3. Position of P.B.'s (organizational buyers or final consumers)
4. Expected consumption rates of potential buyers
5. Economic strength of potential buyers
How consumers will perceive various prices/price changes.
Ex: Will potential buyers use price as an indicator of product quality? Are pot. buyers prestige oriented? How much are they willing to pay?
Types of Costs (3)
1. Time Costs
2. Psychological Costs
3. Behavioral Costs
Many people are willing to pay more money to reduce the time they have to wait to get a product.
Ex: vending machines often depend on buyers willing to pay more money to get something sooner.
Ex: people using credit cards usually want things immediately
The mental energy and stress in making important purchases and accepting the risks of products not performing as expected
Ex: Car dealers that offer "no haggle" to lower buyers psychological costs
Physical activity. Costs increase if buyers have to drive a long way to make a purchase, park far away, stand for long periods of time in a line, etc. Buyers reduce this cost by online and catalogue shopping.
3 Types of Psychological Pricing Strategies
-odd pricing (odd-even pricing
A high price is charged to create a signal that the product is exceptionally fine. Used for cars, clothing, perfume, jewelry, cosmetics, alcohol, crystal and china
Odd Pricing (odd-even pricing)
Prices are set a few dollars or a few cents below a round number. Ex: Lay's potato chips priced at 69 cents instead of 70 cents to seem less expensive
Several products are sold together at a single price to suggest a good value. Ex: travel agents offer vacation packages that include travel, accommodations, and entertainment at a single price to connote value and convenience
demographic and psychological factors affect thing. Is a measure of consumers' price sensitivity
Equation for price elasticity
relative changes in quantity sold divided by relative changes in price.
e= % change in quantity demanded/% change in price
Estimating price elasticity (2 ways)
1. Estimated from historical data or from price/quantity data across different sales districts
2. Estimated by sampling a group of consumers from the target market and polling them concerning various price/quantity relationships
Supply Influences on Pricing Decisions
1. Pricing Objectives
2. Cost Considerations in Pricing
3. Product Considerations in Pricing
1. Pricing to achieve a target return on investment
2. Stabilization of price and margin
3. Pricing to achieve a target market share
4. Pricing to meet or prevent competition
2 Pricing Strategies at the retail level
1. EDLP - Everyday Low Pricing
EDLP - "Everyday Low Prices"
Home Depot, Walmart, Office Depot, Toys "R" Us
Advantages: assures customers of low prices, reduces advertising and operating expenses and reduced stockouts and improves inventory management
The retailer charges prices that are sometimes above competitors' but promotes frequent sales. Grocery, fashion and drug stores.
Advantages: Increases profit, creates excitement (get them while they last feeling) and sells merchandise
Cost Considerations in Pricing
The most common approach in practice.
1. Mark-up pricing
2. Cost-plus pricing
3. Rate-of-Return pricing
Commonly used in retailing. A percentage is added to the retailer's invoice price to determine the final selling price
The costs of producing a product or completing a project are totaled and a profit amount or percentage is added on
-most often used to describe the pricing of jobs that are non-rountine and difficult to "cost" in advance. Ex: construction or military weapon development
Cost-oriented approach criticisms (2)
1. they give little or no consideration to demand factors
2. cost approaches fail to reflect competition adequately. Could lead to severe price competition, which could eliminate smaller firms
Product Considerations in Pricing
3. Life Cycle
Fresh meat, baked goods and some raw materials are physically perishable and must be priced to sell before they spoil. Also can be perishable in sense that demand for them is confined to specific time period (high fashion, fad products, seasonal products)
Distinguish their products from those of competitors and if successful, can often charge higher prices for them. Through branding and brand equity products are commonly made distinctive in consumers minds. Ex: Rolex, Tiffany's and Lexus
The stage of the life cycle that the product is in can have important pricing implications
1. Skimming Policy
2. Penetration Policy
The seller charges a relatively high price on a new product. Used when firm has a temporary monopoly and when demand for product is price inelastic. Ex: Flat screen TV's and cell phones
The seller charges a relatively low price on a new product. Used when firm expects competition to move in rapidly and when demand for the product is, at least in the short run, price elastic. Also used to obtain large economies of scale and as a major instrument for rapid creation of a mass market.
EnvironmentalInfluences on Pricing
Variables that the marketing manager cannot control
Firm must consider its competition and how competition will react to the price of the product
1. Number of competitors
2. market shares, growth, and profitability of competitors
3. strengths and weaknesses of competitors
4. likely entry of new firms into the industry
5. degree of vertical integration of competitors
6. Number of products sold by competitors
7. cost structure of competitors
8. historical reaction of competitors to price changes
pricing a product at competition (the average price charged by the industry). Popular for homogeneous products since this approach represents the collective wisdom of the industry and isn't disruptive of industry harmony
Pricing below competition. The firm is bidding directly against competition for project contracts.
1. Price fixing
2. Deceptive Pricing
3. Price discrimination
4. Predatory Pricing
Sellers must not make any agreements with competitors or distributors concerning the final price of the goods. Not actually illegal. Sherman Antitrust Act is primary device used to outlaw horizontal price fixing
Outlawed under Section 5 of the Federal Trade Commission Act. Ex: to mark merchandise with an exceptionally high price and then claim that the lower selling price actually used represents a legitimate price reduction
The practice of charging different prices to different buyers for goods of like trade and quality. Lessens competition or is deemed injurious to it is outlawed by Robinson-Patman Act. Not illegal, but sellers cannot charge competing buyers different prices for essentially the same products
Charging a very low price for a product with the intent of driving competitors out of business. Illegal under the Sherman Act and Federal Trade Commission Act
General Pricing Model (6 Steps)
1. Set Pricing Objectives
2. Evaluate product-price relationships
3. Estimate costs and other price limitations
4. Analyze profit potential
5. Set initial price structure
6. Change price as needed
Set Pricing Objectives
Pricing process begins with a clear statement of the pricing objectives. These guide the pricing strategy and should be designed to support the overall marketing strategy. Efforts to set prices must be coordinated with other functional areas
Evaluate Product-Price Relationships
Marketers need to consider what value the product has for customers and how price will influence product positioning
3 Basic Value Positions
1. product priced relatively high for a product class bc it offers value in the form of high quality, special features or prestige
2. product priced at about average for the product class bc it offers value in the form of good quality for a reasonable price
3. product could be priced relatively low for a product class bc it offers value in the form of acceptable quality at a low price
Setting prices so that targeted customers will perceive products to offer greater value than competitive offerings
Estimate Costs and Other Price Limitations
Government regulations and prices that competitors charge for similar and substitute products. Likely competitive reactions that could influence the price of a new product or a price change in an existing one need to be considered.
Analyze Profit Potential
Should result in a range of prices that could be charged. Then estimate the likely profit in pricing levels in this range.
discounts for purchasing a large number of units
Often in the form of price reductions in exchange for the channel member performing various activities, such as featuring the product in store advertising or on in-store displays
Payments to retailers to get them to stock items on their shelves
Set Initial Price Structure
Takes into account the price to various channel members, such as wholesalers and retailers, as well as the recommended price to final consumers or organizational buyers
Change Price as Needed
Many reasons why an initial price structure may need to be changed. Channel members may bargain for greater margins, competitors may lower their prices, or costs may increase inflation.
Want to see the other 51 Flashcards in Chapter 11?JOIN TODAY FOR FREE!