3. 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?
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7. 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
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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
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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)
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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
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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
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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)
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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
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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
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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
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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
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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
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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)
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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
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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
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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)
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32. Key Concepts from the Marketing Plan Handbook
Chapter 7 - Pricing Strategies
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33. Value
• Need to research and analyze
value.
• Consider how the product’s
value will be communicated.
• Customers’ perceptions of
value and price sensitivity can
be used to deal with
imbalances in supply and
demand.
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34. Price Elasticity (cont’d)
Change in Price Inelastic Demand Elastic Demand
Small Increase Demand drops
slightly
Demand drops
significantly
Small Reduction Demand rises
slightly
Demand rises
Significantly
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35. Factors Impacting Elasticity
• Customers are less sensitive to price when:
• It is a relatively small amount of product
• Comparisons to possible substitutes are not easy
• Switching costs are involved
• The product’s quality, status, or another benefit justifies the price
• The cost is shared with others
• Perceive the price as fair
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36. Samples of Pricing Objectives
Type of Objective Sample Pricing Objective
Financial For profitability: Set prices to achieve gross
margin of 40%.
Marketing For higher market share: Set prices to achieve a
market share increase of 5% within 6 months.
Societal For philanthropy: Set prices to raise $10,000 for
charity during the second quarter of the year.
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38. Some examples of ethical issues in pricing:
• Is it ethical to raise prices during an emergency, when products may be
scarce or particularly valuable?
• Should a company set a high price for an indispensable product, knowing
that some customers will be unable to pay?
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39. Costs and Break-
Even Objectives
• Costs typically establish the
theoretical “floor” of the pricing
range.
• Break-even point: the sales
level at which revenues cover
costs.
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40. Break-Even Example
• Break-even volume = fixed
cost/price-variable cost.
• Example:
• Given:
• Fixed cost = $30,000
• Variable cost = $10 per unit
• Price = $50 per unit
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41. Break-Even Example
• Break-even volume = fixed
cost/price-variable cost.
• Example:
• Given:
• Fixed cost = $30,000
• Variable cost = $10 per unit
• Price = $50 per unit
• Therefore:
• Break-even = $30,000/($50 -
$10)
• Break-even = $30,000/$40
• Break-even = 750
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42. Pricing Strategy: The
Product Life Cycle
• Introduction: Decision between skim and
penetration pricing.
• Growth: Pricing used to stimulate demand, drive
toward break-even point.
• Maturity: Pricing used to defend market share,
retain customers, pursue profitability, and
expand into additional channels.
• Decline: Pricing can be used to stimulate
demand and “clear out” old products, or to
“milk” existing products for profitability at end of
life.
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