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Louise Ripley

Introductory Marketing
Chapter 10 Armstrong/ Kotler Marketing: An Introduction

Pricing: Understanding and Capturing Customer Value
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I. What is a Price?
money charged for product or service sum of all values a buyer exchanges for benefits of having/using product or service

From its narrowest definition to its broadest, price has always been a major factor in buyer choice, historically set by negotiation between buyer and seller (dynamic pricing) with fixed pricing only a factor in the last century or so. Things like the Internet and e-Bay are seeing us returning to dynamic pricing.

And remember that Price and Profit are not automatically "bad" words. A company must make a profit in order to survive. There is an old Indian proverb, told to me by the owner of The Herb House where I buy many good things, that asks, "If a horse makes a friendship with the grass, what is he going to eat?" What is important is setting a fair price.

2. Factors to Consider When Setting Price

II. Major Pricing Strategies

Customer Value-Based Pricing 

This method involves setting the price based on what the consumer thinks your product is worth rather than on what it cost you to produce and sell it. At its worst, this concept includes the time-worn phrase spoken whenever a marketer asks how much s/he should charge for their product: "Whatever the market will bear." Today, smart marketers know that Value-Based Pricing has a lot more to do with finding out what the customer values (see Peter Drucker's Third Question) and it means a lot of work on the company's part in finding out just exactly what its customers DO want.  

I heard Jack Welch, retired Chair of General Electric speak at the conference on Emerging Issues in Business and Technology, and he said essentially what he's quoted as saying in your textbook: 

"The value decade is upon us. If you can't sell a top-quality product at the world's best price, you're going to be out of the game."

Companies do this through value pricing strategies, offering just the right combination of price and quality to satisfy the customer; an important part of this is everyday low pricing (EDLP), where the company (Wal-Mart is the best-known user of this method) keeps prices consistently low with few discounts or temporary price promotions. The strategy is supposed to encourage more one-stop shopping, so that even though some prices on some items may actually be higher than in other places, overall the consumer feels s/he is getting a good deal.  

Exercise: Lab
Go shopping in a Wal-Mart. Make a note of some of their prices on a product that interests you. Check other stores and compare prices. Is Wal-Mart always the lowest priced? 
Post your answer in the Moodle Discussion Group.

There is also Good Value Pricing, and Value-Added Pricing


Cost-Based Pricing

Types of Costs



Cost-Plus Pricing This involves adding a standard mark-up to the cost of the product; it is simple to use and insures costs are covered, but has no relationship to what consumers are prepared to pay for the product


A major problem with this technique is that the margin can vary greatly. In the frozen food market, it can be anywhere from 13% to 53%. 

A retail store adds a standard markup to the cost of products it sells. For example, the retail store buys a hair dryer for $15 dollars from a manufacturer, adds $10 dollars to cover its own costs and profits, and sells the hair dryer for $25. 

Markup and Margin

What is the retail store's markup? 
What is the retail store's margin? 
Post your answer in the Moodle Discussion Group.

If you had difficulty with calculating any of these, ask for help on the Discussion Group or check the Appendix at the back of your book

Partial Cost Recovery 
Sometimes you know from the start that what you charge the customer will not cover full costs. Why would anyone in their right mind charge this kind of price? Read the exercise below and think about it.
Partial Cost Recovery
How is York University tuition an example of "partial cost recovery" pricing? Why does York only charge you part of the cost of your education? 
Post your answer in the Moodle Discussion Group.

Break-Even Pricing (Also known as target profit pricing) This involves setting a price to break even on the costs of making and marketing a product, or setting a price to make a particular profit that you have in mind (target profit)

One of the best ways to learn and understand key concepts in this or any course is to try to put them into plain ordinary language.

In common ordinary English words, explain why the difference between the selling price and the variable cost is divided INTO the amount of fixed costs.
Post your answer in the Moodle Discussion Group.

Competition-Based Pricing

This cartoon makes fun of what is actually a very serious business - knowing what your competitor is charging and understanding how to price with respect to that is one of the toughest decisions made in Marketing. 



III. Other Internal and External Considerations Affecting Pricing Decisions

Internal Factors Affecting Pricing Decisions

Marketing Strategy

Who are you as a company? What is important to upper management? 

Exercise: Plan
Organization Issues
What overall company factors will influence your choice of price in your Marketing Plan product? (e.g.: is your company an old firm upholding a reputation for quality, or is there something else important about your company that will lead you to set a particular kind of price?) 
Post your answer in the Moodle Discussion Group.

Marketing Objectives - What does your company want to do with this product? 

Survival - if you're about to go under, you price at whatever you think will bring in business

Current Profit Maximization - This is risky, as you are first of all estimating both demand and costs functions which gives you a figure that is to a large extent guess-work, but also because it encourages managers to think only in the short term

Market Share Leadership
When what you ultimately want is a higher market share than any of your competitors 
Product Quality Leadership
When you're the first name they think of when they want a trusted product

Marketing Mix

All the elements of the Marketing Mix have to work together in a common strategy. Even if we consider only variations in Price and Product Quality, there are nine major possible strategies 

Exercise: Lab

Go on a shopping trip or watch some television*. Find an example of a Premium Value Strategy and an example of an Economy Strategy; these should be fairly easy - more difficult: find an example of Rip-Off Strategy or a False Economy Strategy.
Post your answer in the Moodle Discussion Group.

* I am probably one of very few professors who will tell you that if you want to succeed in this course you'll need to go shopping more often and watch more television.  

External Factors Affecting Pricing Decisions 

The Market and Demand

Pricing in Different Types of Markets

Exercise: Plan
Types of Markets

Which kind of market are you entering with your Marketing Plan product?
Post your answer in the Moodle Discussion Group.

Consumer Perceptions of Price and Value (Demand and Supply)

Perception of Price
Is there something you have bought for which you paid much more than it actually might be seen to be worth in the market? 
Post your answer in the Moodle Discussion Group.

Analyzing the Price-Demand Relationship/Price Elasticity of Demand

Demand Type What Happens Occurs When Pricing Strategy Recommended
Elastic  percentage change in price causes a much higher percentage change in demand products have many substitutes and consumption is discretionary Lower price to sell more
Inelastic  percentage change in price causes a much smaller percentage change in demand products have few if any substitutes and consumption is necessary Raise prices to earn more profits

Give an example of a product with elastic demand
and of one with relatively inelastic demand.
Post your answer in the Moodle Discussion Group. 

The Economy

These include "Ethical Considerations" and "Legal and Regulatory Factors"

IV. New-Product Pricing

Market-Skimming Pricing is done to skim the highest price off the top of what people are willing to pay for a product. Few of you are probably old enough to remember when milk was sold (and delivered to your door!) in glass bottles with a narrow neck at the top in which sat the cream. Cream has more butterfat than milk and because oil is lighter than water, the cream rises to the surface, much as oil rises to the surface of a pot of homemade chicken broth. You then skimmed the cream off the top to save for coffee or to whip for dessert - hence the name of this pricing strategy (or you shook the bottle for a really rich bottle of homogenized milk). Note too the bottle cap, which was the inspiration for the children's game/collection item a few years ago - the POG. 

A Market Skimming pricing policy is often used for new technology products, where there will be people willing to pay a higher price to be the "first on the block" to own one. This policy can help a company overcome high technology costs. 


Market-Penetration Pricing

Exercise - Plan
Which will be most appropriate for your Marketing Plan product? Why? 
Post your answer in the Moodle Discussion Group.

Note that Market Penetration Pricing is not the same thing as 

Introductory Price Dealing - such as a special cents off coupon for cookies made to compete with Oreos (they weren't successful)

V. Product Mix Pricing

Product Line Pricing

Optional-Product, Captive-Product, By-Product, and Product-Bundling Pricing

For more about weddings and Marketing, check out an exercise in the Consumer Behaviour course, AK/ADMS3210 3.0.

VI. Price-Adjustment Strategies

Discount and Allowance Pricing

Exercise - Plan
Customer Adjustment
Which of these discounts or allowances can you make in marketing your Marketing Plan product? Describe any relevant ones and how they will work for your product.
Post your answer in the Moodle Discussion Group.

Segmented Pricing

Psychological Pricing

Retailers often set prices to make us feel we are getting a better deal than we really are. Deep discounts can be a real psychological lure. I have bought clothing I was 99% I would never wear because the price was right (a $149 dress for $5 at Winners).

What is a "high" price? Surely it's mostly in the mind of the consumer. If you think gas prices are high today, compare the cost per gallon to the cost of some other fluids (these are in US terminology - from an Internet article sent in by a student in this class in a previous term)

You Think Gas is Expensive at $3 a Gallon? 
Diet Snapple 16 oz $1.29 ....... $10.32 per gallon
Lipton Ice Tea 16 oz $1.19 ..... $9.52 per gallon
Gatorade 20 oz $1.59 ..............$10.17 per gallon
Ocean Spray 16 oz $1.25 ........$10.00 per gallon
Brake Fluid 12 oz $3.15 ...........$33.60 per gallon
Vick's Nyquil 6 oz $8.35 ...........$178.13 per gallon
Pepto Bismol 4 oz $3.85 ..........$123.20 per gallon
Whiteout 7 oz $1.39 ..................$25.42 per gallon
Scope 1.5 oz $0.99 ..................$84.48 per gallon
Evian water 9 oz for $1.49 .......$21.19 per gallon.
So, the next time you're at the pump, be glad your car doesn't run on water, or worse, Nyquil!
Pricing can also be psychological from the point of view of the retailer. In the spring of 2003 after the SARS outbreak, in order to bring tourists back to Toronto, Ed Mirvish (owner of Honest Ed's and the theatres at which Mama Mia and The Lion King were playing) got together with local hotels and the Blue Jays and offered a package deal for $125, which included a night in a luxury hotel, tickets to one of the two musicals, and tickets to a Blue Jays game. He was quoted in the Globe and Mail as saying that while no retailer likes to lower prices, "by putting it in a package, none of us feel our product is being discounted."  

This leads us right into Promotional Pricing. 

Special Pricing

After the SARS health outbreak in Toronto, all kinds of retailers and entertainers offered discounts to try to get Toronto back on its feet. What other examples can you cite of special discounting, special packaging of events of which you have personal knowledge, maybe even something you went to?
Post your answer in the Moodle Discussion Group.

Promotional Pricing

Geographical Pricing Pricing products for customers located in different parts of the country 


Dynamic Pricing We're seeing much more of this traditional method of pricing (think Bartering) as companies increase their sales on the Internet

International Pricing Pricing products for customers in different countries depending on local conditions 

VII. Price Changes

Initiating Price Changes

Responding to Price Changes

Exercise - Plan
Meeting the  Competition
What is your strongest competitor in your Marketing Plan doing about pricing? How will that affect your pricing policy? 
Post your answer in the Moodle Discussion Group.

VIII. Public Policy and Pricing 

Some things aren't considered nice to do in competition, some things are downright illegal, and some things that sound off-kilter are okay if done under the right circumstances. 

There are laws against price fixing and predatory pricing (at channel level) and against retail price maintenance, discriminatory pricing, and deceptive pricing (across channel levels). 

Outright deceptive pricing is illegal: 
But some forms of price discrimination are legal, for example this price discrimination based on product form: 

Even though the stereo parts only cost $5.00, the inclusion of them into the TV to make a different product (TV with stereo) legally justifies charging a higher price for the finished item (whether is fair to consumers is an issue to be dealt with in considerations of ethics, and in the market - will consumers buy the higher priced product? 

Compliance with the law ought to be the minimum standard but it rarely is. There are numerous example all around us of unfair pricing, of prices that are far too high, that disadvantage some groups of people, that prey on those in need, that take advantage of some people.

Exercise: Lab
Unethical Pricing

Can you find some examples of unfair pricing in that great big Marketing Laboratory out there in the shops and stores in the city where you live? Or on the Internet if it's too hot or too cold or too wet or you're too busy to go out?
Post your answer in the Moodle Discussion Group.

Pricing in the "Real" World - Stewart McLean on Earmuffs

From a Stewart MacLean radio talk (with Peter Gzowski) about earmuffs. It had recently come back into fashion, and a lot of the reason had to do with five of the most important elements of Marketing, including pricing. 

5 Important Elements of Successful Marketing

Hard Work
ncluding R&D and Product Development
"Just like the Marketing Professors tell you" the producer adds, the company was doing research on their product
Dumb Luck
Being in the right place at the right time: a European model visiting New York saw the earmuffs in a store and liked them; her husband worked in Marketing
Creative Thinking
How to make something very old-fashioned into a "new" fashion
Clever Packaging
They put the ear muffs in a box that looked like a hamburger container and called it the McMuff (didn't get sued by McD's as far as I know) 
Right Pricing
Price it under $10 and put it in a box and you've got an instant present
Click here to view a PowerPoint Pricing Presentation I used in on-campus Introductory Marketing courses.

Other Units

Introduction Strategy Society Environments Research Buyers
Segmentation Product Price Place Promotion The Marketing Plan

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AP/ADMS 2200 3.0 Introductory Marketing
York University, Toronto
M Louise Ripley, M.B.A., Ph.D.