sets price ceiling Cost sets price floor Consumer value perceptions Consumer price sensitivity Government regulations
Pricing Considerations
Factors
Effecting Pricing:
Product/Service
differentiation Organization’s financial goals Stage of Product Life Cycle Marketing Channel margin impact Prices of other products in mix
Pricing Considerations
Price
as Indicator of Value
Value
= Perceived Benefits/Price Value may be linked to meeting expectations of consumer Price may shape the consumer’s perceptions of value Price may affect consumer’s perception of prestige
categories are not uniformly responsive to prices -- some are more sensitive to price levels than others Customers also may respond differently than one another to price levels
Price sensitivity (price elasticity) reflects how purchase behavior changes with changes in price
Pricing Considerations PRICE SENSITIVITY
Price A. Inelastic Demand Demand hardly changes with a small change in price P2 P1
Q2 Q1 Quantity Demanded per Period B. Elastic Demand Demand changes greatly with a small change in price
Price
P2
P1
Q 2 Q 1 Quantity Demanded per Period
Product-Based Pricing Approaches
Product Line Pricing
Setting price steps between product line items i.e. $299, $399
Optional-Product Pricing
Pricing optional or accessory products sold with the main product *** i.e. car options
Captive-Product Pricing
Pricing products that must be used with the main Product***i.e. Razor Blades, Film, Software
By-Product Pricing
Pricing low-value by-products to get rid of them ***i.e. Lumber Mills, Zoos
Product-Bundle Pricing
Pricing bundles Of products sold together ***i.e. season tickets, computer makers
Source: Prentice Hall
Cost Considerations
Costs that don’t vary with sales or production levels.
Executive Salaries Rent
Fixed Costs (Overhead)
Variable Costs
Costs that do vary directly with the level of production.
Raw materials
Total Costs
Sum of the Fixed and Variable Costs for a Given Level of Production
Cost-Plus Pricing - Adds a standard mark up to the cost of the product
Useful when there are a great many products or demand is hard to forecast Simple to implement
Breakeven or Target Profit Pricing - Price is set to meet a specific profit target
Also takes consumer demand into account
Cost-Based Pricing COST-PLUS
Sellers are more certain about costs than demand
Minimizes price competition Perceived fairness for both buyers and sellers
Pricing Strategies
Competitive
Demand
Bidding
is Known & Constant Marketing Mix Variables Uncontrollable Sophisticated Mathematical Models
Calculate Profit Levels Calculate Probability of Winning at Different Price Levels
New Product Intro Strategies
Intermediate
More
Strategy
Prevalent Less Dramatic
Customer Considerations PRICE AWARENESS
Mindless Shopping:
Average time between arriving and departing from product category is 12 seconds In 85% of purchases only the chosen brand was handled, and 90% of shoppers inspected only one size 21% could not offer a price estimate when asked Only 50% were able to state correct price 93% did know relative price (i.e., higher, lower or the same as other brands in category)
Source: Dickson and Sawyer (1990)
Customer Considerations REFERENCE PRICES
Consumers do not evaluate price absolutely, but rather relative to a convenient quantity for comparison
Context Matters!
Two kinds of reference prices External reference price Internal reference price
Customer Considerations REFERENCE PRICES
External
List
Reference Prices
prices/sale prices
Other
products on the shelf or convenient for comparison
Customer Considerations REFERENCE PRICES
Internal
One
Reference Prices
that is recorded in consumer’s memory Memory of price may not be accurate If brand is frequently promoted, consumers tend to lower their internal reference point consumers have a notion of “fair price”
acquisition utility - economic benefit of the product transaction utility - getting a good deal
Asymmetric
response to price changes
Customer Considerations PRICE AS A SIGNAL
Price not only has the traditional economic role of negatively affecting demand but also offers the customer information about product quality When is price used as a signal? When there is little information about product quality available Primarily for experience or credence goods
Customer Considerations VALUE PRICING
Cost-Based Pricing Value-Based Pricing
Product
Customer
Cost Price
Value Customers
Value Price
Cost Product
Source: Prentice Hall
General Price Adjustment Strategies
Psychological Pricing
• Adjusting Prices for Psychological Effect. •Price Used as a Signal
Promotional Pricing
• Temporarily Reducing Prices to Increase Short-Run Sales. • i.e. Loss Leaders, Special-Events
• Adjusting Prices to Account for the Geographic Location of Customers. • i.e. FOB-Origin, Uniform-Delivered, Zone Pricing, Basing-Point, & Freight-Absorption. • Adjusting Prices for International Markets. • Price Depends on Costs, Consumers, Economic Conditions & Other Factors.
Source: Prentice Hall