Marketing Chapter 21 Developing pricing objectives is an important task

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CHAPTER 21

Setting Prices

TEACHING RESOURCES QUICK REFERENCE GUIDE

Resource

Location

Purpose and Perspective

IRM, p. 479

Lecture Outline

IRM, p. 480

Discussion Starters

IRM, p. 488

Class Exercises

IRM, p. 489

Chapter Quiz

IRM, p. 492

Semester Project

IRM, p. 493

Answers to Discussion and Review Questions

IRM, p. 494

PURPOSE AND PERSPECTIVE

In this chapter, we describe the six-stage, price-setting process: 1) Developing pricing objectives; 2)

Assessing the target market’s evaluation of price and its ability to purchase; 3) Evaluating competitors’

prices; 4) Selecting a basis for pricing; 5) Selecting a pricing strategy; and 6) Determining a specific

price. We point out that marketers do not always take all of these steps. Rather, these steps should be

Answers to Application Questions

IRM, p. 496

Answers to Internet Exercise

IRM, p. 497

Answers to Developing Your Marketing Plan

IRM, p. 498

Comments on the Cases

IRM, p. 499

Case 21.2

IRM, p. 500

Instructions for Role Play Team Case #

IRM, p. 502

Examination Questions: Multiple-Choice

Testing CD

PowerPoint Slides

480 Chapter 21: Setting Prices

LECTURE OUTLINE

I. Development of Pricing Objectives

A. The price-setting process involves six steps that provide a logical way to analyze the effectiveness

of price in the marketing mix and the contributions of price to the organization’s objectives.

B. Stage one involves developing pricing objectives. Pricing objectives are goals that describe what

an organization wants to achieve through pricing efforts.

1. Developing pricing objectives is an important task because pricing objectives form the basis

for decisions about other stages of pricing.

C. Survival

1. One of the most fundamental pricing objectives is survival.

D. Profit

1. The objective of profit maximization is rarely operational because it is difficult to measure its

E. Return on Investment

1. Pricing to attain a specified return on the company’s investment is also a profit-related

F. Market Share

1. Many firms establish pricing objectives to maintain or increase market share, a product’s

sales in relation to total industry sales, in part because they recognize that high relative

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G. Cash Flow

1. Some organizations set prices to recover cash as quickly as possible.

2. Financial managers are interested in quickly recovering capital that has been spent to develop

H. Status Quo

1. In some cases, an organization may be in a favorable position and may set an objective of

status quo.

2. Status quo objectives can focus on several dimensions, including maintaining a certain

I. Product Quality

1. An objective of product quality leadership in the market normally results in charging a high

II. Assessment of the Target Market’s Evaluation of Price

A. Stage two in the price setting process.

B. The importance of price depends on the type of product, the type of target market, and the

III. Evaluation of Competitors’ Prices

A. Stage three in the price setting process.

B. Marketers are generally in a better position to establish prices when they know the competition’s

482 Chapter 21: Setting Prices

IV. Selection of a Basis for Pricing

A. The fourth stage in the price setting process.

characteristics.

D. Cost-Based Pricing

1. When using cost-based pricing, an organization determines price by adding a dollar amount

or a percentage to the cost of the product. It does not always take into account supply and

demand. Cost-based pricing is straightforward and easy to implement.

2. Cost-Plus Pricing

a. Cost-plus pricing is a method whereby the seller’s costs are determined, and then a

specified dollar amount or percentage of the cost is added to the seller’s cost to establish

3. Markup Pricing

a. Through markup pricing, which is common among retailers, a product’s price is derived

by adding a predetermined percentage of the cost, called “markup,” to the cost of the

product.

E. Demand-Based Pricing

1. With demand-based pricing, customers pay a higher price when demand for the product is

strong and a lower price when demand is weak.

F. Competition-Based Pricing

1. Competition-based pricing is pricing primarily influenced by competitors’ prices.

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V. Selection of a Pricing Strategy

A. The fifth stage in the price setting process. A pricing strategy is an approach or a course of action

designed to achieve pricing and marketing objectives. Generally, pricing strategies help marketers

solve the practical problems of establishing prices.

B. Differential Pricing

1. An important issue in pricing is whether to use a single price or multiple prices for the same

product.

a. Using a single price has several benefits, including that it is simple, easily understood by

customers who would have paid more had the price been higher.

2. Differential pricing means charging different prices to different buyers for the same quality

and quantity of product.

a. The market must consist of multiple segments with different price sensitivities, and the

pricing method should be used in a way that avoids confusing or antagonizing customers.

b. Negotiated Pricing

(1) Negotiated pricing occurs when the final price is established through bargaining

c. Secondary-Market Pricing

(1) Secondary-market pricing means setting one price for the primary target market

secondary-market customers may have to pay a higher price.

d. Periodic Discounting

(1) Periodic discounting is the temporary reduction of prices on a patterned or

484 Chapter 21: Setting Prices

(1) Random discounting is temporarily reducing prices on an unsystematic basis.

C. New-Product Pricing

1. Setting the base price for a new product is a necessary part of formulating a marketing

strategy and is one of the most fundamental decisions in the marketing mix.

2. Price Skimming

a. Price skimming is charging the highest possible price buyers who most desire the

product will pay.

3. Penetration Pricing

a. Penetration pricing is setting the price lower than competing brands to penetrate a

D. Product-Line Pricing

1. Product-line pricing is establishing and adjusting prices of multiple products within a

product line. A marketer’s goal here is to maximize profits for an entire product line rather

than to focus on the profitability of an individual product.

2. Captive Pricing

a. Captive pricing involves pricing the basic product in a product line low, but pricing

3. Premium Pricing

a. Premium pricing is often used when a product line contains several versions of the same

product of different quality.

Chapter 21: Setting Prices 485

5. Price Lining

a. With price lining, the organization sets a limited number of prices for selected groups or

E. Psychological Pricing

1. Psychological pricing attempts to influence a customer’s perception of price to make the

product’s price more attractive.

2. Reference Pricing

a. Reference pricing is pricing a product at a moderate level and positioning it next to a

3. Bundle Pricing

a. Bundle pricing is the packaging together of two or more usually complementary

4. Multiple-Unit Pricing

a. Multiple-unit pricing occurs when two or more of the same product are packaged

5. Everyday Low Prices (EDLP)

a. Everyday low prices involves setting a low price for products on a consistent basis,

6. Odd-Even Pricing

a. Odd-even pricing involves ending a price with certain numbers than influence the

buyers’ perceptions of the price or the product.

486 Chapter 21: Setting Prices

7. Customary Pricing

a. With customary pricing, certain goods are priced primarily on the basis of tradition.

b. Customers will react poorly to any significant price changes for such products.

8. Prestige Pricing

a. With prestige pricing, prices are set at an artificially high level to convey a prestigious

F. Professional Pricing

1. Professional pricing is used by people with great skill or experience in a particular field or

activity.

G. Promotional Pricing

1. Price, as an ingredient in the marketing mix, is often coordinated with promotion. The two

variables sometimes are so interrelated that the pricing policy is promotion-oriented.

2. Price Leaders

a. Products priced below the usual markup, near cost, or below cost are price leaders.

4. Comparison Discounting

a. Comparison discounting is the pricing of a product at a specific level and

simultaneously comparing it to a higher price.

VI. Determination of a Specific Price

A. The final stage in the price setting process.

Chapter 21: Setting Prices 487

488 Chapter 21: Setting Prices

DISCUSSION STARTERS

Discussion Starter 1: Celebrity Brands

ASK: With celebrities endorsing high-priced brands, what incentives are there for celebrities to create

moderate-priced brands?

If you ask style icon Jessica Simpson, she will tell you she knows what it is like to have trouble finding

Discussion Starter 2: What Is This Worth?

ASK: What if the price of a good was up to you? How much would you be willing to pay? Why would you

pay anything at all?

The English band Radiohead decided to try something new and distribute their new CD, download

Chapter 21: Setting Prices 489

CLASS EXERCISES

Class Exercise 1: Price Acceptability

Prompt for students:

Answer the questions below and then discuss the reasons for your answers. What does this exercise tell

you about price acceptability?

1. How much would you pay for a 12-ounce soft drink at a

• vending machine?

• movie theater?

• supermarket?

2. How much would you pay for a steak dinner at a(n)

• cafeteria-style restaurant?

• elegant restaurant?

• charity benefit dinner?

3. How much would you pay to have a flat tire repaired

4. How much would you pay for a duplicate car key

• just to have an extra key around?

• at night in a mall parking lot when your keys are locked in your car?

• when your nonrefundable airline ticket is in your locked car, your flight leaves in 30 minutes, and

your car keys are lost?

Estimated answers (actual answers will vary):

1. A 12-oz. soft drink at a

2. A steak dinner at a(n)

3. A flat-tire repair

4. A duplicate key

490 Chapter 21: Setting Prices

Class Exercise 2: Different Products, Different Pricing Strategies

The objective of this exercise is to help students become more familiar with different pricing strategies by

analyzing how they are applied to specific products.

Prompt for students:

What type of pricing strategy does each of the following describe?

1. Hyundai prices its newest model lower than the price of competing brands.

2. A premium men’s shirt has a suggested retail price of $50 instead of $49.95.

3. A doctor charges $85 for a routine office visit.

4. A restaurant lowers the price of its corned beef and cabbage plate during the week before St.

Patrick’s Day.

5. For years the price of a candy bar was 5 cents, and rarely did a manufacturer charge more.

6. A supermarket prices its eggs, bread, and milk below cost.

7. An attorney advertises a $199 fee for a divorce.

Answers:

1. penetration

Class Exercise 3: Blind Taste Test/Price Comparison

This exercise teaches students that we are willing to pay more for branded products even if we cannot

taste or otherwise identify the difference.

Note: Make sure to exempt students with peanut allergies from this exercise; they may even need to leave

the room depending on the severity of their conditions. This exercise demonstrates that most consumers

can’t taste the difference between various levels of a product category but will pay different prices for