Principles Principles of of

MarketingMarketing

Lecture-8Lecture-8

Today’s Today’s TopicsTopics

PricingPricing

Meaning of PriceMeaning of PricePricePrice

The amount of money or items with The amount of money or items with utility needed to acquire a product.utility needed to acquire a product. Utility is an attribute that has the Utility is an attribute that has the potential to satisfy wants.potential to satisfy wants.

BarterBarter Exchanging goods or services for Exchanging goods or services for other productsother products

Meaning of PriceMeaning of Price

Desk PurchaseDesk Purchase You : $375You : $375 Mr. Wallana : $175Mr. Wallana : $175

So who was better off?So who was better off? Your deskYour desk

Has a 1 yr warrantyHas a 1 yr warranty Was delivered to your home Was delivered to your home Has a weather proof polish/furnishHas a weather proof polish/furnish You can pay in installments?You can pay in installments?

So who is better off now?So who is better off now?

Meaning of PriceMeaning of Price This example indicates that:This example indicates that:

Price depends on determining Price depends on determining exactly what is being sold.exactly what is being sold. A seller usually is pricing a A seller usually is pricing a combination ofcombination of

the specific good or servicethe specific good or service supplementary servicessupplementary services the want-satisfying benefits provided by the want-satisfying benefits provided by the productthe product

So what is the price ofSo what is the price of Your first carYour first car Your college degreeYour college degree etc.etc.

Importance of PriceImportance of Price

Price is significant inPrice is significant in our economyour economy to an individual firmto an individual firm in the consumer’s mind. in the consumer’s mind.

In The EconomyIn The Economy

Price influences wages, rent, interest, Price influences wages, rent, interest, and profits.and profits.

Price influences the amounts paid for Price influences the amounts paid for productionproduction labor, land, capital, and entrepreneurship.labor, land, capital, and entrepreneurship.

High wages attract good labor, high High wages attract good labor, high interest rates attract capital, and so on.interest rates attract capital, and so on.

In other words price determines what In other words price determines what will be produced (supply) and who will will be produced (supply) and who will get the goods and services produced get the goods and services produced (demand).(demand).

In the Individual FirmIn the Individual Firm Price of a product determines its demandPrice of a product determines its demand Price affects a firm’s competitive position Price affects a firm’s competitive position

and its market shareand its market share Price affects a company’s revenues and net Price affects a company’s revenues and net

profits.profits. What is revenue?What is revenue?

Factors that limit pricing in a marketing Factors that limit pricing in a marketing plan: plan: Differentiated product featuresDifferentiated product features Favorite brandFavorite brand High qualityHigh quality ConvenienceConvenience or some combination of these and other factors or some combination of these and other factors

may be more important to consumers than pricemay be more important to consumers than price

In The Consumer’s MindIn The Consumer’s Mind Consumer perceive quality with Consumer perceive quality with

price.price. Will you buy a CD Player it if it is Will you buy a CD Player it if it is

priced very low?priced very low? Will you only select a restaurant for a Will you only select a restaurant for a

special dinner because you heard it special dinner because you heard it was expensive?was expensive?

Shoppers make price-quality Shoppers make price-quality judgment when they lack other judgment when they lack other information about product quality.information about product quality.

Consumer’s quality perceptions can Consumer’s quality perceptions can also be influenced by factor such as also be influenced by factor such as store reputation and advertising.store reputation and advertising.

In The Consumer’s MindIn The Consumer’s Mind ValueValue

The ratio of perceived benefits to The ratio of perceived benefits to price and any other incurred costs. price and any other incurred costs.

Incurred costsIncurred costs: time associated : time associated with shopping for the product, with shopping for the product, time and gasoline used traveling to time and gasoline used traveling to the place of purchase, and time the place of purchase, and time and effort assembling the productand effort assembling the product

Value doesn’t imply Value doesn’t imply inexpensiveness. It indicates inexpensiveness. It indicates amounts of potential benefits.amounts of potential benefits.

Pricing ObjectivesPricing Objectives Pricing objectives must be compatible Pricing objectives must be compatible

with the overall goals set by the with the overall goals set by the company.company.

Example: Company’s goal is to Example: Company’s goal is to increase ROR from 15% to 20% within increase ROR from 15% to 20% within 3 years. So it would not be logical, in 3 years. So it would not be logical, in this case, to adopt the pricing goal of this case, to adopt the pricing goal of stabilizing price.stabilizing price.

Profit-oriented GoalsProfit-oriented Goals To achieve a target returnTo achieve a target return To maximize profitTo maximize profit

Sales-oriented GoalsSales-oriented Goals To increase sales volumeTo increase sales volume To maintain or increase market shareTo maintain or increase market share

Status quo-oriented Status quo-oriented GoalsGoals To stabilize pricesTo stabilize prices To meet competitionTo meet competition

Pricing GoalsPricing Goals

Profit-Oriented GoalsProfit-Oriented Goals

Profit goalsProfit goals short or long run.short or long run. A company may select one of two A company may select one of two

profit oriented goals for its pricing profit oriented goals for its pricing policy:policy:

1.1. Achieve a Target ReturnAchieve a Target Return

2.2. Maximize ProfitsMaximize Profits

Achieve a Target ReturnAchieve a Target Return

A firm may price its product to achieve a A firm may price its product to achieve a target returntarget return

Many retailers and wholesalers use a Many retailers and wholesalers use a target return on sales as a pricing target return on sales as a pricing objective for short periods such as a year objective for short periods such as a year or a fashion season.or a fashion season. add an amount to the cost of the product.add an amount to the cost of the product. add an amount to the cost of the product, add an amount to the cost of the product,

called a markup, to cover anticipated called a markup, to cover anticipated operating expenses and provide a desired operating expenses and provide a desired profit for the period.profit for the period.

Maximize ProfitsMaximize Profits

Most popular goal.Most popular goal. The trouble with this goal is that to The trouble with this goal is that to

some people, profit maximization some people, profit maximization has an ugly connotation, suggesting has an ugly connotation, suggesting profiteering, high prices, and profiteering, high prices, and monopoly.monopoly.

Sales-Oriented GoalsSales-Oriented Goals

In some companies, management’s In some companies, management’s pricing is focused on sales volume.pricing is focused on sales volume. The pricing goal may be The pricing goal may be

increase sales volumeincrease sales volume maintain or increase the firm’s market maintain or increase the firm’s market share.share.

Increase Sales VolumeIncrease Sales Volume

Increasing sales volumeIncreasing sales volume adopted to achieve rapid growthadopted to achieve rapid growth discourage potential competitors from discourage potential competitors from

entering a market.entering a market. Usually stated as a percentage Usually stated as a percentage

increase in sales volume over some increase in sales volume over some period, 1 year or 3 years.period, 1 year or 3 years.

Seek higher sales volume bySeek higher sales volume by discountingdiscounting aggressive pricing strategy.aggressive pricing strategy.

Maintain or increase Maintain or increase Market ShareMarket Share

Pricing objective of both large and Pricing objective of both large and small firms.small firms.

Why is market share pursued so Why is market share pursued so vigorously?vigorously? Most industries are not growing muchMost industries are not growing much Most industries have excess production Most industries have excess production

capacity.capacity.

Status Quo GoalsStatus Quo Goals

Two closely related least aggressive Two closely related least aggressive goalsgoals stabilizing pricesstabilizing prices meeting competitionmeeting competition

These goals simply maintain the These goals simply maintain the firm’s current situation—that is, the firm’s current situation—that is, the status quo.status quo.

With either of these goals, a firm With either of these goals, a firm seeks to avoid price competition.seeks to avoid price competition.

Factors Influencing Price Factors Influencing Price DeterminationDetermination

First set the objective of pricingFirst set the objective of pricing Then move to the heart of price Then move to the heart of price

managementmanagement determining the base price of a product.determining the base price of a product.

Base price, or list priceBase price, or list price refers to the price of one unit of product refers to the price of one unit of product

at its point of production or resale.at its point of production or resale. This price does not reflect discounts or This price does not reflect discounts or

freight charges.freight charges.

Estimated DemandEstimated Demand In pricing, a company must estimate the total In pricing, a company must estimate the total

demand for the product. demand for the product. Easier to do for established product than for Easier to do for established product than for

new.new. The two steps in estimating demand areThe two steps in estimating demand are

Determine whether there is a price the market Determine whether there is a price the market expectsexpects

Estimate what the sales volume might be at Estimate what the sales volume might be at different prices.different prices.

The The expected priceexpected price price at which customers consciously or price at which customers consciously or

unconsciously value a productunconsciously value a product what they think the product is worthwhat they think the product is worth Expressed as a range of prices rather than as a Expressed as a range of prices rather than as a

specific amount.specific amount.

Inverse DemandInverse Demand The situation when increasing price The situation when increasing price

increase sales.increase sales. This situation is called inverse This situation is called inverse

demanddemand Inverse demand usually existsInverse demand usually exists

within a given price rangewithin a given price range at low price levels. at low price levels.

price elasticity of demandprice elasticity of demand the responsiveness of quantity the responsiveness of quantity

demanded to price changes.demanded to price changes.

Competitive ReactionsCompetitive Reactions Competition greatly influences base price.Competition greatly influences base price. A new product is distinctive until the arrival of A new product is distinctive until the arrival of

competition.competition. The threat of competition is greatest whenThe threat of competition is greatest when

No barriers to entryNo barriers to entry High profit marginsHigh profit margins

Competition can come from these sources:Competition can come from these sources: Directly similar productsDirectly similar products

Nike versus Adidas or Reebok running shoes.Nike versus Adidas or Reebok running shoes. Available substitutesAvailable substitutes

PIA air transport versus Daewoo Bus travel versus PIA air transport versus Daewoo Bus travel versus Teezgaam Rail travel versus Hertz rent-a-carTeezgaam Rail travel versus Hertz rent-a-car

Unrelated products seeking the same consumer Unrelated products seeking the same consumer dollardollar

Movie theatres versus Disneyland versus Broadway Movie theatres versus Disneyland versus Broadway versus World Cup match versus Weekend Camping versus World Cup match versus Weekend Camping trip to Swat.trip to Swat.

Other Marketing-Mix Other Marketing-Mix ElementsElements

A product’s base price is influenced A product’s base price is influenced considerably by the other considerably by the other ingredients in the marketing mix.ingredients in the marketing mix. ProductProduct PlacePlace PromotionPromotion

ProductProduct Price is affected by whether it isPrice is affected by whether it is

new itemnew item established itemestablished item

The price of a product is also The price of a product is also influenced by whether influenced by whether The product will be leased or The product will be leased or

purchasedpurchased the product can be returned to the the product can be returned to the

sellerseller a trade-in is involved. a trade-in is involved.

Trade-inTrade-in

Distribution ChannelsDistribution Channels

Price will be influenced by the channels and Price will be influenced by the channels and types of middlemen selectedtypes of middlemen selected

A firm selling both through wholesalers and A firm selling both through wholesalers and directly to retailers often sets a different directly to retailers often sets a different factory price for these two classes of factory price for these two classes of customers.customers.

The price to wholesalers is lower because The price to wholesalers is lower because they perform services that the producer they perform services that the producer would have to perform—such as providing would have to perform—such as providing storage, granting credit to retailers, and storage, granting credit to retailers, and selling to small retailers.selling to small retailers.

PromotionPromotion

The extent of promotion ads to pricing. The extent of promotion ads to pricing. If major promotional responsibility is If major promotional responsibility is

placed on retailers, they will be placed on retailers, they will be charged a lower pricecharged a lower price

If the producer advertises it the charge If the producer advertises it the charge higher prices from retailers.higher prices from retailers.

Cost of a ProductCost of a Product

Pricing of a product should consider Pricing of a product should consider its cost. its cost.

A product’s total unit cost is made A product’s total unit cost is made up of several types of costs, each up of several types of costs, each reacting differently to changes in the reacting differently to changes in the quantity produced. quantity produced.

Total cost of a product = TFC + TVCTotal cost of a product = TFC + TVC

The The fixed costfixed cost declines as output declines as output increases, because the total of the increases, because the total of the fixed costs is spread over an fixed costs is spread over an increasing number of units.increasing number of units.

The The variable costvariable cost starts high because starts high because average variable costs for the firs few average variable costs for the firs few units of output are high.units of output are high. Variable costs per unit then decline as Variable costs per unit then decline as

the company realizes efficiencies in the company realizes efficiencies in production.production.

Eventually the average variable cost Eventually the average variable cost curve reaches its lowest point, reflecting curve reaches its lowest point, reflecting optimum output with respect to variable optimum output with respect to variable costs.costs.

Break-Even AnalysisBreak-Even Analysis One way to consider both market demand and One way to consider both market demand and

costs in price determination is to use break-even costs in price determination is to use break-even analysis to calculate break-even points.analysis to calculate break-even points.

A break-even point is that quantity of output at A break-even point is that quantity of output at which total revenue equals total cost, assuming which total revenue equals total cost, assuming a certain selling price. a certain selling price.

There is a different break-even point for each There is a different break-even point for each different selling price. Sales exceeding the different selling price. Sales exceeding the break-even point result in a profit on each break-even point result in a profit on each additional unit.additional unit.

The higher sales are above the break-even point, The higher sales are above the break-even point, the higher will be the total and unit profits.the higher will be the total and unit profits.

Sales below the break-even point result in a loss Sales below the break-even point result in a loss to the seller.to the seller.

Prices Based on Marginal Prices Based on Marginal AnalysisAnalysis

Marginal analysisMarginal analysis takes into account both demand and costs takes into account both demand and costs

to determine the best price for profit to determine the best price for profit maximization.maximization.

Firms use prices based on marginal Firms use prices based on marginal analysis to compare prices determined by analysis to compare prices determined by different means.different means.

At each market price a certain quantity of the At each market price a certain quantity of the product—in this example, a 2-hour rental of a product—in this example, a 2-hour rental of a limousine on a weekend night—will be demanded. limousine on a weekend night—will be demanded. Marginal revenue is simply the amount of additional Marginal revenue is simply the amount of additional money gained by selling one more unit. Limos for money gained by selling one more unit. Limos for Lease gains no additional marginal revenue after it Lease gains no additional marginal revenue after it has rented its fourth limo at a price of $53.has rented its fourth limo at a price of $53.Units sold Units sold

(limos (limos leased)leased)

Unit PriceUnit Price

(average (average revenue)revenue)

Total Total revenurevenu

ee

MarginaMarginal l

revenuerevenue

11 $80$80 $80$80

22 7272 144144 $64$64

33 6363 189189 4545

44 5353 212212 2323

55 4242 210210 -2-2

66 3434 204204 -6-6

Prices in Relation To Prices in Relation To Market AloneMarket Alone

Cost-plus pricing is one extreme Cost-plus pricing is one extreme among pricing methods. among pricing methods. At the other extreme are methods At the other extreme are methods where a firm’s prices are set in where a firm’s prices are set in relation only to the market price.relation only to the market price. The seller’s price may be set right The seller’s price may be set right at the market price to meet the at the market price to meet the competition, or it may be set above or competition, or it may be set above or below the market price.below the market price.

Pricing to Meet Pricing to Meet CompetitionCompetition

Pricing to meet competition is simple to carry out. Pricing to meet competition is simple to carry out. Find out what the market price is, allowing for Find out what the market price is, allowing for customary markups for middlemen, and arrive at selling customary markups for middlemen, and arrive at selling price. price. One situation in which management might price a One situation in which management might price a product right at the market level is when competition is keen product right at the market level is when competition is keen and the firm’s product is not differentiated significantly and the firm’s product is not differentiated significantly from competing products. from competing products. This pricing method reflects the market conditions of This pricing method reflects the market conditions of perfect competition.perfect competition.

Product differentiation is absentProduct differentiation is absent Buyers and sellers are well informedBuyers and sellers are well informed Seller has no control over the selling price. Seller has no control over the selling price.

Pricing below Pricing below competitioncompetition

Set a price below the level of your main Set a price below the level of your main competitors.competitors.

Done by discount retailers, such as Wal-Mart Done by discount retailers, such as Wal-Mart and Target which stress low markup, high and Target which stress low markup, high volume and few customer servicesvolume and few customer services

They price heavily advertised, well-known They price heavily advertised, well-known brands 10 to 30 percent below the suggested list brands 10 to 30 percent below the suggested list price, which is normally charged by full-service price, which is normally charged by full-service retailers. retailers.

Pricing above Pricing above CompetitionCompetition

Producers or retailers sometimes set their prices Producers or retailers sometimes set their prices above the prevailing market level.above the prevailing market level.

Pricing above competition works only when the Pricing above competition works only when the product is distinctive or when the seller has acquired product is distinctive or when the seller has acquired prestige in its field. prestige in its field.

Example of elite clothing boutique and a prestigious Example of elite clothing boutique and a prestigious jewelry store where price tags are noticeably above jewelry store where price tags are noticeably above the level set by other stores with seemingly similar the level set by other stores with seemingly similar products. products.

However, a gas station that has a strong advantage However, a gas station that has a strong advantage based on a superior location (Perhaps the only such based on a superior location (Perhaps the only such station for many miles on an interstate highway) may station for many miles on an interstate highway) may also be able to use above-market pricing.also be able to use above-market pricing.

Lets end hereLets end here

SELECT PRICING OBJECTIVE

SELECT METHOD OF DETERMINING THE BASE PRICE:Cost-plus Price based on Price set inpricing balance between relation only

supply and demand to market price

DESIGN APPROPRIATE STRATEGIES:

Discounts and allowances one price vs. flexible price Leader pricingFreight payments unit pricingpsychological pricingSkimming vs. penetration Resale price maintenance Price vs. nonprice competition

Market-Entry StrategiesMarket-Entry Strategies

In preparing to enter the market with a new In preparing to enter the market with a new product, management must decide whether to product, management must decide whether to adopt a adopt a skimmingskimming or a or a penetrationpenetration pricing pricing strategy.strategy.

Market-Skimming Market-Skimming PricingPricing

Setting a relatively high initial price for a new Setting a relatively high initial price for a new product is referred to as market-skimming product is referred to as market-skimming pricing. pricing.

Ordinarily the price is high in relation to target Ordinarily the price is high in relation to target market’s range of expected prices. market’s range of expected prices.

The price is set at the highest possible level The price is set at the highest possible level that the most interested consumers will pay for that the most interested consumers will pay for the new product.the new product.

The new product has distinctive features strongly The new product has distinctive features strongly desired by consumers. desired by consumers.

Demand is fairly inelastic, most likely the case in the Demand is fairly inelastic, most likely the case in the early stages of a product’s life cycle, thus lower early stages of a product’s life cycle, thus lower prices are unlikely to produce greater total revenues.prices are unlikely to produce greater total revenues.

The new product is protected from competition The new product is protected from competition through one or more entry barriers such as a patent.through one or more entry barriers such as a patent.

Market skimming is often used in pricing new Market skimming is often used in pricing new technological products such as cell-phones and technological products such as cell-phones and HDTVs.HDTVs.

Over time, the initial price may be lowered gradually.Over time, the initial price may be lowered gradually.

Is market skimming ethical ?Is market skimming ethical ?

Market-Penetration Market-Penetration PricingPricing

In market-penetration pricing, a relatively low In market-penetration pricing, a relatively low initial price is established for a new product.initial price is established for a new product.

The price is low in relation to the target market’s The price is low in relation to the target market’s range of expected prices.range of expected prices.

The primary aim of this strategy is to generate The primary aim of this strategy is to generate substantial sales volume and a large market share.substantial sales volume and a large market share.

Discourages other firms from introducing Discourages other firms from introducing competing products.competing products.

Market-Penetration Market-Penetration PricingPricing

A large mass market exists for the product.A large mass market exists for the product.

Demand is highly elastic, typically in the later stages of the Demand is highly elastic, typically in the later stages of the life cycle for a product category.life cycle for a product category.

Substantial reductions in unit costs can be achieved Substantial reductions in unit costs can be achieved through large-scale operations. In other words, economies through large-scale operations. In other words, economies of scale are possible.of scale are possible.

Fierce competition already exists in the market for this Fierce competition already exists in the market for this product or can be expected to materialize soon after the product or can be expected to materialize soon after the product is introduced.product is introduced.

Discounts and Discounts and AllowancesAllowances

Discounts and allowances result in a Discounts and allowances result in a deduction form the base (or list) price.deduction form the base (or list) price.

The deduction may be in the form of a The deduction may be in the form of a reduced price or some other concession, such reduced price or some other concession, such as free merchandise or advertising allowances.as free merchandise or advertising allowances.

Discounts and allowances are commonplace Discounts and allowances are commonplace in business dealings.in business dealings.

Types of DiscountsTypes of Discounts

Quantity DiscountsQuantity Discounts Trade DiscountsTrade Discounts Cash DiscountsCash Discounts OthersOthers

Quantity DiscountsQuantity Discounts

Quantity discountsQuantity discounts are deductions from a are deductions from a seller’s list price intended to encourage seller’s list price intended to encourage customers to buy in larger amountscustomers to buy in larger amounts

Discounts are based on the size of the Discounts are based on the size of the purchase, either in dollars or in units.purchase, either in dollars or in units.

Quantity discounts can beQuantity discounts can be Non- CumulativeNon- Cumulative CumulativeCumulative

A non-cumulative discountA non-cumulative discount based on the size of an individual order of one or based on the size of an individual order of one or

more products.more products. E.g. a retailer may sell golf balls at $2 each or at three E.g. a retailer may sell golf balls at $2 each or at three

for $5.for $5. A cumulative discountA cumulative discount

based on the total volume purchased over a specified based on the total volume purchased over a specified period.period.

This type of discount is advantageous to a seller This type of discount is advantageous to a seller because it ties customers more closely to that firmbecause it ties customers more closely to that firm

The more total business a buyer gives a seller, the The more total business a buyer gives a seller, the greater is the discount.greater is the discount.

For e.g. airline frequent-flyer and hotel frequent-For e.g. airline frequent-flyer and hotel frequent-guest programs are a form of cumulative discount. guest programs are a form of cumulative discount.

Trade DiscountsTrade Discounts

Trade discounts, sometimes called functional Trade discounts, sometimes called functional discountsdiscounts reductions from the list price offered to buyers in payment reductions from the list price offered to buyers in payment

for marketing functions the buyers will perform—functions for marketing functions the buyers will perform—functions such as storing, promoting, and selling the product.such as storing, promoting, and selling the product.

A manufacturer quotes a retail price of $400 with trade A manufacturer quotes a retail price of $400 with trade discounts of 40 percent and 10 percent.discounts of 40 percent and 10 percent.

The retailer pays the wholesaler $240 ($400 less 40 The retailer pays the wholesaler $240 ($400 less 40 percent), and the wholesaler pays the manufacturer $216 percent), and the wholesaler pays the manufacturer $216 ($240 less 10 percent). ($240 less 10 percent).

Cash DiscountsCash Discounts A cash discount is a deduction granted to buyers for A cash discount is a deduction granted to buyers for

paying their bills within a specified time. paying their bills within a specified time. Every cash discount includes three elements, as Every cash discount includes three elements, as

indicated.indicated.The percentage discountThe percentage discountThe period during which the discount may be takenThe period during which the discount may be takenThe time when the bill becomes overdueThe time when the bill becomes overdue

Other Discounts and Other Discounts and AllowancesAllowances

Seasonal discountsSeasonal discounts A manufacturer of goods such as air conditioners or toys purchased on a seasonal basis A manufacturer of goods such as air conditioners or toys purchased on a seasonal basis

may consider granting a seasonal discount.may consider granting a seasonal discount.

Forward dating is a variation on both seasonal and cash discountsForward dating is a variation on both seasonal and cash discounts A manufacturer of fishing tackle might seek and fill orders from wholesalers and A manufacturer of fishing tackle might seek and fill orders from wholesalers and

retailers during the winter months. But the bills would be dated April 1, with terms of retailers during the winter months. But the bills would be dated April 1, with terms of 2/10, n/30 offered as of that date. Orders filled in December and January help to maintain 2/10, n/30 offered as of that date. Orders filled in December and January help to maintain production during the slack season for more efficient operation.production during the slack season for more efficient operation.

2/10, n/30, which is read "2, 10, net 30." These terms mean that the 2/10, n/30, which is read "2, 10, net 30." These terms mean that the authorized credit period is 30 days, but that the customer may deduct authorized credit period is 30 days, but that the customer may deduct 2% of the amount of the invoice if it makes payment within 10 days. 2% of the amount of the invoice if it makes payment within 10 days. The 10-day period during which the discount is available is called the The 10-day period during which the discount is available is called the discount period. discount period.

A promotional allowance is a price reduction granted by a seller as payment for A promotional allowance is a price reduction granted by a seller as payment for promotional services performed by buyerspromotional services performed by buyers To illustrate, a producer of builder’ hardware gives a certain quantity of free goods to To illustrate, a producer of builder’ hardware gives a certain quantity of free goods to

dealers who prominently display its line. Or a clothing manufacturer pays one-half the dealers who prominently display its line. Or a clothing manufacturer pays one-half the cost of a retailer’s ad featuring its product. cost of a retailer’s ad featuring its product.

Geographic Pricing Geographic Pricing StrategiesStrategies

In pricing, a seller must consider the costs of shipping goods to In pricing, a seller must consider the costs of shipping goods to the buyer. the buyer.

These costs grow in importance as freight becomes a larger part of These costs grow in importance as freight becomes a larger part of total variable costs.total variable costs.

Pricing policies may be established whereby the buyer pays all the Pricing policies may be established whereby the buyer pays all the freight expense, the seller bears the entire cost, or the seller and freight expense, the seller bears the entire cost, or the seller and buyer share this expense.buyer share this expense.

The strategy chosen can influence the geographic limits of a The strategy chosen can influence the geographic limits of a firm’s market, locations of its production facilities, sources of its firm’s market, locations of its production facilities, sources of its raw materials, and its competitive strength in various geographic raw materials, and its competitive strength in various geographic markets. markets.

Has the following strategiesHas the following strategies Point-of-Production PricingPoint-of-Production Pricing Uniform Delivered PricingUniform Delivered Pricing Zone-Delivered PricingZone-Delivered Pricing Freight-Absorption PricingFreight-Absorption Pricing

Point-of-Production Point-of-Production PricingPricing

It is a widely use geographic pricing strategyIt is a widely use geographic pricing strategy The seller quotes the selling price at the point of The seller quotes the selling price at the point of

production and the buyer selects the mode of production and the buyer selects the mode of transportation and pays all freight cost.transportation and pays all freight cost.

Usually referred to as Usually referred to as FOB (Free on Board) factory FOB (Free on Board) factory pricingpricing (or FOB mill pricing), this strategy is the (or FOB mill pricing), this strategy is the only one in which the seller does not pay any of the only one in which the seller does not pay any of the freight costs.freight costs.

The seller pays only for loading the shipment aboard The seller pays only for loading the shipment aboard the freight carrier—hence the term FOB, which the freight carrier—hence the term FOB, which stands for free on board.stands for free on board.

The Federal Trade Commission has considered The Federal Trade Commission has considered FOB factory pricing to be legal. However, this FOB factory pricing to be legal. However, this pricing strategy has serious economic and pricing strategy has serious economic and marketing implications.marketing implications.

FOB factory pricing makes a given seller more FOB factory pricing makes a given seller more attractive to nearby customers and much less attractive to nearby customers and much less attractive to distant customer.attractive to distant customer.

Uniform Delivered Uniform Delivered PricingPricing

In uniform delivered pricing same delivered In uniform delivered pricing same delivered price is quoted to all buyers regardless of their price is quoted to all buyers regardless of their locations.locations.

With a uniform delivered price, the net With a uniform delivered price, the net revenue to the seller varies depending on the revenue to the seller varies depending on the freight costs of involved in each sale.freight costs of involved in each sale.

In effect, buyers located near the seller’s In effect, buyers located near the seller’s factory pay some of the costs of shipping to factory pay some of the costs of shipping to more distant locations.more distant locations.

Critics of FOB factory pricing usually favor a Critics of FOB factory pricing usually favor a uniform delivered priceuniform delivered price

Zone-Delivered PricingZone-Delivered Pricing Zone-delivered pricing divides a seller’s market Zone-delivered pricing divides a seller’s market

into a limited number of broad geographic zones into a limited number of broad geographic zones and then sets a uniform delivered price for each and then sets a uniform delivered price for each zone.zone.

Zone-delivered pricing is similar to the system Zone-delivered pricing is similar to the system used in pricing package-delivery services (such used in pricing package-delivery services (such as offered by UPS). as offered by UPS).

The freight charge built into the delivered price is The freight charge built into the delivered price is an average of the charges to all points within a an average of the charges to all points within a zone.zone.

When using this pricing strategy, a seller When using this pricing strategy, a seller must walk a tightrope to avoid charges of must walk a tightrope to avoid charges of illegal price discrimination. illegal price discrimination.

The zones must be drawn so that all The zones must be drawn so that all buyers who compete for a particular buyers who compete for a particular market are in the same zone. market are in the same zone.

Freight-Absorption Freight-Absorption PricingPricing

To penetrate distant markets, a seller may be willing to To penetrate distant markets, a seller may be willing to absorb part of the freight cost.absorb part of the freight cost.

In freight-absorption pricing a manufacturer will quote to In freight-absorption pricing a manufacturer will quote to the customer a delivered price equal to its factory price the customer a delivered price equal to its factory price plus the freight costs that would be charged by a plus the freight costs that would be charged by a competitive seller located near that customer.competitive seller located near that customer.

If the manufacturing firm in Multan agreed to freight If the manufacturing firm in Multan agreed to freight absorption, the customer in Gujranwala would not be absorption, the customer in Gujranwala would not be charged full freight costs but only the costs that would be charged full freight costs but only the costs that would be charged by a competing supplier located close to the charged by a competing supplier located close to the customer—say, in Lahore.customer—say, in Lahore.

A freight-absorption strategy is adopted to offset A freight-absorption strategy is adopted to offset competitive disadvantages of FOB factory pricing. competitive disadvantages of FOB factory pricing.

With an FOB factory price, a firm is at a price With an FOB factory price, a firm is at a price disadvantage when trying to sell to buyers located in disadvantage when trying to sell to buyers located in markets near competitors’ plants. markets near competitors’ plants.

Since buyers pay the freight costs under FOB factory Since buyers pay the freight costs under FOB factory pricing, these charges will grow as the distance pricing, these charges will grow as the distance between supplier and customer increases. between supplier and customer increases.

A nearby supplier has an advantage over more distant A nearby supplier has an advantage over more distant suppliers—at least with respect to freight costs.suppliers—at least with respect to freight costs.

Freight absorption is particularly useful to Freight absorption is particularly useful to a firm that hasa firm that hasexcess capacityexcess capacityhigh fixed costshigh fixed costs low variable costs per unit of product.low variable costs per unit of product.

management must constantly seek ways management must constantly seek ways to cover fixed costs. Freight-absorption to cover fixed costs. Freight-absorption pricing is one means of generating pricing is one means of generating additional sales volume to do that.additional sales volume to do that.

Special Pricing Special Pricing StrategiesStrategies

To set initial prices and evaluate existing To set initial prices and evaluate existing prices, a firm needs to consider a number prices, a firm needs to consider a number of distinctive strategies.of distinctive strategies.

Some of these strategies are:Some of these strategies are:

One-Price and Flexible-One-Price and Flexible-Price StrategiesPrice Strategies

InIn one-price strategy, one-price strategy, a seller charges the a seller charges the same price to all similar customers who buy same price to all similar customers who buy identical quantities of a product.identical quantities of a product.

In In flexible-price strategyflexible-price strategy (also called a (also called a variable-price strategy), similar customers may variable-price strategy), similar customers may pay different prices when buying identical pay different prices when buying identical quantities of a product. quantities of a product.

This practice is normally legal.This practice is normally legal.

With flexible pricing, buyer-seller bargaining With flexible pricing, buyer-seller bargaining often determines the final price.often determines the final price.

Variable pricing may be used to meet a Variable pricing may be used to meet a competitor’s price.competitor’s price. For e.g. to confront Japanese competition, Ford For e.g. to confront Japanese competition, Ford

and General Motors sold cars to West Coast and General Motors sold cars to West Coast dealers at a lower price than was charged to dealers dealers at a lower price than was charged to dealers elsewhere. elsewhere.

A one-price strategy builds customer confidence A one-price strategy builds customer confidence in a seller—whether at the manufacturing, in a seller—whether at the manufacturing, wholesaling, or retailing level—because the wholesaling, or retailing level—because the buyer does not have t worry that the other buyer does not have t worry that the other customer paid lower prices.customer paid lower prices.

With a one-price strategy, weak bargainers need With a one-price strategy, weak bargainers need not feel that they are at a disadvantage.not feel that they are at a disadvantage.

A single-price strategy is an extreme variation A single-price strategy is an extreme variation of the one-price strategy.of the one-price strategy.

Not only are all customers charged the same Not only are all customers charged the same price, but all items sold by the firm carry a price, but all items sold by the firm carry a single price.single price.

The origins of this approach may be traced to The origins of this approach may be traced to budget motels of 30 years ago. For instance. budget motels of 30 years ago. For instance. Motel 6 originally priced all rooms at $6 a Motel 6 originally priced all rooms at $6 a night for single occupancy.night for single occupancy.

The $ store, 99 cents store etcThe $ store, 99 cents store etc

Price LiningPrice Lining

Price lining involves selecting a limited Price lining involves selecting a limited number of prices at which a business will sell number of prices at which a business will sell related products.related products.

It is used extensively by retailers of apparel. It is used extensively by retailers of apparel. The Athletic Store, for instance, sells several The Athletic Store, for instance, sells several styles of shoes at $39.88 a pair, another group styles of shoes at $39.88 a pair, another group at $59.95, and third assortment at $79.99.at $59.95, and third assortment at $79.99.

For the consumer price lining simplifies For the consumer price lining simplifies buying decisions. buying decisions.

For the retailer price lining helps in For the retailer price lining helps in planning purchases.planning purchases.

Rising costs can put a real squeeze on Rising costs can put a real squeeze on price lines.price lines.

A company hesitates to change its price A company hesitates to change its price line every time its costs go up.line every time its costs go up.

If costs rise and prices are not increased If costs rise and prices are not increased accordingly profit margins shrink.accordingly profit margins shrink.

Retailers may be forced to seek products Retailers may be forced to seek products with lower costs.with lower costs.

Price Versus Nonprice Price Versus Nonprice CompetitionCompetition

Management decides whether to compete Management decides whether to compete primarily on the basis of price or the nonprice primarily on the basis of price or the nonprice elements of the marketing mix. elements of the marketing mix.

Price CompetitionPrice Competition

A firm engages in price competition by A firm engages in price competition by regularly offering products price as low as regularly offering products price as low as possible and accompanied by a minimum of possible and accompanied by a minimum of services. services.

Discount houses and off-price retailers Discount houses and off-price retailers compete in this way.compete in this way.

A firm can also use price to compete by:A firm can also use price to compete by: changing its priceschanging its prices reacting to price changes made by a competitor reacting to price changes made by a competitor

There is tremendous price competition in There is tremendous price competition in our economy today.our economy today.

This form of competition is spreading to This form of competition is spreading to other parts of the world as well. For other parts of the world as well. For example, price reduction became example, price reduction became commonplace throughout Europe in the commonplace throughout Europe in the early 1990s.early 1990s.

Proactive and Reactive Proactive and Reactive ChangesChanges

What is proactive and reactive?What is proactive and reactive? A number of situations may prompt a firm to A number of situations may prompt a firm to

change its price.change its price. As costs increase, for instance, management As costs increase, for instance, management

may decide to raise its price rather than to may decide to raise its price rather than to maintain price and either cut quality or maintain price and either cut quality or promote the product aggressively.promote the product aggressively.

Temporary price cuts may be used to sell Temporary price cuts may be used to sell excess inventory or to introduce a new product.excess inventory or to introduce a new product.

Any firm can safely assume that its Any firm can safely assume that its competitors will change their prices sooner competitors will change their prices sooner or later.or later.

Thus every firm should have guidelines on Thus every firm should have guidelines on how it will react.how it will react.

If a competitor boosts price, a short delay If a competitor boosts price, a short delay in reacting probably will not be perilous.in reacting probably will not be perilous.

If a competing firm reduces price, a If a competing firm reduces price, a prompt response normally is required to prompt response normally is required to avoid losing customers.avoid losing customers.

Price WarsPrice Wars

From a seller’s standpoint, the big disadvantage in From a seller’s standpoint, the big disadvantage in price cutting is that competitors will retaliate.price cutting is that competitors will retaliate.

A price war may begin when one firm decreases its A price war may begin when one firm decreases its price in an effort to increase its sales volume and /or price in an effort to increase its sales volume and /or market share.market share.

The battle is on if other firms retaliate, reducing price The battle is on if other firms retaliate, reducing price on their competing products.on their competing products.

Additional price decreases by the original price cutter Additional price decreases by the original price cutter and/or its competitors are likely to follow until one of and/or its competitors are likely to follow until one of the firms decides it can endure no further damage to the firms decides it can endure no further damage to its profits.its profits.

Most businesses would like to avoid price wars.Most businesses would like to avoid price wars.

As one consultant advised retailersAs one consultant advised retailers “ “Long-term price competition can take a Long-term price competition can take a

devastating toll on profits. Lower profits devastating toll on profits. Lower profits typically decrease the number of competitors typically decrease the number of competitors and, over a longer period, possibly the vigor of and, over a longer period, possibly the vigor of companies in industries as different as companies in industries as different as groceries and personal computers have gone groceries and personal computers have gone out of business. Ultimately, a smaller number out of business. Ultimately, a smaller number of competing firms might translate to fewer of competing firms might translate to fewer product choices and/or higher prices for product choices and/or higher prices for consumers”consumers”

Nonprice CompetitionNonprice Competition

In nonprice competition sellers maintain stable In nonprice competition sellers maintain stable prices and attempt to improve their market prices and attempt to improve their market positions by emphasizing other aspects of their positions by emphasizing other aspects of their marketing programs.marketing programs.

Competitor's prices still must be taken into Competitor's prices still must be taken into consideration, and price changes will occur consideration, and price changes will occur over time. Nevertheless, in nonprice over time. Nevertheless, in nonprice competition, the emphasis is on something competition, the emphasis is on something other than price.other than price.

More and more consumers are seeking better More and more consumers are seeking better value in their purchase.value in their purchase.

In response, many companies in diverse In response, many companies in diverse industries are using industries are using value pricing.value pricing.

This form of price competition aims to This form of price competition aims to improve a product’s value—that is, the ratio of improve a product’s value—that is, the ratio of its benefits to its price and related costs.its benefits to its price and related costs.

Using value pricing, a firm:Using value pricing, a firm: offers products with lower prices but same benefitsoffers products with lower prices but same benefits seeks ways to slash expenses so that profits do not seeks ways to slash expenses so that profits do not

suffer.suffer.

In economic theory, we can differentiate price In economic theory, we can differentiate price and nonprice competition.and nonprice competition.

In price competition, sellers attempt to move In price competition, sellers attempt to move up or down their individual demand curves by up or down their individual demand curves by changing prices.changing prices.

In nonprice competition, sellers attempt to In nonprice competition, sellers attempt to shift their demand curves to the right by means shift their demand curves to the right by means of product differentiation, promotional of product differentiation, promotional activities, or some other technique. activities, or some other technique.

Many firms stress nonprice competition—and Many firms stress nonprice competition—and others would like to rely on it rather than price others would like to rely on it rather than price competition. Wanting to be masters of their competition. Wanting to be masters of their own destinies, companies believe they have own destinies, companies believe they have more control in nonprice competition. With more control in nonprice competition. With price competition, many consumers will buy a price competition, many consumers will buy a brand only as long as it has the lowest price. brand only as long as it has the lowest price. There is little customer loyalty when price is There is little customer loyalty when price is the only feature differentiating products from the only feature differentiating products from each other.each other.

With nonprice competition, however, a seller With nonprice competition, however, a seller keeps some advantage when a competitor keeps some advantage when a competitor decides to undersell.decides to undersell.

The best approach in nonprice competition is The best approach in nonprice competition is to build strong brand equity for the firm’s to build strong brand equity for the firm’s products.products.

Two methods of accomplishing this areTwo methods of accomplishing this are to develop distinctive, unique, productsto develop distinctive, unique, products to create a novel, appealing promotional program.to create a novel, appealing promotional program.

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