Marketing: An Introduction PDF

Marketing: An Introduction Fourteenth Edition Chapter 9 Pricing: Understanding and Capturing Customer Value Copyright © 2020, 2017, 2015 Pearson Educatio...

Marketing: An Introduction Fourteenth Edition Chapter 9 Pricing: Understanding and Capturing Customer Value Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Objectives Outline (1 of 4) 9.1 Define price, 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. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Objectives Outline (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 and change their prices to take into account different types of customers and situations. 9.6 Discuss the major public policy concerns and key pieces of legislation that affect pricing decisions. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved First Stop: Apple: Premium Priced and Worth It Avid Apple fans have long anointed the brand as the keeper of all things cool. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Objective Outline 9.1 Define price, identify the three major pricing strategies, and discuss the importance of understanding customer value perceptions, company costs, and competitor strategies when setting prices. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Price Amount of money charged for a product or service Determines a firm’s market share and profitability Produces revenue Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Figure 9.1 Considerations in Setting Price Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Figure 9.2 Value-Based Pricing versus Cost-Based Pricing Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Value-Added Pricing Premium audio brand Bose creates “better sound through research—an innovative, high-quality listening experience,” adding value that merits its premium prices. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Figure 9.3 Break-Even Chart for Determining Target Return Price and Break-Even Volume Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved 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? Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Competition-Based Pricing (2 of 2) Caterpillar dominates the heavy equipment industry despite charging premium prices. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Objective Outline 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. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Objective Outline 9.2 Identify and define the other important external and internal factors affecting a firm’s pricing decisions. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Other Internal and External Considerations Affecting Price Decisions Internal factors – Overall marketing strategy, objectives, and mix – Organizational considerations External factors – Market and demand – Economy – Impact on other parties in its environment Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved 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. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Pricing in Different Types of Markets Pure competition Monopolistic competition Oligopolistic competition Pure monopoly Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Pricing in Monopolistic Competition Markets Pixel ads tell consumers to “Ask more of your phone.” Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Figure 9.4 Demand Curve Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved 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. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Other External Factors Company must consider several other factors in its external environment when setting prices. – Resellers – Government – Social concerns Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Objective Outline 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 Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Objective Outline 9.3 Describe the major strategies for pricing new products. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved New Product Pricing Strategies (2 of 2) Thanks to penetration pricing, Wavestorm is now the market leader in good-quality softfoam surfboards. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Objective Outline 9.3 Summary Strategies for pricing new products include – Market-skimming pricing – Market-penetrating pricing Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Objective Outline 9.4 Explain how companies find a set of prices that maximizes the profits from the total product mix. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Product Mix Pricing Strategies Table 9.1 Product Mix Pricing Pricing Situation Description Product line pricing Setting prices across an entire product line Optional-product Pricing optional or accessory products sold with the pricing main product Captive-product Pricing products that must be used with the main pricing product By-product pricing Pricing low-value by-products to get rid of or make money on them Product bundle Pricing bundles of products sold together pricing Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Product Mix Pricing Gillette has long sold razor handles at low prices and made its money on higher- price, higher margin replacement blade cartridges. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Objective Outline 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 Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Objective Outline 9.5 Discuss how companies adjust and change their prices to take into account different types of customers and situations. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Price Adjustment Strategies Table 9.2 Price Adjustments Strategy Description Discount and allowance Reducing prices to reward customer responses such as pricing volume purchases, paying early, or promoting the product Segmented pricing Adjusting prices to allow for differences in customers, products, or locations Psychological pricing Adjusting prices for psychological effect Promotional pricing Temporarily reducing prices to spur short-run sales Geographical pricing Adjusting prices to account for the geographic location of customers Dynamic pricing Adjusting prices continually to meet the characteristics and needs of individual customers and situations International pricing Adjusting prices for international markets Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Geographical Pricing FO B-origin pricing Uniform-delivered pricing Zone pricing Basing-point pricing Freight-absorption pricing Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Dynamic and Personalized 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 Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Dynamic and Personalized Pricing (2 of 2) Amazon’s automated dynamic pricing system reportedly changes the price on as many as 80 million items on its site in a given day based on a host of marketplace factors. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Objective Outline 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 Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Objective Outline 9.6 Discuss the major public policy concerns and key pieces of legislation that affect pricing decisions. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Initiating Price Changes Reasons for price cuts: – Excess capacity – Falling demand – Attempt to dominate the market Reasons for price increases: – Cost inflation – Over-demand Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Reactions to Price Changes Buyer’s perspective Competitor’s perspective Price increase: Price cut: – Product is more exclusive – Company is trying to grab a or better made. larger market share. – Company is being greedy. – Company is doing poorly and trying to boost its sales. Price cut: – Company wants the whole – Brand wants to get a better industry to cut prices to deal on an exclusive increase total demand. product. – Product’s quality has been reduced. – Company’s image has tarnished. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Figure 9.5 Responding to Competitor Price Changes Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Figure 9.6 Public Policy Issues in Pricing Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Objective Outline 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. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Objectives Outline (3 of 4) 9.1 Define price, 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. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Objectives Outline (4 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 and change their prices to take into account different types of customers and situations. 9.6 Discuss the major public policy concerns and key pieces of legislation that affect pricing decisions. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved Copyright This work is protected by United States copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved