Services are intangible activities or benefits (such as airline trips, financial advice or automobile repair) that an organization provides to satisfy consumer’s needs in exchange for money or something else of value
Four I’s of Services
intangibility, inconsistency, inseperability, and inventory.
Services are intangible; that is, they can’t be held, touched, or seen before the purchase decision. In contrast, before purchasing a traditional product, a consumer can touch a box of laundry detergent, kick the tire of an automobile, or sample a new breakfast cereal, because services tend to be a performance rather than an object, they are much more difficult for consumers to evaluate. To help consumers assess and compare services, marketers try to make them tangible or show the benefits of using the service.
Developing, pricing and promoting, and delivering services the challenging because the quality of a service is often inconsistent. Because services depend on the people who provide them, their quality varies with each person’s capabilities and day to day job performance. Inconsistency is much more of a problem in services than it is in tangible goods. Tangible products can be good or bad in terms of quality, but with modern production lines the quality will at least be consistent.
A third difference between services and goods, and related to problems of consistency is inseparability. In most cases, the consumer cannot (and does not) separate the deliverer of the service from the service itself. For example, to receive an education, a person may attend a university. The quality of the education may be high but if the student has difficulty interacting with instructors, finds counseling services poor, or does not receive adequate library or computer assistance, he or she may not be satisfied with the educational experience.
Inventory of services is different from that of goods. Inventory problems exist with goods because many items are perishable and because there are costs associated with handling inventory.
Idle production capacity
when the service provider is available but there is no demand for the service. The inventory cost of a service is the cost of paying the person used to provide the service along with any needed equipment.
The Service Continuum
The four I’s differentiate services from goods in most cases, but many companies are not clearly service-based or good-based organizations. The range of product dominant to service dominant offerings is referred to as the service continuum.
1) They are delivered by people or equipment 2) they are profit or non-profit 3) they are government sponsored.
Delivery by People or Equipment
Many companies offer services. Professional services include management consulting firms such as Booz, Allen and Hamilton or Accenture. Skilled labor is required to offer services such as Sears appliance repair or Sheraton catering service. Unskilled labor such as that used by Brinks store-security forces is also a service provided by people.
Profit or Non-profit Organizations
Many organizations involved in services also distinguish themselves by their tax status as profit or non-profit organizations. In contrast to profit organizations, nonprofit organizations’ excesses in revenue over expenses are not taxed or distributed to shareholders.
A third way to classify services is based on whether or not they are government sponsored. Although there is no direct ownership and they are non-profit organizations, governments at the federal state, and local levels provide a broad range of services. The United States Postal Service, for example has adopted many marketing activities. First Class postage revenue has declined as postal service customers have increased their use of the Internet to send e-mail, pay bills, and file taxes. Rather than fight the tend, however, the Postal Service is embracing the Internet.
How consumers Purchase Services
Colleges, Hospitals, Hotels and even Charities are facing an increasingly competitive environment. Successful service organizations, like successful product-oriented firms, must understand how the consumer makes a service purchase decision and quality evaluation and in what ways a company can present a differential advantage relative to competing offerings.
The Purchase Process
Many aspects of services affect the consumer’s evaluation of the purchase. Because services cannot be displayed, demonstrated, or illustrated, consumers cannot make a pre-purchase evaluation of all the characteristics of services. Similarly, because service providers may vary in their delivery of a service, an evaluation of a service many change with each purchase.
Assessing Service Quality
Once a consumer tries a service, how is it evaluated? Primarily by comparing expectations about a service offering to the actual experience a consumer has with the service.
Differences between the consumer’s expectations and experience are identified through gap analysis. This type of analysis asks consumers to assess their expectations and experiences on dimensions of service quality such as those described. Expectations are influenced by word-of-mouth communications, personal needs, past experiences, and promotional activities, while actual experiences are determined by the way an organization deliver its service. The relative importance of the various dimensions of service quality varies by the type of service.
Customer Contact and Relationship Marketing
Consumers judge services on the entire sequence of steps, that make up the service process.
customer contact audit
a flowchart of the points of interaction between consumer and service provider. This is particularly important in high-contact services such as hotels, educational institutions, and automobile rental agencies, it’s a customer contact audit for renting a car from Hertz. The interactions identified in a customer contact audit often serve as the basis for developing relationships with customers.
A Customer’s Car Rental Activities
1) contacts the rental company. A customer service representative receives the information. 2) and checks the availability of the car at the desired location. When the customer arrives at the rental site. 3) the reservation system is again accessed and the customer provides information regarding payment, address and driver’s license 4) A car is assigned to the customer 5) who proceeds by bus to the car pickup 6) On return to the rental location 7) the customer checks in 8) a customer service representative collects information on mileage, gas consumption and damages 9) and a bill is printed 10)
The contact between a service provider and a customer represents a service encounter that is likely to influence the customer’s assessment of the purchase. The number of encounters in a service experience may vary.
Managing the Marketing of Services
Just as the unique aspects of services necessitate changes in the consumer’s purchase process, the marketing management process also requires special adaptation. As we have seen in earlier chapters, the traditional marketing mix is composed of the Four Ps: product, price, place and promotion. Careful management of the four Ps is important when marketing services. However, the distinctive nature of the services requires that other variables also be effectively managed by service marketers. The concept of an expanded marketing mix for services has been adopted by many service-marketing organizations. In addition to the four P’s, the services marketing mix include, people, physical environment and process.
The Seven Ps of Services Marketing
Product, Price, Place and Promotion, People, Physical Environment and Process
The concepts of the product component of the marketing mix discussed in Chapter 10 and 11 apply equally well to Cheerios (a good) and to American Express (a service) Managers of goods and services must design the product concept with the features and benefits desired by customers. An important Aspect of the Product Concept is Branding. Because services are intangible, and more difficult to describe, the brand name or identifying logo of the service organization is particularly important when a consumer makes a purchase decision. Therefore, service organizations, such as banks, hotels, rental car companies, and restaurants, rely on branding strategies to distinguish themselves in the mind of the consumers.
In service businesses, price is referred to in many ways. Hospitals refer to charges; consultants, lawyers, physicians, and accountants to fees; airlines to fares; hotels to rates; and colleges and universities to tuition.
Many service businesses use off-peak pricing, which consists of charging different prices during different times of the day or during different days of the week to reflect variations in demand for the service. Airlines, for example, offer discounts for weekend travel, while movie theaters offer matinee prices.
Place or distribution is a major factor in developing a service marketing strategy because of the inseparability of services from the producer. Rarely are intermediaries involved in the distribution of a service; the distribution site and the service deliverer are the tangible components of the service.
The value of promotion, especially advertising, for many services is to show consumers the benefits of purchasing the service. It is valuable to stress availability, location, consistent quality, and efficient, courteous service, and to provide a physical representation of the service or a service encounter. The Accenture ad, for example describes the benefits available to its customers “High Performance. Delivered.” The Space Adventures ad describes the benefit of its service as being “the world’s first civilian explorer to circumnavigate the moon,” and it provides a photo of the service encounter- a close-up view of the moon! In most cases promotional concerns of services are similar to those of products.
has played a major role in the promotional strategy of many service organizations. Nonprofit organizations such as public schools, religious organizations, and hospitals, for example, often use publicity to disseminate their messages. For many of these organizations the most common form of publicity is the public service announcer because it’s free.
Mary services depend on people for the creation and delivery of the customer service experience. The nature of the interaction between employees and customers strongly influences the customer’s perceptions of the service experience. Customers will often judge the quality of the service experience based on the performance of people providing the service. This aspect of services marketing has led to a concept called internal marketing.
is based on the notion that a service organization must focus on its employees, or internal market, before successful programs can be directs at customers. Service firms need to ensure that employees have the attitude, skills, and commitment needed to meet customer expectations and to sustain customer loyalty.
Customer experience management
Once internal marketing programs have prepared employees for their interactions with customers, organizations can better manage the services they provide. Customer experience management (CEM) is the process of managing the entire customer experience with the company. CEM experts suggest that the process should be intentional and planned, consistent so that every experience is similar, differentiated from other service offerings, and relevant.
The appearance of the environment in which the service is delivered and whether the firm and customer interact can influence the customer’s perception of the service. The physical evidence of the service includes all the tangibles surrounding the service:The buildings, landscaping, vehicles, furnishings, signage, brochures, and equipment.
Process refers to the actual procedures, mechanisms and flow of activities by which the service is created and delivered. The actual creation and delivery steps that the customer experiences provide customers with evidence on which to judge the service.
The service capacity is lost if not used. So the service component of the marketing mix must be integrated with efforts to influence consumer demand. This is referred to as capacity management. Service organizations must manage the availability of the offering so that 1) demand matches capacity over the duration of the demand cycle (for example one day, week, month, or year) and 2) the organization’s assets are used in ways that will maximize the return on investment.
Services in the Future
What can we expect from the services industry in the future? New and better services of course, and an unprecedented variety of choices. Many of the changes will be the result of two factors: technological development and social imperative for sustainability. Technological advances are rapidly changing the services industry. The key elements of future services include mobility, convergence and personalization. Mobility will be provided by new generations of networks that will allow TV, GPS, high-speed data transfer, and high-definition programming on portable digital devices. Products such as Google TV, and the Apple IPhone are examples of the convergence of television, the Internet, and data services.
What Is a Price?
These examples highlight the many varied ways that price plays a part in our daily lives. From a marketing viewpoint, price is the money or other considerations (including other products and services) exchanged for the ownership or use of a product or service. Recently, Wilkinson Sword exchanged some of its knives for advertising use to promote its razor blades. This practice of exchanging products and services for other products and services rather than for money is called barter. These transactions account for billions of dollars annually in domestic and international trade.
the money or other considerations (including other products and services) exchanged for the ownership or use of a product or service
Practice of exchanging products and services for other products and services rather than for money.
Price and the Global Marketplace
To generate Profits in today’s global marketplace, international firms look around the world to find both new markets to increase revenues and suppliers whose efficiencies and lower hourly wages can reduce the prices the buying firm must pay.
Price as an Indicator Value
From a consumer’s standpoint, price is often used to indicate value when it is compared with the perceived benefits such as quality, durability, and so on of a product or service.
the ratio of perceived benefits to price or Value-P. Benefits/Price
the practice of simultaneously increasing product and service benefits while maintaining or decreasing price. For some products, price influences consumer’s perception of overall quality and ultimately its value to consumers. In a survey of home furnishing buyers, 84 percent agreed with the statement.
Price in the Marketing Mix
Pricing is a critical decision made by a marketing executive because price has a direct effect on a firm’s profits. This is apparent from a firm’s profit equation: Profit=Total Revenue-Total Cost (Unit Price X Quantity Sold)-(Fixed Cost+Variable Cost)
Identifying Pricing Objectives
Pricing Objectives involve specifying the role of price in an organization’s marketing and strategic plans. To the extent possible, these pricing objectives for marketing managers responsible for an individual brand.
Three different objectives relate to a firm’s profit, which is often measured in terms of return on investment. or return on assets. These objectives have different implications for pricing strategy. One objective is managing for long-run profits, in which companies such as many Japanese car or TV set manufacturers-give up.
Given that a firm’s profit is high enough for it to remain in business, an objective may be to increase sales revenue, which will in turn lead to increases in market share and profit. Objectives related to dollar sales revenue or unit sales have the advantage of being translated more easily into meaningful targets for marketing managers responsible for a product line or brand than profit objectives.
Market Share is the ratio of the firm’s sales revenues or unit sales to those of the industry (competitors plus the firm itself). Companies often pursue a market share objective when industry sales are relatively flat or declining, In the late 1990s, Boeing cut prices drastically to try to maintain its 60 percent market share and encountered huge losses.
Many firms use unit volume, the quantity produced or sold, as a pricing objective. These firms often sell multiple products at very different prices and need to match the unit volume demanded by customers with price and production capacity. Using unit volume as an objective can be counterproductive if a volume objective is achieved, say, by drastic price cutting that drive down profit.
In some instances, profits, sales, and market share are less important objectives of the firm than mere survival. Specialty-toy retailers increasingly are facing survival problems because they can’t match the price cuts by big discount retailers like Walmart and Target, the reason FAO Schwartz recently filed for bankruptcy.
A firm may forgo higher profit on sales and follow a pricing objective that recognizes its obligations to customers and society in general. Medtronics followed this pricing policy when it introduced the world’s first heart pacemaker.
Consumer demand for the product clearly affects the price that can be charged. Other constraints on price vary from factors within the organization to competitive factors outside the organization.
Demand for the Product Class, Product and Brand
The number of potential buyers for the product class (cars), product (sports cars), and brand (Bugatti Veyron) clearly affects the price a seller can charge. Likewise, whether the item is a luxury-like the Veyron- or a necessity-like bread and a roof over your head-also affects the price that can be charged. Generally, the greater the demand for a product, the higher the price that can be set. For example, the New York Mets set different ticket prices for their games based on the appeal of their opponent-prices are higher when they play the New York Yankees and lower when they play the Pittsburgh Pirates.
Cost of Producing and Marketing the Product
In the long run, a firm’s price must cover all the costs of producing and marketing a product. If the price doesn’t cover these costs and provide a reasonable profit, the firm will fail.
Newness of the Product: Stage in the Product Life Cycle
The newer a product and the earlier it is in its life cycle, the higher is the price that can usually be charged. Willing to spend $5399 for a Samsung Smart Tv? The high initial price is possible because of patents and limited competition early in its product life cycle.
Single Product verse a Product Line
When Apple introduced its iPad in 2010, it was not only unique and in the introductory stage of its product life cycle but also the first commercially successful tablet device sold. As a result, Apple had a great latitude in setting the price. Now, with a wide range of competition in tablets from Samsung’s Galaxy Tab, Motorola’s Xoom, and others, Apple might want to develop a product line of iPad models. So the price of individual models has to be consistent with the others and must communicate value to consumers.
Cost of Changing Prices and Time Period they Apply
If Scandinavian Airlines asks General Electric to provide spare jet engines to power the new Boeing 737 it just bought, GE can easily set a new price for the engines to reflect its latest information since only one buyer has to be informed. But if Coldwater Creek decides that sweater prices are too low in its catalogs after thousands of catalogs have been mailed to customers, it has a big problem. It must consider the cost of changing prices and the time period for which they apply in developing the price list for its catalog items.
Type of Competitive Market
The seller’s price is constrained by the type of market in which it competes. Economists generally delineate four types of competitive markets as described in Chapter 3. From most competitive to least competitive, then are pure competition, monopolistic competition, oligopoly and pure monopoly.
Hundreds of local grain elevators sell corn whose price per bushel is set by the marketplace. Within strains, the corn is identical, so advertising only informs buyers that the seller’s corn is available.
Dozens of regional, private brands of peanut butter compete with national brands like Skippy and Jif. Both price competition exist.
The few sellers of aluminum try to avoid price competition because it can lead to disastrous price wars in which all lose money. Yet firms in such industries stay aware of a competitor’s price cuts or increases and may follow suit.
In 1994 Johnson and Johnson revolutionized the treatment of coronary heart diseases by introducing the stent a tiny mesh tube “spring” that props open clogged arteries. Initially a monopoly, J and J stuck with its early 1595 price and achieved 1 billion in sales and 91 percent market share by the end of 1996. But its reluctance to give price reductions for large-volume purchases to hospitals antagonized them. When Competitors like Medtronic introduced an improved stent at lower prices.
A firm must know what specific prices its present and potential competitors are charging now as well as what they are likely to charge in the near future. The firm then develops a marketing mix strategy including setting prices-to respond to its competitors’ prices.
Fundamentals of Estimating Demand
How much money would you pay for your favorite magazine? If the price kept going up, at some point you would probably quit buying it. Conversely, if the rice kept going down, you might eventually decide not only to keep buying your magazine but also to get your friend a subscription too. The lower to price the higher the demand.
The Demand Curve
A demand curve is a graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a give price.
As we saw in Chapter 3, these depend on many forces such as demographics, culture, and technology. Because consumer tastes can change quickly, up-to-date marketing research is essential to estimate demand.
Price and availability of similar products
The laws of demand work for one’s competitors, too. If the price of Time magazine falls, more people will buy it. That then means fewer people will buy Newsweek.
In general as real consumer income (allowing for inflation) increases, demand for a product also increases.
factors that determine consumer’s willingness and ability to pay for products and services.
Change in TR/1 unit increase in Q.
Price elasticity of demand
Price elasticity of demand=E=Percentage change in quantity demanded/Percentage change in price.
Exists when a 1 percent decrease in price produces more than a 1 percent increase in quantity demanded, thereby actually increasing sales revenue. This results in a price elasticity that is greater than 1 with elastic demand. In other words, a product with elastic demand is one in which a slight decrease in price results in a relatively large increase in demand or units sold.
exists when a 1 percent decrease in price produces less than a 1 percent increase in quantity demanded, thereby actually decreasing sales revenue.
Important to marketing managers because of its relationship to total revenue, so it is important that marketing managers recognize that price elasticity of demand is not the same over all possible prices of a product.
Decisions Involving Price Elasticity
Price elasticity of demand is determined by a number of factors. First, the more substitutes a product or service has, the more likely it is to be price elastic. For example, a new sweater, shirt or blouse has many possible substitutes and is price elastic. but gasoline has almost no substitutes and is price inelastic.
The Importance of Controlling Costs
Understanding the role and behavior of costs is critical for all marketing decisions particularly pricing decisions. Five cost concepts are important in pricing decisions.
Total Cost (TC)
The total expense incurred by a firm in producing and marketing a product. Total cost is the sum of fixed cost and variable cost.
Fixed Cost (FC)
the sum of the expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold.
Variable Cost (VC)
is the sum of the expenses of the firm that vary directly with the quantity of a product that is produced and sold. TC=FC+VC
Unit Variable Cost (UVC)
is a variable cost expressed on a per unit basis for a product UVC=VC/Q
Marginal Cost (MC)
is the change in total cost that results from producing and marketing one additional unit of a product MC=Change in TC/1 unit increase in Q.
Which is continuing, concise trade-off of incremental costs against incremental revenues. In personal terms, marginal analysis means that people will continue to do something as long as the incremental return exceeds the incremental cost. This same idea holds true in marketing and pricing decisions. In this setting, marginal analysis means that as long as revenue received from the sale of an additional product is greater than the additional cost of producing and selling it, a firm will expand its output of that product.
Marketing managers often employ an approach that considers cost, volume, and profit relationships based on the profit equation. Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output.
Break-even point (BEP)
BEP= Fixed Cost/Unit Price-Unit Variable Cost.
Applications of Break-Even Analysis
Because of its simplicity, break-even analysis is used extensively in marketing, most frequently to study the impact on profit of changes in price, fixed cost, and variable cost.
The Six Steps in Setting Price
1) Identifying pricing objectives and constraints
2) Estimate demand and revenue
3) Determine cost, volume, and profit relationships
4) Select an approximate price level
5) Set list or quoted price
6) Make special adjustments to list or quoted price.
Select an Approximate price level
A key for a marketing manager setting a final price for a product is to find an approximate price level to use as a reasonable starting point. Four common approaches to helping find this approximate prive level are 1) demand-oriented 2) cost-oriented 3) profit-oriented 4) competition-oriented approaches. Although these approaches are discussed separately below, some of them overlap and a seasoned marketing manager will consider several in selecting an approximation price level.
Skimming Pricing, setting the highest initial price that customers really desiring the product are willing to pay. These customers are not very price sensitive because they weigh the new product’s price, quality, and ability to satisfy their needs against the same characteristics of substitutes.
Setting a low initial price on a new product to appeal immediately to the mass market is penetration pricing,the exact opposite of skimming pricing. The conditions favoring penetration price are the reverse of those supposing skimming pricing 1) many segments of the market are price sensitive 2) a low initial price discourages competitors from entering the market and 3) unit production and marketing costs fall dramatically as production volumes increase. A firm using penetration pricing may 1) maintain the initial price for a time to gain profit lost from its low introductory level or 2) lower the price further, counting on the new volume to generate the necessary profit.
Consumers may use price as a measure of the quality or prestige of an item so that as price is lowered beyond some point. Demand for the item actually falls. Prestige Pricing involves setting a high price so that quality- or status conscious consumers will be attracted to the product and buy it. The demand curve slopes downward and to the right between points A and B but turns back to the left between points B and C because demand is actually reduced between points B and C. From A to B buyers see the lowering of price as a bargain and buy more; from B to C they become dubious about the quality and prestige and buy less. A marketing manager’s pricing strategy here is to stay above the initial price.
Often a firm that is selling not just a single product but a line of products may price them at a number of different specific pricing points.
Odd Even Pricing
Involves setting prices a few dollars or cents under an even number. The presumption is that consumers see the Craftsman radial saw as priced at “something over $400” rather than “about 500.” In theory, demand increases if the price drops from 500 to 499.99.
Manufacturers will sometimes estimate the price that the ultimate consumer would be willing to pay for a product. They then work backwards through markups taken by retailers and wholesalers to determine what price they can charge wholesalers for the product.
A frequently used demand-oriented pricing practice is the marketing of two or more products in a single package price. For example, Delta Air Lines offers vacation packages that include airfare, car rental, and lodging. Bundle pricing is based on the idea that consumers value the package more than the individual items.
Yield Management Pricing
the charging of different prices to maximize revenue for a set amount of capacity at any given time. Service businesses engage in capacity management and an effective way to do this is by varying prices by time, day, week or season.
Cost-Oriented Pricing Approaches
With cost oriented approaches a price setter stresses the cost side of the pricing problem, not the demand side. Price is set by looking at the production and marketing costs and then adding enough to cover direct expenses, overhead and profit.
Standard Markup Pricing
Managers of supermarkets and other retail stores have such a large number of products that estimating the demand for each product as a means of setting price is impossible. Therefore, they use standard markup pricing.
Many manufacturing, professional services, and construction firms use a variation of standard markup pricing. It involves summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at a price. Cost-plus pricing generally assumes two forms.
Cost-plus percentage of cost pricing
a fixed percentage is added to the total unit cost.
cost-plus fixed pricing fee
means that a supplier is reimbursed for all costs, regardless of what they turn out to be, but is allowed only a fixed fee as profit that is independent of the final cost of the project.
Experience Curve Pricing
holds that the unit cost of many products and services declines by 10-percent to 30-percent each time a firm’s experience at producing and selling them doubles.
Target Profit Pricing
A firm may set an annual target of a specific dollar volume of profit.
Target Return on Sales Pricing
A shortcoming with target profit pricing is that although it is simple and the target involves only a specific dollar volume, there is no benchmark of sales or investment used to show how much of the firm’s effort is needed to achieve the target.
Target Return-on-Investment Pricing
Large, publicly owned corporations and many public utilities set annual return-on-investments, T ROI Pricing is a method of setting prices to achieve this product.
In choosing a price or another action using spreadsheet results, the manager must 1) study the results of the simulation projections 2) assess the realism of the assumptions underlying each set of projections.
Target return on sales formula
Target Profit/Total Revenue.
Competition-Oriented Pricing Approaches
Rather than emphasize demand, cost, or profit factors, a price setter can stress what competitors or “the market” is doing.
For some products where tradition, a standardize channel of distribution, or other competitive factors dictate the price.
Above, At, or Below Market Pricing
Most products, it is difficult to identify a specific market price for a product or product class. Still, marketing managers often have a subjective feel for the competitors’ price or market price. Using this benchmark, they then may deliberately choose a strategy.
Loss Leader Pricing
For a Special promotion retail stores deliberately sell a product below it’s customary price to attract attention to it. The purpose of this loss-leader pricing is not to increase sales but to attract customers in hopes they will buy other products as well, particularly the discretionary items with large markups.
Choosing a Price Policy
Choosing a Price Policy is important in setting a list or quoted price. Two options are common-a one-price policy or a flexible-price policy.
also called fixed pricing, is setting one price for all buyers of a product or service. You can buy it or not, but there is only one fixed price.
also called dynamic pricing, involves setting different prices for products and services depending on individual buyers and purchase situations. A flexible-price policy gives sellers considerable discretion in setting the final price in light of demand, cost, and competitive factors.
For a firm with more than one product a decision on the price of a single product must consider the price of other items in its product line or related product lines in its product mix. Within a product line or mix there are usually some products that are substitutes for one another and some that complement each other.
Product line Pricing
the setting of prices for all items in a product line. When setting prices, the manager seeks to cover the total cost an produce a profit for the complete line, not necessarily for each item.
Product-line pricing involves determining 1) the lowest-priced product and price. 2) the highest-priced product and price. 3) price differentials for all other products in the line.
In setting a price, marketers weigh factors heavily that satisfy the perception of expectations of ultimate consumers, such as the customary prices for a variety of consumer products.
A manager’s pricing decision is immediately apparent to most competitors, who may retaliate with price changes of their own. Therefore, a manager who sets a final list or quoted price must anticipate potential price responses from competitors.
Involves successive price cutting by competitors to increase or maintain their unit sales or market share. Price wars erupt in a variety of industries.
Marketers are advised to consider price cutting only when one or more conditions exist 1) the company has a cost or technological advantage over its competitors, 2) primary demand for a product class will grow.
Incremental number of frames
Extra fixed cost/(Price-Unit Variable Cost)
Discounts are reductions from the list price that a seller gives a buyer as a reward for some activity of the buyer that is favorable to the seller. Four kinds of discounts are especially important in marketing strategy: 1) quantity, 2) seasonal 3) trade and 4) cash.
To encourage customers to buy larger quantities of a product, firms at all levels in the marketing channel offer which are reductions in unit costs for a larger order.
To encourage buyers to stock inventory earlier than their normal demand would require, manufacturers often use seasonal discounts.
To reward wholesalers and retailers for marketing functions they will perform in the future, a manufacturer often gives trade or functional discounts. 1) where they are in the channel and 2) the marketing activities they are expected to perform in the future.
Retailers provide cash discounts to consumers as well to eliminate the cost of credit granted to consumers. These discounts take the form of discount-for-cash.
like discounts are reductions from list or quoted prices to buyers for performing some activity.
Trade in Allowances
A Price reduction given when a used product is part of the payment on a new product. Trade-ins are an effective way to lower the price a buyer has to pay without formally reducing the price.
Undertaking certain advertising or selling activities to promote a product. Various types of allowances include an actual cash payment or an extra amount of “free goods”
a payment to a dealer for promoting the manufacturer’s products
Everyday low pricing
the practice of replacing promotional allowances with lower manufacturer list prices. EDLP promises to reduce the average price to consumers while minimizing promotional allowances that cost manufacturers billions of dollars every year.
Geographical adjustments are made by manufacturers or ever wholesalers to list or quoted prices to reflect the cost of transportation of the products from seller to buyer. The two general methods for quoting prices related to transportation costs are 1) FOB origin pricing 2) uniform delivered pricing.
FOB Origin Pricing
Involves the seller’s naming the location of this loading as the seller’s factor or warehouse. The title to the goods passes to the buyer at the point of loading, so the buyer becomes responsible for picking the specific mode of transportation, for all the transportation costs, and for subsequent handling of the product.
Uniform Delivered Pricing
The price the seller quotes includes all transportation costs. It is quoted in a contract as “FOB buyer’s location,” and the seller selects the mode of transportation, pays the freight charges, and is responsible for any damage that may occur because the seller retains title to the goods until delivered to the buyer. Although they go by various names, there are four kinds of delivered pricing methods: 1) single zone pricing 2) multiple-zone pricing 3) FOB with freight-allowed pricing, and 4) basing-point pricing.
all buyers pay the same delivered price for the products, regardless of their distance from the seller. So, although a retail store offering free delivery in a metropolitan area has lower transportation costs for goods shipped to customers nearer the store than for those shipped to distant ones, customers pay the same delivered price.
a firm divides its selling territory into geographic areas or zones. The delivered price to all buyers within any one zone is the same, but prices across zones vary depending on the transportation cost to the zone and the level of competition.
Involves selecting one or more geographical locations (basing point) from which the list price for products plus freight expenses are charged to the buyer.
Legal and Regulatory Aspects of Pricing
Arriving at a final price is clearly a complex process. The task is further complicated by legal and regulatory restrictions. Five pricing practices have received the most scrutiny 1) price-fixing 2)price discrimination 3) deceptive pricing 4) geographical pricing 5) predatory pricing.
A conspiracy among firms to set prices for a product is termed price fixing. Price fixing is illegal per se under the Sherman Act.
Horizontal Price Fixing
Occurs when competitors that produce and sell competing products collude, or work together, to control prices, effectively taking price out of the decision process for consumers.
Vertical Price Fixing
occurs when parties at different levels of the same marketing channel (e.g., manufacturers and retailers) collude to control the prices passed on to consumers.
Consumer Goods Pricing Act
Prohibit manufacturers and retailers from setting a fixed price for a product, 1975
The Clayton Act as amended by the Robinson-Patman Act prohibits the practice of charging different prices to different buyers for goods of like grade and quality. However, not all price differences are illegal; only those that substantially lessen competition or create a monopoly deemed unlawful.
1. When price differences charged to different customers do not exceed the differences in the cost of manufacture, sale, or delivery resulting from differing methods or quantities in which such goods are sold or delivered to buyers.
2. When price differences result from changing market conditions, avoiding obsolescence of seasonal merchandise, including perishables, or closing out sales.
3. When price differences are quoted to selected buyers in good faith to meet competitors’ prices and are not intended to injure competition.
Cost justification defense
defenses for pricing discrimination
A communications budget in which expenditures are raised or lowered to match the competition
Price deals that mislead consumers fall into the category. Deceptive pricing is outlawed by the Federal Trade Commission Act, the FTC monitors such practices and has published a regulation titled “Guides against Deceptive Pricing.” to help business people avoid a charge of deception.
FOB origin pricing is legal, as are FOB freight-allowed pricing practices, providing no conspiracy to set prices exists. Basing-point pricing can be viewed as illegal under the Robinson-Patman Act and the Federal Trade Commission Act if there is clear-cut evidence of a conspiracy to set prices. In general, geographical pricing practices have been immune from legal competition exists under the Sherman Act or price discrimination exists under the Robinson-Patman Act
The practice of charging a very low price for a product with the intent of driving competitors out of business. Once competitors have been driven out, the firm raises its prices. This practice is illegal under the Sherman Act and the Federal Trade Commission Act.