Pricing Problems

• Focusing on costs and industry margins

• Not revising price to capitalize on market
changes
• Setting price independently rather than as an
intrinsic element of market-positioning
strategy
• Not varying price enough for different
products, segments, channels, and purchase
occasions.
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 Value = Benefits - Costs
• Consumers often cannot see beyond the cost
factor (price)
• Important for marketers to stress that:
benefits > cost

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Benefits vs. Cost Example
Firm A Firm B

Full Service
Self Service (delivery,
replenishment)

Order Price $250 $280

Acquisition
costs $20 $0
Loss of
productivity $20 $0

Total cost $290 $280

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 Psychological Pricing
• Reference prices
• Price-quality inferences
• Price cues
– Left to right: $39.99 vs. $40.00
– Odd vs. even: odd perceived as discounted
• Impact of selection on price
http://www.youtube.com/watch?v=70wDh9gDiAQ&feature=player_embedded

Copyright 2009, Prentice-Hall, Inc. 12-4

 Ariely Pricing Perception
• 16 x $59 = $ 944 • 68 x $59 = $4,012
• 0 x $125 = $ 0 • 32 x $125 = $4,000
• 84 x $125 = $10,500 • Total: $8,012
• Total: $11,444

5
 Steps in Setting Price Policy
1. Select the pricing objective
2. Determine demand
3. Estimate costs
4. Analyze competitors’ costs, prices, and offers
5. Select a pricing method
6. Select the final price

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Step 1: Selecting the Pricing Objective
• Survival
• Maximum current profit
• Maximum market share
• Maximum market skimming
• Market penetration
• Product-quality leadership

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 Price Sensitivity Determinants
• Proportion of income
• Switching costs
• Product is small part of acquisition
• Price is proxy for quality
• Difficulty of comparing suppliers

Copyright 2009, Prentice-Hall, Inc. 12-8

 Step 4: Analyzing Competitors’ Costs,
Prices, and Offers
• Does the firm offer features not offered by
competitors?
• Given this point of comparison, should the
price be higher, lower, or the same?

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 Price-Setting Methods
• Markup pricing
• Target-return pricing
• Perceived-value pricing
• Value pricing
• Going-rate pricing
• Auction-type pricing
• Pay what you want
– e.g. Panera Bread Company

Copyright 2009, Prentice-Hall, Inc. 12-10

 After one month….
• 60 to 70 percent pay in full
• 15 percent leave a little more
• 15 percent pay less, or nothing at all
• Some very large donations
– e.g. $20 for a cup of coffee
• $100,000 in revenues

Source: http://special.registerguard.com/csp/cms/sites/web/business/24953837-
41/panera-pay-customers-nonprofit-restaurant.csp
 Step 6: Selecting the Final Price
• Factors to consider:
– Impact of other marketing activities
– Company pricing policies
– Gain-and-risk sharing pricing
– Impact of price on other parties

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 Promotional Pricing
• Loss-leader pricing
• Special-event pricing
• Financing terms
– Rate
– Duration
• Warranties and service contracts
• Psychological discounting
• Cash rebates

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 Differentiated Pricing
• Customer-segment pricing
– e.g. veteran discount
• Product-form pricing
– e.g. 20 oz. vs. 12 oz. bottles of ketchup
• Image pricing
• Channel pricing
– e.g. fast food restaurant vs. baseball stadium
• Location pricing
– e.g. sporting events
• Time pricing
– e.g. utilities

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 Product-Mix Pricing
• Product-line
– e.g. Mercedes C and E classes
• Optional-feature
– e.g. navigation system
• Captive-product
– e.g. shavers and razor blades
• Two-part
– e.g. cell phones
• By-product
– e.g. cheese curds, carpet remnants
• Product-bundling
– e.g. McDonald’s combo meal
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 Traps of Price-Cutting
• Perceived low quality
• Buys market share but not loyalty
• Price war
• Salesperson issues*

Copyright 2009, Prentice-Hall, Inc. 12-16

 Why Increase Prices?
• Greater margin (possibly)
• Enhanced perceived quality
• J.N.D. may allow for it
• Higher commissions for salespeople

Copyright 2009, Prentice-Hall, Inc. 12-17

 Salespeople and price cuts….
• Current price: $10
• Commission rate: 10%
• Commission: $1 /unit
• Unit sales to make $1000:
1,000
• Reduced price: $9
• Commission rate: 10%
• Commission: $.90/unit
• Unit sales to make $1000:
1,112

• Problem: more sales calls

= more costs
– Time
– Mileage
– Effort

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 Dealing with Low
Cost Competition

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 Marketing Channels
Producer

Brokers or Agents

Distributors or Wholesalers

Retailers or Dealers

Ultimate Buyers
Channel selection from a Consumer Perspective

iTunes Local
Record
Store

Wal-Mart
Amazon

Best Buy

Based on this example, what should

marketers know to be able to effectively
design their distribution channels?
The Channel-Selection Decision
Fundamental Decisions

Targets + buying requirements

• Who are potential customers (target)?

• Where do they buy (requirements)?
• When do they buy (requirements)?
• How do they buy (requirements)?
• What do they buy (requirements)?
• Example: KISS
 Design of Marketing Channels
Indirect Direct
• Use intermediaries to reach • Contact ultimate buyers
target directly
– type – own sales force
– location – own retail stores
– number of channel levels – Web site
– geographical – catalog + phone
considerations

Under which circumstances is direct vs. indirect distribution

used?
 Direct vs. Indirect Issues
Direct Indirect
• Complete control • Less control
• More expensive • Possibly temporary
• More risk (sort of) • Leverage expertise and
access
• Cheaper
• Less risk (sort of)
Transaction Costs
 Channel Selection at the Retail
Level
Target Market Coverage

Exclusive Selective Intensive

Rolex Levi’s Wrigley’s

Faberge Sony Coke
 Channel Conflict
• Vertical
– e.g. Boeing
• Horizontal
– e.g. two franchisees
• Multichannel
– e.g. music retailers

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 Brand Dilution via Channels
• Channel must fit brand image
– E.g. Ralph Lauren and Wal-Mart
– E.g. Lee Jeans and Nordstrom

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 Channel Selection Decisions

1. Which channel and intermediaries provide the

best coverage of the target (type and location)?

2. Which channel and intermediaries satisfy the

requirements of the target market?
3. Which channel and intermediaries is the most
profitable?