Marketing Chapter 14 Strategic Pricing Methods Dhruv Grewal

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14 -2 Texas Instruments, Digital Light Processing l l l To make big screen possible requires Digital Light Processing (DLP) Texas Instruments (TI) developed this technology and had to price it Pricing this type of product is extremely difficult © 2007 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

14 -4 Cost-Based Methods l l l Cost-base pricing methods start with cost All costs calculated on a per unit basis Assumes costs don’t vary for different levels of production © 2007 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

14 -6 Test Your Knowledge When a firm deliberately prices a product above the prices set for competing products to capture those consumers who always shop for the best, this is known as ______. A) snobbery B) premium pricing C) value-based pricing D) price discrimination

14 -9 How Can Firms Use Value Pricing? Should a firm raise prices if it determines that the customer values the item more than the current price? © 2007 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

14 -10 Case in Point: Amazon. com and the Mystery of Changing Prices Challenge Answer Results To use a value-based pricing strategy without alienating consumers. Amazon. com now discloses to consumers what items in their wish list or save basket have increased or decreased in price since their last visit. Consumers are skeptical of Amazon’s motives for the changing price. Amazon refuses to discuss its pricing strategy but states that “Prices change; some go up and some go down. ”

14 -11 Costs of Ownership Method l l Consumer maybe willing to spend more initially If, over the lifetime the product will eventually cost less to own Discussion question How do marketers justify the high cost of solar energy panels to homeowners? © 2007 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

14 -12 Psychological Factors Affecting Value. Based Pricing Strategies Reference pricing Price-quality relationship Psychology pricing strategies Odd prices © 2007 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin Everyday low pricing (EDLP)

14 -13 Entrepreneurial Marketing 14. 1: Turning $1 into a Million l l l Cal Turner Sr. (Dollar General) and Leon Levine ( Family Dollar) invented a new type of retail format – extreme value Target low income consumers but increasingly higher income consumers Focus on value and convenience © 2007 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

14 -14 Consumers’ Use of Reference Prices l l Reference price External reference price Internal reference price External reference prices influence internal references prices

14 -15 Test Your Knowledge Which of the following would NOT be associated with an internal reference price? A) The last price a consumer paid for an item B) What a consumer expects to pay for an item C) Consumer price perception regarding an item D) The overall cost of ownership of an item

14 -16 Everyday Low Pricing versus High/Low Pricing Everyday low pricing (EDLP) versus High/low pricing Create value in different ways EDLP saves search costs of finding lowest overall prices High/low provides the thrill of the chase for the lowest price © 2007 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

14 -17 Odd Prices l l l Odd prices may be so traditional that sellers are afraid to round them off May suggest a good deal May suggest low quality © 2007 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

14 -18 The Price-Quality Relationship Lacking experience, consumers use price as an indicator of quality Products/brands that consumers have little knowledge about, price becomes crucial Discussion question Wine ranges in price from under $5 a bottle to over $100 K a bottle. How do you know which to choose? © 2007 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

14 -20 Adding Value 14. 1: Price Skimming versus Market Penetration in the World of High Fashion l l Fashion designers have been able to use both strategies Karl Lagerfeld, chief designer for Chanel couture also designs a line of clothes for budget fashion retailer H&M © 2007 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

14 -22 Business to Business Pricing Tactics and Discounts Seasonal discounts Uniform delivered versus zone pricing Cash discounts B-to-B Pricing Tactics and Discounts Quantity discounts Allowances © 2007 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

14 -24 Cash Discounts l l l Reduced invoice cost if buyer pays prior to the end of the discount period Encourages buyers to pay before the discount period ends Seller benefits either way © 2007 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

14 -27 Test Your Knowledge When a car dealership offers great deals at the end of a fiscal period to boost sales, they are most likely trying to take advantage of ________. A) advertising allowances B) a cumulative quantity discount C) zone pricing D) a noncumulative quantity discount

14 -32 Leader Pricing Enticing consumers into the store with the popular aggressively priced item and hoping they will pick up other items while shopping © 2007 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

14 -34 Markdowns An integral component of high/low pricing strategy l Enable retailers to get rid of slow moving or obsolete merchandise l Used to generate store traffic. l © 2007 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

14 -35 Quantity Discounts for Consumers l l Size discount The more you buy the cheaper the unit cost

14 -38 To Coupon or Not to Coupon? How should firms respond when couponing no longer seems to work to increase sales?

14 -39 Case in Point: Cereal and the End of Couponing Challenge To re-invigorate sale of Ready-to-Eat cereal. Answer Reduce the price of cereal and put an end to constant couponing to make cereal more attractive to consumers. Results Sales of the cereal category were decreasing due to consumers perception of high price and increasing competition from alternatives such as breakfast pastries and bagels. Consumers liked the lower prices but were hooked on the coupons which are still a key to cereal sales.

14 -40 Test Your Knowledge The redemption rate on coupons averages _______. A) less than 2 percent B) 5 percent to 10 percent C) 20 percent to 30 percent D) over 30 percent

14 -41 Legal Aspects and Ethics of Pricing Deceptive or illegal price advertising Price fixing Legal Aspects and Ethics of Pricing Price discrimination © 2007 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin Predatory pricing

14 -45 Case in Point: Google Checkout Challenge Answer Results To make a dramatic move into a new market. Google Checkout allows users to make payments to online merchants using payment and shipping information kept on file with Google. To lower prices to merchants beneath the competition and offer the service as an add on if the merchant advertises with Google is actually going to take a loss on each transaction, but will receive increased revenue from advertising.

14 -46 Price Discrimination l l l Is not always illegal Different rules in the B 2 B and B 2 C markets Federal law does not apply to sales to end consumers

14 -48 Test Your Knowledge According to a decision rendered by Justice Sandra Day O’Connor, vertical price fixing is ________. A) clearly illegal B) legal when used in conjunction with horizontal price fixing C) not always illegal D) considered discriminatory under the Clayton Act

14 -49 Ethical Dilemma 14. 1: Oh Yes, It’s Ladies’ Night…No More l l l Ladies offered no cover and discounted drinks one night a week Coastline bar was sued for discrimination Discrimination or effective price strategy? © 2007 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

14 -50 Chapter 14 Glossary l l l l l Advertising allowance: Tactic of offering a price reduction to channel members if they agree to feature the manufacturer’s product in their advertising and promotional efforts. Bait and switch: A deceptive practice of luring customers into the store with a very low advertised price on an item (the bait), only to aggressively pressure them into purchasing a higher-priced model (the switch) by disparaging the low-priced item, comparing it unfavorably with the higher-priced model, or professing an inadequate supply of the lower-priced item. Cumulative quantity discount: Pricing tactic that offers a discount based on the amount purchased over a specified period and usually involves several transactions; encourages resellers to maintain their current supplier because the cost to switch must include the loss of the discount. Deceptive reference prices: External reference price: A higher price to which the consumer can compare the selling price to evaluate the deal. Everyday low pricing (EDLP): A strategy companies use to emphasize the continuity of their retail prices at a level somewhere between the regular, nonsale price and the deep-discount sale prices their competitors may offer. High/low pricing: A pricing strategy that relies on the promotion of sales, during which prices are temporarily reduced to encourage purchases. Internal reference price: Price information stored in the consumer’s memory that the person uses to assess a current price offering-perhaps the last price he or she paid or what he or she expects to pay. Loss leader pricing: Loss leader pricing takes the tactic of leader pricing one step further by lowering the price below the store’s cost. Markdowns: Reductions retailers take on the initial selling price of the product or service.

14 -51 Chapter 14 Glossary (continued) l l l l l Noncumulative quantity discount: Pricing tactic that offers a discount based on only the amount purchased in a single order; provides the buyer with an incentive to purchase more merchandise immediately. Premium pricing: A competitor-based pricing method by which the firm deliberately prices a product above the prices set for competing products to capture those consumers who always shop for the best or for whom price does not matter. Price penetration: A pricing strategy of setting the initial price low for the introduction of the new product or service, with the objective of building sales, market share, and profits quickly. Price skimming: A strategy of selling a new product or service at a high price that innovators and early adopters are willing to pay in order to obtain it; after the high-price market segment becomes saturated and sales begin to slow down, the firm generally lowers the price to capture (or skim) the next most price sensitive segment. Pricing strategy: A long-term approach to setting prices broadly in an integrative effort (across all the firm’s products) based on the five Cs (company objectives, costs, customers, competition, and channel members). Pricing tactics: Short-term methods, in contract to long-term pricing strategies, used to focus on company objectives, costs, customers, competition, or channel members; can be responses to competitive threats (e. g. , lowering price temporarily to meet a competitor’s price reduction) or broadly accepted methods of calculating a final price for the customer that is short term in nature. Reference price: The price against which buyers compare the actual selling price of the product and that facilitates their evaluation process. Size discount: The most common implementation of a quantity discount at the consumer level; the larger the quantity bought, the less the cost per unit (e. g. , per ounce). Slotting allowance: Fees firms pay to retailers simply to get new products into stores or to gain more or better shelf space for their products. © 2007 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin