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BUS 343 (122)
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Chapter 9

Marketing: Real People, Real Decision (3rd Edition): Chapter 9

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Department
Business Administration
Course
BUS 343
Professor
Jason Ho
Semester
Summer

Description
Chapter 9: Pricing Strategy Yes, But what does it cost Key pricing strategy decisions Price objective Pricing Policy/Strategies Price Points & Tactics Implementation: Terms & Conditions Legal Considerations Monetary and Non-Monetary Prices Price the value that customers give up, or exchange to obtain a desired product Marketing is the process that creates exchanges of things of value Bartering the practice of exchanging a good or service for another good or service of like value Consumers take into account other economic costs such as operating costs, switching costs, and opportunity costs o Operating costs costs involved in using a product o Switching costs costs involved in moving from one brand to another o Opportunity cost the value of something that is given up to obtain something else Personal investment consumers make in buying and using product is also a cost Consumers also experiences psychological costs such as stress, hassle, cognitive, difficulty The Importance of Pricing Decisions Pricing is probably the least understood and least appreciated element of the marketing mix Net value received by the customer in an exchange (benefits minus costs) versus the net value (profit) received by the firm Good pricing decisions are critical to a firms success Purchasing agents for firms often put a high priority on getting the best price o Second to quality Developing Pricing Objectives Pricing objectives must support the broader objectives of the firm Profit Objectives Profit objectives pricing products with a focus on a target level of profit growth or a desired net profit margin Three main profit objectives o Maximizing profits o Achieving a target level of profit growth o Achieving a desired net profit margin Fad products can expect a rather short market life o Charge high price to recover cost and make profit while the product is still a fad Sales or Market Share Objectives www.notesolution.com Sales or market share objective pricing products to maximize or to attain a desired sales or market share If obviously competitive advantage, matching price with other firms might already be enough Competitive Effect Objectives Competitive effect objective pricing that is intended to have an effect on the marketing efforts of the competition Some firms a firm deliberately seeks to pre-empt or reduce the effectiveness of one or more competitors Price stability is another competitive effect objective Customer Satisfaction Objectives Customer satisfaction (and retention) pricing that is intended to maximize customer satisfaction and retention Firms that believe focusing on short term profits will lose customer long term Image Enhancement (Positioning) Objectives Image enhancement (or positioning) objectives pricing intended to establish a desired image or positioning to prospective customers Price is often an important means to communicating not only quality but also image to prospective customers High price can communicate high quality and wealthy product Low price can communicate a different image such as good qua.ity product that is reasonably priced Flexibility of Price Objectives Prices objectives need to be tailored to different geographic areas and time periods Marketing conditions can change during the year Price objectives are only one part of price planning, before any prices can e set, marketers must understand the alternative pricing strategies available to achieve those objective Pricing Strategies Policies Pricing today has more of the continuous decisions-making character of a chess game o Organization must think two or three moves ahead and no pricing decisions is set in stone Price reductions can discourage new competitors or at least sabotage competitors product introductions Marketers whose responsibility it is to develop pricing strategies will consider a number of alternative strategies and try to anticipate the outcomes Pricing Strategies to Achieve Profit Objectives Three main sets of strategies are based on cost, demand, and experience Cost-Based Pricing Strategies Cost based strategies are typically associated with a target profit or return objectives Simple to calculate and are relatively safe www.notesolution.com Ensure that price will cover the costs the company incurs in producing and marketing the product Do not consider factors such as nature of the target market, demand, competition, the product life cycle, and the products image But sometimes it is hard to allocate cost Cost-plus Pricing Cost plus pricing a method of setting prices in which the seller totals all the until costs for the product and then adds the desired profit per unit Users need only estimate the unit cost and add the mark up Marketers usually calculate either a mark-up on cost or a mark-up on selling price Calculate the price by adding a predetermined percentage to the cost Price-Floor Pricing Price floor pricing a method for calculating price in which, o maintain full plan operating capacity, a portion of a firms output maybe sold at a price that covers only marginal costs of product o Sometimes used when the state of the economy or other temporary market conditions make it impossible or a firm to sell enough units Fixed costs costs of production that do not change with the number of units produced Variable costs the costs of production (raw and processed materials, parts, and labour) that are tied to, and vary depending on, the number of units produced Selling something at a lower price may cannibalize full price sales and if the lower price is offered to some retailers and not others, it might anger those not included and undermine customer loyalty Demand-Based Pricing Demand-based pricing a price setting method based on estimates of demand at different prices To use pricing strategies based on demand, firms must research demand Demand curve a plot of the quantity of a product hat customers will buy in a market during a period of time at various prices if all other factors remain the same Law of demand if prices decrease, customers will buy more For prestige products price increase customer will buy more Strength of demand based pricing strategies is that their use assures a firm that it will be able to sell what it products at the determined price Major disadvantage is the difficulty than on the sellers costs Four specific demand-based pricing strategies are: o Target cost pricing, yield management pricing, variable (custom) pricing and skimming pricing www.notesolution.com Target Cost Pricing Target costing a process in which firms identify the quality and functionality needed to satisfy customers and what price they are willing to pay before the product is designed; the product is manufactured only if the firm can control costs to meet the required price Firms use marketing research to identify the quality and functionality needed to satisfy attractive market segments and what price they are willing to pay before the product is designed Target costing is practiced more because competitor firms can bring me too products to market quickly Success is tied to designing costs out of a product Yield Management Pricing Yield-management pricing a practice of charging different prices to different customers to manage capacity while maximizing revenues o Firms can charge different prices to different customers to manage capacity while maximizing revenues Goal of yield management pricing is to accurately predict the proportion of customers who fail into each category Strategy similar to price discrimination strategy where different segments are targeted for different pricing levels Variable Pricing a flexible pricing strategy that reflects what individual customers are willing to pay o Common in business to business marketing context where prices are typically negotiated in new buy or modified re-buy situations Considered a customer satisfaction based strategy as it also ensures that customers get the best deal they are able to negotiate Skimming Pricing Setting a skimming price for a new product o Charging a very high, premium price for a new product If a product is highly desirable and offers unique benefits, and early adopters are not price sensitive during the introductory stage of the product life cycle In order for skimming price to be successful, there must be little chance that new competitors can enter quickly Skimming pricing strategy is most successful when the market consist of several customer segments with different levels of price sensitivity o Must be substantial number of initial product customers who have very low price sensitivity Experiencing-Based Pricing Strategies Experimental pricing a strategy of experimenti
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