Pricing in the Marketing Mix

Effects of Price of Good (A)

• Quantity Demanded for “own” product (A)• Demand for Substitute (B) (+)• Demand for Complement (C) (-)

– In use or in purchase

• Cost structure (of A, B or C) (+/-)• Image of the product line (A1, A2, …) (+/-)• Image of the company (+/-)• Potential for cannibalization (+/-)• Marginal Analysis Critical

Behavioral Responses to Interactions

• Loss Leaders (use price of one product to sell another product) – Frequent Purchase– Price Sensitive

• Product Line Cover (top of the line enhances image of the second in line)

• Marginal Analysis (upgrade cost)• Adjust marginal revenue/contribution

margin in analysis

Behavioral Responses to Interactions (2)

• Product selection adjustments– High end priced higher– Low end priced lower

• Versioning (complements over time)

• Good vs service

• Product Positioning (price and product for niche)

• Don’t overestimate price sensitivity

Effects on Pricing of Interrelatedness

• Price higher if substitute of another product of yours (CM = CMA + CMB * interaction)

• Price lower if complement of another product of yours (CM = CMA - CMB * interaction)

• Measure Interrelationship, if possible• Segmentation Fences affect interrelatedness• Product prices should account for future service

revenue (or cost)• Pricing responsibility should not be too

fragmented• Optimal price rises with CM of substitute

Pricing and Promotion

• Advertising increases price sensitivity– Cost advantage, is good– Increases gain or loss from Price Change

• Short run response includes option of timing• Advertising more effective with low price

• Unique features must be sold• Penetration good with commoditiesMarginal analysis with advertising budget

Δ Advert / CM

Price as promotion

• Intro– Trial sizes– Leases– Coupons (cost/redemption rates)– Specially marked packages– Rebates (size, less fraud, cheaper, marketing

research)– Trade discounts

• Keys– Don’t affect reference value– Decrease cost to consumer– Limit discount to first time buyers

Price as promotion (2)

• Defensive dealing– May be costly (decrease P to all to defend a

few)– Must neutralize competitive thrust– High CM, deal until response– Frequent dealing affects reference price– Advertising may be more effective

• Trade dealing– Uses distribution network