Pricing Decisions

Objectives
• Understand the role of pricing in relation to
the other elements of the marketing mix.
• Apply the pricing strategies in the
development of the marketing plan.
 The Role of Marketing Strategy in
Pricing
• Price must be consistent with marketing
strategy which consists primarily of market
segmentation and product positioning
decisions.
 The Izod Case
• A number of years ago, the short sleeved
sport shirts sold under Izod label were very
popular.
• They were sold in many colors and were
extensively distributed in the best department
stores.
 The Izod Case contd.
• The marketing strategy and mix were
consistent: target segments were upscale
consumers, the product positioning
emphasized fashion and color, and the
marketing mix supported the strategy through
classy advertising, limited distribution and
high price.
 The Izod Case contd.
• Izod was subsequently bought by General
Mills who believed that the brand had
substantial growth opportunities beyond the
targeted segments.
• To reach these other segments, channels of
distribution were widened and price reduced.
Discount stores began selling Izod sport shirts.
 The Izod Case contd.
• Unfortunately, reaching new market segments
produced mismatch between the strategy
(fashion, color, exclusivity) and the marketing
mix (discount stores, low price).
• The upscale segment simply stopped buying
the shirts and fled to competitors such as
Polo.
• Can you think of a similar situation?
 The Izod Case contd.
• Eventually, GM divested Izod, which has
recently begun to go back to its former
successful strategy, including opening up its
own retail stores.
 The Role of Marketing Strategy in
Pricing contd.
• Target market affects price because prices
vary widely over segments
• Economists refer to this as
– price discrimination, charging different prices to
segments according to their price elasticity or
sensitivity.
 The Role of Marketing Strategy in
Pricing contd.
• Brand offerings in most product categories
vary in price among market segments, often
based on order quantities.
• Airline ticket prices vary based not just on
class of service (first or business class) but also
on the time of travel and when the ticket is
purchased (e.g. 21 days advance)
 The Role of Marketing Strategy in
Pricing contd.
• Prices can also vary within a targeted
segment. These variations can be referred to
as price bands. Take the case of the ice cream
market.
The Price Band in Ice Cream
The Price Band in Ice Cream contd.
• As the movement of the price distribution
shows, there is a positive relationship
between price and perceived quality.
 Influences on Pricing Decisions
Psychological aspects Industry Conditions
• Reference prices • Threat of New Entrants
• Price/Perceived quality • Power of
buyers/suppliers
• Rivalry
• Substitutes
• Capacity
Influences on Pricing Decisions contd.
Pricing Objectives
• Penetration
• Skimming
• Customer Value cost
• Return-on-investment
• Stability
 Pricing Objectives
1. Penetration Pricing – low pricing; applicable
for new products
2. Return on Sales/Investment Pricing –
computed based on rate of return; applicable
to monopoly
3. Pricing for Stability - avoids fluctuation
4. Skimming – high price
5. Competitive Pricing – based on competitor
or industry
 Psychological Aspects of Pricing
• Customers continually assess prices charged
for products based on prior purchasing
experience, formal communication (e.g.
advertising) and informal communications
(e.g. friends and neighbors), etc.
• They use those assessments in the ultimate
purchase decision.
Psychological Aspects of Pricing contd.
• Reference prices and the price-perceived
quality relationship are two factors related to
psychological pricing.
• Reference price has two types: internal and
external. External reference prices are
referred to as the “regular retail price”.
Internal reference prices are mental prices
used to assess an observed price.
Psychological Aspects of Pricing contd.
Examples of internal reference price are:
1. Fair price or what the product ought to cost the customer;
2. Price frequently charged;
3. Last price paid;
4. The highest price someone would pay;
5. The lowest amount the customer would pay;
6. The price of the brand usually bought;
7. The average price charged for similar products;
8. The expected future price;
9. The typical discounted price.
Psychological Aspects of Pricing contd.
• Reference price has significant impact on
brand choice in both durable and non-durable
goods.
• When observed price is higher than the
reference price consumers perceive it as a bad
deal.
• When observed price is either at or below the
reference price the consumer is happy.
Psychological Aspects of Pricing contd.
• Odd prices or those ending with nines or other
odd numbers like 99, 1.99 can also have an
important impact on purchasing behavior.
 Competition and Pricing
• Two factors key to understanding the role of
competition in pricing decision are
competitors’ costs and historical pricing
behavior.
• Competitors’ costs can be estimated through
reverse engineering and publicly available
data.
 Other Factors Affecting Price
• Stage of the Product Life Cycle
• Category Conditions
 Stage of the Product Life Cycle – The Case of Du Pont
Competitive Focus of Pricing Method
Cycle Stage Attention
Sole supplier (Intro Customers Value-in-use
stage) Perceived value
Competitive Customers Reaction analysis
penetration (Growth) Competitors
Shared stability Competition and Profitability
costs analysis
Commodity
competition
(Maturity)
Withdrawal
(Decline)
Category Conditions Effect on Price
• Threat of New Entrants – if high, lower prices
help to protect market position
• Power of Buyers and Suppliers – if high, tends
to lower prices as it tends to put more
pressure on the product to deliver a good
value/price ratio.
 Category Conditions Effect on Price
contd.
• Rivalry – high rivalry tends to be manifested in
strong price competition.
• Pressure from Substitutes – More substitutes
mean higher chances of price competition.
• Unused capacity – over capacity leads to price
war.
 Pricing Tactics
• Product Line Pricing – setting prices for a
closely related set of products or for a product
line.
• Price Bundling – takes a set of products in a
package and prices lower than the sum of the
individual items in the package. Sometimes
the bundle can also be priced higher (e.g.
McDonald’s Happy Meal) as long as it is
attractive or convenient.
 Pricing Tactics contd.
• Complementary Pricing – applies to products
that are used together when one of the
products fills a sustainable need. (e.g. razor
and blades, cellular phone and sim, computer
and printer, etc.)
• Value Pricing – used by airlines, hotels, rental
cars, fastfood restaurants like McDonalds,
Jollibee, etc.
 Pricing Tactics contd.
• Everyday Low Pricing (EDLP) – lowering prices
permanently and significantly reducing both
trade and consumer promotions. Walmart,
Home Depot, Toys R Us are examples of
retailers using EDLP.
 Pricing Tactics contd.
• Hidden Price Increases – raising prices without
explicitly changing increasing the posted price.

• Price Discrimination – charging different prices

to different segments. (e.g. senior citizens are
charged discounts at movie theaters)
 Pricing Tactics contd.
• Second-Market Discounting – a useful pricing
strategy when excess production exists. This
policy sells the extra production at a discount
to a market separate from the main market.
(e.g. private label brands, foreign markets)
 Pricing Tactics contd.
• Periodic Discounting – varies price overtime.
This is appropriate when some customers are
willing to pay a higher price to have the
product/service during a particular period.
(e.g. electricity and telephone companies
charge higher during off peak and charge
lower during off peak)
 Pricing Tactics contd.
• Auctions – personalized pricing practiced by E-
bay
 Cases on Unethical Pricing
• High-priced basketball shoes (over $125)
produced by Nike, Reebok endorsed by NBA
stars such as LeBron and Iverson have caused
some public school students to assault the
owner to steal the shoes
• Wellcome PLC drug AZT, a treatment for AIDS
cost $10,000
 Most Expensive Products: Ethical or
Not?
• Clive Christian No. 1 perfume seems to be the world's most
expensive over the counter perfume available starting at just
under $2,000.00 USD for a 1 oz. bottle.
• For a small up charge one can have the bottle customized to
suit one's whim and that's just what Sir Elton John did, paying
about $250,000.00 USD for a bottle of Clive Christian No. 1 in
the shape of a, you guessed it, piano.

Source: http://thelongestlistofthelongeststuffatthelongestdomainnameatlonglast.com/expensive.html
 Most Expensive Products: Ethical
or Not?
• Gianni Vive Sulman created Parfum VI after being
inspired by the Rolls-Royce Phantom Six and the box
is even made by Rolls-Royce coach builders. The box
is made of exotic wood and gold and the key made of
gold, diamonds and rubies which justify the nearly
$90,000.00 USD price tag. Only 173 bottles were ever
made.
 Most Expensive Products: Ethical or
Not?
• The sheer nail polish has just enough platinum to make your
nails shimmer and shine, while you are out on the town. Each
bottle of this very expensive nail polish sales for $250,
however, the very first batch of the polish was placed in a
special bottle made with a platinum top and base, which is on
display and is valued at $55,000.

Source: http://thelongestlistofthelongeststuffatthelongestdomainnameatlonglast.com/expensive.html
 Most Expensive Products: Ethical or
Not?
• In 2003 Harrods department store in London displayed the
creation of Stuart Weitzman, a pair of shoes inspired by the
shoes worn in 'The Wizard of Oz' by Judy Garland.
• Woven with thread of platinum and studded with 642 rubies,
the price tag on the world's most expensive shoes was a foot
stomping $1.6 million USD.
• In 2004 Stuart Weitzman did it again, creating the 'Cinderella
Slippers' which boasted 565 platinum-set diamonds including
one large 5 karat chunk of ice.
• They were worn to the 2004 Oscars by Alison Krauss and can
be yours for only $2 million USD.
Source: http://thelongestlistofthelongeststuffatthelongestdomainnameatlonglast.com/expensive.html
 Most Expensive Products: Ethical or
Not?
This USB flash drive is of course made from real gold, either 14
or 18 karat, depending on your preference and if you want to
show that your storage needs are truly worth every penny,
you may also choose to add diamonds to the external drive
just to make you smile with that sparkle as you go about your
work! So how much will you be able to do with this tiny yet
precious USB drive? Who knows? White Lake doesn’t offer up
how much storage capacity this tiny stick has but it is very
clear on the price $2,800 for one that does not have any
diamonds and $3,500 for one with a little extra panache!

Source: http://thelongestlistofthelongeststuffatthelongestdomainnameatlonglast.com/expensive.html
 Ethical Issues in Pricing
Is the right price a fair price?

You are an executive for a large multinational corporation and are

meeting with other managers (your classmates) to discuss the following
topic: Is the right price a fair price?
Prices are often set to satisfy demand or to reflect the premium that
consumers are willing to pay for a product or service. Some critics
shudder, however, at the thought of $2 bottles of water, $150 running
shoes, and $500 concert tickets.
Take a position:
Prices should reflect the value that consumers are willing to pay.
vs.
Prices should primarily just reflect the cost involved in making a product
or service.