Marketing Exam Review Chapter 15 Strategic Pricing Methods Cost Based Methods Determine the final price to charge by starting with the cost to produce the product Relevant Costs e g Fixed costs variable costs and overhead costs and profit are added This total amount is divided by the total expected demand to arrive at a cost plus price Ex Fixed Costs 200 000 Variable Costs 100 000 Demand 30 000 units 200 000 100 000 300 000 300 000 30 000 10 00 Cost plus price Cost based prices assume that the costs will not vary very much for different levels of production Competition Based Methods Value Based Methods Firms set their prices to reflect the way they want consumers to interpret their own prices relative to competitors Approaches to setting prices that focus on the overall value of the product offering as perceived by the consumer Consumers determine value by comparing the benefits they expect the product to deliver with the sacrifice they will have to make to acquire the product Improvement Value Method Represents an estimate of how much more or less consumers are willing to pay for a product relative to other comparable products Calculating the improvement value entails consumers calculating how much better or worse a product is based on weighted comparable dimensions All weighted factors must add to a total of 1 00 That weighted percentage is added or subtracted to the competitors price and set as a fair price for the new product Cost of Ownership Method Determines the total cost of owning the product over its useful life Consumers may be willing to pay more for a particular product because over its lifetime it will eventually cost less to own Pricing Strategies Everyday Low Pricing EDLP High Low Pricing Setting a price between the regular non sale price and the deep discounts of their competitors offer allows consumers to not spend time comparing to find the best deal when they know the EDLP is applied to every item Relies on the promotion of a product during which prices will temporarily be reduced to encourage purchases Affects 2 market segments the non price sensitive High Price consumer and the more price sensitive Low Price consumer Creative uses of a reference price or the price that buyers would be paying if the promotional price was not there allows the seller to stimulate the consumers evaluation process Price Quality Relationships Some consumers think that companies that use the EDLP strategy sell low quality goods High Low pricing sellers are perceived to sell better quality goods Consumers often view the reference price in a high low pricing strategy as the price associated with the quality of the good adding a feeling of legitimacy New Product Pricing Strategy Market Penetration Pricing Set the initial price low for the introduction of the new product service to build sales market share and profits quickly This acts as an incentive to purchase the product immediately The Experience Curve Effect is when the unit costs drops significantly due to the large volume of product sold This discourages competitors from joining the market because the profit margins appear relatively low Market Penetration Cont Firms must be able to handle the rapid rise in demand Penetration pricing should not be done in a market where segments of the market are willing to pay more for the product This is known as leaving money on the table Price Skimming Firms set the price of a new product high as it enters the market after much promotion and anticipation Innovators and early adopters are willing to pay a higher price to obtain a new product or service think Call of Duty or Iphones The product must be seen as breaking new ground in some way Pricing high to start signals a high quality product or service then skim the price down according to consumers sensitivity You can always lower a price from a high starting price but starting with a low price then increasing it will come with lots of consumer resistance For Price Skimming to work competitors must not be able to enter a market easily or competition between firms will cause prices to drop Drawbacks include relatively high unit costs associated with producing small volumes of products which means higher production costs less economy of sale Pricing Tactics Pricing Strategy vs Pricing Tactics Strategy Tactic Long term approach to setting prices in an integrative effort or across all of the firm s products based on the Five C s Company Objectives Costs Competition Customers Channel Competition Members Short term methods of setting prices to focus on specific components of the Five C s Represents short term responses to competitive threats Pricing Tactics Aimed at Consumers Markdowns Reductions retailers take on the initial selling price of the product or service that allow retailers to get rid of slow moving or obsolete merchandise Quantity Discounts for Consumers Consumers get a size discount for buying larger products More bang for your buck In turn these consumers are less likely to switch brands because consuming a larger product takes a longer time Offer a discount on the price of specific items when they re purchased Used to get customers to try new products encourage large purchases increase usage and protect market share against competition Coupons Rebates Manufacturer issues discount instead of the retailer and issues the refund as a portion of the purchase price to the buyer in the form of cash This allows manufacturers to show lower prices in stores if customers participate in the rebate 90 of customers never bother to redeem rebates Business to Business Pricing Tactics Seasonal Discounts An additional reduction offered as an incentive to retailers to order more merchandise in advance of the normal buying season Cash Discounts An additional reduction that reduces the invoice cost if the buyer pays the invoice prior to the end of the discount period Allowances Advertising Slotting allowances offered in return for specific behavior Advertising allowances are offered to retailers if they agree to feature the manufacturer s product in its advertising and promotional efforts Slotting allowances are offered to get new products into stores or obtain more or better shelf space Chapter 16 Marketing Channels and Supply Chain Management Marketing Channels Allow companies to get their products in the appropriate outlets in the right quantities to meet customer demands To anticipate this demand advertising and promotions must be coordinated
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