Week 3 Discussion 1 & 2 in Principles of Marketing?

Discussion 1

Prior to beginning work on this discussion forum,

Read

Week 3 Lecture
Chapter 5 of the course text, Principles of Marketing

This week, you learned about the three core pricing strategies: penetration, neutral, and skim. In this interactive activity, you’re going to briefly recap the three pricing strategies, use them to classify the major pizza chains based on exploring the online ordering process, and then answer a few related questions. So let’s dig in!

+Re-familiarize yourself with the three main pricing strategies

+Research pizza prices for 5 different pizza brands

+Create a forum post that includes the following:

(a) a brief description of the 3 prices strategies, from least to most expensive

(b) Classification of the five brands into the 3 pricing strategies: Penetration, neutral and skim

(d)Include the kind of pizza you priced out, your recorded prizes and any other pertinent notes.

(e)Your classifications may differ from others but that is okay.

+Answer the following questions

(a) Did your perception of these chains pricing strategies change based on this exercise? If so how

(b) For you, which of these chains represent the greatest value and why? Explain how the mix of the 4 P’s of the marketing mix contributes to your answer.

(c) If you were to suggest 2 sales promotion strategies (section 5.4) to attract more sales for the brand that has greatest value for you, which 2 would you suggest and why?

(d) Name the promotional brand strategy and explain why this is best fit for the brand you picked.

Discussion 2

Prior to beginning work on this discussion forum,

Read

Chapter 6 of the course text, Principles of Marketing

Watch

What Is Integrated Marketing?

One Message, Many Media: Integrated Marketing Campaigns

To examine integrated marketing in action, you’re going to tell the story of a particular

campaign from your internship brand, you selected in Week 1, across multiple media for this interactive activity. We want to know what unifies the campaign and how the unique nature of each medium is being utilized (or underutilized if you feel so). And we want to hear if you think the campaign is effective or not and why.

+Refer to your text and define what IMC is:

+Identify a significant marketing campaign from your internship total brand

+ Create a new post determining the elements

(a)title and subtitle

(b) headings for the three media you found

Learning Outcomes

After reading this chapter, you should be able to

• Give examples of how buyer psychology influences pricing strategy.

• Describe four inputs to the strategic planning process for pricing decisions.

• Explain why a segmented price strategy is worth considering, despite its complexity.

• Explain the main objectives of sales promotions.

• Summarize three challenges to developing effective pricing strategies.

The Marketing Mix: Price

GA161076/iStock/Getty Images Plus

Pricing Basics

Introduction Musical icon Bruce Springsteen brought his talents to Broadway in 2017, choosing a theater with fewer than 1,000 seats for an event that combined storytelling with an intimate one-man performance featuring the Boss on piano and guitar. Springsteen set the ticket prices at $75 to $850; tickets were distributed through a lottery that required identity verification, with the intent to keep them from being resold by scalpers. But tickets leaked into the open market and could be found on StubHub at prices ranging from $1,200 to $9,999, the New York Times reported. With limited seating and apparently limitless demand, why would the Boss have chosen to price the tickets so much lower than fans were clearly willing to pay? We can’t peer inside his head or heart to know, but New York Times journalist Neil Irwin offered, “One view of the Springsteen approach is that it is economically irrational. But another is that it is part of a long-term relationship between a performer and his fans” (Irwin, 2017, para. 8). Besides a rare theatrical experience, Springsteen has given us a view into the complex world of pric- ing strategy.

Price plays two important roles in the marketing mix—it influences how much of an offer- ing will sell and how much profit the sale will generate for the seller. There’s seldom a good reason for pricing an offering so low that it does not cover its costs (unless, like Bruce Spring- steen, you have other motivations than profit). On the other hand, there’s no point in pricing an offering so high that no one will buy. Between those two boundaries lies every company’s pricing strategy.

“Price” is a quantifiable way of measuring the value customers place on an offering. Marketers must understand the relationship of price to value, as value reflects—and affects—the brand image of the offering and the company selling it. This chapter examines the decision pro- cess that marketers go through in setting prices, while familiarizing you with the terminology marketers use. You will learn about strategies and tactics that apply to pricing, and about the challenges that make determining a pricing strategy for an organization’s goods and services so complex. By the conclusion of this chapter, you will recognize how Marketing 3.0’s call for more humanity-centric marketing practices influences this P of the marketing mix.

5.1 Pricing Basics What is a price, exactly? The AMA (2017b) defines price as “the formal ratio that indicates the quantities of money, goods, or services needed to acquire a given quantity of goods or ser- vices” (para. 219). At its simplest, price might be described as what a customer has to give up in order to get what he or she wants to buy. That customer’s sacrifice might consist of money, time, and/or effort.

Developing a pricing strategy is a requirement for every single business that brings an offer- ing to market. (A note about terms: offering is used throughout this chapter when the unit for sale may be either a product or service. Since most of the principles of pricing apply equally to goods and services, the use of offering prevents unnecessary wordiness.)

The right pricing strategy can lift a brand’s cachet and lock in loyal customers for the long term. The wrong pricing strategy can rob a business of its competitive edge or starve it by failing to generate sufficient revenue to cover costs.

Section 5.1

Section 5.1Pricing Basics

In many cases a price is accompanied by adjustments that raise or lower it—incentives, allow- ances, and/or extra fees. The amount a buyer will actually pay for an offering is seldom repre- sented simply by the price listed for it. Consider tuition for education (yet another name for a price). A school publishes its tuition structure. The institution may offer scholarships and other financial aid that reduces that price. It may charge special activity fees that raise that price. It may charge interest to students who opt to pay over time. All those factors affect the price of a semester’s course work.

If you chose to pursue your education online, you participated as a buyer in the exchange of a quantity of money (tuition) to acquire a given quantity of services (education) from the seller, to paraphrase our definition of price. Interest in distance learning is booming as more people understand the cost savings and the convenience of taking a course from anywhere, and more people have the equipment and online skills to take advantage of those benefits.

The fact that pricing strategy is complex is reflected in the many terms used for price. Con- template the number of ways we refer to prices by matching the terms in Table 5.1 with the offering they purchase. See table 5.2 for answers.

Table 5.1: Many ways to say price Offerings Terms

Sandwich Rent

Credit card Subscription

Lawyer Interest

Trade association Fee

Bus trip Fare

Apartment Dues

Mobile app Price

Instructions: Match the terms in Table 5.1 with the offering they purchase.

Why so many names for essentially the same thing—money exchanged for ownership or use? Because purchase exchanges happen in so many aspects of our culture.

Table 5.2: Many ways to say price answers Offerings Terms

Sandwich Price

Credit card Interest

Lawyer Fee

Trade association Dues

Bus trip Fare

Apartment Rent

Mobile app Subscription

Note. Price goes by many names in daily life.

Section 5.1Pricing Basics

Price and the Marketing Mix The marketing mix, as you have learned in previous chapters, consists of the four Ps of product, place, price, and promotion. From the marketing orientation, which places customers at the center of all mar- keting mix decisions, we recognize that pricing strategy must begin with under- standing how customers decide what to pay for what they buy. Price can be led or driven by the other four Ps of the market- ing mix but cannot be divorced from them.

As you learned in Chapter 1, the customer value equation (the relationship between perceived benefits and the sacrifice required to get those benefits) is dynamic. As perceived benefits increase, value increases; so does the customer’s estima- tion of a fair price for those benefits. This illustrates how a pricing strategy interacts with other aspects of the marketing mix.

Factors affecting the price a company charges for its offerings include customer expectations, competitors’ pricing strategies, and the brand image a company has chosen to project, since price reinforces brand identity. A luxury offering like a cruise cannot be priced below a cer- tain amount and maintain its luxury aura, nor can a bargain offering like bulk-pack paper tow- els be priced above a certain point and still maintain its value positioning. Similarly, customer expectations and competitors’ prices determine a range outside of which a price fails to be perceived as a good value.

Customers’ Expectations and Pricing Strategy Consumers must assess the value they’ll place on an offering, which means estimating what service it will render. Does it fill a basic need or something less urgent? This is the realm of psychology, where motivation, belief, and perception come into play. Let’s look at how the psychological factors influencing buyers’ purchase behavior shape sellers’ pricing decisions.

The entire purchase situation affects consumers’ perception of value. In the bricks-and-mor- tar world, how products are displayed, what items are nearby for comparison, how helpful the sales staff is, how attractive the store seems—all of these affect consumer perception and thus expectations about prices. Likewise, online shoppers look for ease of navigation and comparison among offerings, clear explanations of shipping and return policies, and cus- tomer testimonials to help them form perceptions about price. And of course, many people blend online and bricks-and-mortar shopping behavior concerning price before making a purchase—for example, choosing to avoid shipping charges by having a product delivered for pickup at a nearby store.

tupungato/iStock Editorial/Getty Images Plus The brand image a company selects affects the price of its merchandise, since price reinforces brand identity. A luxury offering cannot be bargain priced and still maintain its high-end positioning.

Section 5.1Pricing Basics

Interestingly, consumers are prone to perceive the purchase situation inaccurately and to react to their inaccurate evaluation of the situation. If the brochure for your whale-watching cruise to Alaska depicted whales airborne in gymnastic leaps, and yet as a traveler you only witness a few humps breaking the ocean’s surface, you could feel your cruise was overpriced.

Fortunately, the psychology of price perception and assignment of value has been well researched (Nagle & Holden, 1995). What does that research tell us?

First, marketers should be aware of reference pricing—the concept that consumers hold reference points in mind regarding the expected price of many offerings. Whether remem- bered, researched, or inferred from the buying situation, the reference price represents “a fair price” in the consumer’s mind. The reference price is often a price range. The width of that price range held in the consumer’s mind affects his or her judgment of the attractiveness of a posted price. Changes in context around the offering for sale can bring about changes in the price range evoked in consumers’ minds and thus change perceptions of the attractiveness of a specific price (Janiszewski & Lichtenstein, 1999).

For an example, consider a Le Creuset iron skillet. The same product is available through sev- eral online retailers, including Williams-Sonoma.com, AllModern.com, CutleryandMore.com, and of course, Amazon.com. Each product listing includes a “suggested price” of $250 to $285 and a “sale price” within a few cents of $200 (Streitfeld, 2016). Thanks to the skillet’s refer- ence price range, the savvy chef knows that $200 is a fair price.

Customers typically know the prices of items they buy frequently. Their reference price ranges on those items act as signposts that signal a store’s prices in general (Anderson & Simester, 2003). If a store charges more than expected for Coca-Cola, for example, a consumer is likely to assume that all items in the store are more expensive than they should be. Most people lack the time and inclination to research stores and compare brands to be sure they are getting the best deal. Perceptual cues such as sale signs and prices ending in 9 are surprisingly effective in influencing consumers’ beliefs about prices. Reference pricing, signposts, and perceptual cues are all factors in consumers’ assessment of price and value.

Other factors that influence perceptions of price include promotions, such as “buy one, get one free” offers that invoke mental math leading to a favorable assessment of the posted price, and marketing that links a specific purchase with a social cause or issue.

Finally, marketers must recognize potential buyers’ resistance to change. When a purchase will require buyers to spend on additional goods or services to gain its full value, they hesi- tate. This spending, termed switching costs, can take several forms: Opportunity, implemen- tation, and conversion can each carry costs not included in the offering’s price, and they place a burden on the buyer, as the following examples show. A member of an airline’s frequent flier program considering a switch to another will face an opportunity cost: The new pro- gram will bring some additional benefits, but the flier will have to surrender perks of his or her previous program. Implementation may require additional purchases, such as Apple’s iPhone 7, released in 2016, which did not include a headphone jack. Users needed to purchase Lightning or Bluetooth headphones, which were more expensive than traditional earbuds and other headsets that used the traditional 3.5mm connector. A business switching software for its clerical workforce might have to spend on employee training or conversion of existing template documents.

Section 5.1Pricing Basics

Companies can respond to, but not change, how consumers’ minds work. Buyer psychology— why people buy things—must be taken into account as marketers develop a strategic market- ing mix. Pricing decisions will reflect this.

Elasticity of Demand Customers’ expectations have a profound impact on pricing, as has just been shown. So do the economic concepts of supply and demand. Supply represents the amount of a product sell- ers make available and demand the amount buyers want to purchase. When supply exceeds demand, buyers have greater control over the price suppliers can charge for an offering. When demand exceeds supply, sellers have greater control over pricing.

Supply and demand curves represent this concept visually. The demand curve almost always slopes downward as price decreases and quantity increases, because consumers will typi- cally buy more of the offering as its price goes down. The supply curve slopes upward as the price increases, because consumers will buy less as the price goes up. This model rests on assumptions that the marketplace follows a perfect competitive model in which no firm has influence over the market price and that a sufficient supply of buyers and sellers exist with adequate information about product qualities and availability. In this model, the point at which buyer and seller equilibrium meet is their shared equilibrium point, as shown in Figure 5.1. At this position, the price of an offering generates an equal amount of demand and supply for that offering.

Field Trip 5.1: Reference Pricing and the U.S. Health Care System

In most areas of our consumer purchasing behavior, we can easily compare prices and rely on reference pricing, signposts, and our estimation of switching costs to make reasoned choices. Cost for health care procedures in the United States, however, has been notoriously difficult to compare. The company FairPrice Healthcare launched with a value proposition to change that, using a social community model and a database that offers health care providers for comparison based on geography, quality, or cost.

View an advertisement for FairPrice Healthcare here:

FairPrice: How We Help You Save 30% on Your Healthcare

According to a company press release, FairPrice Healthcare (2016) is “positioned to battle the cost of healthcare with transparency and fairness” (para. 1).

Have you ever shopped for a medical procedure based on cost?

What challenges do you see for health care providers in the face of this disruptor?

Section 5.1Pricing Basics

Figure 5.1: Supply and demand curves

Supply and demand can achieve a point of equilibrium.

Other factors in the marketing mix, such as product quality, promotion, and distribution (place), can shift the demand curve, allowing a company to sell more product at the current price, or the same amount of product at a higher price—within reason. Shift too far, and con- sumer perception of value will falter. Prestige products, such as cosmetics, can demand a higher price because reference pricing tells consumers they have bought “the very best.” But if the price of cosmetics were to rival the price of a person’s weekly groceries, he or she might decide to switch to a cosmetic brand at a lower price point.

Of course, there are many determinants of demand, such as individual tastes and the existence (and price) of substitutes, in addition to the price of an offering. Even so, the model provides a good enough approximation of marketplace behavior that predictions based on the model are useful—one reason it is considered fundamental to pricing strategy (Schenk, 2012).

Let’s apply supply and demand curves to higher education: The lower the tuition (price) for campus-based courses, the higher the quantity of those courses students will sign up for. The higher the tuition for those classes, the smaller the quantity those same students can afford, and so the number of course enrollments (sales) will decrease. The existence of substitutes, such as similar courses offered online, affects demand for the campus-based offering.

Price changes affect demand. A product that a buyer perceives as a good value when priced at $50 likely won’t seem such a good value if priced at $100. This introduces the concept of elas- ticity of demand—the degree to which demand for a product or service varies with its price.

Quantity

P ri

Demand curve Supply curve

Equilibrium price

E q

u ilib

riu m

q u

an tity

Section 5.1Pricing Basics

Demand for a product or service is considered highly elastic when a small change in price brings about a large change in sales. Demand for an offering is considered highly inelastic if a big price change has little effect on sales. Every offering falls somewhere between elastic and inelastic in the eyes of any given market segment; that elasticity of demand will vary from one segment to the next.

Consider your investment in education. Would an increase by $25 in the tuition you paid for a course change your decision to enroll? If you answered yes, your demand is elastic—it snapped like a worn-out rubber band in response to a small upward change. If you answered no, your demand is inelastic—a price change did not affect your demand, because of the high value you place on higher education.

Marketers strive to position offerings so that demand for them becomes more inelastic. Com- panies selling products with highly elastic demand cannot raise prices, since demand will fall off. They must instead rely on controlling costs to generate profits. Companies selling offerings with inelastic demand have more freedom to charge higher prices and thus gener- ate more profits. Branding can turn even basic commodities into premium-priced offerings. Consider bottled water: While many brands are accepted as interchangeable commodities, some consumers are quite willing to pay for the higher priced FIJI, Voss, or Perrier brands.

Demand can fluctuate based on factors other than price, such as seasonality or environmental factors. Fireworks can demand a higher price as the Fourth of July nears, as can roses around Valentine’s Day. Forest fires and floods can destroy crops, causing shortages that affect prices and demand. In some cases prices are governed by price controls, in which the government intervenes in the free market to protect consumers by setting a price ceiling or producers by setting a price floor. Examples include limits on interest rates that protect consumers from payday lenders (a price ceiling) and agricultural supports that keep farmers’ price for com- modities above their costs of production (a price floor).

Where the demand for an offering is highly elastic, consumers experience price sensitivity— the degree to which the price of a good or service affects a consumers’ purchasing behavior. Consumers are sensitive about how much they pay and will turn to lower priced substitutes if the original item they wanted is too expensive. Some factors that affect consumers’ price sensitivity include the following:

• the number of close substitutes • the cost of switching between products • the price of related goods or services • the degree of necessity of the offering • the percentage of the consumer’s income that the purchase will require • tastes or preferences of consumers • the time available for making the decision to purchase • consumer expectations about whether the price will go up or down • whether the offering is subject to habitual consumption

One or a combination of these factors can shift price sensitivity toward elastic or inelastic in a given market.

Section 5.2Strategic Planning for Pricing Decisions

Each of a company’s offerings might experience a different level of demand, with differ- ing degrees of elasticity and price sensitivity, in relation to different market segments. No wonder developing a pricing strategy is complex! Marketers must estimate demand and price sensitivity when considering where to set prices. An estimate that misses the mark will hurt revenue.

As has been shown, marketers need to understand the interactivity of pricing strategy with the other Ps of the marketing mix, how customer psychology drives perceptions of pricing, and how elasticity of demand affects their offerings—that is, whether demand will snap (behave elastically) in the face of price changes.

Some ways that buyer psychology affects pricing strategy are reference pricing, signposts, and perceptual cues. Also influential are sales promotions and links to social causes, which cast prices in a new context of added value either through quantity of goods received or qual- ity of engagement with the brand and the social or environmental causes in the larger world.

5.2 Strategic Planning for Pricing Decisions Pricing strategy decisions are driven by situational factors, including customers’ expecta- tions, competitors’ moves, and the company’s brand position. Strategic planning leads to pric- ing decisions designed to achieve overall company objectives, as well as specific marketing objectives.

Pricing decisions have far-reaching implications for the operations of an organization. These decisions must be based on sound strategy that takes into account four influential factors:

1. cost to produce the product 2. target market 3. environment 4. differentiation strategy

Marketers apply the strategic planning process (which was discussed in Chapter 2) to pric- ing just as they do to arrive at strategies for the other areas of the marketing mix. Figure 5.2 shows the four influencing factors of price decisions as inputs to the strategic planning process.

Questions to Consider

Describe the elasticity of demand in the following scenarios. Would you change your plans for a family driving vacation if the price of gas spiked up? How about a designer handbag: If you worked in the New York fashion world, would you pay whatever it took to carry the current “it” accessory? Explain your thinking.

Section 5.2Strategic Planning for Pricing Decisions

Figure 5.2: Inputs and processes of effective price strategy

Four factors are inputs to the strategic planning process by which marketers arrive at a pricing strategy.

Strategic planning cannot be done in a vacuum. The process must begin with situation analysis so that resulting plans take into account internal and external factors. Internal factors, such as the cost to produce the product, are relevant, as is the influence of strategies for target mar- keting and competitive differentiation. Meanwhile, the environment includes an extremely important external factor affecting pricing: the psychology of buyers.

Input: Costs A company’s financial managers as well as its marketers take a great interest in this input to the pricing decision, but from different perspectives. While the financial manager is primar- ily interested in how high prices can be set to achieve profit objectives, the marketer is more interested in how low prices can go to achieve sales volume objectives. The two must collabo- rate to reach a coherent pricing strategy (Nagle & Holden, 1995).

Production costs set the “floor” price, below which sales cannot translate to profits. Con- sumers’ perceptions create the “ceiling” price, above which there will be no demand for the offering, given consumers’ estimation of its value. In between those two points, internal and external factors exert their influence on what the price strategy will be. Companies select a methodology by which to calculate price ranges (somewhere between that floor and ceiling) that will meet their organizational goals, choosing from the following approaches.

Costs Target market Environment Differentiation

Situation analysis

Objectives

Goals

Tactics

Pricing strategy

Section 5.2Strategic Planning for Pricing Decisions

• Cost-plus: Adding a standard markup to unit cost derived by adding fixed and vari- able costs of production.

• Target profit: Calculating breakeven costs of making and marketing a product, selecting a price to make a target profit above that cost.

• Competition based: Setting prices based on competitors’ prices for similar offerings.

• Value based: Using buyers’ perception of the customer value equation to design an offering that can be sold profitably at a price buyers recognize as fair.

• Markup: Adding a constant percentage to the cost paid for an item to arrive at its selling price.

Increasingly, companies are turning to the value-based pricing method to ensure they are offering good value at a fair price (Kotler & Armstrong, 2006). The value-based method offers the most potential for competing on real points of difference among offerings, thus escaping competition on price alone. By estimating the economic value to a customer in order to set prices, marketers gain fundamental insight to inform all decisions of the marketing mix. Posi- tioning becomes the driver rather than price competition.

The key to determining the price at which sales will be profitable is the breakeven analysis, which calculates the point at which a company’s total sales revenues equal total expenses. This is the lower limit a pricing strategy must deliver in sales. The analysis is essentially a what-if exercise that projects the breakeven point, given specific assumptions about sales volume and pricing.

The breakeven analysis depends on four key assumptions:

1. the price received per unit sold 2. the incremental cost, or variable cost, on average, of each unit sold 3. monthly fixed costs, those associated with normal operations of the business 4. sales volume (how many units will be sold)

Fixed costs remain largely the same despite changes in production volume, such as rent, insurance, and new product development. Variable costs fluctuate with production volume; for example, process materials or sales commissions.

Managers use the estimate of sales volume to calculate the variable cost total and the total sales revenue (price multiplied by units sold). Estimating a specific sales volume allows them to perform the following calculation:

Breakeven point (in dollars) = Total fixed cost/1 – Cost per unit price

Managers then vary their assumptions to see how changes in the estimate of costs, sales, or price per unit will change the breakeven point, as illustrated in Figure 5.3.

Section 5.2Strategic Planning for Pricing Decisions

Figure 5.3: Breakeven point

Managers estimate the costs, sales, and price per unit of each offering in their product line to establish a breakeven point.

Helpful as it is, this breakeven analysis method showing the effect of changing output on reve- nue hasn’t taken into consideration consumer demand. Therefore, managers typically modify this approach by creating estimates of the number of units consumers are likely to purchase at each of a series of retail prices, taking into account elasticity of demand and potential buy- ers’ price sensitivity. These data can then be superimposed onto a breakeven chart to reveal feasible prices, as shown in Figure 5.4. With this calculation, both financial managers and marketers have solid data to inform a value-based pricing strategy.

Output

Break-even point

ProfitLoss

Variable costs

Fixed costs

�

Costs

Income

Section 5.2Strategic Planning for Pricing Decisions

Figure 5.4: Breakeven trade-off between price and sales volume

To arrive at a value-based price strategy, marketers estimate demand at various price points, taking into account elasticity of demand and buyers’ price sensitivity.

Breakeven analysis will reveal feasible prices at which sales will generate revenue, based on the seller’s fixed and variable costs and the nature of buyer demand. It’s important to note that additional factors affect price and must be accounted for.

Another tool, price waterfall analysis, is used to model the actual profit the firm retains on a sale at a specific price after transactional costs that impact price, such as discounts and other incentives, have been applied.

The price waterfall begins with the list price or manufacturer’s suggested retail price, the price a company officially displays to buyers. Significant sums can leak away as buyers receive promotional “give-backs” such as free shipping, volume discounts, and bonuses for paying cash. That initial price is gradually nibbled down through transactional costs to arrive at the final pocket price the seller actually receives. The pocket price has to cover costs and con- tribute to profit margin (the amount by which revenue from sales exceeds costs), so it must reflect the breakeven point.

In a complex distribution channel, nibbling might occur at multiple steps along the way from manufacturer to end consumer, creating a significant “hole in the pocket.” Figure 5.5 illus- trates a price waterfall for automobiles sold by General Motors.

Quantity

R ev

en u

e an

d c

o st

Quantity R

ev en

u e

an d

c o

st s

Revenue at $15 per unit

TR1 ($15)

TR2 ($10)

TR3 ($9) TR4 ($8)

TR5 ($7)

Breakeven points

Revenue at $10 per unit Revenue at $9 per unit

Revenue at $8 per unit Revenue at $7 per unit

Total variable cost $5 per unit

Total fixed cost $40,000

Demand curve

Total fixed cost

Total cost Total cost

Section 5.2Strategic Planning for Pricing Decisions

Figure 5.5 Price waterfall

The price waterfall graphically represents how a list price is gradually reduced to a pocket price.

Price waterfall, from Dr. Tim J. Smith, Ph.D., “GM May be Learning Price Discipline Growing Margins While Lowering Prices by Tilting the Price Waterfall Vector, Wiglaf Journal, December 2006. Reprinted by permission..

Input: Target Market For this input to the pricing decision, customers’ perception of value, the elasticity of their demand, and their price sensitivity (which determines the maximum price feasible to charge) come into play.

Marketers estimate the price sensitivity of buyers in the target market(s) using both the eco- nomic and psychological factors affecting buyers. Blending these factors, marketers can esti- mate a product’s economic value, defined as the reference price the buyer assigns to the features that differentiate an offering from the alternatives available at the reference price. The differentiating value can include negatives as well as positives. Looked at this way, the economic value is the price that well-informed shoppers, seeking the offering best suited to their needs, would consider a good value.

However, not all buyers make purchase decisions exactly as economic value would predict, because the expenditure is small (not worth the bother of evaluation), someone else is paying, or a desire to impress others causes the buyer to choose a higher priced alternative. Again, understanding distinct market niches will help marketers anticipate responses to various price scenarios, taking into account economic value. Given the arguments in favor of a seg- mented price strategy, understanding the target market means understanding many distinct market niches, each affected by economic and psychological factors in different ways.

The target market input to pricing strategy emphasizes creating lasting relationships with customers by delivering a satisfactory customer value equation.

Input: Environment This input to the pricing decision covers the external factors influencing a company’s pricing decisions—economic conditions, intermediaries, competitors, and social concerns.

MSRP Invoice price Pocket price

Promotional incentives

Cash rebates

Standard dealer

discounts

Section 5.2Strategic Planning for Pricing Decisions

Economic factors such as recession, inflation, and changes in interest rates affect the macro environment—competitors and consumers all feel the same pressures. A price increase may be needed to cover costs of production hurt by negative economic trends, and yet prospec- tive buyers—also feeling the pinch—may be more price sensitive than ever. Competitors and channel partners may react to economic forces with their own price adjustments. Both con- sumers and business leaders increasingly place expectations of social sustainability on com- panies, creating the triple bottom line of responsibility for social and environmental impacts as well as financial profitability. Any or all of these factors can alter the assumptions driving a breakeven analysis.

Marketers must consider the nature of the marketplace in which a company competes, tak- ing into account how many and what kind of competitors exist and whether the offerings for sale are uniform commodities or highly differentiated offerings. Sellers of undifferentiated offerings have little power to increase their price without losing sales volume, unlike sellers of highly differentiated goods or services. And this leads us to the final input to the pricing decision: differentiation strategy.

Input: Differentiation Strategy This input to the pricing decision involves an offering’s positioning strategy, which in turn flows from market segmentation and targeting. This is where consumers’ perception of the expanded product (discussed in Chapter 3) comes into play: the desirability of the brand, based on its ability to differentiate itself from competitors on attributes that matter to consumers.

In 1980 American economist and Harvard Business School professor Theodore Levitt wrote:

Any product can, in principle, be distinguished from the commodity mass. The key is recognizing that what buyers purchase is more than just the physical product or particular service exchanged. They buy an entire package—includ- ing the ease of purchase, terms of credit, reliability of delivery, pleasantness of personal interactions, fairness in handling complaints, and so on—that is called the augmented [enhanced] product. Even when the physical product or service is immutable, the augmented product is invariably differentiable. (pp. 58, 83–91)

Differentiation strategies were covered in Chapter 3. What’s important to realize, in applying that knowledge as an input to pricing decisions, is the tremendous effect that product strat- egy has on price—and the effect that price has on product strategy, since it supports product positioning.

Let’s consider one of the ways product strategy affects pricing: product line pricing.

Buyers’ psychological reference pricing comes into play in evaluating individual products in a product line. When items with added features are priced in increments, the cost difference between the products signals quality or feature differences. For example, a line of Black & Decker Dirt Devil hand vacuums begins with a basic model, topped by several more expensive models promising added power and useful accessories at incrementally higher prices.

Section 5.3Pricing Objectives, Strategies, and Tactics

Sellers naturally want to sell more of the more expensive items. But buyers will rarely opt for the highest priced item, not wanting to be seen as ostentatious consumers or “easy marks.” A simple response in pricing strategy is to set the price of the most expensive item in the line quite high, in effect ratcheting up the other prices in relation to it, which will thus posi- tion them as better values by comparison. As long as the seller’s marketing messages convey quality differences between the offerings, the strategy delivers perceived value to buyers and profits to the seller.

In conclusion, a company’s strategic planning to determine pricing strategy must consider four factors. Production costs must be calculated to determine a breakeven point that takes into account fixed and variable costs. The target market’s perception of the product’s eco- nomic value must be understood. External environmental factors will affect the success of any pricing strategy. Aspects of the offering that differentiate it from competing options affect the customer value equation, and so product strategy must also be included in strategic planning to determine pricing.

5.3 Pricing Objectives, Strategies, and Tactics A company’s pricing strategy reflects the sum of its activities aimed at finding a product’s optimum price. Pricing strategy takes into account overall marketing objectives, consumer demand, product attributes, competitors’ pricing, and market and economic trends. The prices consumers encounter in advertising and at the point of sale are just the tip of the ice- berg. The company cannot set a price higher or lower than customers expect. Competitors’ pricing also constrains the price range a company can charge and yet remain competitive. And intangible factors, like a musician’s loyalty to his longtime fans, can influence pricing decisions in seemingly irrational ways.

Certain overarching questions must be addressed as a company develops pricing objectives, which will drive choices of strategy and tactics to come. Will it choose to emphasize volume or profit? For how long? And will it adopt a fixed or variable approach?

Field Trip 5.2: When List Prices Become Meaningless

Retailers once depended on list prices or the manufacturer’s suggested retail price to entice buyers to view a lower price as a good value. But online retailing has disrupted that standard. Read about this trend here.

Amazon Is Quietly Eliminating List Prices

https://www.nytimes.com/2016/07/04/business/amazon-is-quietly-eliminating-list -prices.html

Think about a recent online shopping experience: Did a list price affect your purchase decision? Considering this trend, do you feel some form of government regulation to protect consumers is necessary?

Section 5.3Pricing Objectives, Strategies, and Tactics

Objective: Volume or Profit Maximization? The question of volume or profit maximization is answered by what a company wants to achieve through pricing. Because pricing objectives form the basis for subsequent decisions, they should be stated in measurable terms, with a specific time frame.

In the volume maximization approach, the company’s primary objective is to generate as much sales volume as possible (number of units sold). Prices are set low, even below cost, in order to draw more sales. A firm might choose volume maximization during its start-up phase or during a period of setbacks that make short-run losses an acceptable tradeoff for increased likelihood of survival. Volume maximization is a short-term strategy intended to generate sales volume quickly. This can be effective to build up cash on hand, expand a customer base, attract customers from competitors, or dispose of unwanted inventory. The underlying goal is often to increase market share and reduce costs, resulting in long-term profits.

On the other hand, the pricing objective of the profit maximization approach is to generate the highest net income over time. The main difference between volume maximization and profit maximization is the financial effect. Profit maximization requires that all sales maintain acceptable profit margins. Profit maximization addresses the profit objective directly with a focus on positioning a brand for long-term success.

When Starbucks raised its beverage prices by an average of 1% in 2013, the company’s net income was already healthy, and coffee prices were falling—so what was the justification for this price increase? Profit maximization. The Great Recession of 2007–2009 had already caused Starbucks’ more price-sensitive customers to trade down to cheaper options (McDon- ald’s had introduced its McCafé coffee drinks in 2009). Starbucks’ loyal, higher income con- sumers were less price sensitive (an example of inelastic demand). Paying a dime more for what they viewed as “an affordable luxury” would not faze them. Starbucks’ marketing com- munications associated the increased price with an increase in commodity costs and empha- sized that less than a third of beverages were affected, making the price increase seem insig- nificant. Starbucks generated higher net income, without affecting the brand’s reputation with consumers, by maximizing the profit on every beverage sold. This is an example of a value-based strategy, discussed earlier (Dawson, 2013).

In many cases profit maximization is the overarching objective, but volume maximization takes temporary priority—for example, near the end of a quarter or fiscal year. In some busi- nesses with a social mission, making sufficient profits to sustain operations takes priority over a “more is better” objective. Before marketers can establish the pricing strategy that will form the basis for day-to-day decisions, they need deep understanding of overall company strategy and pricing objectives.

Strategy: One Price or Many? The varying price sensitivity among market segments introduces the possibility of charging different prices to different segments. When different market segments have different per- ceptions of value, a different price can be charged to different customers or at different times. With this variable pricing strategy, a company can generate more revenue from market

Section 5.3Pricing Objectives, Strategies, and Tactics

niches willing to pay higher prices and still maintain sales to those placing a lower value on that offering.

On the other hand, a fixed pricing strategy, in which the same price is charged to all cus- tomers, is easier to administer. Training the customer service staff and accounting for sales is easier, but the rigidity of this policy can seem unfriendly to customers, and revenue oppor- tunities could be lost. If a company chooses a fixed price strategy, it must decide whether to occupy the high-, average-, or low-price position.

The goal of variable pricing is to ensure that companies are selling the right product to the right consumer at the right price, while steering clear of illegal practices. U.S. law prohibits price discrimination, defined as the practice of charging different prices to different buyers for goods of like grade or quality.

The norms of specific industries tend to define which companies opt for a variable pricing strategy. The tiered pricing plans common among cell phone carriers are an example of a variable pricing strategy designed to avoid problems with overburdening existing networks while allowing carriers to make money from mobile data and applications, rather than just voice minutes (Wortham, 2011). Tiered pricing is legal because each tier represents a bundle of different service options for calls, text messaging, and data usage.

The primary disadvantage of a variable pricing approach is the potential to run afoul of laws prohibiting price discrimination, while the advantage is the potential to experiment with price points to maximize the profitability of each customer. Given that computers are typi- cally involved in calculating prices and that big data on customers is available for analysis, the potential to run real-time experiments (for example, an online retailer cutting prices for a few hours to see whether demand is stimulated) gives variable pricing a strategic advantage.

Variable pricing is accepted in many parts of the world. Haggling is an ancient form of variable pricing. North Americans tend to expect marketers to practice a one-price policy, represent- ing the fundamental fairness of a democracy. A company’s strategic decision to pursue a fixed or variable pricing strategy must take this into account.

Field Trip 5.3: Should Women Pay More?

Women’s products cost far more than men’s in dozens of categories, ranging from toys, to dry-cleaning services, to personal care products. No federal law prevents this, and few women notice it because they have become conditioned to pay more for items like clothes and personal care products.

Read about the phenomenon in this 2015 Time magazine article:

http://time.com/4159973/women-pay-more-everything

View a CBS News report:

https://www.cbsnews.com/videos/cbs-news-goes-undercover-to-investigate-gender -price-gap

Is gender-based pricing justified? Explain your reasoning.

Section 5.3Pricing Objectives, Strategies, and Tactics

Pricing Tactics for Every Situation Having chosen an objective of either vol- ume or profit maximization, as well as a one-price or variable pricing strategy, it falls to marketers to fine-tune their choice of pricing strategy with tactics that fit the specifics of their situation.

Marketers in service industries can adopt peak-load pricing to counter the perish- ability of their offerings. Similarly, mar- keters can adopt yield management to exploit timing to generate sales while managing a fixed, perishable capacity. Most people have had experience with airlines’ use of price changes to profit- ably manage the fit of a fixed supply to a varying demand. Airlines change prices frequently—even minute by minute— depending on their supply of seats and demand for them.

Marketers can position themselves as the low-cost provider with strategic use of loss lead- ers—products sold below cost with the intention to attract customers who will purchase other, profit-generating goods as well. Loss leaders are typically high-profile brands that lead to repeat purchases, like razors and printers, or services like oil changes.

Marketers can adopt a cocreation model, in which customers bundle options to design their own offerings that suit their individual ideas of value. Vans shoes offer an example: Customers can specify a shoe style, choose fabrics, and upload artwork to be printed on their customized shoes. This tactic attracts consumers who value engagement and customization. A company can participate in a dynamic pricing model, in which buyers collaborate with the seller, allowing retailers to offset the threat created by price comparison, which drives prices down and narrows profit margins. Online auction sites like eBay are one example of businesses using a dynamic pricing model; hotels and transportation companies that adjust prices based on temporary fluctuations in demand are another. Coca-Cola tried dynamic pricing when it fielded a vending machine designed to adjust the price of an ice-cold bever- age based on external temperatures. Temperature sensors allowed the machine to be pro- grammed to respond to rising temperatures with a price increase. An outcry and threat of boycott, plus promises from rival PepsiCo to avoid such practices, caused Coca-Cola to end the experiment (Swabey, 2007).

E-commerce facilitates dynamic pricing, which gave rise to the Name Your Own Price (NYOP) variation popularized by Priceline.com. Unlike the traditional seller-driven pricing model, in which the seller prices the goods, leaving the buyer to “take it or leave it,” the NYOP approach is buyer driven. In response, sellers opt for opaque exchanges, strategically withholding information from customers who may not know the exact features of their purchase at the point of payment. Processing is fast, and competition among customers is minimized since no

anama7/iStock Editorial/Getty Images Plus Dell Computers was one of the first to adopt the cocreation model, offering a base price for spe- cific features and then encouraging customers to customize features to create a unique product.

Section 5.3Pricing Objectives, Strategies, and Tactics

one knows what anyone else is paying. NYOP gives firms more leverage in inventory control and pricing to different segments. But in the end, it may be a double-edged sword, making it difficult to predict profit margins and increasing buyer-driven sales by cannibalizing seller- driven channels (Huang & Sosic, 2011).

The subscription pricing model focuses on creating “forever transactions”—ongoing reve- nue from loyal subscribers who engage with a company or organization over time, through automated payments that give access to goods or services, such as a subscription to Netflix or Dollar Shave Club. Some companies take this idea further, seeing a subscription as merely a financial arrangement, versus the feelings of belonging and engagement that accompany a richer membership experience. Caesars Entertainment Corporation’s Total Rewards program is an example: The company (which sees itself as in the entertainment business, not simply as a gaming company) uses member segments to provide differentiated sets of benefits and offers and empowers frontline employees to use that data to make members’ visits special by offering a favorite wine or room location (Baxter, 2015). These membership economy busi- nesses tie into timeless human psychology while helping people fill specific needs and desires. Subscription and membership businesses often deploy a freemium pricing tactic—the term is a combination of “free” and “premium.” In this strategy, customers are given a basic level of service for free, with options to pay for additional value. MailChimp, an e-mail marketing soft- ware platform, is one example. LinkedIn is another.

Pricing is tightly tied to consumers’ perceptions of a brand. Marketers can signal position- ing of their brands by choosing a high-, average-, or low-price point in relation to competi- tors, as mentioned earlier. Skim pricing is defined by setting prices high to attract higher income groups for luxury or status goods. Neutral pricing is defined by matching prices of the general market, a decision that shifts comparison to other features of an offering. Pen- etration pricing is defined by keeping prices low in comparison to competitors’ and widely promoting an offering to quickly achieve more sales to more buyers. Opting for a penetration price works best when the seller intends to maintain consistency of pricing, forgoing use of sales events or other discounts that would lower revenue even further. Walmart long held this position with its strategy of promising “everyday low pricing” with few discount sales promotions (Perner, 2008).

Penetration pricing deemphasizes market segments. It works where buyers are price sensi- tive and markets are large enough that thin profit margins are sustainable, but it is highly vul- nerable to competitors who match low prices (Nagel & Holden, 1995). This and other pricing strategies are shown in the graph in Figure 5.6.

Field Trip 5.4: Freemium Pricing

Follow this link to view an article about freemium pricing on the Forbes website.

7 Examples of Freemium Products Done Right

http://www.forbes.com/sites/sujanpatel/2015/04/29/7-examples-of-freemium-products -done-right/#26617e25ff72

Section 5.3Pricing Objectives, Strategies, and Tactics

Figure 5.6: Pricing strategies that signal economic value

Price is a signal of economic value.

From Strategy and Tactics of Pricing: A Guide to Profitable Decision Making (2nd ed.), by T. Nagle and R. Holden, 1994. Upper Saddle River, NJ: Pearson Education, Inc. Copyright ©1994. Reprinted by permission of Pearson Education, Inc., New York, New York.

Table 5.3 summarizes pricing strategies discussed in this chapter.

Table 5.3: Pricing strategies and objectives

Strategy Definition Example Use

Peak load Charging higher prices during periods of rising demand

Uber’s app switches to “surge” pricing during times of high ride demand in certain areas, to better match the demand of riders to the supply of drivers.

Counter the perishability of a service offering; viable only when few competi- tors exist

(continued on next page)

Medium

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mi ng

Ne utr

Pe ne

tra tio

Economic value

R el

at iv

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ri ce

Low High

M od

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w V

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H ig

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Section 5.3Pricing Objectives, Strategies, and Tactics

Table 5.3: Pricing strategies and objectives (continued)

Strategy Definition Example Use

Yield management

Strategic control of inven- tory to maximize yield or profits from a fixed, perishable resource

Restaurants charge less during off-peak periods for the same package of seat, menu, and service.

Counter the perishabil- ity of a service offer- ing; reduce the strain on a fixed-capacity infrastructure

Loss leader Selling products below cost

Retailers sell razors or printers that require future purchases.

Attract customers who will purchase other, profit- generating goods

Cocreation Allowing customers to select from options to design customized offerings

Dell Computers offers a base price for specific features, encouraging cus- tomers to add or subtract features to create a unique product.

Meet customers’ desire to partner with the compa- nies they buy from and to customize the value they receive

Subscription pricing

Charging a recurring peri- odic payment for access to goods or services

Netflix collects a monthly fee for unlimited access to digital entertainment through automated payment.

Create ongoing revenue from customers over the long term

Dynamic pricing

Buyer collaborating with seller to establish the price, accepting trade-offs in exchange for favorable pricing

Mobile phone carriers, electrical utilities, Internet domain names, auto insurance

Offset threat created by buyers’ knowledge of com- petitors’ pricing

Opaque exchanges

Seller withholding infor- mation from customers about exact features of their purchase until trans- action is completed

NYOP strategy offered by Priceline.com

Give firms leverage in inventory control and pric- ing to different segments

Brand leader- ship (skim)

Setting prices high in com- parison to competitors

Luxury goods Attract higher income groups

Neutral Matching prices of the general market

Arts organizations such as symphony orchestras

Shift emphasis to compet- ing on other aspects than price

Penetration Keeping prices low in comparison to competi- tors’ prices

Walmart’s “everyday low prices”

Deemphasize market segments

In a marketing era that values long-term customer relationships, both organizational buyers and consumers have come to expect a degree of flexibility in pricing. While all the pricing strategies discussed are viable choices, those that allow for customer negotiations are gain- ing in importance.

Section 5.3Pricing Objectives, Strategies, and Tactics

Segmented Pricing An appropriate response for companies wanting to pursue a variable pricing strategy while staying on the right side of the law is segmented pricing, a tactic for separating markets into niches and pricing offerings differently for each.

A segmented pricing strategy is a natural extension of a company’s market segmen- tation strategy. Segmentation can be an effective response to variations in seg- ment price sensitivity and a useful tool for differentiation from competitors. When McDonald’s offers seniors a discount on coffee, or a movie theater offers students a discount on tickets, segmented pricing strategies are at work. At its simplest, seg- mented pricing requires only two steps: (a) segment the market and (b) design a mechanism to charge each a different price. Both the McDonald’s and the movie example segment people into groups based on their price sensitivity (seniors and students are consistently more frugal than other people), then using identifica- tion to determine eligibility, since stu- dents and seniors carry ID cards.

In industries with high fixed costs, such as cell phone carriers and power utilities, segmented pricing is often essential (Nagle & Holden, 1995). Without it, the companies could never cover their costs and still serve all the customers who need their services. Why don’t all companies implement a segmented pricing strategy? Certain factors work against it.

• Customers don’t self-identify themselves into segments; this puts the burden on the seller to identify segments with differing demand.

• The costs of managing the segmentation program can’t be higher than the extra rev- enue earned by the differences in prices.

• Intermediaries can undermine the strategy by figuring out how to buy low and sell high.

• A poorly designed segmented price strategy can violate federal antitrust laws.

An extremely important factor is that whatever price a customer is charged for the value he or she receives, that price should reflect a real difference in value from similar offerings purchased at other price points by other customers. Otherwise, the company risks charges of illegal price discrimination.

Associated Press Consumer resentment can result when the price charged to different segments doesn’t reflect an actual difference in value. Adidas learned this when it charged more for team shirts in one country than another.

Section 5.3Pricing Objectives, Strategies, and Tactics

There is also the possibility of an outcry of consumer resentment if prices charged to different segments do not reflect a real difference in value. This happened when Adidas charged more for rugby team shirts in the team’s home country of New Zealand than it charged for the same shirts in other countries. In the summer of 2011, when New Zealand’s hugely popular rugby team the All Blacks made it to the Rugby World Cup, national pride soared—and so did demand for the official team jersey. New Zealand fans went into a frenzy when they discovered shirts were being sold online in the United States and Britain for about half the price charged in New Zea- land. Local news outlets ran with the story. Anger escalated when it was reported that Adidas told online retailers selling inter- nationally to remove New Zealand from the available delivery options. The Adidas brand image suffered as a result, to the extent that corporate sponsorship events were canceled and branding removed from company vehicles after staff members were publicly harassed (Hutchison, 2011). In a Marketing 3.0 world of connected consumers, discriminatory pricing policies will be met with consumer protest, if not a legal challenge.

A segmented pricing strategy benefits consumers. It spurs competitive innovation when com- panies develop improvements that different market niches will value, thus allowing them to charge more profitable prices. Without segmented pricing, some small market niches’ demands would more frequently go unmet.

Some segmented pricing tactics that have proven effective (and legal) include varying the price by customer segment, demand elasticity, price sensitivity, product version, seasonality, geography, and volume purchase. Other tactics include product bundling, in which the items combined increase the value for a specific buyer segment, such as an orchestra bundling con- cert tickets into a season package or an airline offering hotel and rental car bundled with the purchase of a flight.

In conclusion, a pricing strategy must reflect overall corporate objectives regarding volume and profitability over both short and long time frames. Marketers may support the objective by offering a fixed price to all customers or a price that varies by market segment. Many pric- ing strategies serve different purposes and situations; those that allow customers to partici- pate in establishing the price are becoming more important. A segmented pricing strategy holds potential to yield the most revenue, since each customer pays what he or she perceives as a fair price for the value received. However, this is the most difficult strategy to implement.

In the end, successfully responding to the economics of pricing relies on marketers who must find product advantages that create sustainable competitive differentiation. This is the only way to avoid competing solely on price.

97/iStock/Getty Images Plus Strategic planning to determine pricing should include consideration of product line strategy. When these items are priced in increments, the cost difference between products signifies differ- ences in features or quality.

Section 5.4Adjusting Price Strategically

5.4 Adjusting Price Strategically Our discussion of pricing strategy has focused on its role in the marketing mix as an influence on the quantity of an offering that can be expected to sell and the profit those sales will gener- ate for the seller. Now the discussion moves to the strategies and tactics for changing prices.

About half of all companies change prices once a year or less, but as many as 1 in 10 change prices every month (Kurtz, 2010). Clearly, for most companies, pricing strategy is character- ized by frequent revisions. Marketers may change their pricing strategy to outmaneuver com- petitors or to achieve a shift in potential buyers’ perception of an offering’s value. They may change prices to increase sales volume or to increase profitability at the current sales volume. With so many possible effects, it’s evident that price changes must be addressed strategically.

An increase in posted prices can be positive for a company but can anger current customers, who perceive a negative shift in the customer value equation when the price increases but nothing else about the offering changes. Price increases can be risky if marketers don’t com- municate a benefit, or at least a logical need that requires the company to pass on new costs to customers (as with gas price fluctuations). Thus, price increases need to be accompanied by strategic marketing communications.

Marketers considering a price decrease need to decide whether the change will be a short- term strategy, lowering the base price for a stated period with a fixed end date on which prices revert to the original base, or a long-term strategy in which the new pricing strategy becomes permanent.

Reductions from the base price can be part of the permanent pricing strategy. Marketers fre- quently create policies allowing cash discounts for prompt payment, trade discounts to cer- tain channel partners, and quantity discounts to buyers at specified volume levels.

Temporary Price Adjustments For the rest of this discussion on price adjustment, we’ll focus on short-term strategies that decrease prices. Note that these promotions are an integral part of the marketing plan that can contribute to long-term objectives related to product life cycles, corporate growth strate- gies, or other strategic aims.

Sales promotions are short-term marketing strategies intended to stimulate purchases over a specific time period, by offering a reason to buy in addition to the service rendered by the offering regardless of price. The promotion temporarily shifts the balance of the customer

Questions to Consider

Call to mind a clothing brand you like. Describe how a segmented pricing tactic could be used to increase revenue while steering clear of laws against price discrimination.

Section 5.4Adjusting Price Strategically

value equation in the buyer’s favor. That shift is intended to influence buyer behavior for the short-term benefit of the seller, for example by encouraging switching from another item to the one promoted, stockpiling of the promoted item, or creating an incremental lift in overall sales.

A sales promotion is just one of many types of promotional campaigns a company can offer. (Promotions are discussed in the next chapter as the final P of the marketing mix.) A promo- tional campaign qualifies as a sales promotion when it involves a decreased price intended to

• encourage new customers to try an offering for the first time, • increase recall of favorable experiences from previous trial or awareness of brand

image, or • reward customers who have been loyally buying at full price.

Frequently, a sales promotion will be included in the launch of a new product or opening of a new store. Reduced prices for a limited period can be expected to generate excitement and reduce barriers to trial of the new offering or location. Companies will use sales promo- tions to counter the promotional activities of a direct competitor—for example, by offering to match advertised prices. And sales promotions can be used to shift demand away from peak usage periods, as when resorts advertise off-season price discounts. Each is a variation on encouraging trial, increasing awareness and recall, or rewarding loyal buyers.

Promotional pricing strategies can be used anywhere along the distribution channel—as a pull tactic to encourage consumers to buy or as a push tactic to encourage distributors to sell, as described in Chapter 4. Consumer-oriented (pull) tactics include the following.

• Samples: Free products distributed in hopes of obtaining future sales. • Refunds: Money returned on presentation of proof of purchase of an offering. • Premiums: Items given free or at reduced cost with purchases of other items. • Coupons: Documents that can be exchanged for a financial discount. • Contests: Prizes given to winners who are drawn from a pool of entrants who have

completed a required task. • Sweepstakes: Prizes given to winners selected by chance from a pool of entrants. • Cash rebates: Money returned on what has already been paid for an offering. • Bonuses: Payment or gift added to what is expected.

Trade-oriented (push) tactics include the following.

• Trade allowances: Financial incentives to purchase or promote specific offerings. • Sales incentives: Programs that reward intermediaries’ superior performance.

The feature these consumer and trade promotions have in common is that the seller forgoes some portion of the regular price to achieve one of the three objectives of promotional pricing.

A price discount creates urgency to act, which can be very helpful in meeting short-term objectives. After all, pricing is the only P in the marketing mix that can be changed quickly.

To be effective, discount promotional periods must be alternated with time periods in which no promotions are in effect. Otherwise, consumers set their reference pricing expectations

Section 5.4Adjusting Price Strategically

at the sale price. High–low pricing is a strategy by which marketers leverage this tendency of consumers in their favor. The company intentionally sets its regular prices higher than its target prices and then holds sales promotions during which prices are lowered to the target price. This strategy is most effective when consumers in the target market hold a strong belief that discount sales equate with better value for price.

An example of a pull promotional price strategy can be found in stores that offered gas dis- counts to customers in the summer of 2011, when high gas prices added to the misery con- sumers were already experiencing from the stagnant economy. To stimulate shopping trips, some retailers and manufacturers offered discounts on gas purchases, recognizing that high gas prices were keeping consumers from shopping as frequently as in the past. The Publix grocery chain offered $50 gas cards for $40 with a minimum purchase of $25 in other prod- ucts. Kellogg’s asked shoppers to send in bar codes from certain cereals to receive a $10 gas card. CVS pharmacies gave customers a $10 gas card when they spent $30 on certain items (Clifford, 2011). These gas-discount sales promotions conveyed an “I feel your pain” message more vividly than the other strategy these companies could have chosen—offering deeper discounts on products purchased in the stores. The sellers achieved increased sales volume with their promotional price tactic.

Some marketers feel that offering discounts is a flawed strategy, suggesting that frequent sales simply train customers to wait for sales before they buy. While sales can increase recall of brands and remind buyers of past positive experiences, they do not necessarily engage consumers with the brand or build lasting relationships. Customers who get pleasure from hunting down discounts will likely go wherever the bargains are.

The tactic of using sales promotions to reward customers who have been loyally buying at full price also has its critics. Some ask, why would a company forgo sales income? Others respond that rewards to loyal customers are justified, pointing out that competitors may be recruiting those customers with their own sales promotions and that customers appreciate recognition of their loyalty.

Results will determine whether the criticism is valid. Sales promotions must be measured to prove their worth as a pricing strategy. It’s important to measure the incremental sales gen- erated by the promotion—not total sales—to find the contribution to return on investment (ROI) from the sales promotion. If the ROI isn’t there, then there’s a flaw somewhere in the sales promotion strategy.

Sales Promotions as Business Model In 2007, as the U.S. economy weakened sharply, the demand for luxury goods dropped dra- matically—and a new business model emerged online that had sales promotions in its DNA. Online retailer Gilt Groupe started a members-only site to sell high-end merchandise at deep discounts. That move launched a fast-growing trend: flash sales, featuring designer brands at bargain prices for very limited time periods (Khalid, 2011). Originally intended to unload excess inventory, flash sellers encountered problems in 2011. Recession-affected manufac- turers cut back on production, reducing the inventory available to be liquidated. The original flash-site sellers attempted to turn their business model from liquidating inventory toward spotlighting brands, having observed that many buyers who visit flash-sale sites soon buy

Section 5.4Adjusting Price Strategically

merchandise from the same brands at full price. The advantage of the flash-sale sites began to rest more on their ability to gather consumer data (by tracking behavior on their sites) and less on the original inventory-management objective (Miller, 2011). By 2015 the flash-sale business model had lost some of its luster. As the economic recovery picked up speed, retail- ers no longer needed the aid of flash-sale sites to sell their products, and meanwhile, competi- tors to Gilt Groupe multiplied. Furthermore, luxury brand bricks-and-mortar retailers started investing in their own discount sales channels, both online and off (Rao, 2015). Is the flash sale approaching obsolescence? Customers will always want bargains, and limited-term offers generate a “now or never” urgency. How customers and businesses interact in the flash-sale business model will continue to evolve, but industry observers are not ready to write its obit- uary yet.

The “deal of the day” site Groupon is an example of a business model designed to leverage consumer interest in sales promotions and social media. The company offers one “groupon” each day in each of the markets it serves. If a certain number of people sign up for the offer, then the deal becomes available to all. This gives the offer a social component—by forwarding Groupon offers to friends, consumers can increase the likelihood the deal will become avail- able. This reduces risk for retailers, too, who can treat the coupons as quantity discounts as well as sale offers. (Groupon makes money by keeping about half the list price of the coupon.) However, participating in a Groupon deal can prove to be an unprofitable prospect for retail- ers, who must use deep discounts to attract customers to a daily deal. Retailers need to care- fully calculate how many coupons they can validate and still make money (Carrera, 2011). In 2017 Groupon rolled out a product that doesn’t require customers to show coupons before getting deals: Groupon+, which allows customers to link their credit cards to the Groupon platform to get discounts automatically when paying for eligible items (Bary, 2017).

In conclusion, it’s important for marketers to recognize how changing prices changes every- thing else in the marketing mix. Giving up profits is something no company would do without a defensible reason. Price changes can address internal objectives, such as a need to liquidate excess inventory, a desire to increase sales volume, or a way to facilitate campaign measure- ment. A price change can address external factors, such as signaling a shift in positioning to the target market. Any of these reasons offers sufficient benefit to warrant including sales promotions as part of a company’s overall pricing strategy. It’s important that the discount be used strategically—that is, to address one of three objectives:

Field Trip 5.5: Flash Sales as Business Model

Search the term “flash-sale discounting” using your favorite search engine to discover the current state of flash retailing.

You could start your research with this December 16, 2015, article from Fortune:

Why Flash Sales Are in Trouble

http://fortune.com/2015/12/16/flash-sales-trouble

Section 5.5Challenges to Effective Pricing Strategies

1. encourage first-time trial 2. increase engagement between seller and buyer 3. reward loyalty

5.5 Challenges to Effective Pricing Strategies Throughout this chapter, we’ve made the case that pricing decisions must be strategic to pro- duce results. But certain challenges counter any organization’s efforts to develop and imple- ment effective pricing strategies.

Perhaps the most important constraint is the need to stay within the bounds of all applicable laws. Beyond the rule of law lies the moral ground of doing what is right. Today’s consumers are harsh in their judgment and quick to share their opinions when they perceive a company as unfair to some or all customers. Also challenging for decision makers regarding pricing are potential conflicts of interest with distribution channel partners and the difficulties of selling in the B2B model. Taken together, these constraints increase the operational complexities of managing pricing strategies. A closer look at each follows.

Ethics and Legality Is it fair for different people to pay different prices for the same thing? Should a student and a millionaire pay the same for a gallon of milk? Should a person in the United States and in a developing country pay different prices for a cancer-treating drug? These questions are not easily answered. Discounted prices for those on fixed incomes, such as students or senior citi- zens, have been a visible part of retail pricing structures for decades. But less transparent use of segmented pricing can backfire, as examples mentioned earlier have shown. In a Marketing 3.0 world, consumers increasingly bring an expectation that they will be able to customize offerings to their own tastes, that such customization will not be reflected in high prices, and that in many cases they will be able to collaborate on what the price will be (NYOP) as well as what features are included in that price. These trends make more opaque just what each customer pays and what each customer gets, mitigating somewhat the potential of segmented pricing to be perceived as unfair. How marketers frame their prices as part of their position- ing strategy has much to do with perceptions of the ethics of their pricing practices.

Questions to Consider

Many people consider shopping for bargains to be part of their everyday “financial fitness routine.” Some take it to such lengths that they identify as “extreme couponers.” Do you look for sales promotions and price discounts when you shop? Does the type of item you are shopping for affect your interest in discounts and sales promotions? Would you pass up buying your favorite brands to save money? What could marketers learn by observing your behavior with regard to strategic use of sale pricing?

Section 5.5Challenges to Effective Pricing Strategies

Marketers not only risk consumer dissatisfaction but also legal sanctions if their pricing strat- egies are unethical or illegal. Since 1890 the federal government has acted to maintain fair price competition through antitrust law. The United States maintains stringent laws; the rest of the world is following suit, although traditionally European and Asian countries impose fewer constraints through law (Perner, 2008). Failure to comply can bring risk of substantial fines and even prison sentences. Practices such as requiring a customer to buy a less desired product in order to buy a more desired one, collusion among businesses to fix prices, price discrimination (selling identical products to different buyers at different prices), or predatory pricing (temporarily selling below a sustainable price to undermine competition) are illegal. A deeper study of pricing law falls outside the intent of this introductory book but is essential for any marketer responsible for organizational pricing strategy decisions.

Channel Conflicts Members of a distribution channel may find they have conflicting interests. Any partner in the channel may seek to increase profits or sales volume at the expense of other channel partners. For example, retailers seeking to maximize category profits may offer promotional pricing on one brand and thus hurt a com- peting brand’s sales, since consumers can easily switch if one brand goes on sale. Retailers may advertise a few highly dis- counted items to generate store traffic; the manufacturers of those items may resent the positioning effect of the deep discount, which can send a message that the item is low-quality or being discontin- ued. As discussed in Chapter 4, channel partner relationships are difficult to change, so channel conflicts arising from pricing decisions can cause significant disruption that is hard to repair.

Selling to Organizations Selling goods and services to organizations can be substantially more complex than selling to consumers. In a business, the single consumer is replaced by an organizational function, termed the buying center, in which several people participate in the buying decision. Initia- tors, users, buyers, gatekeepers, and deciders may all be involved in the buying center (Nagle & Holden, 1995). Initiators generate purchase requests, users help identify specifications for the purchase, and buyers have the formal responsibility to authorize the purchase. Large organizations will have dedicated purchasing agents, while smaller organizations may be

Associated Press Channel partners can have conflicts of interest arising from pricing decisions, such as when a retailer advertises a sale price on one brand and thus hurts competing brands’ sales.

Section 5.5Challenges to Effective Pricing Strategies

less structured, making it difficult for a seller to identify who holds buying responsibility or authority. Also influencing the buying process in an organization are gatekeepers, who con- trol the flow of information and contact with the buying center, and deciders (who may be the buyer or may serve in a less visible role), who have the final authority to select a vendor. Busi- nesses selling to other businesses need a sales staff knowledgeable in the subtle dynamics of the buying center. Too frequently, salespeople underestimate the impact or fail to understand the perspectives of the different individuals in the buying center.

Managing Complexity “Strategic pricing is becoming a profession in its own right that bridges marketing, finance, sales, and top management,” write Nagle and Holden (2003, p. xx) in the preface to the third edition of their classic text, The Strategy and Tactics of Pricing. In their view, strategic pricing is about much more than putting a price to an offering—it means targeting markets that can profitably be served, communicating in ways that justify certain price levels, and managing processes and systems to keep fluctuating prices aligned with perceptions of value received (Nagle & Holden, 2003).

The humanity-centric consumers of the Marketing 3.0 era, who demand responsibility to a triple bottom line of economic value, environmental health, and social progress in the companies they do business with, are not likely to buy from sellers who fail to offer full transparency about pricing or that fail to involve customers as collaborative partners in creation of value. Pricing strategies must reflect authenticity, including authentic differ- ences in value for each market niche under a segmented pricing strategy. Positioning strat- egies must reflect clear competitive differentiation, to move the conversation away from price toward economic value.

The key to managing these complexities lies in tracking the effectiveness of the strategy in use. Information on how current strategic decisions perform is the best tool for deciding whether to change or maintain the current strategy, and if a change is warranted, what stra- tegic direction it should take.

Field Trip 5.6: Finding the Best Value in Film Transfer Services

In the previous chapter, you learned about film transfer services’ use of distribution strategies as a competitive differentiator. Now return to the world of film digitization for a lesson in the complexities of pricing strategies.

Visit three film transfer services’ websites (search “film transfer” to select your consideration set) and examine their posted prices. Assume you have three 5-inch reels of Super 8mm film you would like transferred. Can you compare prices? What factors, such as quality of transfer and turnaround time, affect the price? Can you ascertain which vendor offers the best economic value for you?

Section 5.5Challenges to Effective Pricing Strategies

The concerns discussed above make any organization’s pricing decisions complex. Ethical and legal matters, channel partners’ perspectives, and the functional and psychological fac- tors affecting the buying center in a business-to-business purchase exchange are all chal- lenges to any organization’s pricing decisions. Pricing decisions directly affect sales volume and profitability, and they indirectly affect the other aspects of the marketing mix: what is designed into the offering to give it economic value (product), its effect on intermediaries in the distribution channel (place), and the objectives and effectiveness of advertising (promo- tion). In the end, it is the customers in the targeted market segment who make the decision about which offering presents the best value and who have the most input on a company’s pricing strategy.

Case Study: Price War in Mariachi Plaza In a corner of the Boyle Heights neighbor- hood just east of downtown Los Angeles you’ll find Mariachi Plaza—a long-estab- lished hiring center for musical ensembles that play the traditional music of western Mexico. Mariachi musicians play party music for christenings, quinceañeras, weddings, and other celebrations in Los Angeles’s Latino community, wearing the silver-studded costumes and wide- brimmed sombreros characteristic of the Jalisco region. Mariachi Plaza, an estab- lished marketplace for the bands since the 1940s, has become an attraction with huge murals and a bandstand. The musi- cians for hire there are professional enter- tainers who are well paid for their performances.

Or were. A dispute over what they should charge heated up in the summer of 2011, reported in the New York Times (Medina, 2011). Since about 2000 the established musicians of Maria- chi Plaza—and their customers—knew how much a mariachi should charge. The going rate had been about $50 per hour for each musician in the ensemble. A decade later, two factors were challenging the status quo: a 50% drop in demand for bookings and a rise in competition

Questions to Consider

Apply what you have learned about today’s consumer from this and previous chapters. Do you see challenges to effective pricing strategies arising from expectations of consumers in the Marketing 3.0 era? How is pricing strategy affected when consumers reach for fulfillment of their higher needs through their buying decisions, such as projecting a social identity through display of certain brands?

Associated Press Many musicians in Mariachi Plaza have had to drop their rates in order to book an event, since the demand has dropped and more competitors have filled the marketplace.

Section 5.5Challenges to Effective Pricing Strategies

from newcomers, some willing to lower their rate to $30 per hour. Some also began charg- ing only for time played, not including charges for travel and setup, which further undercut the common pricing practices of Mariachi Plaza. The old-timers shared an opinion that the newer musicians brought a lower artistic quality, lacked knowledge of the traditional song repertoire, and even fell short in their costuming (Hoag, 2011). Shouting matches and even fistfights erupted over who would get gigs, the New York Times reported (Medina, 2011).

In 2011 roughly 150 of the 400 musicians formed a group to set a minimum price expectation (Hoag, 2011). Those who joined the United Mariachi Organization of Los Angeles agreed to pay $10 a month and to hold the line at $50 an hour, in return for a photo identification card marking them as authentic practitioners with high professional standards. The organization helps its members deal with booking contracts; complaints of bounced checks and reneged- on prices have been numerous.

Consider the situation from the point of view of the (fictional) recently arrived musician Jose Aguinaga, whose talented ensemble, Grupo Danzón, was well respected in Jalisco before arriving in the United States. Should he and his musicians cast their lot with the profession- als who join the United Mariachi Organization or side with the newcomers who, due to their lower rates, are more likely to find work? Pricing strategy is crucial to Jose’s success in the music business.

How is psychology affecting potential buyers’ decisions about entertainers in Mariachi Plaza? If they’ve booked bands there in the past, they may be familiar with the reference price point of $50 per hour per musician established a decade ago. More recent customers may be unaware of the downward trend and fix on $30 as “fair.” Customers’ perception sets the “ceiling” price Jose can charge. Jose will need a pricing strategy that recognizes his potential customers’ price sensitivity.

Jose sets the “floor” with a breakeven analysis that factors in his fixed and variable costs, including instruments, costumes, and the pay he and his band members need to support their families. Complicating this calculation is Jose’s need to charge enough to cover the periods when the band is not working—unpredictable at best. Inputs to Jose’s strategic pricing plan, in addition to costs, include the characteristics of the target market (with its reference pric- ing), environment (competitive), and his choice of differentiation strategy.

Is segmented pricing an option for Grupo Danzón? Several of the segmentation tactics listed in this chapter could be effective: The band could vary prices by form (offering different musi- cal sets designed to appeal to different market niches), by geography (charging for travel), by purchase quantity (offering discounts for multiple bookings), or by product bundling (adding party planning to the band’s service offering), for example.

Jose knows he must find a competitive differentiation strategy that will allow him to become profitable by charging higher prices. Jose’s pricing strategy will have to be neutral, as opposed to a skim or penetration approach, because Los Angeles’s mariachi bands have been experi- encing a declining stage in the product life cycle relative to their popularity in the 1950s and 1960s, but mitigated by the steady growth of the area’s Hispanic population.

He must find a way to stand out for something other than price. As a newcomer, he needs to encourage trial by new customers who, if satisfied, will reward him with referrals and future

Key Ideas to Remember

bookings. Joining the United Mariachi Organization will position him as part of a proud heri- tage, “the real deal” among imitators.

Sales promotions have proven effective to encourage trial. In sales promotions Jose has found his differentiating factor; few other mariachi bands have adopted this technique. To stand out among union members, Jose Aguinaga and his Grupo Danzón begin offering free samples in the form of music videos on DVDs, accompanied by coupons promising a 20% discount from his posted rate of $50 per hour per musician. On the disc, in addition to his band’s traditional Jalisco musical stylings, he includes videos showcasing several updated genres Grupo Danzón has mastered—including tunes by Beyoncé and Justin Bieber. There’s no group in Mariachi Plaza quite like them. Tracking redemption of the coupons will let Jose know whether his strategy is effective—as will the buzz his unusual take on Mariachi music creates. (Will the videos go viral on YouTube?)

Fundamentally, pricing for mariachi bands is a function of supply and demand. With demand falling relative to supply, the musicians are experiencing increasing elasticity of demand. Those who want to work must develop strategic responses, including finding new ways to promote themselves beyond the boundaries of Mariachi Plaza. Those who wish to use Maria- chi Plaza as a marketing venue should respect its traditions—including pricing structure.

Key Ideas to Remember • The price established for a product or service is critical because the price affects the

customer value equation. Psychological factors and economic principles affect buy- ers’ purchase behavior, which influences sellers’ pricing decisions.

• Inputs to the pricing decision include costs, target market, environment, and dif- ferentiation strategy. Cost takes into account the breakeven analysis, which sets the “floor” below which prices cannot yield profit and the “ceiling” above which cus- tomer demand falls off. Target market involves customers’ perception of value, the elasticity of their demand, and their price sensitivity. Environment includes external factors such as economic conditions, intermediaries, competitors, and social con- cerns. Differentiation strategy recognizes the interactivity of product strategy and price in creating a product’s positioning.

• Economic concepts that affect pricing strategy include supply and demand, elastic- ity of demand, price sensitivity, and the breakeven point. In light of these effects,

Challenge Question

When customers grow accustomed to negotiating prices, whether through haggling, customizing, or NYOP exchanges, a company loses some degree of control over the profitability of each sale. Plus, consumers lose transparency about pricing when they don’t know what each other customer paid for similar value. And yet in a Marketing 3.0 world, consumers increasingly expect to be able to customize offerings, and that includes collaborating on the price they pay. Choose a position for or against negotiated pricing. Explain your reasoning.

Key Terms to Remember

marketers should consider a segmented pricing strategy that identifies specific mar- kets and matches differentiated offerings to them, because of the strategy’s potential to maximize revenue, even though a segmented strategy is difficult to implement.

• Adjusting prices via short-term sales promotions can achieve strategic objectives, including encouraging first-time trial, increasing engagement between seller and buyer, and rewarding loyalty. Sales promotions must be measured to track their incremental contribution to sales.

• Pricing decisions are made more complex by challenges that include ethical and legal matters, channel partners’ perspectives, and the certain complications unique to business-to-business purchase exchanges. Pricing decisions interact with the other four Ps of the marketing mix, directly affecting sales volume and profitability.

Critical-Thinking Questions 1. If you were starting a coffee shop across the street from a Starbucks, how might you

use buyer psychology concepts discussed in this chapter (reference pricing, sign- posts, sale signs, and prices ending in 9) to set your pricing strategy?

2. What differentiates a sales promotion from other price adjustments? 3. Identify factors influencing elasticity of demand. 4. Explain how calculating the breakeven point and estimating consumers’ price sensi-

tivity assist in price determination. 5. Give examples that demonstrate how the economic concepts of supply and demand,

elasticity of demand, price sensitivity, and breakeven point affect pricing strategy. 6. Consider a locally owned hardware store that competes with several national brand

“big-box” stores in its trade area. Justify which is better for the hardware store: a pricing strategy that features a sale once a month, or everyday low pricing. Explain your thinking.

7. Project a future in which the business model for flash-sale websites focuses on spot- lighting brands and using data gathered by tracking individual consumer behavior on the site. Could a segmented pricing strategy work for these “second-generation” flash-sale sites? Could an NYOP strategy work? Explain your thinking.

8. How does the concept of value-based pricing lead to a variable pricing strategy?

Key Terms to Remember bonuses A consumer-oriented promo- tional strategy involving payment or gift added to what is expected.

breakeven analysis The point where total revenue received equals the total of fixed and variable costs associated with the sale of the product.

buying center Within a business, a func- tional unit charged with evaluating and purchasing goods and services. Initiators, users, buyers, gatekeepers, and deciders may all be involved in the buying center.

cash rebates A consumer-oriented promo- tional strategy involving money returned on what has already been paid for an offering.

cocreation model Buyers may bundle options to design products that suit their individual ideas of value.

competition based A pricing approach focused on setting prices based on competi- tors’ prices for similar offerings.

Key Terms to Remember

contests A consumer-oriented promo- tional strategy involving prizes given to win- ners who are drawn from a pool of entrants who have completed a required task.

cost-plus A pricing approach focused on adding a standard markup to the cost of the product that accommodates fixed and vari- able costs of production.

coupons A consumer-oriented promo- tional strategy involving documents that can be exchanged for a financial discount.

demand curve A visual representation of the quantity of offerings expected to be sold at various prices if other factors remain constant.

dynamic pricing model Buyers and sell- ers collaborate to establish a price, accept- ing trade-offs in deliverables for favorable pricing.

economic value The reference price that a buyer assigns to the features that differenti- ate an offering from the alternatives avail- able at the reference price.

elasticity of demand The degree to which demand for an offering varies with its price. Demand is highly elastic when a small change in price brings about a large change in sales and is highly inelastic if a large price change has little effect on sales (demand).

equilibrium point The position of a mar- ket price that generates an equal amount of demand and supply for a product or service.

fixed costs Costs associated with normal operations of the business, such as rent or insurance, that do not change with changes in production volume.

fixed pricing strategy A strategy in which the same price is charged to all customers, as opposed to a variable pricing strategy.

flash sales A trend beginning in 2007 of members-only websites selling designer brands at bargain prices for very limited time periods while collecting consumer data by tracking online behavior.

freemium A pricing strategy in which the basic features of a product or service (typi- cally a digital application) is provided free of charge, but money (premium) is charged for additional features or services.

high–low pricing A strategy in which a company intentionally sets its regular prices higher and then reduces the price structure during frequent sales promotions.

list price A manufacturer’s, distributor’s, or retailer’s quoted, published, or displayed price on which discounts are computed. Also called manufacturer’s suggested retail price.

loss leader A pricing strategy whereby a product is sold at a price below its market cost to stimulate other sales of more profit- able goods or services.

markup A pricing approach that adds a constant percentage to the cost paid for an item to arrive at its selling price.

membership economy Subscription pricing taken further to create long-term relationships with customers by creating a sense of engagement and community.

neutral pricing A strategy calling for matching prices of the general market.

opaque exchanges Buying exchanges in which sellers strategically withhold infor- mation from customers, who may not know the exact features of their purchase at the point of payment, a feature of the Name Your Own Price approach.

Key Terms to Remember

peak-load pricing A strategy in which higher prices are charged during periods of rising demand (viable only when few com- petitors exist).

penetration pricing A strategy calling for keeping prices low in comparison to com- petitors’ prices and widely promoting an offering to quickly achieve the most sales to the most buyers possible.

pocket price The price collected by a seller in a particular transaction after accounting for all relevant discounts given to channel partners or the end consumer.

premiums A consumer-oriented pro- motional strategy involving items given free or at reduced cost with purchases of other items.

price The money or other consideration exchanged for the ownership or use of a good or service, representing a quantifiable way to measure the value customers place on that offering.

price ceiling The maximum price a seller is allowed to charge for an offering, typically set by law as a means of direct economic intervention to manage the affordability of certain goods.

price controls Government regulations establishing a maximum or minimum price to be charged for specified goods and services.

price discrimination The practice of charging different prices to different buyers for goods of like grade or quality, prohibited under the Clayton Act as amended by the Robinson–Patman Act.

price floor The minimum price a seller is allowed to charge for an offering, typically set by law to ensure fair and reasonable business practices.

price sensitivity The amount by which changes in a product’s cost tend to affect consumer demand for that product.

price waterfall analysis A tool used to cal- culate how much revenue companies keep from each sale after transactional costs have been subtracted.

profit margin The amount by which rev- enue from sales exceeds costs in a business.

profit maximization A strategic approach with the objective of generating the highest possible net income over time.

reference pricing In buyer psychology, an amount representing a fair price in the consumer’s mind that is remembered, researched, or inferred from the buying situation.

refunds A consumer-oriented promo- tional strategy involving money returned on presentation of proof of purchase of an offering.

sales incentives A promotional strategy involving programs that reward intermedi- aries for superior performance.

sales promotions A short-term marketing strategy intended to stimulate purchases over a specific time period, by offering a reason to buy in addition to the service ren- dered by the offering regardless of price.

samples A consumer-oriented promo- tional strategy involving free products dis- tributed in hopes of obtaining future sales.

segmented pricing Selling a product or service at more than one price, where the difference in prices is based on differences other than costs of production.

signposts In buyer psychology, the ten- dency of reference prices on certain items to signal a store’s pricing in general.

Key Terms to Remember

skim pricing A strategy calling for setting prices high to attract higher income groups for luxury or status goods or to extract maximum returns from a market before competitors emerge.

subscription pricing A strategy of requir- ing customers to pay a recurring periodic fee for access to services content or physical products.

supply and demand The amount of a product sellers make available (supply) and the amount buyers want to purchase (demand).

supply curve A visual representation of the quantity of offerings expected to be in demand at various prices if other factors remain constant.

sweepstakes A consumer-oriented pro- motional strategy involving prizes given to winners selected by chance from a pool of entrants.

switching costs The costs associated with switching suppliers when the purchase will require buyers to spend on additional goods or services to gain its full value.

target profit A pricing approach focused on calculating breakeven costs of making and marketing a product, and selecting a price to make a target profit above that cost.

trade allowances A promotional strategy involving financial incentives to channel partners to purchase or promote specific offerings.

value based A pricing approach focused on using buyers’ perception of value to design an offering that can be sold profitably.

variable cost A cost that fluctuates with production volume; for example, process materials or sales commissions.

variable pricing strategy A strategy in which different prices are charged to differ- ent customers or at different times.

volume maximization A strategic approach in which a company’s primary objective is to generate as much sales vol- ume (and revenue) as possible over a short time frame.

yield management Strategic control of inventory to maximize yield or profits from a fixed, perishable resource.

Week 3 Discussion 1 & 2 in Principles of Marketing?

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