BUS 343 Chapter Notes - Chapter 10: Bath & Body Works, Predatory Pricing, Dominate

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Published on 28 Dec 2016
School
Simon Fraser University
Department
Business Administration
Course
BUS 343
Professor
BUS 343 - Chapter 10 Notes: Pricing
- Reducing prices unnecessarily can lead to lost profits and damaging price wars
- It can cheapen a brand
- Better to persuade customers that paying a higher price for the company’s brand is
justified by the greater value they gain
WHAT IS A PRICE
Price - the amount of money charged for a product or service, or the sum of the values that
customers exchange for the benefits of having or using the product/service
- It’s the only element in the marketing mix that produces revenue; other elements
represent costs
- Also it can be changed quickly; is more flexible
MAJOR PRICING STRATEGIES
- Customer perceptions of the product’s value sets the ceiling for prices (how high it can
go)
- Product costs set the floor prices (the minimum you must charge to not make a loss)
- 3 major pricing strategies: customer value-based pricing, cost-based pricing, competition-
based pricing
Customer Value-Based Pricing
Customer Value-Based Pricing - setting price based on buyers’ perceptions of value rather than
on the seller’s cost
- Price is considered before the marketing program is set
- Analyze customer needs and value perceptions, set price to match perceived value,
determine costs that can be incurred, design product to deliver value at target price
- However, it’s hard to measure value; they are subjective
Good-Value Pricing - offering just the right combination of quality and good service at a
fair price
- Introducing less expensive versions of established brand-name products
- Redesigning existing brands to offer more quality for the same price
- Or provide less value for lower price
- Everyday low pricing (EDLP) - ex costco, walmart
- High-low pricing - charging higher prices on everyday basis but running frequent
promotions to lower prices temporarily
Value-Added Pricing - attaching value-added features and services to differentiate a
company’s offers and charging higher prices
- More for more
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Cost Based Pricing
Cost-based pricing - setting prices based on the costs for producing, distributing, and selling the
product plus a fair rate of return for effort and risk
- Companies with lower costs can set lower prices that result in smaller margins but greater
sales and profits
- Or other companies pay higher costs so they can claim higher prices and margins
Types of Costs
Fixed Costs (overhead) - costs that do not vary with production or sales level
Variable Costs - costs that vary directly with the level of production
Total Costs - the sum of fixed and variable costs together for any given level of
production
Cost-Plus Pricing
Cost-Plus Pricing (markup pricing) - adding a standard markup to the cost of the
product
- Doesn’t really make sense because it ignores consumer demand and competitor
prices; not likely to lead to the best price
- But marking up prices is common because: Sellers are more certain about costs
than about demand and prices tend to be similar, minimizing price competition
Break-even pricing - setting price to break even on the costs of making and marketing a
product or setting price to make a target return
- Uses a break even chart, which shows total cost and revenue expected at different
sales volume levels
- Slope of total revenue curve reflects the price
- The higher the price, the lower the manufacturer’s break-even point will be
- Fails to consider customer value and relationship between price and demand
- Break-even analysis can help the company determine minimum prices needed to
cover costs and profits, it does not take into account price-demand relationship
Competition-Based Pricing
Competition-Based Pricing - setting prices based on competitor’s strategies, prices, costs, and
market offerings
- How does the market offering compare to competitors’ offerings in terms of customer
value?
- How strong are current competitors and what are their current pricing strategies?
- Be certain to give customers superior value for the price
- Ex. Pete’s independent grocer in Nova Scotia vs. Sobeys or superstore
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OTHER INTERNAL/EXTERNAL CONSIDERATIONS AFFECTING PRICING
DECISIONS
Overall Marketing Strategy, Objectives, and Mix
- Pricing strategy is largely determined by decisions on brand positioning
- Ex. positioning the product on high-performance quality will mean that sellers must
charge a higher price to cover higher costs
- Target Costing - pricing that starts with an ideal selling price, and then targets costs that
will ensure that the price is met
- Other companies de-emphasize price and use other marketing mix tools to create non-
price positions (Ex. Bang&Olufsen electronics)
Organizational Considerations
- In small companies and industrial markets, top management set pricing objectives and
policies
- In large companies, divisional or product line managers do pricing
- Pricing departments in industries like airlines, aerospace, steel, railroads
- Others who influence pricing - sales managers, production managers, finance managers,
and accountants
The Market and Demand
Pricing in Different Types of Markets:
- Pure competition - many buyers and sellers trading uniform commodities; no
single buyer/seller has much effect on market price; not much time spent on
marketing strategy, as advertising, development plays little role
- Monopolistic competition - many buyers and sellers who trade over a range of
prices because of product differentiation; use advertising and branding to set
themselves apart
- Oligopolistic Competition - few sellers who are highly sensitive to each others
pricing and marketing strategies; responsive to competitors
- Pure Monopoly - one seller; could be government, private regulated monopoly,
or private non-regulated
Analyzing the price-demand relationship
Demand Curve - a curve that shows the number of units the market will buy in a given
time period, at different prices that might be charged
- Demand and price are inversely related
Price Elasticity of Demand
Price Elasticity - a measure of the sensitivity of demand to changes in price
- Elastic: if demand changes greatly with a small change in price
- Inelastic: if demand hardly changes with small change in price
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Document Summary

Reducing prices unnecessarily can lead to lost profits and damaging price wars. Better to persuade customers that paying a higher price for the company"s brand is. It can cheapen a brand justified by the greater value they gain. Price - the amount of money charged for a product or service, or the sum of the values that customers exchange for the benefits of having or using the product/service. It"s the only element in the marketing mix that produces revenue; other elements represent costs. Also it can be changed quickly; is more flexible. Customer perceptions of the product"s value sets the ceiling for prices (how high it can go) Product costs set the floor prices (the minimum you must charge to not make a loss) 3 major pricing strategies: customer value-based pricing, cost-based pricing, competition- based pricing. Customer value-based pricing - setting price based on buyers" perceptions of value rather than on the seller"s cost.

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