Chapter 12

On Pricing Products: Pricing Considerations, Approaches, and Strategy

“The real issue is value, not price.” – Robert T. Lindgren

Outline:
I. Price
II. Factors to Consider when Setting Prices
a. Internal Factors Influencing Pricing Decisions
b. External Factors Affecting Pricing Decisions
c. Competitors’ Prices and Offers
d. Other External Elements
III. General Pricing Approaches
a. Cost-Based Pricing
b. Break-Even Analysis and Target Profit Pricing
c. Value-Based Pricing
d. Competition-Based Pricing
IV. Pricing Strategies
a. New Product Pricing Strategies
b. Existing-Product Pricing Strategies
c. Psychological Pricing
d. Promotional Pricing
V. Other Pricing Considerations
a. Price Spread Effect
b. Price Points
VI. Price Changes
a. Initiating Price Changes
b. Initiating Price Cuts
c. Initiating Price Increases
d. Buyer Reactions to Price Changes
e. Competitor Reactions to Price Changes
f. Trade Ally Reactions to Price Changes
g. Responding to Price Changes

I. Price
- It is the only marketing mix element that produces revenue.
- It is the amount of money charged for a good or service.
- It is the sum of the values consumers exchange for the benefits of having
or using the product or service.

Pricing
- It is the least understood of the marketing variables.
- Changes are often a quick fix made without proper analysis.

Most common mistakes in pricing:

 1. It is too cost oriented.
2. It is not revised to reflect market changes.
3. It does not take the rest of the marketing mix into account.
4. It is not varied enough for different product items and market
segments.
5. Charging too much (chases away potential customers).
6. Charging too little (leaves a company without enough revenue to
maintain the operation properly).

II. Factors to Consider When Setting Prices

a. Internal Factors Influencing Pricing Decisions

1. Marketing Objectives

Objectives:
*Survival
Market Targeting *Current Profit
Maximization Pricing
*Market-Share
Market Positioning Leadership
*Brand Equity Growth
*Product-Quality

The firm’s pricing objectives must be identified in order to determine the optimal pricing.
Common objectives include the following:

*Survival
- in situations such as market decline and overcapacity, the goal may be to select
a price that will cover costs and permit the firm to remain in the market. In this case,
survival may take priority over profits, so this objective is considered temporary.

*Current Profit Maximization

 - seeks to maximize current profit, taking into account revenue and costs.
Current profit maximization may not be the best objective if it results in lower long-term
profits.

*Market-Share Leadership
- set low price to gain large market share (market penetration)
- companies with this objective believe that gaining the largest market share will
eventually lead to low costs and high long-rung profits.

*Brand Equity Growth

- seeks to increase a brand’s value (high brand-name awareness; maintain a
favorable brand image, perceive that the brand is of high quality; increase loyalty to the
brand)
- a strong brand equity helps companies earn a price premium and increase
sales volume.

Brand equity – is the summation of all associations that consumer have with a brand –
including communication, product benefits, emotional benefits and experiential benefits.

*Product-Quality Leadership
- use price to signal high quality in an attempt to position the product as the
quality leader.

*Other Objectives
- create barriers to entry, temporarily create excitement for a new product, to
stabilize market, etc.

2. Marketing Mix Strategy

Objectives: Product
*Survival
Market Targeting *Current Profit
Maximization Pricing
*Market-Share
Market Positioning Leadership
*Brand Equity Growth Place
*Product-Quality

Promotion

Price must be coordinated with product design, distribution, and promotion decisions to
form a consistent and effective marketing program.

3. Costs
- Sets the floor for the price a company can charge for its product.
 - Price should cover its costs for producing, distributing, and promoting the
product; and it should be high enough to deliver a fair rate of return to
investors.

Effective low-cost producers achieve cost savings through efficiency rather than cutting
quality.

- Costs take two forms:

Fixed costs – costs that do not vary with production or sales level.
Variable costs – vary directly with the level of production.

4. Organizational Considerations
- Who sets the price?
Small companies: CEO or top management
Large companies: Divisional or product line managers
- Pricing negotiation is common in industrial settings where pricing
departments may be created.

b. External Factors Affecting Pricing Decisions

1. Market and Demand

- Sets the upper limit of prices (costs set the lower limits)
- Before setting prices, a marketer must understand the relationship
between price and demand for a product.

2. Cross-Selling and Upselling

- One of the basics of effective revenue management.
- Upselling and cross-selling to existing clients is critical if you want to sell
more and maker more money.

Cross selling – when the company promotes and sells other products to the
guests.

Upselling – occurs through training of sales or reservations employees to

continuously offer a higher-priced product, rather than settling for the lowest
price.

3. Consumer Perceptions of Price and Value

-