Pricing

Departement Wirtschaft
Marketing 5 – Marketing Mix-Instruments
Price
BBA 2.0 Class of 2014
02.12. / 06.12.2014
Ebru Klüver
Dr. Grosse-Ruyken
Agenda
Marketing 1. Introduction – Understanding Marketing
1.1 The Marketing Concept
1.2 Customer Value, Satisfaction and Loyalty
Marketing 2. Marketing Insights
2.1 Buying Behavior
2.1.1 Consumer Buying Behavior
2.1.2 Organizational Buying Behavior
Marketing 3. Marketing Research
3.1 The marketing environment
3.2 The Marketing Research Process
Marketing 4. Strategic Marketing
4.1 Market, Strategies and Plans
4.2 Segmentation and Targeting
4.3 Positioning
Marketing 5. Marketing Mix-Instruments
5.1 Product
5.2 Pricing
5.3 Sales
5.4 Communication
11/17/14
Slide 2
The Marketing Core Course will be structured as follows:
3 Strategic Marketing
Price
Product
4
Sales
Communication
2 Marketing Insights
1 Understanding Marketing
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Pricing
In this chapter, we focus on the
following
questions:
Chapter
Objectives
!  How do consumers process and evaluate prices?
!  How should a company set prices initially for products or services?
!  How should a company adapt prices to meet varying circumstances and
opportunities?
!  When should a company initiate a price change?
!  How should a company respond to a competitor’s price change?
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Reduction of complexity by mentioning the
price?
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Pricing is a very psychological issue.
FREE is the most radical form of pricing
in online environments
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Changes in price management of the last decade
!  Sales and price pressure have further increased.
!  Transparency and comparability of prices have further increased.
!  Successful "Price warriors" have established themselves
(Aldi, Dell, Sixt, Fielmann, Ryanair etc.).
!  Sales Discounts, special sales, coupons etc. became „a drug“.
!  Consumer acceptance for prices decrease: Smart Shopper, Cherry
Picker, Discount buyers.
!  Highest/premium prices are spend on convenience (comfort),
experiences, speed, innovation and quality: Gas station shops,
overnight-delivery, cinema/theatre, fun cars, pharmaceuticals.
Dynamics of environment keeps on intensifying!
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Price management ! Why?
COSTS
PRICE
CONSUMERS
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COMPETITORS
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Factors influencing the pricing policy
Manufacturing costs
Competition
Demand
Price
Product range
Customer utility
Source: Kuß
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Decisions to be taken in price management
Preisbestimmung
für neue Produkte
Preisbestimmung
für das
Produktprogramm
Durchsetzung der
Preise
Preispolitik
Gestaltung der
Rabatt und
Bonussysteme
Preisänderungen
für Produkte
Preisdifferenzierung
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The price management process
Price management organization
1
Strategy
development
Positioning
Competition
What do we
want?
What shall we
do?
2
Analysis
Price
decision
• Price
structure
• Price level
• Discrimination
As-IsSituation
Processes
How do we do
it today?
A system of rules
- to determine prices and
- to implement prices.
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3
What is the
optimal price
or price
structure?
4
Implementation
• Incentives
Positive
price
perception
How can the
price be
implemented?
5
Monitoring/
Controlling
Tools
Which prices
did we get?
How did they
develop?
The price management process contains: Information,
models, rules, competences, responsibilities, incentives,
timing
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Consequences of pricing decisions
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Deutsche Bahn AG:
Consequences of pricing decisions 2002
A
Änderung des
Preissystems
!  Einführung eines
Frühbucherrabattes von
bis zu 40%, aber: geringe
Flexibilität, hohe
Stornokosten
!  Abschaffung der
Bahncard 50 ( 50%
Rabatt auf den
Normalpreis), nur
Bahncard 25 wird
weitergeführt
B Kundenreaktionen
!  Durch den
Frühbucherrabatt sanken
die Preise nicht genug um
in der
Kundenwahrnehmung
den Nachteil der
mangelnden Flexibilität
auszugleichen
C
Wirtschaftliche
Konsequenzen
!  Umsatzeinbruch im ersten
Quartal 2003 im
Personenfernverkehr um
14.9% = 433.3 Mio €
!  Im gleichen Zeitraum 185
Mio. € Verluste
!  Die Stammkunden
(alleinreisende
Erwachsene) wurde durch
die Abschaffung der
Bahncard 50 verprellt
(Billigflug!)
!  Die Fahrgastzahlen
sanken um bis zu 20%
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Importance of price management: Profit impact
A 10% improvement
in ...
Profit Driver
... leads to a profit increase
of ...
Profit
Old
New
Old
New
Price
$100
$110
$10m
$20m
Variable
unit cost
$60
$54
$10m
$16m
Sales
volume
1m
1.1m
$10m
$14m
Fixed
costs
$30m
$27m
$10m
$13m
100%
60%
40%
30%
Source: Simon, Kucher & Partners
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Importance of the price
1.  Price is a profit driver
! 
Direct impact on profit
! 
Direct impact on sales volume " indirect influence on fixed costs
2.  Price is the strongest profit driver
Assuming a typical cost structure of big businesses – a 1% increase of
price may result in a 12% increase of profit
3.  Price is a strong marketing instrument
! 
Price elasticity is ten times higher than advertising elasticity
! 
Immediate reaction of consumers and competitors on price changes
Price is the only element of the marketing mix that produces revenues!
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Selecting the pricing objective
Several possible objectives:
Survival
Maximize current profits
!  Estimation of demand and costs
!  Choosing prices that produces maximum current profit
Maximize market share
→ Market-penetration
pricing
!  Set lowest price when market is price sensitive
!  Best when:
-  Market is highly price-sensitive, and a low price stimulates market
growth
-  Production and distribution costs fall within accumulated production
experience
-  Low price discourages actual and potential competition
Maximize market
skimming
→ Market-skimming
pricing
!  Prices starts high and are slowly lowered over time
!  Best when:
-  A sufficient number of buyers have a high current demand
-  The unit costs of producing a small value volume are not so high that
they cancel the advantage of charging what the traffic will bear
-  The high initial price does not attract more competitors to the market
-  The high price communicates the image of a superior product
Product-quality
leadership
Other pricing objectives
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!  Plagued with overcapacity
!  Intense competition
!  Changing consumer wants
!  Products at high levels of perceived quality, taste and status
!  Premium prices with a intensely loyal customer base
!  Different specific objectives (e.g. nonprofit and public organizations)
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Principles of price orientation
Market orientation
Cost orientation
!  Cost-oriented price
determination
!  Orientation at different
cost facts
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Value orientation
Competition orientation
! Demand-oriented price
determination
!  Competitive supplieroriented price
determination
! Orientation at behavioral
categories of the demand
!  Orientation to price
actions and reactions
of the competition
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Revenue effects of the demand side
Economies of Scale and Economies of Scope
Economies of scale
!  cost of incremental units less than
average cost
!  equivalently: average cost is declining in
units produced
!  often due to fixed costs
!  Network effect: value of product
increases with number of users
Economies of scope
!  cost of producing additional products
reduced
!  often due shared resource
!  E.g., Google infrastructure allows them to
offer additional services at relatively low
cost (e.g., Google Scholar)
!  systems lock-in effects: DVD player +
disk, hardware + software
!  due to branding, reputation, etc.
!  Virgin Air, Virgin phone, etc.
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Strategic Objectives: Profit vs. Market shares
Quantitavie triangle
Market shares – Profit Revenues
Pricing strategy must
be based on
companies` strategy
Source: Dolan/Simon 1996; p. 34
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Selecting a Pricing Method
1. Mark-up Pricing
Unit cost =
variable cost + (fixed cost/unit
sales)
2. Target-Return Pricing
Target-return price =
unit cost + (desired return x
investment capital)/unit sales
5. Value Pricing
! Everyday low pricing (EDLP)
! High-low pricing
6. Perceived-Value Pricing
Different customers:
! Price buyers
! Value buyers
3. Going-Rate Pricing
Prices vs. competitors’ prices
! Loyal buyers
! Value-in-use price
4. Auction-Type Pricing
! English auctions (ascending bids)
! Dutch auctions (descending bids)
! Sealed-bid auctions
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2. Target-return pricing
Should be based on Break-even analysis
!  Target price is the price at which a seller projects that a buyer will buy a product. This
projection is reached by market research and calculating the so called cost to market of
the product.
!  In turn, the target price is used to calculate the target cost. The target cost is the
maximum amount of cost that can be incurred on a product and with it the firm can still
earn the required profit margin from that product.
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1
Einschätzung der von den relevanten
Wettbewerbern verfolgten Ziele
2
Analyse der Preisstrategien der relevanten
Wettbewerber
Identifikation der den
3 Konkurrenzpreisstrategien zugrunde liegenden
Annahmen
4
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Preisreaktionsprofil
3. Going-rate Pricing
Four elements of competitor analysis
Einschätzung der Fähigkeiten der relevanten
Wettbewerber
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Risks of competition orientation:
Price spirals
Kundenverhalten
Unternehmensreaktion
Der Smart Shopper
“Qualität zum
günstigsten Preis”
Der Schnäppchenjäger
„Rabatte sind
wichtiger als de Preis”
Aggressive und
naive Wettbewerber
Kostendruck
Steigende Vertriebs- und
Verkaufsförderungskosten
xx
Nachlassende
Kundentreue
Preissturz
Wertevernichtung
Trading down
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The way out of price spirals
Kundenkenntnis
Massgeschneiderte Angebote auf die
Bedürfnisse der Kunden
Differenzierung
Angebotsbreite anpassen
Signaling
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Ankündigung einer Preiserhöhung
im 8/8/8 Rhythmus
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The way out of price spirals
Examples
Die LautitiaCard ist eine PremiumKreditkarte für Frauen
Kundenkenntnis
mit exklusiven Vorteilen und
besonderen Angeboten
von Lautitia, EMOTION und Sixt.
Differenzierung
Signaling
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Reactions to Price Changes
Reactions to Price Changes:
! Customer Reactions
! Competitor Reactions
Responding to Competitors’ Price Changes:
! Maintain price
! Maintain price and add value
! Reduce price
! Increase price and improve quality
! Launch a low-price fighter line
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5. Value based pricing
!  Setting a price based on the buyers’ perceptions of product values rather
than on the cost.
!  Underlying principle is to offer the right combination of quality and good
service at a fair price.
Nagle and Holden 2002
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Price Should Align with Value
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Price-value positions – international
context
Discount price in
Mexico
Puma sneakers
price in USA:
51,36 €
Levi’s 501 price in
USA:
28,24 €
Premium price in
Europe
Puma sneakers
price in
Switzerland:
120 CHF
Levi’s 501 price in
Switzerland:
99 CHF
In an international context one can find products with a significant
different price positioning.
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Example: Limits of the value pricing
Coca Cola Value-Pricing
+30
+20
+10
! Idea: Prices vary with the
outdoor temperature.
! The warmer it gets, the higher
the price.
! The idea was implemented, but it
led to a great pressure on the part
of the media so that it was
abolished after a certain period of
time.
0
-10
The client should never get the
feeling to be screwed.
Source: Simon-Kucher & Partners
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Examples: Fencing price differences
Product differentiation and Price discrimination
•  iMac G5
•  Price USA: 1,299 $
•  Price UK: 1,430 $
•  American version does not work with European power system
•  Other examples:
•  Hewlett-Packard printers only work with region-coded ink
cartridges
•  Nintendo’s Gameboy Advanced which is 30% cheaper in the
US does not work with European power system as well
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Example Automotive
Perceived value pricing ensures profits
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Durchschnittliche
Preisbereitschaft
Herstellungskosten
Marge
In Euro
In Euro
Marge= PB-Kosten/PB
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Determining Demand
Price
sensitivity
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T. Nagle/ R. Holden offers this list of factors associated with lower price sensitivity:
! The product is more distinctive
! Buyers are less aware of substitutes
! Buyers cannot easily compare the quality of substitutes
! The expenditure is a smaller part of the buyer’s total income
! The expenditure is small compared to the total cost of the end product
! Part of the cost is borne by another party
! The product is used in conjunction with assets previously bought
! The product is assumed to have more quality, prestige, or exclusiveness
! Buyers cannot store the product
Estimated
demand
curves
Different methods to measure consumers’ demand curves:
! Statistical analysis
! Price experiments
! Surveys
Price
elasticity of
demand
Demand is less elastic under the following conditions:
! There are a few or no substitutes or competitors
! Buyers do not readily notice the higher price
! Buyers are slow to change their buying habits
! Buyers think the higher prices are justified
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The effect of the price on the profit
Example: Sales price of a product at 100 $ at cost
of 60$
Quantity
in Mio
Price
variable costs/piece
variable costs/piece
Price
Source: Backhaus
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Lowering the price by 20 $ requires the
double amount of sales
Quantity
in Mio
Required sales
increase to achieve
the same profit (100%)
Price
variable costs/piece
variable costs/piece
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New price
Source: Backhaus
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Increasing the price by 20% allows less sales
Quantity
in Mio
Allowable
reduction in
sales to
achieve the
same profit
Price
variable costs/piece
Source: Backhaus
variable costs/piece
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New price
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Curves of identical profit
Required increase in sales volume
Price cut 20%
Variable costs
Price cut 10%
Price increase 10%
in per cent
of current
price
Price increase 20%
Allowable reduction in sales volume
Source: Simon/Dolan 1997
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The Price Elasticity of Demand (PED)
Amount sold
in million units
Price elasticity of demand =
% change in quantity demanded
% change in price
Price
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Inelastic and elastic demand
Inelastic demand
Elastic demand
Demand
Demand
150
105
100
50
$10
$15
Quantity demand per period
Price
$15
$10
Quantity demand per period
Price
! Decreased price sensitivity
! Increased price sensitivity
! Small volume change by changing prices ! Great volume change by changing prices
! Set favorably higher prices
! Set favorably lower prices
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Examples of the price elasticity of demand (PED) I
X
X
a) Bananas
P
X
P
X
c) Market for cigarettes
P
X
P
d) Cigarettes of a specific brand
X
P
e) Special cardiac medication
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b) Salt
f) City Travel Tours
P
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The price response function: Gutenberg
Gutenbergs’ double broken price response function
Demand x
Price p
Gutenberg: piecewise-linear approximation
Demand x
x=
30-p
for
26-
for
170-5p
for
Price p
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Pricing Strategy for new innovative products
Profit
Penetration Strategy
Skimming Strategy
Time t
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Examples: Sony walkman and Sony camcorder
It should be noted that a first-time exporter is
unlikely to use penetration pricing!
I-Phone? What strategy?
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Which strategy option to take?
Für Skimming
Gegen Penetration
!  Geringe Preiselastizität in der
Einführungsphase
!  Realisation hoher kurzfristiger Gewinne
!  Später Konkurrenzeintritt
!  Starke Konzentrationstendenzen bei
Absatzmittlern
!  Hoher Innovationsgrad
!  Unterstützung der Produktpositionierung
im hochwertigen Preis-Qualitätsumfeld
!  Graduelles Abschöpfen der
Preisbereitschaft ( Konsumentenrente)
wird möglich (zeitliche
Preisdifferenzierung)
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Für Penetration
Gegen Skimming
!  Durch schnelles Absatzwachstum trotz
niedriger Stückdeckungsbeiträge hohe
Gesamtdeckungsbeiträge
!  Hohe Lernrate
!  Geringe Produktüberlegenheit
!  Preisorientierte Qualitätsbeurteilung
!  Möglichkeit der Abschreckung von
Konkurrenten durch niedrige
Einführungspreise
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Price Discrimination = additional profit!
With a one-price the triangle of consumer’s willingness-to-pay can just be cut into
a rectangle. An intelligent price discrimination would here lead to more profit.
One-price
Sales
Sales
“too
expensive”
P1
Discriminated prices
“additional profit”
P3
P2
“money left
on the table”
Profit*
Profit*
Price
P1
Price
Condition: Diverse customer segments, e.g. regions
*Assumption: variable costs = 0
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Source: adapted from SKP
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Dimensions of Price Differentiation
Price differentiation
Goal
Methods
Examples
Customersegment
pricing
! Students
! Seniors
Productform
pricing
! Packages
! Bottles
! Tetra-Pack
Image
pricing
! White
labels
! brands
Channel
pricing
Location
pricing
! Restaurants ! Locations
! Vending
! Seat prices
machine
! pharmacy
Time
pricing
! Season
! Day/hour
! weekends
Price discrimination leads to a better extraction of the
willingness-to-pay.
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Bundling
Champions of Bundling
Customer wants a burger + drink
Why is Mc Donald offering menues?
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Ankering
Offer:
Economist e-paper p.a.
Economist print p.a.
Economist e-paper + print p.a.
59 CHF
125 CHF
125 CHF
Consumers Choice
16%
0%
84%
Why offering something
no one wants to have?
Economist e-paper p.a.
Economist e-paper + print p.a.
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59 CHF
68%
125 CHF
32%
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Ankering Example
Just for ankering!
Option not available!
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Price Perception
What else matters?
Discount
8%
Discount +
5%
Rebate
2%
+ Deduction
15%
Discount
✖
✔
Consumers perceive two separated discounts to be higher than one discount
Payment
-110
+
-530
+
-80
-720
✖
✔
Consumers perceive one loss to be less painful than separated additions of losses.
Source: Diller/ Herrmann, 2003
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Mit
gekennzeichnete Folien sind
klausurrelevant!
Best of luck
for your exam!
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Objectives of price management
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Dimensions of pricing psychology
Preispsychologisches Profil
Welche Rolle spielt
der Preis in welcher
Stufe des
Entscheidungsprozesses?
Preisinteresse
Wie tief müssen, wie
hoch können wir mit
dem Preis gehen?
Welche Preismotive
spielen eine Rolle?
Preismotiv
Preiswissen
Preissensitivität
Entscheidungsprozess und
Kaufverhalten
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Kennen die Kunden
die Preise
überhaupt? Welche
Preiselemente sind
zentral für die
Bildung des
Preisimages?
Welche Abwägungen
spielen eine Rolle?
Welche Heuristiken
werden angewandt?
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Pricing strategies for new imitation products
(me-too)
Kotler et al. 2005
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Adapting the price:
Price Discounts and Allowances
Cash Discount:
A price reduction to buyers who pay bills promptly. A typical example is
“2/10, net 30,” which means that payment is due within 30 days and that
the buyer can deduct 2 percent by paying the bill within 10 days.
Quantity Discount:
A price reduction to those who buy large volumes. A typical example is
“$10 per unit for less than 100 units; $9 per unit for 100 or more units.”
Quantity discounts must be offered equally to all customers and must not
exceed the cost savings to the seller. They can be offered on each order
placed or on the number of units ordered over a given period.
Functional Discount:
Discount (also called trade discount) offered by a manufacturer to tradechannel members if they will perform certain functions, such as selling,
storing, and recordkeeping.
Seasonal discount:
A price reduction to those who buy merchandise or services out of
season. Hotels, motels, and airlines offer seasonal discounts in slow
selling periods.
Allowance:
An extra payment designed to gain reseller participation in special
programs. Trade-in allowances are granted for turning in an old item when
buying a new one. Promotional allowances reward dealers for
participating in advertising and sales support programs.
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