|


Agenda:
‡ Discuss the chapter
 

 
 

j × u pay rent f r y ur apartment, tuiti n f r y ur

educati n, and a fee t y ur dentist r physician.
j The airline, railways, taxi and bus c mpanies charge
y u a fare
j The l cal utilities call their price a rate
j The l cal bank charges y u interest f r the m ney y u
b rr w.
j The guest lecturer is paid an h n rarium
j The g
ernment fficial takes a bribe t pass a law
which was his j b anyway.
 

 
  

‡ Pricing is the nly element in the marketing mix

that brings in the re
enues (all the rest are c sts)

‡ Pricing is the easiest f the 4 P¶s t change

‡ Price affects c nsumer demand

‡ Price c mmunicates the value f the pr duct

(and ften ser
es as a signal f r quality)
º
  
 

  
 º 

 

Objecti
e Gain as much market share as p ssible. Price wars,
ncrease Sales penetrati n pricing. C mm n in c mpetiti
e industries
r Market Share where c nsumers percei
e small differences in pr ducts:
(Veriz n, Sprint)

C mm nly used when firm wants t rec
er its in
estment

Obtain a certain in a sh rt peri d f time (fads t premium/prestige pr ducts)
le
el f Pr fits (a high price, skimming strategy)

Price is intended t reduce effecti
eness f c mpetit rs

C mpetiti
e
eff rts. Typically set at r bel w the c mpetiti n
Effect
(S uthwest Air in Den ± t beat ut United)

Cust mer F cus is n pr
iding c nsumers with
alue. F r example,

Satisfacti n Saturn¶s (
alue) n haggle pricing (
alue is determined by
c nsumer)

mage Enhancement C mm n with prestige pr ducts ± gi
e the c nsumer

the percepti n f high status. Use skimming pricing
 º




· w much will pe ple buy if the price g es up r d wn?

— amples of products that operate — amples of products that operate

on an elastic demand curve? on an inelastic demand curve?


  



 


Price —lasticity
A measure of sensitivity of consumers to changes in price

    
—
  
 

f the absolute value of — is < 1.0, price is  

f the absolute value of — is > 1.0, price is  



  



 

!"
 

#"
 

$

Elastic Demand 1 Elastic Demand 2 nelastic Demand

Price Change 10 t 9 = 10% 2.98 t 3.06 = 2.7% 10 t 9 = 10%

1/10 = -10% .06/2.99 = 2.7% 1/10 = -10%

Demand Change 27 t 31 = 15% 30 t 27 = -10% 27 t 28 = 3.7%

4/27 = 15% 3/30 = -10% 1/27 = 3.7%

Elasticity 15% 10% 3.7%

= -1.5 = -3.7 = -.37
-10% -2.7% -10%

f the abs lute
alue f  is < 1.0, price is



f the abs lute
alue f  is > 1.0, price is 


Vhen analyzing ?
 elasticity, y u are c ncerned with

the abs lute
alue, s ign re negati
e
alues
 





|


 

Fact rs that affect elasticity:

‡ a
ailability f substitutes
 .

‡ substitute pr ducts

if price increases demand may increase

|       f r bananas f r apples

‡ c mplimentary pr ducts

if price increases demand decreases

f r h t d gs f r h t d g buns
 º%
|

&
' (


 )

  
D n t
ary with Vary with the le
el f Sum f the fixed and
pr ducti n r sales pr ducti n
ariable c sts f r any
le
els gi
en le
el f pr ducti n
‡ Rent ‡ Packaging
‡ ·eat ‡ Raw materials
‡ nterest
‡ Executi
e salaries
 
*+


A meth d f r determining the number f units that a firm must sell
at a gi
en price t c
er all f its c sts (fixed and
ariable)

Fixed C sts
Q(BE) =
Price ± Variable C sts Per Unit

Assume Fixed C sts = $56,000 Assume Variable C sts = $20/unit

Quantity T tal T tal T tal T tal Break-E
en

Price Demanded Re
enue F-C sts V-C sts C sts Quantity Pr fit

$76 1,000 Œ
,000 $56,000 $20,000 Œ
,000 1,000 $0

$80 1,000 Œ0,000 $56,000 $20,000 Œ
,000 933 $4000

$90 900 Œ1,000 $56,000 $18,000 Œ ,000 800 $7000

1. Q(B—

,000 = 1000 . Q(B—

,000 = 933 3. Q(B—

,000 = 00

0 00 900
 º,

  

 


External (unc ntr llable) Fact rs t C nsider Vhen Setting Prices

1. The Ec n my
‡ Recessi n: c nsumers are ?



, switch brands
l k f r the best price.

‡ nflati n: prices and c st f li
ing rise while m ney l ses its

purchasing p wer (because c st f g ds escalate). ·ere,
cust mers are m re


 t price increases.

2. The C mpetiti n
‡ Olig p ly: small number f suppliers c ntr l the market (airlines,
beer c mpanies, wireless pr
iders). Price at the competition.

‡ M n p listic c mpetiti n: many sellers wh pr duce similar

pr ducts (t thpaste, jeans, restaurants). Focus on nonprice
competition (features and benefits dictate price).
º-| 
 

 º
 

Based n C st: C st Plus Pricing

Based n Demand (estimate demand at different prices):

Target C sting & ×ield Management

Based n C mpetiti n: Price Leadership

Based n Cust mer Needs: Value Pricing & EDLP

New Pr duct Pricing: Price Skimming & Price Penetrati n

 º-| 
 

 º
 

Based n C st: C st Plus Pricing

C st-plus pricing adds a standard markup t the c st f the pr duct

Markup Pricing

Price = f (unit c st + desired markup)

Assume: unit c st f J e¶s jeans = $52

´appos desired markup n c st = 180% Œ(1.0
= 9

oe¶s eans
C st t C nsumer? Œ + Œ9 = Œ1

MU n C st: 94 = 180% MU n Sell price: 94 = 64%

52 146
 º-| 
 

 º
 

Based n C st: C st Plus Pricing

‡ Benefits
± Simple
± Resellers (e.g., Zapp s) are certain ab ut c sts
± Price c mpetiti n (am ng resellers) is minimized (because
mark-up is standardized)

‡ Disad
antages
± gn res c nsumers¶ percepti n f
alue
± gn res demand (if mark-up t high, demand may fall)
± gn res c mpetiti n (e.g., Le
i, Gap, Diesel)
 º-| 
 

 º
 

Based n Demand (estimate demand at different prices):

Target C sting & ×ield Management

aarget Costing: (aC = Anticipated selling price ± profit margin

‡ Uses marketing research t identify the c st f pr ducing a pr duct

f r a certain market-buyer before the pr duct is designed

‡ First determine price, then w rk backward t design and pr duce the

pr duct, which will still pr duce a desired pr fit

Boeing customer requested heated floors. n order

to cover costs and make a reasonable profit, Boeing
estimated that the anticipated selling price would
be greater than Œ1million. ahe customer then declined.
 º-| 
 

 º
 

Based n Demand (estimate demand at different prices):

Target C sting & ×ield Management
×ield management (als kn wn as revenue management

‡ Understanding, anticipating, and influencing c nsumer beha
i r

in rder t maximize re
enue r pr fits fr m a fixed, perishable
pr duct (such as airline seats r h tel r m reser
ati ns).

‡ Results in price discriminati n: charging different cust mers

different prices f r the same g d r ser
ice

ffpeak fares vs. peakfares

(same routes, different Œ

 º-| 
 

 º
 

Based n C mpetiti n: Price Leadership

aacit collusion (implied agreement) whereby ne firm in an lig p listic

industry sets a price (general industry price) with ther firms f ll wing suit

United Airlines may set a standard offpeak

fare (between destinations
and all other
airlines follow suit
 º-| 
 

 º
 
Based n Cust mer Needs: Value Pricing & EDLP

alue Pricing
‡ ntr duced in the 1990¶s

‡ Originat r f the c ncept is belie
ed

t be Tac Bell

‡ Gi
e cust mers m re
alue than they

expect f r the price paid

‡ N t the same as penetrati n pricing, which

implies l w price al ne. Value pricing relates
t cust mer expectati ns (gi
e m re than
they expect f r price paid)
 º-| 
 

 º
 
Based n Cust mer Needs: Value Pricing & EDLP

—veryday Low Pricing (—LP

‡ Pr mises c nsumers a l w price with ut
the need t wait f r sale price e
ents

‡ EDLP sa
es retail st res the eff rt and

expense needed t mark d wn prices, and
t pr m te ³sale e
ents´

‡ Belie
ed t generate sh pper l yalty.

‡ Used hea
ily by Val-Mart,

Pr cter & Gamble, Vinn-Dixie
 º-| 
 

 º
 

New Pr duct Pricing: Price Skimming & Price Penetrati n

Price kimming

‡ Firm charges a
ery high, premium price f r new pr ducts in the

intr duct ry stage f PLC

‡ Vhen ri
al pr ducts enter, firm then l wers price t be c mpetiti
e

‡ F cus is n a pr fit bjecti
e

‡ Appr priate strategy when:

ù pr duct has unique benefits (R lex)
ù when there is a str ng price-percei
ed quality benefit (wine)
ù little chance f c mpetiti n in the near future (iPad?)
 º-| 
 

 º
 

New Pr duct Pricing: Price Skimming & Price Penetrati n

Price kimming

Apple used a price skimming strategy

when it intr duced the iPh ne in July, 2007

C mpany charged $599, making it the

m st expensi
e ph ne n the market.

n September, Apple dr pped the price

t $399 ± causing s me c nsumers t
want an iP l gy.

The 2 m nths f $599, helped Apple

t rec
er R&D c sts and make a pr fit
 º-| 
 

 º
 

New Pr duct Pricing: Price Skimming & Price Penetrati n

Price Penetration
‡ Firm charges a
ery l w price f r new pr ducts (in the intr duct ry
stage f PLC) t sell m re in a sh rt peri d f time

‡ Objecti
e is t gain market share

‡ Used t disc urage c mpetit rs fr m entering the market

Apple used a penetration strategy
when introducing music downloads
(for Œ0.99/song

ome customers were angered when

some songs started selling for Œ1.9
 º. 

 )


F r Multiple Pr ducts

Product Bundling
‡ Selling tw r m re g ds r ser
ices as a single package f r ne price

‡ The single price is typically less than the t tal price f the items if
purchased separately (³wh le is less than the sum f its parts´)

amsung Home aheater ystem:

‡ Blue Ray 

‡ 3ready
‡ nternet connectivity
‡ Builtin WiFi
‡  towers plus wireless rear satellite speakers
‡ iPod and iPhone dock
 º. 

 )


F r Multiple Pr ducts

Captive Pricing
‡ Pricing f r tw items that must be used t gether

‡ One item is priced l w, and the ther, which is essential t the

perati n f the first, is priced
ery high

Raz r: $4.95 Blades: $35.00

 º. 

 )



F r the Trade

arade or Functional iscounts

‡ Manufacturer (C ke) gi
es reseller (Price Ch pper) a set

percentage disc unt ff the list price (the suggested retail price
f r the end c nsumer t pay)

‡ Gi
en t resellers f r:

ù marketing the manufacturer¶s pr ducts (e.g., in-st re pr m ti ns)

ù st ring the manufacturer¶s pr duct
ù transp rting the manufacturer¶s pr duct (t all f resellers¶ st res)
 º. 

 )



F r the Trade

Quantity iscounts

‡ Manufacturer (C ke) gi
es reseller (Price Ch pper) a disc unt

f r purchasing large quantities f the manufacturers¶ pr ducts

Cash iscounts
‡ Manufacturer (C ke) gi
es reseller (Price Ch pper) a cash
disc unt f r paying their bill quickly

ù 3/10 net 30: 3 percent cash disc unt if bill is paid in 10

days, therwise the n n-disc unted bill is due in 30 days
 º. 

 )



F r the Trade

easonal iscounts
Pr
ide resellers (· me Dep t) price disc unts f r buying pr ducts
ff-seas n and either:

1. St ring the pr duct at the resellers l cati n until the right time
f year r,

2. Pass the disc unt al ng t the c nsumer with ³ ff-seas n sales´

 

 
/|

Dynamic Pricing

‡ C st f changing a price nline is essentially zer , hence

‡ Online, sellers can adjust prices quickly (i.e., use dynamic pricing)
t meet changing needs in the marketplace

‡ Used extensi
ely with nline aucti ns

Both types of sites adjust prices on the basis of supply and demand
 

 
/|

On-line Sh ppers

‡ Sh pb ts: ffer price c mparis ns at a number f e-tailers

 

 
/|
Freen mics

‡ The m re pe ple y u can get t participate in the marketplace, the

m re pr fitable the marketplace will be

‡ · w t get m re pe ple: Gi
e things away f r free!

ù Radi head music gi
eaway ù Ryanair: L nd n t Barcel na, $20

n MySpace
built a fan base a la carte f d and be
erage
s ld c ncert tickets fee f r preb arding
s ld merchandise fee f r checked baggage

Free: Vhy $0.00 is the future f Business

http://www.wired.com/techbiz/it/magazine/1
03/ff_free?currentPage=all
  


º
  


Reference Prices
nternal reference price
‡ expected price O  I ? ? (j <$50)

‡ price last paid O  I ?
 
 (j = $45)

‡ reser
ati n price O 
    I¶ O

 ? ($50)

— ternal reference price standards the c mpany tells y u

‡ c mparis n price
P
 
      ³

 ?
 O
 
  O   

 ?   ?
¶ ?


  


º
  


PricePerceived Quality Relationship

·igh-price equals high-quality L w-price equals l w-quality

‡ Research has f und:

f r m st pr ducts, c nsumers ha
e b th an upper- and a l wer-price
thresh ld; if y u g bey nd either, demand will dr p

price-quality relati nship h lds mainly f r pr ducts wh se quality

is difficult t assess

— perience goods ± y u ha
e t try the pr duct bef re y u can

assess its quality (e.g., hair cut, legal ad
ice)

Credence goods ± e
en after y u ha
e purchased and used the pr duct
quality is still hard t assess (e.g.,
itamin supplements, car repair)
  

 
º



dd—ven Pricing

‡ Research has f und, increased sales ccur with dd prices (US)

60% f prices in ad
ertising material end in the digit 9
30% end in the digit 5
7% end in the digit 0
3% end in the remaining se
en digits (1,2,3,4,6,7,8)

‡ D es n t h ld f r all pr ducts/ser
ices. n s me cases, e
en is better

d ct r¶s fees
luxury items (jewelry, res rt acc mm dati ns)
l ttery tickets
 
 



Bait and witch

‡ llegal pricing scheme

‡ Ad
ertise an item at a
ery l w price (bait) t lure cust mers t st re,

then switch them t a higher-priced item

‡ Enc uraging c nsumers t buy a higher-priced item is k, but illegal

t ad
ertise l wer-priced time when it¶s n t legitimate

Ad
ertised Older m del: $9000 Switch t newer m del: $15000

 r

 



Loss Leader Pricing

‡ Take a l ss n a leader brand (e.g., C ke) t get cust mers t the st re

‡ Unfair because it hurts c mpetiti n am ng smaller resellers, wh

cann t c mpete n such l w (leader) prices

‡ S me characteristics f l ss leaders:

A loss leader may be placed in an inconvenient part of the store so that

consumers must walk past other goods which have higher profit margins

A loss leader is usually a product that customers purchase frequently.

thus they are aware of its usual price



 



Price Discriminati n

‡ t is a
i lati n f the R bins n-Patman Act (1936) f r manufacturers

t sell their pr ducts t similar retailers at different prices based s lely
n the
lume f pr ducts purchased.

Example:
n 1994, the American B ksellers Ass ciati n (ABA; independent
b ksellers) filed a federal c mplaint against · ught n Mifflin C mpany
and ther b k publishers ± alleging that the publishers
i lated the
R bins n-Patman Act by ffering price disc unts t large nati nal chains
(e.g., B rders, Barnes and N bel)

ABA w n and the publishers paid milli ns (~$25M) t ABA members.




 



Price Fixing

‡ Tw r m re c mpanies c nspire t keep prices at a certain (typically

ery high) le
el, leading t increased pr fits f r the c mpanies

‡ The c mpanies in
l
ed in price fixing are s metimes referred t as

a  

Example:
N
ember, 2008, US Justice Department f und the 3 largest flat-screen
pr ducers ± LG f S uth K rea, Sharp f Japan, and Chunghwa f Taiwan ±
guilty f price fixing. The 3 c mpanies pled guilty and agreed t pay
$585 milli n in criminal fines f r their r le in fixing the price f liquid
crystal display panels. Payment will g t American c mpanies affected
by the price-fixing (e.g., Dell, Apple, M t r la)



 



Predat ry Pricing

‡ Predatory pricing is the practice f selling a pr duct r ser
ice

at a
ery l w price, intending t dri
e c mpetit rs ut f the
market and create barriers t entry f r p tential new c mpetit rs

Example:

n September, 2000, Val-Mart was charged with predat ry pricing in

Visc nsin, whereby the c mplaint alleged that Val-Mart s ld butter, milk,
laundry detergent, and ther staple g ds bel w c st in st res in Bel it,
Oshk sh, Racine, T mah, and Vest Bend in rder t f rce ther st res ut
f business and gain a m n p ly in these l cal markets.

The case was settled ut f c urt with n fines