BUAD 307 PRICING Lars Perner, Instructor 1 PRICING Often the only marketing mix variable allowing...

BUAD 307 PRICING Lars Perner, Instructor 1

PRICINGOften the only marketing mix variable allowing for immediate

competitive response

Important part of product positioning

Long term effects of pricing decisions—your decisions may come back to haunt you!


Learning Objectives

• Understanding – Price choices faced by

managers, the constraints faced on these choices (e.g., legal), and the consequences of these choices

– “Signaling” effects of product prices

– The respective interests of manufacturers and retailers in product pricing

• Appreciating the advantages and disadvantages of different pricing strategies


One View of Price• Price =

resources given up_____________________________________

goods received

• E.g., 12 bullets for $6.00 = $0.50 per bullet

• Ways to change the price:– Sticker price– Quantity—same sticker

price but lesser quantity– Quality—use of lower cost

materials—e.g., “gooeye” stuff rather than chocolate in candy

– Terms • E.g., support,

accessories, payment terms, delivery


Views of Consumers and Price Response• Economics

– Assumed to have perfect information about

• Quality of all brands

• Prices of each brand at all locations

– Elasticity: A “down-sloping” demand curve means that a higher quantity will be demanded when the price is reduced

• Marketing– Consumer knowledge

of product quality and prices is imperfect

– Due to imperfect information, a higher price may sometimes be used by consumers to infer greater quality (Research suggests that actual product quality as rated by Consumer Reports accounts for about 25% of product price differences among brands)


Supply, Demand, and Quantities Supplied and Demanded


Supply, Demand, and Quantities Supplied and Demanded• Supply: The “schedule,” or “curve,”

of quantities supplied by the sellers at various prices offered by buyers

– Tends to increase with price—a greater quantity will be supplied at a higher level of incentive to produce

• Demand: The “schedule,” or “curve,” of quantities demanded by the buyers at various prices offered by sellers

– Tends to decrease with price—the marginal value of additional quantity tends to decline with a greater price

– Occasionally, higher prices may lead to higher quantity demanded due to a possible “signal” of quality

• Equilibrium: The intersection of the supply and demand curves—neither side is interested in buying or selling more or less given the resultant market prices

– This equilibrium may be temporary and may change once the market changes—e.g.,

• Changes in the availability change in supply

• Changes in cost of production change in supply

• Availability of new substitutes change in demand

• Quantity supplied: The quantity that will be supplied (sold) by sellers at a given price point

• Quantity demanded: The quantity that will be demanded (bought) by buyers at a given price point


Price Discrimination

• Explicit– Only some customers

are eligible for special pricing—e.g.,

• Student discounts on software

• Senior citizen discounts• Geographic: Only

customers in the 900**-935** zip code areas are eligible for discount Disneyland Admission

• Implicit– No outright rule, but

discounted deal is unattractive to some customers

• Airlines: Saturday night stay-over or advance purchase requirement

• Daily special meal—one cheaper meal but no choice

• Periodic discounting (products going on and off sale)


Some Approaches to Pricing

• Cost-plus: Add fixed percentage markup

• Skimming: high intro price ---> take advantage of price insensitive consumers

• Penetration pricing: low intro price ---> volume

• Buyer-based

• Perceived value

• Going-rate (competition)

---> Balancing cost and

market considerations


Skimming Pricing

P2

P3

Q3

The product is introduced at a high price, P1. Very few customers—only the least price sensitive ones—buy at this price. When the price is later lowered to P2 and then to P3, other customers who value the product less will start to buy.The least price sensitive customers pay a premium for quick access to the new product.


Penetration Pricing

P1

Q1

The product is immediately introduced at a relatively low price. The seller sacrifices the higher margins that would have resulted from selling to some customers at a higher price, but, in return gains immediate sales. Fewer competitors are attracted into the market since the apparent profits are not as high. Because of economies of scale and experience curves—the tendency of production costs to decline with the cumulative production—costs are reduced.


Legal Issues

• Banned by Federal law:– Discrimination in prices

paid by firms which compete against each other unless supported by evidence of cost savings

• OK to charge restaurants more than grocery stores

• Can only charge Wal-Mart less than Joe’s Supermarket if volume savings can be proven—and the price difference must be no greater than the actual provable cost savings.

• Banned by some state laws:– Gender discrimination (e.g.,

charging more for dry cleaning women’s clothes than men’s clothes)

– Discrimination between consumers in general

• Senior citizen discounts are explicitly permitted in California


More Legal Issues

• Federal and State bans on:– Collusion (coordinating or even

discussing prices with competitors)

– Predation (offering temporary prices below cost of production to drive competitors out of business and then raising prices)

• In general, fully absorbed average cost must be used—cannot use marginal cost

– Using monopoly power in one market to “subsidize” new market


Price Maintenance

• In 2007, the U.S. Supreme Court reversed the longstanding ban on explicit agreements between manufacturers that the branded product would not be sold below an agreed upon “floor” price

– Although setting minimum retail prices for a brand reduces intra-brand competition (competition between different retailers selling the brand), some believe that minimum prices may encourage investment in service and brand building to the extent that competition between brands increases (inter-brand competition)

– Manufacturers generally cannot enforce minimum price agreements on existing inventory, but they can “cut off” offending retailers

• “Gray market” goods: Retailers in the U.S. generally have an absolute right to sell products that they have bought legally at a price lower than the suggested retail price.

– Diversion: Legitimate retailers buy up extra quantity to be resold to unauthorized dealers and/or geographic shipment. (More details will be given under distribution).


Other Manufacturers’ “Suggested” Retail Prices (MSRPs)• U.S. manufacturers often put

an exorbitantly high “suggested” price on a product so that even full service retailers can look good by selling below the MSRP

• In some EU countries, selling below the MSRP may not be legal—manufacturers must therefore be careful not to “recommend” excessive prices


REMINDER

INCOME ≠

WILLINGNESS TO SPEND!


Price Adjustments For and Discrimination Among Consumers• Cars: List price –

manufacturer discounts and rebates – dealer discount

• Tuition: List price – scholarships – financial aid

Text, p. 263. Copyright © 2005 McGraw-Hill.


Introductory Effects

• In an experiment, laundry detergent was introduced at $0.49 in one condition and $0.79 in another.

• After 8 weeks, price was raised to $0.79 for low price intro condition.

• There were higher cumulative sales in high price intro.

0

200

400

600

800

1000

1200

8 16

Weeks

Units sold

Low priceintro

High priceintro


Consumer Price Awareness

• A survey revealed of consumers who had just selected a product suggested:

• Avg. time spent before departing from product area: 12 seconds

• Avg. no. of products inspected: 1.2; only 21.6% claimed to check price of non-chosen brand

• 55.6% could state price of just chosen product within 5%


Consumer Reference Prices

• Consumers typically have some expectation of what they will pay. This is based on:

• previous experience

• common sense

• perceived fairness• Two kinds of reference prices:

• Internal: Based on consumer’s memory.

• External: Based on environment (e.g., signs, other products in the store)


Internal Reference Prices• Consumers tend to develop some

memory of prices of frequently purchased items ---> to make store prices look low, you may want to price especially salient products lower

• More knowledgeable consumers typically have tighter price range expectations

• Reference prices are constantly updated to some extent, but are hard to change upwards--certain unreasonable “stimuli” (prices) may be rejected as unreal

• Consumer reference prices tend to be lower than actual prices ---> “sticker shock”


External Reference Prices

• Reference prices provided by seller or environment

• E.g.,

• “MSRP $3.99; our price $2.49”

• “Sold elsewhere for $20.00; our price $14.99”

• “Was $100.00; now $69.95”


The Promotion Signal

• A segment of consumers will respond to negligible discounts--e.g., “SALE! $3.95 (Was $4.02).

• However, merely placing a sign “EVERYDAY LOW PRICE” randomly also increased sales of affected products.


Odd/Even Pricing--Does It Have an Impact?• Theory: $3.00 is rounded to $3.00

while $2.99 is rounded to “$2.00 plus change”

• Reality: Studies in U.S. have found a small impact; no impact found in Germany

• Note that odd pricing may signal receiving a bargain, which may nor may not be compatible with the desired product image

• Odd pricing has typically been used by tradition (initially implemented to force cashiers to ring up purchases).

BUAD 307 PRICING Lars Perner, Instructor 1 PRICING Often the only marketing mix variable allowing...

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