PRICING
Often the only marketing mix variable allowing for immediate competitive response
Important part of product positioning
Long term effects of pricing decisions—your decisions may come back to haunt you!
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Price - Basic Marketing - Lecture Slides, Slides of Marketing
Its lecture of Basic marketing course. Main points from the lecture are Price, Understanding, Constraints Faced, Signaling, Effects of Product, Respective Interests, Manufacturers and Retailers, Product Pricing, Disadvantages, Economics
Typology: Slides
2011/2012
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PRICING
Often the only marketing mix variable allowing for immediate competitive response Important part of product positioning Long term effects of pricing decisions—your decisions may come back to haunt you!
Learning Objectives
- Understanding
- Price choices faced by managers,
the constraints faced on these
choices (e.g., legal), and the
consequences of these choices
- “Signaling” effects of product
prices
- The respective interests of
manufacturers and retailers in
product pricing
- Appreciating the advantages and
disadvantages of different pricing strategies
Views of Consumers and Price
- Economics Response
- Assumed to have perfect information about - Quality of all brands - Prices of each brand at all locations
- Elasticity: A “down- sloping” demand curve means that a higher quantity will be demanded when the price is reduced - Marketing - Consumer knowledge of product quality and prices is imperfect - Due to imperfect information, a higher price may sometimes be used by consumers to infer greater quality (Research suggests that actual product quality as rated by Consumer Reports accounts for about 25% of product price differences among brands)
Supply, Demand, and Quantities
Supplied and Demanded
Illustration: Food Prices
FARMER
RETAILER
WHOLESALER
MANUFACTURER
CONSUMER
SUPPLY
DEMAND
DEMAND
SUPPLY
SUPPLY
DEMAND
DEMAND
OTHER FARMERS IMPORTS^ SUBSTITUTES
Price Discrimination
- Explicit
- Only some customers
are eligible for special
pricing—e.g.,
- Student discounts on software
- Senior citizen discounts
- Geographic: Only customers in the 900- 935 zip code areas are eligible for discount Disneyland Admission - Implicit - No outright rule, but
discounted deal is
unattractive to some
customers
- Airlines: Saturday night stay- over or advance purchase requirement
- Daily special meal—one cheaper meal but no choice
- Periodic discounting (products going on and off sale)
Skimming Pricing
0
50
100
150
200
250
300
350
0 200 400 600 800 1000 1200
P
Q1 Q
P
P
Q
The product is introduced at a high price, P 1. Very few customers—only the least price sensitive ones—buy at this price. When the price is later lowered to P 2 and then to P 3 , other customers who value the product less will start to buy. The least price sensitive customers pay a premium for quick access to the new product.
Penetration Pricing
0
50
100
150
200
250
300
350
0 200 400 600 800 1000 1200
P
Q
The product is immediately introduced at a relatively low price. The seller sacrifices the higher margins that would have resulted from selling to some customers at a higher price, but, in return gains immediate sales. Fewer competitors are attracted into the market since the apparent profits are not as high. Because of economies of scale and experience curves—the tendency of production costs to decline with the cumulative production— costs are reduced.
Legal Issues
- Banned by Federal law:
- Discrimination in prices
paid by firms which
compete against each
other unless supported by
evidence of cost savings
- OK to charge restaurants more than grocery stores
- Can only charge Wal-Mart less than Joe’s Supermarket if volume savings can be proven —and the price difference must be no greater than the actual provable cost savings. - Banned by some state laws: - Gender discrimination (e.g., charging more for dry cleaning women’s clothes than men’s clothes) - Discrimination between consumers in general - Senior citizen discounts are explicitly permitted in California
More Legal Issues
- Federal and State bans
on:
- Collusion (coordinating or even discussing prices with competitors)
- Predation (offering temporary prices below cost of production to drive competitors out of business and then raising prices) - In general, fully absorbed average cost must be used— cannot use marginal cost
- Using monopoly power in one market to “subsidize” new market
Other Manufacturers’ “Suggested” Retail Prices
(MSRPs)
- U.S. manufacturers often put an exorbitantly high “suggested” price on a product so that even full service retailers can look good by selling below the MSRP
- In some EU countries, selling below the MSRP may not be legal—manufacturers must therefore be careful not to “recommend” excessive prices
REMINDER
INCOME
WILLINGNESS
TO SPEND!
Introductory Effects
- In an experiment, laundry detergent was introduced at $0.49 in one condition and $0.79 in another.
- After 8 weeks, price was raised to $0.79 for low price intro condition.
- There were higher cumulative sales in high price intro.
0
200
400
600
800
1000
1200
(^816) Weeks
Units sold
Low price intro High price intro
Consumer Price Awareness
- A survey revealed of consumers
who had just selected a product suggested:
- Avg. time spent before departing from product area: 12 seconds
- Avg. no. of products inspected: 1.2; only 21.6% claimed to check price of non-chosen brand
- 55.6% could state price of just chosen product within 5%