14

Pricing Concepts for

Establishing Value

Price and Value

Whats the most

you will pay for
your favorite
drink?

The McGraw-Hill Companies, Inc./Jill Braaten, photographer.

Price

Sacrific
e
Benefits

Price is a Signal
Alex Segre/Alamy.

Prices can be both

too high and too
low
Price set too low
may signal poor
quality
Price set too high
might signal low
value

What does this signal?

PriceGrabber.com
Website

The Role of Price in the Marketing Mix

Chad Baker/Ryan McVay/Getty Images

Price is usually ranked as one of the most

important factors in purchase decisions

Price is the only marketing mix element

that generates revenue

Lets Go to Costco!

The 5 Cs of Pricing

1st C: Company Objectives

Profit Orientation

Target
return
pricing

Target
profit
pricing

Profit
Orientati
on

Maximizi
ng
profits

Sales Orientation
Focus on
increasing
sales
Does not
More
always
concerned
imply
with overall
setting low
market
prices
share

Firms that want to attain market leadership set prices at less profitable levels to gain
market share.
to establish a position in the market by getting the most price sensitive consumers to
change brands.

Competitor Orientation
Competitive parity
Status quo pricing
Value is not part of this pricing strategy
This strategy is particularly common among smaller firms that lack knowledge
or experience in setting prices.
Non-market leader firms also use it to signal they are similar to the market
leader
What are the benefits of a competitor strategy?
For example, can a new hotel chain indicate its level of service through price?
yes.
In many instances new brands will set price equal to the competitors they wish
to be compared with knowing that consumers use reference prices to indicate
quality

Customer Orientation
=
C Borland/PhotoLink/Getty Images

Don Farrall/Getty Images

Focus on customer expectations by

matching prices to customer expectations
A recent study indicates that a variety of retailers sell one-carat diamonds, but
consumers pay vastly different prices at Costco versus Tiffanys. The diamonds
are a commodity; they must meet the same standards and are rated the same

What are they trying

to accomplish with this ad?

Consumers have an expectation of a rental car costing a lot of money. They

dont realize they can rent the car for under $10 an hour. Because Zipcar is
a new product, they need to set customers expectations. To help
consumers relate to the price, they compare it to a purchase very familiar to
the consumer.

Demand Curves and Pricing

Knowing demand
curve enables to
see relationship
between price
and demand

Photo by Simon Frederick/Getty Images

E-book Prices

Demand Curves
Not all are
downward sloping

Prestigious
products or
services have
upward sloping
curves

Price Elasticity of Demand

Elastic
(price sensitive)

Inelastic
(price insensitive)

Consumers are less

sensitive to price
increases for
necessities

PhotoLink/Getty Images

For pricing, elasticity is a crucial concept

Price Elasticity
Most customers in most markets are
sensitive to the price of a product or
service, and the assumption is that
more people will buy the product or
service if its cheaper and less will
buy it if its more expensive.

Price Elasticity of Demand

Elastic: Sensitive to fluctuations in
price
Inelastic: Largely ambivalent about
price changes.
Price elasticity of demand:
Percentage change in quantity
demanded _
Percentage change in price

Price Elastic
Some products have a much more
immediate and dramatic response to
price changes, usually because
theyre considered nice-to-have or
non-essential, or because there are
many substitutes available.
Beef: When the price dramatically
increases, demand may go way down
because people can easily substitute
chicken or pork.

Perfectly Elastic
Perfectly elasticwhere any very
small change in price results in a very
large change in the quantity
demanded. Products that fall in this
category are mostly pure
commodities, says Avery. Theres no
brand, no product differentiation, and
customers have no meaningful
attachment to the product.

Commodities

Relatively Elastic
Relatively elastic where small
changes in price cause large
changes in quantity demanded
(the result of the formula is greater
than 1). Beef, as discussed above,
is an example of a product that is
relatively elastic.

Relatively Inelastic
Relatively inelasticwhere large changes
in price cause small changes in
demand (the number is less than 1).
Gasoline is a good example here because
most people need it, so even when prices
go up, demand doesnt change greatly.
Also, products with stronger brands
tend to be more inelastic, which makes
building brand equity a good
investment.

Price Inelastic

Perfectly Inelastic
Perfectly inelastic: Where the
quantity demanded does not
change when the price changes.
Products in this category are things
consumers absolutely need and
there are no other options from
which to obtain them. We tend to
see this only in cases where a firm
has a monopoly on the demand.
Even if I change my price, you still

Price Elasticity of Demand

In elastic markets, depending on the level of elasticity, a price

increase can increase revenues, but if the increase drives
consumers out of the market, demand falls, and a loss of
revenue may result.
in inelastic markets, a price increase almost always increases
rev, because the relationship between price and demand is
weak. Pharmaceuticals; even if the price of a cancer drug
increases, consumers still demand it, so firm generates more rev.

How Do Marketers Use the Theory?

A marketers goal is to move his or
her products from relatively elastic to
relatively inelastic.
Marketers do that by creating
something that is differentiated and
meaningful to customers.

Company Standing
When, through branding or other
marketing initiatives, a company
increases consumers desire for the
product and their willingness to pay
regardless of price, its improving the
companys standing compared with
competitors.

Factors Influencing
Price Elasticity of Demand
Crossprice
elasticity

Income
effect

Substitution
effect

Cross-Price Elasticity
A price change in one good might
effect the quantity demanded in
another good.

Income Effect & Substitution Effect

Meet Pete, college
student on a budget:
Old Spice Sport
Deodorant user
At the store he notices
that Old Spice is more
expensive
Pete decides to give
another brand a try
and save money
BananaStock/JupiterImages

Cross-Price Elasticity

Getty Images/Digital Vision

Meet Kendra, selfsupporting college

student:
Buys a new printer on
sale for a great price
Learns it requires
special ink cartridges
that cost more than
the printer

3rd C: Costs
Variable Costs
Vary with production
volume

Fixed Costs
Unaffected by
production volume

Total Cost
Sum of variable and
fixed costs
Michael Rosenfeld/Stone/Getty Images

Break Even Analysis and Decision

Making

Break Even Analysis

Although profit, which represents the difference between the total

cost and the total revenue (total revenue or sales = selling
price of each unit sold number of units sold), can indicate
how much money the firm is making or losing at a single period of
time, it cannot tell managers how many units a firm must produce
and sell before it stops losing money and at least breaks even

4th C: Competition
Less Price Competition

Monopoly

One firm controls the market

Brand X Pictures/PunchStock.

Monopolistic Comp.

Many firms selling differentiated

products at different prices

Steve Cole/Getty Images.

More Price Competition

Oligopoly

A handful of firms control the

market

Fewer
Firms

Ingram Publishing/SuperStock.

Pure Competition

Many firms selling commodities

for the same prices

Many
Firms

Corbis All Rights Reserved.

Monopoly: Microsoft software products;Oligopolistic: Cable TV

firms; Pure: Most frequently purchased consumer goods -soft drink

5th C: Channel Members

Courtesy Apple, Inc.

Manufacturers,
wholesalers and
retailers can have
different perspectives
on pricing strategies
Manufactures must
protect against gray
market transactions