bmgt 411 marketing management fall 2014 chris lovett

1. BMGT 411: Chapter 12
Developing Pricing Strategies and Programs

2. Chapter Questions
• How do consumers process and evaluate prices?
• How should a company set prices initially for products or services?
• How should a company adapt prices to meet varying circumstances and
opportunities?
• How should a company initiate a price change and respond to a competitor’s
price change?

3. Premium Pricing

4. Synonyms for Price
• Rent
• Tuition
• Fee
• Fare
• Rate
• Toll
• Premium
• Honorarium
• Special assessment
• Bribe
• Dues
• Salary
• Commission
• Wage

5. Internet: Empowers
Consumers

6. Common Pricing Mistakes
• Determine costs and take traditional industry margins
• Failure to revise price to capitalize on market changes
• Setting price independently of the rest of the marketing mix
• Failure to vary price by product item, market segment, distribution channels,
and purchase occasion

7. 5C’s of Pricing Inputs
• Customers
• Company
• Competition
• Collaborators (Distribution)
• Context

8. Consumer Psychology
and Pricing
• Reference prices: Comparing an observed price to an internal reference
price they remember or an external frame of reference such as a posted
“regular retail price”
• Kohl’s uses reference pricing to make their sales look even bigger
• Price-quality inferences: When consumer’s use price as an indicator of
quality
• Luxury cars, perfume, designer clothes
• Price endings: $299 Vs $300, consumers process prices left to right, $299
seems like it is in the $200 range Vs $300 range

9. Steps in Setting Price
1. Select the price objective
2. Determine demand
3. Estimate costs
4. Analyze competitor price mix
5. Select pricing method
6. Select final price

10. Step 1: Select the price objective
1. Survival Pricing: Often a short term objective if they are plagued with
overcapacity, intense competition, or changing customer wants (Blackberry?)
2. Maximum Current Profit: Estimating the demand, competition and choose
a price that yields a maximum profit, cash flow, or ROI (Business to Business
markets where there is lower competition)
3. Market Penetration Pricing: Setting the lowest price, leading to higher
volume, lower unit costs, and higher long run profit (Walmart, Target)
4.Market-Skimming Pricing: Prices start high, and as demand increases,
prices slowly drop over time (Roku Box)
5. Product Quality Leader Pricing: High prices that come with tastes, quality,
or customer service (BMW, Apple)

11. Step 2: Determine demand
• Price sensitivity: How customers react to higher and lower prices
• Rule of thumb: less sensitive to low cost items and items bought
infrequently
• Because food is purchased so often, it is often noticed and very sensitive
to price changes
• Estimate demand curves: Estimating different demands based on different
pricing strategies. Often meeting in the middle to set prices
• Price elasticity of demand: Depends on how responsive, or elastic, demand
is to a change in price

12. Inelastic Demand
Demand hardly changes with a
small change in price - demand
is inelastic
- If gas went up 5%, demand
would almost remain unchanged

13. Elastic Demand
When demand changes
considerable when prices
change, we call that demand is
elastic
- Example - Beef and other Food
sources (Because there are often
cheaper substitutes)

14. Table 12.1 Factors Leading to Less Price
Sensitivity
• The product is more distinctive
• Buyers are less aware of
substitutes
• Buyers cannot easily compare the
quality of substitutes
• Expenditure is a smaller part of
buyer’s total income
• Expenditure is small compared to
the total cost
• Part of the cost is paid by another
party
• Product is used with previously
purchased assets
• Product is assumed to have high
quality and prestige
• Buyers cannot store the product

15. Step 3: Estimating Costs
• Types of costs:
• Fixed Costs: Overhead, do not vary with increased production (Rent,
salaries, etc)
• Variable Costs: Varies directly with the level of production (Raw materials)
• Total Costs: The sum of the fixed costs and variable costs for a given level
of production
• Average Cost: The cost per unit at the total level of production

16. Step 3: Estimating
Costs
Figure 12.1 Cost per Unit as a
Function of Accumulated
Production

17. Target Costing
Bringing down the costs to
target levels marketers want to
achieve

18. Step 4: Analyzing Competitor’s Costs,
Prices, and Offers

19. Step 5: Selecting a Pricing Method
• Markup pricing
• Target-return pricing
• Perceived-value pricing
• Value pricing
• Going-rate pricing
• Auction-type pricing

20. Markup Pricing
• Unit Cost = Variable Cost + Fixed Costs/Unit Sales
• = $10 + $300,000/50,000 = $16 Per Unit
• If they wish to earn 20 percent markup, the formula is as follows
• Markup Price = Unit Cost/ (1 - Desired return on sales)
• = $16 / (1 - .2) = $20
Variable Cost Per Unit: $10
!
Fixed Costs: $300,000
!
Expected Unit Sales: 50,000
!
Invested Capital = $1,000,000

21. Target Return Pricing
• Target Return Cost = Unit Cost + (Desired Return x Invested Capital)/ Unit Sales
• If they wish to earn 20 percent markup, the formula is as follows
• $16 + (.2 x $1,000,000)/50,000 = $20
Variable Cost Per Unit: $10
!
Fixed Costs: $300,000
!
Expected Unit Sales: 50,000
!
Invested Capital = $1,000,000

22. Target Return Pricing
Figure 12.3 Break-Even Chart for
Determining Target-Return Price
and Break-Even Volume

23. Target Return Pricing - Break Even Point
• Break Even Volume = Fixed Cost / (Price - Variable Cost)
• = $300,000/ ($20 - $10) = 30,000
Variable Cost Per Unit: $10
!
Fixed Costs: $300,000
!
Expected Unit Sales: 50,000
!
Invested Capital = $1,000,000

24. Perceived Value
Pricing
Basing the price on the
customer’s perceived value

25. Value Pricing
Winning loyal customers by
charging a fairly low price for a
quality offering
!
EDLP Model - Everyday Low
Price
!
High Low Pricing - Charges
higher prices on everyday items
partnered with sales

26. Other Pricing Methods
• Going Rate Pricing: Charging based mostly on what other competitors are
charging, not very scientific
• Popular in business to business marketing with little competition, and
service industries (Plumbers, etc)
• Auction Pricing: Bidding the price up or down
• English - One seller, many buyers (Ebay Model)
• Dutch, or Reverse - Buyer announces something they want to buy, and
sellers compete to offer the lowest price (Popular in the printing industry)

27. Step 6: Selecting the Final Price
• Impact of other marketing activities: Prices must align with overall brand
strategy, image, and customer expectations
• Company pricing policies: Cannot alienate customers with pricing that does
not fit the companies model
• Impact of price on other parties: Will partners be left with room to make a
profit as well? They may not carry the product if not
• In 2009, Costco stopped selling Coke due to a pricing dispute

28. Other Pricing
Considerations
Geographical Pricing: Pricing
varies by location
Very common in the hotel
business, same hotel in different
locations are very different prices

29. Other Pricing Considerations
• Discount: Discount for paying bills within a desired timeframe
• Quantity discount: Discount to buyers who buy large volumes
• Functional discount: Discount offered for selling or storing a product
• Seasonal discount: Discounts on out of season goods
• Allowance: Example, trade ins, discounts for displaying product

30. Promotional Pricing Tactics
• Loss-leader pricing
• Special-event pricing
• Cash rebates
• Low-interest financing
• Longer payment terms
• Warranties and service contracts
• Psychological discounting

31. Differentiated Pricing
• Customer-segment pricing: Students or Senior Citizen Pricing
• Product-form pricing: Different versions of the product are priced differently
• Channel pricing: Different pricing for different channels (Coke in vending,
restaurants, C-store)