration Pricing Leaves less of the market for the competition Low margins less attractive to new entries Strong choice when scale effects exist

Not appropriate for products characterized by perceived price-quality relationships A strong competitive advantage neutralized by low prices Limited flexibility

Deciding How Much of the Strategic Gap to Capture

Skimming Pricing

Appropriate for product categories that are characterized by perceived price-quality relationships Appropriate when little chance of future competition exists

High margins increase the likelihood of competition Appropriate when costs are unrelated to volume and when managers are less concerned about building significant market share Appropriate early in PLC

Deciding How Much of the Strategic Gap to Capture

Pricing policies accomplish many objectives.

Penetration or market share pricing Skimming or prestige pricing Return on sales or investment pricing Pricing for stability Competitive pricing

Deciding How Much of the Strategic Gap to Capture

Factors Favoring Price Wars New market entrants Excess manufacturing capacity Slow sales growth Few, but large competitors

High exit barriers Low product differentiation High customer price sensitivity Strategic importance of a product or company

- Russell S. Winer

“A reference price is any standard of comparison against which a potential transaction or purchase price is compared.”

Deciding How Much of the Strategic Gap to Capture

Psychological aspects of price are considered by consumers.

Reference prices External and internal reference prices Influence brand choice Future reference prices

Deciding How Much of the Strategic Gap to Capture

Psychological aspects of price

Price and perceived quality Psychological price points

Table 9.3 DuPont Pricing over the Product Life

Cycle

Figure 9.8 Experience Curve-Based Pricing

Patterns over the Product Life Cycle

Deciding How Much of the Strategic Gap to Capture

Industry Conditions to be Considered When Price-Setting

Threat of new entrants Rivalry

Pressure from substitutes Unused capacity

Power of buyers and suppliers

Specific Pricing Tactics

Product-line pricing tactics: Price bundling/unbundling Product-line pricing Complementary pricing

Visit Dell.com to see various pricing tactics.

http://www.dell.com/

Specific Pricing Tactics

Value pricing: Differs from pricing to value and penetration pricing. Relates to customer expectations.

Specific Pricing Tactics

Differential pricing is appropriate when customer behavior is heterogeneous.

Direct price discrimination Second market discounting Periodic discounting Flat-rate vs. variable-rate Other pricing mechanisms

Specific Pricing Tactics

Competing against private labels Several methods can be used to defend a brand against private labels.

Pricing and the Internet

The most successful websites feature lower prices, contrary to predictions. The Internet aids with comparison shopping. Online shoppers often receive inducements. Developing higher customer value and profits online is difficult. Firms may be underestimating their ability to build online brands.

Global Pricing Issues

Price is very difficult to control in international markets. Many factors influence price. Country of origin also has an effect on the price-perceived value relationship. Export strategies vary depending on the strength of the domestic currency.

Table 9.4 Export Strategies under Varying

Currency Conditions

Ethical Considerations

Price is often a focus of ethical issues, particularly in a global context. Firms are frequently criticized for pricing policies. The motive for price increases matters to consumers. Price should be viewed as akin to the communications mix.

Executive Summary

Price should recover customer- perceived value. Four components of price exist. Price must be consistent with the marketing mix. Customer value is important. Competitor’s cost structures should be understood.

Executive Summary

Price should be greater than variable costs. The strategic pricing gap is determined by several factors. Various pricing tactics exist. Price discrimination is common. The Internet has impacted searching and buying behavior.

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Pricing
Key Learning Points
The Role of Marketing �Strategy in Pricing
Figure 9.1�Price Tiers in GPS Products
Illustration
The Role of Marketing �Strategy in Pricing
Discussion Question
Slide Number 8
Illustration
Figure 9.2�The Cost of Online Music
Perceived Value
Slide Number 12
Figure 9.3�Strategic Pricing Gap
Perceived Value
Figure 9.4�The Economic Value Concept
Table 9.1�Dollarmetric Example
Figure 9.5�Price Experiment for a Mobile Phone
Perceived Value
Table 9.2�Profit Impact of Price Cuts
Slide Number 20
Competition and Pricing
Figure 9.6�Market Share vs. Price and Cost
The Role of Costs
Figure 9.7�Factors in the Pricing Decision
Slide Number 25
Slide Number 26
Deciding How Much of the Strategic Gap to Capture
Slide Number 28
Slide Number 29
Deciding How Much of the Strategic Gap to Capture
Deciding How Much of the Strategic Gap to Capture
Table 9.3�DuPont Pricing over the Product Life Cycle
Figure 9.8�Experience Curve-Based Pricing Patterns over the Product Life Cycle
Slide Number 34
Specific Pricing Tactics
Specific Pricing Tactics
Specific Pricing Tactics
Specific Pricing Tactics
Pricing and the Internet
Global Pricing Issues
Table 9.4�Export Strategies under Varying Currency Conditions
Ethical Considerations
Executive Summary
Executive Summary
Slide Number 45