Chapter 13 & 14 Class Notes

Content List

Nature of Pricing

Price is the value placed on what is exchanged. Something of value is exchanged for satisfaction and utility, includes tangible (functional) and intangible (prestige) factors. Can be a barter.

Buyers must determine if the utility gained from the exchange is worth the buying power that must be sacrificed. Price represents the value of a good/service among potential purchases and for ensuring competition among sellers in an open market economy.

Marketers need to understand the value consumers derive from a product and use this as a basis for pricing a product--must do this if we are customer oriented.

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Importance of Price to the Marketer

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Price and Non Price Competition

Price Competition

Match, beat the price of the competition. To compete effectively, need to be the lowest cost producer.
Must be willing and able to change the price frequently. Need to respond quickly and aggressively.
Competitors can also respond quickly to your initiatives.
Customers adopt brand switching to use the lowest priced brand.
Sellers move along the demand curve by raising and lowering prices.
Demand Curve

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Non-Price Competition

Emphasize product features, service, quality etc. Can build customer loyalty towards the brand. Must be able to distinguish brand through unique product features.
Customer must be able to perceive the differences in brands and view them as desirable.
Should be difficult (impossible) for competitors to emulate the differences (PATENTS)
Must promote the distinguishing features to create customer awareness.
Price differences must be offset by the perceived benefits.
Sellers shift the demand curve out to the right by stressing distinctive attributes (consumers must perceive and desire particular attributes).

Handout...Bristish Airways

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Handout...Mobil Bets Drivers Pick Cappucino...

Mobil is trying to distinguish its offering from other gas marketers, in order that it doesn't have to compete on price alone, which is the traditional way gas has been marketed. It identified 4 types of consumers that purchase gas in different ways etc.
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Factors Affecting Pricing Decisions

There is considerable uncertainty regarding the reaction to price on the part of buyers, channel members, competitors etc.
It is also important in market planning, analysis and sales forecasting.
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Select an approximate price level

Demand Oriented Pricing:

Determined by the demand for the product.
Determine the demand first,
calculate the mark up needed for each channel member,
then determine how much is available (cost ceiling) to produce the product.
Need to estimate the amount of products demanded at each price level.

Demand - Minus pricing--determine final selling price and work backwards to compute costs. Used by firms that sell directly to consumers. Price decisions revolve around what people will pay.
Determine the final selling price, mark-up required, then maximum acceptable/unit cost for production or buying a product.

Range of acceptable prices, used when firm believes that price is key factor in consumer decision making process. Price ceiling is the maximum the consumers will pay for a product. Need to understand the elasticity of demand.

Use Yield Management Pricing-right mix price-quantity to generate highest revenue--airlines. Price manages demand!

Types of policies:

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Cost oriented pricing:

$ amount or % added to cost. Need to know the desired margins etc. Easy to administer.
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Competitive Oriented Pricing:

Considers competitors prices primarily. Especially with products that are homogeneous.
Can chose to be below, at or above competitors prices.
Better position for estimating pricing if marketers know what competitors are charging.
IE employ competitive shopping, purchase pricing, call up.
Sometimes very difficult to determine, esp. in the resellers market.
How will competitors respond to an adjustment in price.
What is the market structure?
Oligopoly--Marlboro's Black Monday
Perfect competition--buyers will only pay the market determined price.
Is the competitive environment Market controlled, Company controlled or Government controlled price environment?
Policies consistent w/ competition oriented: Return to Content List

Selecting a Price level in today's marketplace:

Price resistance from consumers.
Age of disinflation due to: Therefore need to rethink all aspects of business.
Price has been restored as the economic arbiter:
How the marketplace truly values goods and services
No cloak of inflation to disguise mgt. decision errors
"When you have inflation, it covers alot of sins."


"Management challenge of the '90s is to reduce costs and increase perceived value of the product"

Cannot let the internal processes determine price, price MUST determine process.

Traditional view of pricing = add up costs, overruns and acceptable profit margin.
Now...set target price (what the customer is willing to pay), determine acceptable level of profit, intermediary costs, then determine allowable costs of production.
"Back into price from the customers perspective"

Must accelerate product development, since costs and demand patterns will shift over time.
Cars' development cycle was 5-6 yrs, now less than 3 = Neon.

Compaq "Design to price", built computers costing 60% less. Price target from marketing, profit margin goal from management, team then determines what the costs must be. Prolinea and Contura Notebook were developed in less than 8 months.


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Determine A Specific Price

A pricing method will yield a certain price, that price will likely need refining.

One-Price vs. Flexible Pricing Policy

Price Discounting (off list prices)