© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

McGraw-Hill/IrwinMarketing Management, 8e

Chapter Eleven

Pricing Strategy

Key Words / OutlineDemographic factors, Prestige pricing, Odd pricing, Bundle pricing, Mark-up Pricing, Cost-plus pricing, Rate-of-returns pricing, Perishability, Distinctiveness, Stages in the product

life cycle, Price fixing, Deceptive pricing, Price discrimination, Promotional pricing, Value pricing, Quantity

discounts, Promotional allowances, Slotting allowances,

Skimming policy, Penetration policy

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Demand Influences on Pricing Decisions

Demographic Considerations:

• Number of potential buyers• Their age, gender and education• Location of potential buyers• Position of potential buyers• Expected consumption of potential buyers• Economic strength of potential buyers

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Demand Influences on Pricing Decisions Cont.

Psychological Considerations

• Will potential buyers use price as an indicator of quality?• Will potential buyers be favorably attracted by odd pricing?• Would potential buyers perceive price as too high relative to the service

product gives?• Are potential buyers prestige oriented and willing to pay a premium to

fill this need?• How much will potential buyers be willing to pay for the product?

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Psychological Considerations Cont.

• There are three types of psychological pricing- Prestige pricing: In which a high price is charged to create a

signal that the product is exceptionally fine- Odd pricing: Or odd even pricing in which the prices are set a

few dollars or a few cents below a round number- Bundle pricing: Where several products are sold together at a

single price to suggest good value

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Price Elasticity

• Price elasticity (e) is a measure of consumers’ price sensitivity

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Pricing Objectives

• Pricing to achieve a target return on investment• Stabilization of price and margin• Pricing to achieve a target market share• Pricing to meet or prevent competition

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Pricing Strategy

• Markup pricing – percentage is added to the retailer’s invoice to determine final price

• Cost-plus pricing – costs of producing a product plus desired profit are added to achieve price

• Rate-of-return or target pricing – price is determined by adding desired rate of return on investment to total costs

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Everyday Low Pricing: Advantages

• Reduces price wars• Reduces advertising• Improves customer service• Reduces stock-outs and improves inventory management• Increases overall profit margins

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High/Low Pricing: Advantages

• Helps segment the market• Creates excitement• Moves merchandise• Emphasizes product quality and store service• Easier to use

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Product Considerations In Pricing:Perishability

• Perishability: Goods that are very perishable in a physical sense must be priced to promote sales without costly delays

• Two important pricing considerations- Such goods tend to be expensive because of large amounts of

service are purchased at one time- The customer has a certain amount of discretionary time available

in making replacement purchase decisions

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Product Considerations In Pricing:Distinctiveness

• Distinctiveness: Products can be classified in terms of how distinct they are

• Homogeneous goods are perfect substitutes for each other • Manufactured goods can be differentiated on the basis such as

trademarks• One of the primary marketing objectives of most firms is to

make their products and brands distinctive in the minds of the buyers

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Product Considerations In PricingLife Cycle

• Life cycle: The stage of the life cycle that a product is in can have important implications

• With regard to life cycle two approaches are- Skimming price policy: One in which the seller changes a

relatively high price on a new product- Penetration price policy: One in which the seller charges a

relatively low price on a new product

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Environmental Influences OnPricing Decisions: Competition

• Number of competitors• Size of competitors• Strengths and weaknesses of competitors• Likely entry of new firms into the industry• Degree of vertical integration of competitors• Number of products sold by competitors• Cost structure of competitors • Historical reaction of competitors to price changes

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Environmental Influences On Pricing Decisions: Government Regulations

• Price fixing is illegal• Deceptive pricing practices are outlawed under Section 5 of

the Federal Trade Commission Act• Price discrimination that lessens competition or is deemed

injurious to it is outlawed by the Robinson-Patman Act• Promotional pricing such as cooperative advertising and price

deals are not illegal

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General Pricing Model

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Set Pricing Objectives

• Any pricing process begins with a clear statement of the pricing objectives

• These objectives guide the pricing strategy and should be designed to support overall marketing strategy

• Since pricing strategy has a direct bearing on demand for a product and the product and profit obtained, efforts to set prices must be coordinated with other functional areas

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Evaluate Product – Price Relationships

• A product should be priced relatively high for a product class if it offers value in the form of high quality, special features, or prestige (High Quality)

• A product should be priced at about average for the product class if it offers value in the form of good quality for a reasonable price (Same Quality)

• A product should be priced relatively low for a product class if it offers value in the form of acceptable quality at a low price (Low Quality)

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Analyze Profit Potential

• Quantity discounts: Discounts for purchasing large number of units

• Promotional allowances: Often in the form of price reductions in exchange for the channel member performing various promotional activities

• Slotting allowances: Payment to retailers to get them to stock items on their shelves

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Set Initial Price Structure

• The price structure takes into account the price to various channel members such as wholesalers and retailers, as well as the recommended price to final consumers or organizational buyers

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Change Price As Needed

• Channel members may bargain for greater margins• Competitors may lower their prices• Costs may increase with inflation• In the long term, price structures tend to increase for most

products as production and marketing costs increase

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Pricing Strategy Improvement

• Base pricing strategies on sound research in order to understand relevant price factors

• Continuously monitor pricing decisions because they often help define company image

• Remember that consumers have trouble recognizing subtle price differences

• Remember that consumers evaluate prices comparatively- They often use a sense of what they think the item should cost as a

benchmark

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Pricing Strategy Improvement

• Recognize that buyers typically have a range of acceptable prices defined by upper and lower limits

• Understand the importance of relative price to buyers – the relationship between a price and your competitors’ price

• Understand the importance of price information and it effects on differentiating products within a product line

• Recognize that price elasticity vary – it is easier to lose customers to price increases than gain them from price decreases