MKTG 2030 Chapter 6: Chapter 6 – Pricing Strategies

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11 Feb 2017
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Chapter 6 – Pricing Strategies
Price Is A KEY Marketing Decision Any Business Has To Make
Introduction
Price is the articulation of value that the customer exchanges for a product or service and
the experience that accompanies it
After purchase, it is one of the strongest references used by consumers to decide if they will
repurchase
It is part of the brand experience
White sock test --> the one used for tide --> wash socks that have been run over on the
soccer field
Dollar risk --> the higher dollar --> the more risk
Time risk --> the longer the time to understand and use the product --> the more the risk
Price is IMPORTANT
Reason 1: Price is your reward
Tells whether or not a business has succeeded in differentiating from competitors
Example: Lululemon --> doesn't use advertising --> relies on word of mouth
o Encourages employees to do yoga for 2 times a week
o Its priced at a premium but customers are willing to pay the high prices
Reason 2: Price and your overall marketing strategy are inextricable related
Marketing strategy and price are strongly correlated
Prices need to match the brand position
For example: Vlasic made jars of pickles --> was over-priced compared to Walmart -->
filed bankruptcy
Opposite example: Rolex charges a premium to make the premium brand position that it
wants to occupy in the marketplace
Reason 3: Price has the most impact on your profits
Variable Cost - cost that varies by "production" volume
Fixed Cost - the cost that has to be incurred, regardless of "production" volume
1% of improvement in price results in an 11% improvement in operating profits
Consumer Pricing Process
1. Problem Recognition
2. Information Search
3. Alternative Evaluation --> men shop by elimination,
4. Purchase
5. Post Purchase Evaluation
Price plays a role at every stage
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Why do firms set their prices too low?
Reason 1: They use a "seat-of-the-pants" approach to pricing
Use last year's price and add a percentage increase
Managers set an initial prices within a middle rang --> then make incremental adjustments
depending on whether the market demand is lower or higher than expected
Managers are slow to changing prices in response to market information
Reason 2: They blindly chase after market share
If you lower your prices, competitors will lower their prices --> engage in a price war - a
situation in an industry where competitors are trying to win by out-doing each other on
lowering prices
o Leads to putting the market in jeopardy
Can hurt your brand image - the brand identity as received in the marketplace --> the
strategist has no control over it
Major reason why managers lower prices --> want to gain a greater market share
o Price elasticity - the % change in volume for a given % change in price
Reason 3: They rely too much on costs to make pricing decisions
Cost-plus pricing - a pricing method where-by a profit margin is added to the cost of an
item to arrive at its final price. Opposite --> value based pricing - a pricing method that
takes into account customer perceptions of value, rather than the seller's cost.
Advantage: simplicity and ability to cover costs
Disadvantages: does not take into account the customer need or brand strategy
o Prices should be based on what customers are willing to pay
Pocket Price
Price determined by the manufacturer is not always the price you pay at retail to put it in
your pocket
Discounts, sales features, sales person concessions, varying retail margins all affect pocket
price
Two Approaches You Can Take to Making Pricing Decisions
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