Discuss the importance of understanding Identify and define the other important internal Describe the major strategies for pricing imitative Discuss how companies adjust their prices to Discuss key issues related to initiating and

Copyright 2007, Prentice Hall, Inc. 9-2 Roadmap: Previewing the Concepts

1. Discuss the importance of understanding

customer value perceptions and company costs when setting prices.

2. Identify and define the other important internal

and external factors affecting a firm’s pricing decisions.

3. Describe the major strategies for pricing imitative

and new products. 4. Explain how companies find a set of prices that maximizes the profits from the total product mix.

5. Discuss how companies adjust their prices to

take into account different types of customers and situations.

6. Discuss key issues related to initiating and

responding to price changes. Copyright 2007, Prentice Ha ll, Inc. 9-3 The Past  1970s: Toys ‘R’ Us emerges as a toy retailing category killer, offering greater product selection and lower prices than its small store competition.  Explosive growth occurs.  Late 1990s: Wal-Mart uses toys as a loss leader, pricing lower than Toys ‘R’ Us and becomes the largest toy retailer. Toys ‘R’ Us – Pricing for Success Toys ‘R’ Us – Pricing for Success Case Study Case Study The Present  Toys ‘R’ Us tries price matching and fails miserably, losing sales, profit, and market share.  New ownership closes stores, cut costs, and steps away from the price war.  Efforts focus on top-selling, higher margin or exclusive items, store atmosphere, shopper experiences, and customer service. Copyright 2007, Prentice Ha ll, Inc. 9-4 What Is a Price?  Narrowly, price is the amount of money charged for a product or service.  Broadly , price is the sum of all the values that consumers exchange for the benefits of having or using the product or service. Copyright 2007, Prentice Ha ll, Inc. 9-5  Customer perceptions of value  Other internal and external considerations – Marketing strategy, objectives, mix – Nature of the market and demand – Competitors’ strategies and prices  Product costs Copyright 2007, Prentice Ha ll, Inc. 9-6 Customer Value Perceptions  Customer-oriented pricing: – Involves understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value.  Value-based pricing: – Uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing. • Good value pricing • Value-added pricing Copyright 2007, Prentice Ha ll, Inc. 9-7  Company and Product Costs: – Fixed Costs: • Costs that do not vary with production or sales level. – Variable Costs: • Costs that vary directly with the level of production. Copyright 2007, Prentice Ha ll, Inc. 9-8 Cost-Based Pricing  Cost-plus pricing – Adding a standard markup to the cost of the product  Break-even pricing  Target-profit pricing Copyright 2007, Prentice Ha ll, Inc. 9-9  Marketing Objectives: – Company must decide on its strategy for the product. – General pricing objectives: • Survival • Current profit maximization • Market share leadership • Product quality leadership Copyright 2007, Prentice Ha ll, Inc. 9-10  Marketing Mix Strategy: – Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective marketing program. – Target costing: • Pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met. Copyright 2007, Prentice Ha ll, Inc. 9-11  Organizational Considerations: – Must decide who within the organization should set prices. – This will vary depending on the size and type of company. Copyright 2007, Prentice Ha ll, Inc. 9-12  The Market and Demand: – Costs set the lower limit of prices while the market and demand set the upper limit. – Pricing in different types of markets: • Pure competition • Monopolistic competition • Oligopolistic competition • Pure monopoly – Analyzing the price-demand relationship – The price elasticity of demand Copyright 2007, Prentice Ha ll, Inc. 9-13  Competitors’ Strategies and Prices – How does the market offering compare? – How strong is competition and what is their pricing strategy? – How does competition influence price sensitivity?  Other External Factors Copyright 2007, Prentice Ha ll, Inc. 9-14 New-Product Pricing Strategies  When to Use: – Product’s quality and image must support its higher price. – Costs of low volume cannot be so high they cancel the advantage of charging more. – Competitors should not be able to enter market easily and undercut the price.  Market Skimming: – Set a high price for a new product to “skim” revenues layer by layer from the market. – Company makes fewer, but more profitable sales. Copyright 2007, Prentice Ha ll, Inc. 9-15 New-Product Pricing Strategies  When to Use: – Market is highly price sensitive so a low price produces more growth. – Costs must fall as sales volume increases. – Need to keep competition out or effects are only temporary.  Market Penetration: – Set a low initial price in order to “penetrate” the market quickly and deeply. – Can attract a large number of buyers quickly and win a large market share. Copyright 2007, Prentice Ha ll, Inc. 9-16 Product Mix Pricing Strategies  Product line pricing  Optional-product pricing  Captive-product pricing  By-product pricing  Product bundle pricing Copyright 2007, Prentice Ha ll, Inc. 9-17 Product-Line Pricing  Involves setting price steps between various products in a product line based on: – Cost differences between products – Customer evaluations of different features – Competitors’ prices Copyright 2007, Prentice Ha ll, Inc. 9-18  Optional-Product – Pricing optional or accessory products sold with the main product e.g., ice maker with the refrigerator.  Captive-Product – Pricing products that must be used with the main product e.g., replacement cartridges for Gillette razors. Copyright 2007, Prentice Ha ll, Inc. 9-19  By-Product Pricing – Pricing low-value by-products to get rid of them e.g., animal manure from zoo.  Product Bundle Pricing – Pricing bundles of products sold together software, monitor, PC, and printer. Copyright 2007, Prentice Ha ll, Inc. 9-20 Price Adjustment Strategies  Discount and allowance pricing  Segmented pricing  Psychological pricing  Promotional pricing  Geographical pricing  Dynamic pricing  International pricing Copyright 2007, Prentice Ha ll, Inc. 9-21 Discounts and Allowances  Discounts – Cash – Quantity – Functional – Seasonal  Allowances – Trade-in – Promotional Copyright 2007, Prentice Ha ll, Inc. 9-22 Segmented Pricing  Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs.  Types:

1. Customer-segment 2. Product-form