Pricing Concepts and Strategies: Establishing Value PDF

Chapter 11 Pricing Concepts and Strategies: Establishing Value © 2023 McGraw Hill Limited 11-1  Chapter 11: Pricing Concepts and Strategies: Establishing Value LEARNING OBJECTIVES LO1 Explain what price is and i...

Chapter 11 Pricing Concepts and Strategies: Establishing Value © 2023 McGraw Hill Limited 11-1  Chapter 11: Pricing Concepts and Strategies: Establishing Value LEARNING OBJECTIVES LO1 Explain what price is and its importance in establishing value in marketing LO2 Illustrate how the 5 C’s – company objectives, customers, costs, competition, and channel members – influence pricing decisions LO3 Understand the considerations for setting prices; three pricing methods (e.g., cost-based methods, competitor-based methods, and value- based methods); and various strategies (e.g., EDLP, high/ low, and new product pricing) used in marketing LO4 Identify pricing tactics targeted to channel members and consumers LO5 Summarize the legal and ethical issues involved in pricing © 2023 McGraw Hill Limited 11-2  Pricing Concepts and Strategies: Establishing Value ⚫ Disney Company undertakes their pricing via strategic pricing methods that are sophisticated and complex. ⚫ It needs to price its amusement park offerings to both encourage and discourage attendance. © 2023 McGraw Hill Limited 11-3  The Importance of Pricing ⚫ A strategic opportunity to create value ⚫ Not an after thought to the rest of the marketing mix ⚫ Pricing signals quality or a lack of quality When shopping for wine, most of us infer that a higher price means higher quality. © 2023 McGraw Hill Limited 11-4  The Role of Price in the Marketing Mix Price is: – usually ranked as one of the most important factors in purchase decisions – the only element in the marketing mix that generates revenue – the most challenging of the four Ps to manage, partly because it is often the least understood. – misunderstood by managers © 2023 McGraw Hill Limited 11-5 The Five C’s of Pricing © 2023 McGraw Hill Limited 11-6  st 1 C: Company Objectives Profit Orientation Maximize profits Target return pricing Target profit pricing Sales Orientation Competitor Orientation Customer Orientation P&G increases sales by introducing new Tide products. © 2023 McGraw Hill Limited 11-7  2nd C: Customers The most important C!!! It’s all about understanding consumers reactions to different prices Consumers want value Price is half of the value equation Can you tell the difference between the $19,000 and the $320 Paradigm speakers? © 2023 McGraw Hill Limited 11-8 Demand Curves & Pricing Knowing demand curves enables to see relationship between price and demand © 2023 McGraw Hill Limited 11-9 Demand Curves & Pricing Prestige Products have a unique demand curve © 2023 McGraw Hill Limited 11-10  Prestige Pricing Hermès uses prestige pricing for its handbags, like this one that sold for more than $300,000 at auction, which is more than $20,000 above the standard retail price. © 2023 McGraw Hill Limited 11-11  Price Elasticity of Demand How do consumers respond to price increases or decreases? This is measured by the price elasticity of demand Price elasticity of demand = % change in quantity demanded % change in price Consumers are less sensitive to the price of milk (left) than to steak (right). When the price of milk goes up, demand does not fall significantly because people still need to buy milk. However, if the price of steak rises beyond a certain point, people will buy less because they can turn to the many substitutes for steak. © 2023 McGraw Hill Limited 11-12 Factors Influencing Price Elasticity of Demand: Income Effects ⚫ Generally, as people’s income increases, their spending behaviour changes ⚫ Demand shifts from lower-priced products to higher- priced products © 2023 McGraw Hill Limited 11-13  Factors Influencing Price Elasticity of Demand: Substitution Effects ⚫ The greater the availability of substitute products, the higher the price elasticity of demand for any given product If there are many close substitutes for a product, customers will be sensitive to small price changes, and the product will be highly price elastic. If, for instance, Kraft raises its price, many customers will switch to another brand. © 2023 McGraw Hill Limited 11-14  3rd C: Costs ⚫ Variable Costs Vary with production volume ⚫ Fixed Costs Unaffected by production volume ⚫ Total Cost Sum of variable and fixed costs © 2023 McGraw Hill Limited 11-15 Break-even Analysis & Decision Making © 2023 McGraw Hill Limited 11-16  Break-Even Point 𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡 = 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 × 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 + 𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑃𝑟𝑖𝑐𝑒 × 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠 𝐵𝑟𝑒𝑎𝑘−𝐸𝑣𝑒𝑛 𝑃𝑜𝑖𝑛𝑡 𝑢𝑛𝑖𝑡𝑠 = 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 © 2023 McGraw Hill Limited 11-17  Break-Even Point In a hotel, the cost of the physical structure, including the lobby, is fixed—it is incurred even if no rooms are rented. The costs to clean towels and sheets are variable—the more rooms that are rented, the more the costs. © 2023 McGraw Hill Limited 11-18  4th C: Competition Less Price Competition More Price Competition Monopoly Oligopoly One firm controls the market A Handful of firms control the market Fewer Firms Monopolistic Competition Pure Competition May firms selling Many firms selling differentiated products at commodities for the same Many Firms different prices price © 2023 McGraw Hill Limited 11-19  th 4 C: Competition ⚫ Can you match each photo to its respective type of competition? © 2023 McGraw Hill Limited 11-20  th 5 C: Channel Members ⚫ Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies ⚫ Manufactures must protect against grey market transactions TV sets and other consumer electronics are commonly sold in the grey market. © 2023 McGraw Hill Limited 11-21 Pricing Methods & Strategies Cost Pricing Strategies Value Competitor © 2023 McGraw Hill Limited 11-22  Cost-Based Methods ⚫ Cost-base pricing methods start with cost ⚫ All costs calculated on a per unit basis ⚫ Assumes costs don’t vary for different levels of production © 2023 McGraw Hill Limited 11-23 Competitor-Based Methods Set prices to signal information of how product compares with competitors Premium pricing © 2023 McGraw Hill Limited 11-24 Value-Based Methods Setting prices that focus on the overall value of the product Consumer perceptions © 2023 McGraw Hill Limited 11-25  Psychological Factors Affecting Value-Based Pricing Strategies Skimming New Product Penetration Pricing Everyday Strategies low pricing High/Low © 2023 McGraw Hill Limited 11-26  Everyday Low Pricing (EDLP) Everyday low pricing High/low Versus (EDLP) pricing Value is created in different ways EDLP saves search costs of finding lowest overall prices High/low provides the thrill of the chase for the lowest price © 2023 McGraw Hill Limited 11-27  High-Low Pricing RELIES ON THE PROMOTION OF SALES, DURING WHICH PRICES ARE TEMPORARILY REDUCED TO ENCOURAGE PURCHASES © 2023 McGraw Hill Limited 11-28  New Product Pricing Strategies Price skimming Market penetration pricing Apple uses a price skimming strategy. The Apple Watch Sport (left) started at $349, but now sells for $259, which is still higher than competitors like Misfit (right) that start at just $149. © 2023 McGraw Hill Limited 11-29  Pricing Tactics - Consumers Tactic Price lining Establishing a price floor and a price ceiling for an entire line of similar products and then setting price points in between to represent distinct differences in quality. Price bundling Pricing of more than one product for a single, lower price. Leader pricing Building store traffic by aggressively pricing and advertising a regularly purchased item, often priced at or just above the store’s cost. © 2023 McGraw Hill Limited 11-30  Price Lining ⚫ Marketers establish a price floor & a price ceiling & set prices in between ⚫ Allows for easy comparison Brooks Brothers uses the price lining tactic by establishing a price floor with its Performance Non-Iron Dress Shirt at $118 (left), the Luxury Shirt Collection in the middle at $168 (middle), and the Regent Fit as the price ceiling at $225 (right). © 2023 McGraw Hill Limited 11-31  Price Bundling ⚫ Encourage sales of slow moving items ⚫ Encourage stock up ⚫ Encourage trial of new brand ⚫ Incentive to purchase © 2023 McGraw Hill Limited 11-32  Leader Pricing Enticing consumers into the store with the popular aggressively priced item and hoping they will pick up other items while shopping © 2023 McGraw Hill Limited 11-33  Consumer Price Reductions Markdowns Quantity Coupons & discounts for rebates consumers © 2023 McGraw Hill Limited 11-34  Markdowns ⚫ An integral component of high/low pricing strategy ⚫ Enable retailers to get rid of slow moving or obsolete merchandise ⚫ Used to generate store traffic. © 2023 McGraw Hill Limited 11-35  Quantity Discounts for Consumers ⚫ Size discount ⚫ The more you buy the cheaper the unit cost Customers get a size discount for buying larger sizes. With Cheerios, the larger the box, the less it costs per gram. © 2023 McGraw Hill Limited 11-36  Coupons & Rebates ⚫ Coupons Retailer handles ⚫ Rebate Manufacturer issues Coupons offer a discount on the price of specific items when they’re purchased. © 2023 McGraw Hill Limited 11-37  Business-to-Business Pricing Tactics & Discounts Tactic Seasonal discounts An additional reduction offered as an incentive to retailers to order merchandise in advance of the normal buying season. Cash discounts An additional reduction that reduces the invoice cost if the buyer pays the invoice prior to the end of the discount period. Allowances Advertising or listing allowances (additional price reductions) offered in return for specific behaviours. Advertising allowances are offered to retailers if they agree to feature the manufacturer’s product in their advertising and promotional efforts. Listing allowances are offered to get new products into stores or to gain more or better shelf space. Quantity discounts Providing a reduced price according to the amount purchased. Uniform delivered With uniform delivered pricing, the shipper charges one rate, versus geographic no matter where the buyer is located. pricing With geographic pricing, different prices are charged depending on the geographical delivery area. © 2023 McGraw Hill Limited 11-38  Seasonal Discounts Designed to spur buyers into purchasing merchandise early © 2023 McGraw Hill Limited 11-39  Cash Discounts ⚫ Reduced invoice cost if buyer pays prior to the end of the discount period ⚫ Encourages buyers to pay before the discount period ends ⚫ Seller benefits either way © 2023 McGraw Hill Limited 11-40  Allowances ⚫ Lowers the final cost in return for specific behaviour ⚫ Advertising allowance ⚫ Listing allowance © 2023 McGraw Hill Limited 11-41 Quantity Discounts Cumulative quantity discount Noncumulative quantity discount © 2023 McGraw Hill Limited 11-42  Uniform delivered vs. Geographic Pricing Addresses the impact of shipping, which is often a major cost for manufacturers © 2023 McGraw Hill Limited 11-43 Legal & Ethical Aspects of Pricing Deceptive or Illegal Price Advertising Legal & Price Fixing ethical Predatory aspects of Pricing pricing Price Discrimination © 2023 McGraw Hill Limited 11-44  Consumers’ Use of Reference Prices The price against which buyers compare the actual selling price of the product and that facilitates their evaluation process Winners shows its price and then compares it to how much the product would cost elsewhere to set a reference price in consumers’ minds. © 2023 McGraw Hill Limited 11-45  Legal & Ethical Aspects Of Pricing - Deceptive Or Illegal Price Advertising Deceptive Reference Prices Deceptive or Illegal Price Advertising Bait & Loss Leader Switch Pricing © 2023 McGraw Hill Limited 11-46  Legal & Ethical Aspects Of Pricing – Predatory Pricing When a firm sets a very low price for one or more of its products with the intent to drive its competition out of business © 2023 McGraw Hill Limited 11-47  Legal & Ethical Aspects Of Pricing – Predatory Pricing Price Discrimination When firms sell the same product to different resellers (wholesalers, distributors, or retailers) at different prices, usually, larger firms receive lower prices. Is this price discrimination illegal? © 2023 McGraw Hill Limited 11-48  Legal & Ethical Aspects Of Pricing – Predatory Pricing Practice of colluding with other firms to control prices. Mars, maker of Snickers, and its competitor, Nestlé, were accused of collaborating with independent wholesalers to bump up the prices of their chocolates to a fixed level. © 2023 McGraw Hill Limited 11-49