product in marketing management by solomon

product in marketing

1. Marketing: Real People, Real Choices
Eleventh Edition
Chapter 10
Price: What Is the Value
Proposition Worth?
Copyright © 2022, 2020, 2018 Pearson Education, Inc. All Rights Reserved

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Learning Objectives
(1 of 2)
10.1Explain the importance of pricing and how marketers
set objectives for their pricing strategies.
10.2Describe how marketers use costs, demand, revenue,
and the pricing environment to make pricing decisions.
10.3Understand key pricing strategies and tactics.

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Learning Objectives
(2 of 2)
10.4Understand the opportunities for Internet pricing
strategies and innovations in payment.
10.5 Describe the psychological, legal, and ethical aspects
of pricing.
10.6 Understand the important considerations in job
compensation, how to set realistic expectations, and how to
improve your chances of getting a great first job.

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“Yes, But What Does It Cost?”
•Price: assignment of value
•Payment: anything that has value to the other party:
money, goods, services, favors, votes, and so on.
–What are opportunity costs?: something that we have to give up
in order to obtain something else
–What is bartering? parties exchange products with each other
–Sometimes other names are used. When is price a fee? A
fare? Interest? Tuition? Rent? computer technology has
provided the opportunity for digital currency or cryptocurrency.

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Figure 10.1 Elements of Price Planning

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Step 1: Develop Pricing Objectives
•Must support the broader objectives of the firm as well as
overall marketing objectives.

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PRICING OBJECTIVES CONTD

Profit objectives focus on a level of profit growth or a target net profit margin.
Profit objectives are often used in the pricing of B2B goods. For consumer goods
firms, profit objectives may focus on a product line or portfolio of products.

Sales objectives focus on the dollar or units sold while market share objectives
attempt to increase market share.

Competitive effect objectives attempt to dilute the competition’s marketing
efforts. Sometimes the firm consciously prices its products in a way that negatively
impacts competitors marketing efforts. Established brands often react to new
market entrants by cutting prices (sometimes even below the cost of the product or
service) in an attempt to drive the newcomer out of business or out of the
geographic market. Small business marketers often do the same thing.

Customer satisfaction objectives focus on keeping customers for the long
term. Quality-focused firms believe that profit stems from customer satisfaction,
hence, pricing their products in a manner that satisfies customers.

Image enhancement objectives attempt to get customers to relate a high price
to better quality. Prestige products such as Rolls-Royce or Rolex have a high price
tag, but appeal to customers’ thoughts about “status.”

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Costs, Demand, Revenue, and the
Pricing Environment
•To set the right price, marketers must understand a variety of
quantitative and qualitative factors.

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Understanding Demand
•Demand refers to the quantity of a good or service that
consumers and business customers are willing and able to buy
at a given price in a given time period
•In order to set price, marketers must have an understanding of
product demand.
•This includes considerations, such as:
–The law of demand
–Shifts in demand
–Price elasticity
–Variable and fixed costs
–Impact of external environment on pricing

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Step 2: Estimate Demand
•Demandrefers to customers’ desire for a product.
–How much are customers willing to pay as the price
of the product goes up or down?
•Economists use demand curves to illustrate the effect of
price on quantity of a product demanded.
•The law of demand:As price goes up, quantity
demanded goes down.

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Figure 10.4 Demand Curves for Normal
and Prestige Products

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Shifts in Demand
•A shift is a change in
direction or position.
•Marketers can stimulate
shifts through effective
marketing e.g. advertising
•An upward shift is when a
greater demand for a
product occurs.
•A downward shift is when
demand suddenly drops.

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Table 10.1 Estimating Demand for Pizza
Number of families in market 180,000
Average number of pizzas per family per year 6
Total annual market demand 1,080,000
Company’s predicted share of the total market 3 percent
Estimated annual company demand 32,400 pizzas
Estimated monthly company demand 2,700 pizzas
Estimated weekly company demand 675 pizzas
Marketersmayneedtoadjustmonthlyorweeklydemandlevelswhencertainfactorshave
adirectorindirectinfluenceondemandlevels.Somefactorstoconsiderincludethe
impactofspecialevents(e.g.,“backtoschool”;“BlackFriday),andholidays(Christmas,
FourthofJuly).Butmanyotherfactorscancomplicatedemandcalculations,including
seasonalinfluences,whethertheproductinquestionisadurablegood(suchasalawn
mower),oranon-durableconsumer(suchaspizza),andtheregionofthecountryfor
whichtheforecastisbeingmade.

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Price Elasticity of Demand
•Price elasticity of demand is the percentage change in
unit sales that results from a percentage change in price.
•Elastic demand is when changes in price have large
effects on the amount demanded.
•Inelastic demand is when changes in price have little or
no effect on the amount demanded.

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Figure 10.6 Price Elasticity of Demand
Marketers know that price elasticity of demand is an important pricing metric.

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Figure 10.7 Price-Elastic and Price-
Inelastic Demand

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Cross-Elasticity of Demand
•Changes in the prices of other products may affect a
product’s demand.
–If products are substitutes, an increase in the price of
one will increase demand for the other.
▪Beef versus chicken
–If one product is essential for use of a second
product, an increase in the price of one decreases
demand for the other.
▪Cars and gasoline

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Step 3: Determine Costs
•In order to ensure that product price will cover costs,
marketers must determine
–Variable Costs: Per-unit costs of production that will
fluctuate depending on how many units a firm produces
(such as the costs to make a pizza include the ingredients,
labor costs of cooks, and boxes for the pizza).
–Fixed Costs: Costs that do not vary with the number of
units produced (such as rent on the building, electricity,
water, and insurance).
–Average fixed costs: fixed cost per unit.
–Total costs: Total of fixed and variable costs for a set
number of units produced.

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Figure 10.8 Variable Costs for Bookcases at
Different Levels of Production
Variable Cost: production costs that are tied to the
number of units produced and thus vary depending
on volume
Fixed cost: don’t change with the number of units produced,
whether it’s 100 or 10,000. Thus the average fixed cost per
unit will alwaysdecrease as the number of units produced
increases

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Break-Even Analysis
•Break-even analysis tells marketers how many units must be sold in order to cover
all costs.
•Knowing the break-even point will tell you at what point the firm will start (or stop)
making a profit.
•If the firm sells one fewer units than the break-even quantity, they will lose money. If
they sell one more unit than the break-even quantity, they will make a profit.
•Break-even analysis is important because it helps marketers understand the
relationship between costs and price.

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Figure 10.9 Break-Even Analysis
Assuming a Price of $100

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Break-Even Calculation


Totalfixed costs
Break-even point in units
Contributionper unit to fixed costs



Total fixed costs
Break-even point in dollars
variable cost per unit
1
selling price
Product is a pair of running shoes.
Fixed costs: Annual rent on manufacturing facility $1,200,000
Advertising contracted $2,000,000
Management and other salaries not related to production$850,000
Total fixed costs $4,050,000
Variable costs per unit $21.50
Selling price per unit to the retailer $63.00
Contribution per unit to fixed costs $41.50
BEP (Unit? Dollar?)

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Markups and Margins: Pricing through
the Channel
•Markup is an amount added to the cost of the product
to create a price at which the channel member will sell
the product. The markup is referred to as a margin.
–Gross margin (profit expected by channel members
and their fixed cost)
▪Retailer margin
▪Wholesaler margin
–List price or manufacturer’s suggested retail price
(MSRP) -the price the manufacturer has estimated
that the end customer should be willing to pay

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Figure 10.10 Markups through the
Channel

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Step 4: Examine the Pricing Environment
•Firms must also consider external influences upon pricing
decisions.
–Broad economic trends/economic influences
▪The business cycle
▪Economic growth: During a recession, consumers’ tend to
become very price sensitive
▪Inflation: possibleprice increases -consumers may also
grow fearful about the future and cut back on purchases
▪Consumer confidence: is a measure of consumer
optimism about the overall state of the economy and
their personal financial situation (e.g. pandemic,
confidence declines)

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The Pricing Environment: Non-Economic
Influences
•Competition
–The type of industry structure (oligopoly, monopolistic
competition, or pure competition) can influence pricing.
•Government regulation
–Laws and government agencies impact pricing decisions.
•Consumer trends
–Culture and demographics influence pricing.
•The International environment
–Companies may vary their pricing depending upon the country in
which their product is sold.

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Identify Strategies and Tactics to Price the Product
Step 5: Choose a Pricing Strategy
•The fifth step of the pricing process requires choosing a pricing
strategy.
•When is it best for the firm to undercut the competition and
when best tojust meet the competition’s prices?
•When is the best pricing strategy one that considers costs
only? When is it best to use a strategy based on demand?
•In today’s marketplace, there seldom is any one-and-only,
now-and-forever, best pricing strategy.

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Figure 10.11 Pricing Strategies and
Tactics
Pricing Strategies
•Based on cost Cost plus
•Based on demand Target costingYield management
•Based on the competition Price leadership
•Based on customers’ needs Value (EDLP) pricing
•New product pricing Skimming pricing Penetration pricing. Trial
pricing

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Pricing Strategies Based on Cost
•Cost-based pricing is very common.
•Most frequently used cost-based is cost-plus pricing.
–Easy to calculate
–Relatively risk free
•But not without drawbacks:
–Cost-based approaches do not factor in key
considerations, such as the nature of target market,
demand, and competitors.

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Pricing Strategies Based on Demand
•Demand-basedpricing:firmbasesellingpriceonan
estimateofvolumeitcansellindifferentmarketsat
differentprices.
–Yieldmanagementpricinge.g.movietheatresprice
theearlyshowcheaperthanthosethatbeginafter5
pm
–Targetcosting-firstidentifyingthroughmarketing
researchthelevelofqualityandfunctionality
customersneedandthepricethey’rewillingtopay.
Thentheyworkbackwardstodesignaproductthat
meetsthetargetedlevelofcost(orabandoned)

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Figure 10.12 Target Costing Using a
Jeans Example
Step 1: Determine the price customers are willing to pay for the jeans $79.99
Step 2: Determine the markup required by the retailer 40% (.40)
Step 3: Calculate the maximum price the retailer will pay, the price customers
are willing to pay minus the markup amount
  
  
 
Formula: Price to the retailer Selling price (1.00 markup percentage)
Price to the retailer $79.99 (1.00 .40)
$79.99 0.60 = $47.99
Step 4: Determine the profit required by the firm 15% (.15)
Step 5: Calculate the target cost, the maximum cost of producing the jeans
  
  
Formula: Target cost Price to the retailer (1.00 profit percentage)
Target cost $47.99 0.85 $40.79

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Pricing Strategies Based on Competition
and Customer Needs
•Pricing based on competition
–Price leadership strategy: oligopolistic industries
when a dominant firm announces its new price, and
competitors get in line or drop out
•Pricing based on customer needs
–Value or everyday low pricing (EDLP) e.g. Wall Mart
–Hybrid EDLP approaches –lower price + experience
value

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New Product Pricing
•New products present unique pricing challenges!
•In absence of reliable demand estimates and pricing norms, common pricing
tactics include:
–Skimming price: a very high premium price is charged by the
manufacturer when the product first hits the market, with the intention of
reducing price in the future. Thus, each unit sold incurs a huge profit,
though initially, fewer units are sold. As demand at a given price level
disappears, the price is dropped, bringing new buyers to the market.
–Penetration pricing: prices the product very low in order to build unit
sales very quickly. By building a large market share quickly, the
manufacturer hopes to discourage competitors from entering the market
as the profit margin per unit is very small.
–Trial pricing: sets a low price initially and advertises it as being for a
limited period of time

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Price Segmentation
•Practice of charging different prices to different market
segments for the same product (price fencing) –NOT
discriminatory pricing e.g.childprice
•Peak load pricing: is a pricing plan that sets prices higher
during periods with higher demand e.g. airline or hotel
•Surge pricing: is a pricing plan that raises prices of
products as demand goes up and lowers it as demand
slides. Ride sharing services such as Uber use surge
pricing

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Bottom of the Pyramid Pricing
•Innovativepricingthatwillappeal
toconsumerswiththelowest
incomesbybrandsthatwishtoget
afootholdinbottomofthepyramid
countries(longtermloyalty).
•Examplesofbottomofthepyramid
pricingandmarketinginclude
sellingnon-durableproductsin
smallerpackagesforjustafew
centsandencouragingavillageto
shareonecellphone,refrigerator,
orcomputer.

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Step 6: Develop Pricing Tactics
(1 of 2)
•Implementing pricing strategies using pricing tactics is
the sixth step in price planning
•Pricing for individual products
–Two-part pricing e.g. country club, amusement park
–Payment pricing e.g. house/electronic installment
–Subscription pricing e.g. Netflix, Disney+
•Pricing for multiple products
–Price bundling e.g. National Day Price Saudi 94
–Captive pricing e.g. Printer (low) and Cartridge (high)
–Decoy pricing seller offer 3 similar product to
encourage one with superior quality

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Step 6: Develop Pricing Tactics
(2 of 2)
•Distribution-based pricing for end-users
–F.O.B. (free on board) origin(or factory) pricing: the
customer must pay the cost of shipping the items from
the factory to the customer’s location
–F.O.B delivered pricing: the seller pays both the cost of
the loading and the cost of transporting the goods to the
customer
–Uniform delivered pricing: adds an average shipping
cost to the price, no matter what the distance is
–Freight absorption pricing: the seller takes on part or
all of the cost of shipping

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Develop Pricing Tactics: Discounting for
Channel Members (B2B)
•When setting prices for channel members, marketers may also apply
tactics such as:
•Trade or functional discounts usually set a percentage
discount off of the suggested retail or list price for each channel
level.
•Quantity discounts are useful for encouraging larger purchases,
as the amount of the discount varies according to the quantity
purchased.
•Cash discounts are used to encourage customers to pay their
bills promptly, and may be expressed in a fashion similar to “2
percent 10 net 30”
•Seasonal discounts, as the name implies, are price reductions
that are available only at certain times of the year. Normally such
discounts are offered at times of the year when the product is not
in high demand

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Pricing Advantages for Online Shoppers
•The Internet provides consumers and business buyers
more control over the purchase process.
–Increased consumer price sensitivity and negotiating
power
The possible implications of increased price transparency for
marketers (and marketing)
•More adaptive pricing models (e.g., dynamic pricing, price-matching).
•More innovative pricing models (e.g., pay as you wish).
•Firms findings way to differentiate and compete more strongly on non-
price factors.

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Pricing and Electronic Commerce
•The online environment provides even more pricing options.
•Technology and market efficiency has led to
–Dynamic pricing strategies: the Internet seller can easily adjust the
price to meet changes in the marketplace to respond to changes in
costs, supply, and/or demand
–Online auctions: online bidding e.g. Ebay
–“Freemium” pricing models: product in its most basic version is
provided free of charge but the company charges money (the
premium) for upgraded versions e.g. Canva, Gmail
–Internet price discrimination (PRICE FENCE) internet pricing
strategy that charges different prices to different buyers for the same
product based on order size or geographic location etc.

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Innovations in Payment Systems
•Cryptocurrency
•Digital and Mobile Wallets
•Buy-Now-Pay-Later
•Save-Now-Buy-Later
•Collaborative Savings and Consumption
•P2P Lending
•Rent-to-Own
•Cashless Society

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Figure 10.13 Psychological, Legal, and
Ethical Aspects of Pricing
Psychological Issues in Pricing
•Buyers’ Expectations
•Internal Reference Prices
•Price-Quality Inferences
Psychological Pricing Strategies
•Odd-Even Pricing
•Price Lining
•Prestige Pricing
Legal and Ethical Issues in B2C
and C2C Pricing
•Bait-and-Switch
•Loss-Leader pricing
•Misleading Merchandising
•Price Gouging
Legal and Ethical Issues in B2B
Pricing
•Price Discrimination
•Price-Fixing
•Predatory Pricing

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Psychological Issues in Setting Prices
•Buyers form expectations of what is fair or customary
prices for goods and services.
–Price too high = Bad deal
–Price too low = Suspect quality
•Customary price perceptions are influenced by:
–Internal reference prices: A set price or price range
consumers have in mind when evaluating a product’s
price.
–Price–quality inferences : When consumers use
price as a cue to infer product quality.

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Psychological Pricing Strategies
•Odd–even pricing: Is $199.99 really “less” than $200.00?
•Price lining: a limited number of price points (different
specific prices) are set for items in a product line
•Prestige or premium pricing: status conscious consumers
buying luxury goods become more likely to purchase an
item as price increases. The fact that not everyone can
afford to purchase an item is exactly what makes it
desirable—the more exclusive, the better in many cases.

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Legal and Ethical Considerations in B2C
Pricing
•Bait-and-switch is illegal
–Advertise very low-priced item to lure customers to store
(bait)
–Arriving customers find product is out of stock and are
offered more expensive item (switch)
•Loss-leader pricing
–Use very low prices to get customers into the store
–Making up the “loss” through sale of other products
–Some states have “unfair sales acts” forbidding loss-
leader pricing.
•Misleading merchandising: e.g.
a sale that is not really a sale

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Legal Issues in B2B Pricing
•The Robinson–Patman Act includes regulations against
price discrimination in interstate commerce.
•Illegal B2B price discrimination: Firms sell products to
channel members at different prices in a way that
“lessens competition.”
•Price-fixing: Two or more companies conspire to keep
prices at a certain level.
–Horizontal v
ersu
s vertical price fixing
•Predatory pricing: Firm sets very low price for purpose
of driving rival out of business.

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The Psychology of Price
•Many pricing frameworks are based on the notion of a
highly rational consumer.
–In the real world, consumer perceptions and
judgments of price aren’t nearly so logical!
•Psychological aspects of price raise a number of ethical
and legal considerations.
Restaurants have found odd–even pricing influences
spending. Have you seen local dining establishments
who have employed such tactics?

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