CHAPTER 11 of 17th

SUMMARY

Price is the sum of all the values that customers give up to gain benefits of having or
using a product or a service. Price is the only element in the marketing mix that
produces revenue; all other elements represent cost: First we have the New- product
pricing strategies, second is Product Mic Pricing Strategies , third is Price Adjustment
strategies, Price Changes, and lastly Public Policy and Pricing.

In New- Product Pricing strategies there are two broad strategies:

 Market Skimming Pricing – sets a high initial price

 Market penetration pricing – sets a low initial price

Market Skimming Pricing - is a strategy with high initial prices to skim revenues layer-
by layer from the market.

 Product quality and image must support the price.

 Buyers must want the product at the price.
 The cost of producing a smaller volume cannot be so high that they can cancel
the advantage of higher prices.
 Competitors should not be able to enter the market easily and undercut the high
price.

Market penetration pricing – It sets a low initial price in order to penetrate the market
quickly and deeply to attract a large number of buyers quickly to gain market share.

 Price sensitive market

 Production and distribution cost must fall as sales volume increases.
 Low prices must keep competition out of the market.

The firm looks for a set of prices that maximizes the profits on the total product mix.

Five product mix pricing situations

 Product line price – the products in the product line

  Optional product pricing – optional or accessory products
 Captive product pricing – complementary products
 By- product pricing- by – products
 Product bundle pricing – several products

Product lining pricing takes into account the cost difference between product in the line,
customer evaluation of their features, and competitors’ prices. – the price differences
represent the perceived quality differences. Optional product pricing takes into account
optional or accessory products along with the main product. – Decide which items to
include in the base price and which to offer as options.

Captive product pricing involves products that must used along with the main product.

- Price the main, or driver product to low and seek high margins on the supplies.
 For services: two- part pricing is where the price is broken into fixed fee and
variable usage fee.
- Decide how much to charge for the basic service and how much for the variable
usage.
- The fixed amount should be low enough to induce usage of the service; profit can
be on the variable fees.

By product pricing refers to products with little or no value produced as a result of

the main product.

 Producers will seek little or no profit

 Producers should accept any price that covers more than the cost to cover
storage and delivery.

Product bundle pricing combines several products and offer the bundle at reduced
price. Price building can promote the sales of products.

For Price Adjustment Strategies, companies adjust basic prices to account for
various customer differences and changing situations.

 Discount and allowance pricing- reduces price to reward customer for certain
responses such as paying early, volume purchases, and off-season buying.
 - Discounts, cash discount for buying in large volume, functional (trade) discount
for selling, storing, distribution, and record keeping.
- Allowances, Trade in allowance for turning in an old item when buying a new
one, Promotional allowance to reward dealers for participating in advertising or
sales support programs.
- Segmented pricing – Is used when company sells a product at two or more
prices even though the difference is not based on cost. Adjust basic prices to
allow for differences in customers, products, and locations.
 Psychological pricing – occurs when sellers consider the psychology of prices
and not simply the economics. Reference pricing are prices that buyers carry in
their minds and refer to when looking at a given product. Noting current prices,
remembering past prices, Assessing the buying situations.
 Promotional Pricing – Is when prices are temporarily priced below list price or
cost increase demand.
 Geographical pricing – Is used for customers in different parts of the country or
the world.
 Dynamic pricing – Is when prices are adjusted continually to meet the
characteristics and needs of the individual customer and situations.
 International pricing – Is when prices are set in a specific country based on
country- specific factors.

Initiating pricing changes. – Price cuts is a reduction in selling price. – Price increases is
an increase in selling price. – Price cuts, new model will be available. – Price increases,
products is “hot”. Price fixing: sellers must set prices without talking to competitors.
Predatory pricing: selling below cost with the intention of punishing a competitor or
gaining higher long- term profits by putting competitors out of business. Retail price
maintenance is when a manufacturer requires a dealer to charge specific retail price for
its products. Defective pricing occurs when a seller states prices saving that mislead
consumers or are not actually available to consumers.
 Questions for Discussion

11-18 Relative to customer value, explain customers’ willingness to pay premium prices
for Lululemon’s products.

- Lululemon is a premium yoga brand. They have targeted yoga teachers as brand
ambassadors. People practicing yoga talk about it wherein others at yoga class
too try the brand. Yoga teachers talk about the brand and the quality which it
brings. People are spending on yoga and hence they purchase Lululemon as it is
most spoke about brand in yoga class, Once the person tries it, the comfort
which it offers build brand loyalty and the new customer also talks about it.
Lululemon also builds campaigns around yoga and people connect with it which
again increases its value. The value which Lululemon brings is the reason why
customer's are willing to pay premium prices.

11-19 Based on principles from the chapter, explain how price affects customer
perceptions of the Lululemon brand.

- Price affects customer's perceptions of Lululemon brand as premium brand as

Lululemon has priced its product slightly higher than other available options.
Other brands offers discounts but Lululemon hardly offers any discount.
Customer has perception that Lululemon has high quality product.

11-20 Could Lululemon have achieved the same level of success had it executed an
alternative pricing strategy?

- Lululemon is already very successful and with alternative pricing strategy too
Lululemon would have succeeded because the Lululemon products already have
those ingredients of alternative pricing like customer satisfaction, value for price,
long term relationship with brand.

11-21 Can Lululemon continue to succeed by employing the same premium-pricing

strategy? Explain.
- Lululemon did get criticism on price hike, but they have been able to deal with
these in the past as well. The product is still in affordable range and is
considered premium. Some customers might get lost but they have huge loyalty
base. Until Lululemon start losing loyalty base , Lululemon will succeed by
employing premium pricing strategy.
 Reviewing the Concepts

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1. Identify the three major pricing strategies and discuss the importance of
understanding customer-value perceptions, company costs, and competitor
strategies when setting prices.

Customer value-based Pricing- Good pricing usually starts with customers and their
perceptions of value. Eventually, the customer will decide whether a product is worth its
price or not. Therefore, we start with customer value. When customer buy a product,
they exchange something of value (the price) to get something of value (the benefits of
having or using a particular product). Therefore, it is crucial to understand how much
value consumers place on the benefits they receive from the product and setting a price
that captures exactly this value.

Summing these considerations up, we can say that customer value-based pricing uses
buyers’ perceptions of value as the key to pricing, instead of the seller’s costs. This also
means that we cannot design a product and marketing program and then set the price.
Price is considered along with all other marketing mix variables before the marketing
program is set.

Cost-based Pricing- While in customer value-based pricing, customers’ perceptions of

value are key to setting prices, in cost-based pricing the seller’s costs are the primary
consideration.  Costs set the floor for the price that the company can charge. Therefore,
cost-based pricing involves setting prices based on the costs for producing, distributing
and selling the product. In order to make some profit, a fair rate of return is added to
account for efforts and risks.

Some companies, such as Ryanair or Walmart, pursue a low-cost strategy and aim to
offer the lowest prices. This goes along with accepting smaller margins but greater
sales. Other companies, such as Apple or BMW, do not compete based on low prices.
By offering superior customer value, they can claim higher prices and margins – they
pursue a customer value-based pricing strategy. We can see that choosing between the
3 major pricing strategies is closely related to the overall marketing strategy – actually it
is an integral part of it.

Competition-based Pricing- Finally, competition-based pricing involves setting prices

based on competitors’ strategies, costs, prices and market offerings. In highly
competitive markets, consumers will base their judgements of a product’s value on the
prices that competitors charge for similar products. For instance in the gasoline industry,
competition-based pricing is applied.

However, in assessing competitors’ pricing strategies, the company should ask several
questions. First of all, how does the company’s market offering compare with
competitors’ market offerings in terms of customer value? If consumers perceive that
the company’s product provides greater value, the company can charge a higher price.
Secondly, how strong are current competitors, and what are their pricing strategies? If
the market is already dominated by large, low-price competitors, the company may be
better advised to target unserved market niches with value-added products and prices.

2. Identify and define the other important internal and external factors affecting a
firm’s pricing decisions.

Internal Factors Affect Pricing Decision

Some of the internal factors that affect the price decision of the company are as follows;

Company’s Management

When it comes to setting the price of the product, then it involves two parties; the
marketing team and production staff. However, the marketing team comprises of
company’s management, top executives, and marketing staff. They consider how the
product would play out in the market.
One the other hand, the production team considers the production costs and product
strategies. Usually, the final price considers both the views of the product and marketing
teams.

Marketing Mix Strategy

Marketing mix means product, price, promotion, and place. Some marketing experts
view price is the only dominant factor in the mix because a slight change in price can
affect the promotion and distribution of the product at different places. Some companies
lower the prices as a part of their marketing strategy to attract the attention of the price-
conscious market.

While other companies increase the prices as a part of their marketing strategy. It
doesn’t matter whether the company/business lowers the prices or increase it. The price
strategy would only succeed if it follows the overall marketing objectives of the
company. If a brand raises the prices, then it should add some more features and start
a new marketing campaign.  

Different Characteristics

Characteristics of the product are the key to the price decision of the company because
different characteristics of the product in terms of shape, color, size, packaging, etc.
attract the attention of the customers. Customers are willing to pay more if they like and
value the characteristics of the product. It could be a new style, feature, or anything out
of the ordinary.

Costs

The cost of the product is the most important factor among all because it provides the
basis to set the price. Of course, the management has to consider the product’s
demand and the prices of the competitors as well. Finally, the management also
considers the customers’ ability to pay the price, because it would be useless to avoid
customers in the price decision.
The Overall Objective of the Company

A company may have various objectives. It could be profit generation, increasing market
share, the company’s value-oriented, increasing or decreasing customers’ volume,
maintaining a stable price and the company’s brand image, etc. Therefore, the final
price decision also matches with the overall objectives of the company

External Factors Affecting Pricing Decision

Some of the external factors that affect pricing decision of the company/business are as
follows;

Demand in the Market

The demand for the company’s product in the market also plays a huge role because it
tells us about the competitors, size of the market, and customers’ preferences and their
ability to pay the price.

Sometimes, a company charges different prices to customers in different markets. The

purpose is to check the results that how the market is behaving at different pricing
strategies. If the demand for the company’s certain product is higher, then the price
would be higher. If the demand is lower, then the company would lower its prices than
competitors to compete in the market.

Competitors

Market competition is a very significant factor and it affects the price strategy. A firm
may set high or low prices depending upon the competitor’s prices and product quality.
If the company’s products are better than competitors, then the price would be higher.
Otherwise, the business would set lower prices.

Company’s Suppliers
Suppliers provide the raw material to the company from which the business
manufactures the final product. If the suppliers raise the prices, then the company has
no choice but to increase the prices and pass it on to the customers.

If a company is making more profit on a certain product. When the suppliers see it, they
would raise the prices of the raw material because they want to have a portion of the
profit as well. However, it also depends on the abundance and scarcity of the product’s
raw material.

The Economy of the Country- If the economy of the country is prosperous where people
are employed and earning high salaries, then raising prices wouldn’t be a problem. In
such an environment, customers are willing to pay more. However, when the economy
of a country is in a recession, where people have limited sources of income. Businesses
and companies have to set low prices to meet the customers’ ability to pay.

Customers- We have been talking about the customers’ ability to pay. It’s very important
to consider the nature and behavior of the target market. Some customers are price
conscious and the others are quality conscious. Therefore, you should know the nature
of your target market.

Local Government- Sometimes the government controls the prices of certain products
by introducing some laws. The purpose is to control inflation so that the prices shouldn’t
go higher at a certain point. Therefore, the company has to consider the local laws of
the government as well.

3. Describe the major strategies for pricing imitative and new products.

Pricing is a dynamic process, and pricing strategies usually change as the product
passes through its life cycle. The introductory stage—setting prices for the first time—is
especially challenging. The company can decide on one of several strategies for pricing
innovative new products. It can use market-skimming pricing by initially setting high
prices to "skim" the maximum amount of revenue from various segments of the market.
Or it can use market-penetrating pricing by setting a low initial price to penetrate the
market deeply and win a large market share. Several conditions must be set for either
new product pricing strategy to work.

4. Explain how companies find a set of prices that maximize the profits from the
total product mix.

Product line pricing takes into account the cost difference between products in the
line, customer evaluation of their features, and competitors’ prices. – the price
differences represent the perceived quality differences.Optional product pricing takes
into account optional or accessory products along with the main product. – Decide
which items to include in the base price and which to offer as options

Captive product pricing involves products that must be used along with the main
product.- Price the main, or driver product low and seek high margins on the
supplies, for services: two-part pricing is where the price is broken into fixed fee and
variable usage fee.- Decide how much to charge for the basic service and how
much for the variable usage- The fixed amount should be low enough to induce
usage of the service; profit can be made on the variable fees

By-product pricing refers to products with little or no value produced as a result of

the main product. Producers will seek little or no profit,Producers should accept any
price that covers more than the cost to cover storage and delivery.Product bundle
pricing combines several products and offer the bundle at a reduced price, Price
bundling can promote the sales of products

5. Discuss how companies adjust their prices to take into account different types of
customers and situations.

Companies must adjust their basic prices to account for differences in customers
and situations. There are seven price adjustment strategies: Discount and allowance
pricing, segmented pricing, psychological pricing, promotional pricing, geographical
pricing, dynamic pricing and international pricing.
Discount and allowance pricing- Reducing prices to reward customer responses
such as paying early or promoting the product

Segmented pricing- Adjusting prices to allow for differences in customers, products

or locations

Psychological pricing- Adjusting prices for psychological effect

Promotional pricing- Temporarily reducing prices to increase short-run sales

Geographical pricing- Adjusting prices to account for the geographic location of

customers

Dynamic pricing- Adjusting prices continually to meet the characteristics and needs
of individual customers and situations

International pricing- Adjusting prices for international markets

6. Discuss the key issues related to initiating and responding to price changes.
When a firm considers initiating a price change, it must consider customers' and
competitors' reactions. There are different implications to initiating price cuts and
initiating price increases. Buyer reactions to price changes are influenced by the
meaning customers see in the price change. Competitors' reactions flow from a
set reaction policy or a fresh analysis of each situation.

There are also many factors to consider in responding to a competitor's price

changes. The company that faces a price change initiated by a competitor must
try to understand the competitor's intent as well as the likely duration and impact
of the change. If a swift reaction is desirable, the firm should preplan its reactions
to different possible price actions by competitors. When facing a competitor's
price change, the company might sit tight, reduce its own price, raise perceived
quality, improve quality and raise price, or launch a fighter brand.