IN THIS CHAPTER, WE WILL ADDRESS THE FOLLOWING QUESTIONS: 1. How do consumers process and evaluate prices? 2. How should a company set prices initially for products or 3. How should a company adapt prices to meet varying circumstances and opportunities? 4. When should a company initiate a price change? 5. How should a company respond to a competitor's price change? CHAPTER 14 DEVELOPING PRICING STRATEGIES AND PROGRAMS i l .4 Price is the one element of the marketing mix that produces rev- enue; the other elements produce costs. Prices are perhaps the easiest element of the marketing program to adjust; product fea- tures, channels, and even promotion take more time. Price also communicates to the market the company's intended value posi- tioning of its product or brand. A well-designed and marketed product can command a price premium and reap big profits. Consider Whirlpool. A print ad for the Whirlpool Duet, a premium-priced washer-dryer combo that retails for nearly four times the price of comparative models. 431 ashers and dryers traditionally were seen as utilitarian products that could never justify a high price. In 2001, Whirlpool introduced the Duet, a front-loading washer-dryer combo that retailed at $2,300— • arly four times the price of comparative models. How did Whirlpool do it? e Duet was a truly unique offering that promised "performance and effi- Iency without compromise." Its huge capacities could wash and dry big loads, it it used much less water and electricity than competitors. It also washed all pes of clothing—from silks and lace to sleeping bags and comforters. Duet so could claim an emotional benefit for users—bigger loads meant fewer ads and therefore more time and freedom to do other things.' 1 432 PART 5 SHAPING THE MARKET OFFERINGS The Duet pricing plan was the result of a broader shift in Whirlpool's pricing strategy to reduce the frequency of costly and potentially confusing dis- counts. It wanted to find the optimal prices for its products. Many marketers, however, neglect their pricing strategies—one survey found that managers spent less than 10 percent of their time on pricing. 2 Pricing decisions are clearly complex and difficult. Holistic marketers must take into account many factors in making pricing decisions—the company, the cus- tomers, the competition, and the marketing environment. Pricing decisions must be consistent with the firm's marketing strategy and its target markets and brand positionings. In this chapter, we provide concepts and tools to facilitate the setting of ini- tial prices and adjusting prices over time and markets. Ill Understanding Pricing Price is not just a number on a tag or an item: Price is all around us. You pay rent for your apartment, tuition for your education, and a fee to your physician or dentist. The airline, railway, taxi, and bus companies charge you a fare; the local utilities call their price a rate; and the local bank charges you interest for the money you borrow. The price for driving your car on Florida's Sunshine Parkway is a toll, and the company that insures your car charges you a premium. The guest lecturer charges an honorarium to tell you about a govern- ment official who took a bribe to help a shady character steal dues collected by a trade association. Clubs or societies to which you belong may make a special assessment to pay unusual expenses. Your regular lawyer may ask for a retainer to cover her services. The "price" of an executive is a salary, the price of a salesperson may be a commission, and the price of a worker is a wage. Finally, although econo- mists would disagree, many of us feel that income taxes are the price we pay for the privilege of making money. 3 Throughout most of history, prices were set by negotiation between buyers and sellers. "Bargaining" is still a sport in some areas. Setting one price for all buyers is a relatively mod- ern idea that arose with the development of large-scale retailing at the end of the nine- teenth century. F. W. Woolworth, Tiffany and Co., John Wanamaker, and others advertised a "strictly one-price policy," because they carried so many items and supervised so many employees. Today the Internet is partially reversing the fixed pricing trend. Computer technology is making it easier for sellers to use software that monitors customers' movements over the Web and allows them to customize offers and prices. New software applications are also allowing buyers to compare prices instantaneously through online robotic shoppers or "shopbots." As one industry observer noted, "We are moving toward a very sophisticated economy. It's kind of an arms race between merchant technology and consumer technol- ogy." 4 (See "Marketing Insight: The Internet and Pricing Effects on Sellers and Buyers.") Traditionally, price has operated as the major determinant of buyer choice. This is still the case in poorer nations, among poorer groups, and with commodity-type products. Although nonprice factors have become more important in recent decades, price still remains one of the most important elements determining market share and profitability. Consumers and purchasing agents have more access to price information and price discounters. Consumers put pressure on retailers to lower their prices. Retailers put pressure on manufacturers to lower their prices. The result is a marketplace characterized by heavy discounting and sales promotion. DEVELOPING PRICING STRATEGIES AND PROGRAMS CHAPTER 14 433 THE INTERNET AND PRICING EFFECTS ON SELLERS AND BUYERS E-commerce has been arguably the Web's hottest application. Yet the Internet is more than simply a new "marketspace." Internet-based technologies are actually changing the rules of the market. Here is a short list of how the Internet allows sellers to discriminate between buyers and buyers to discriminate between sellers. Buyers can: • Get instant price comparisons from thousands of vendors. One site, PriceScan.com, lures thousands of visitors a day, most of them corporate buyers. Intelligent shopping agents ("bots") take price comparison a step further and seek out products, prices, and reviews from as many as 2,000 merchants. Whether they use "bots" or not, consumers now regularly check online prices, com- pare them with those in their local stores and may well take a peek at what customers in other countries are paying and order from overseas. Consumers also may unbundle product informa- tion from the transaction themselves. For instance, someone might use the Internet to research digital cameras, but visit an electron- ics store for a hands-on demonstration, then walk out of the store without buying, go home to use a search engine to find the lowest price, and buy a camera online. • Name their price and have it met. On Priceline.com, the cus- tomer states the price he wants to pay for an airline ticket, hotel, or rental car and Priceline checks whether any seller is willing to meet that price. Consumers can fix their own prices, and sellers can use it too: Airlines can fill in demand for empty seats, and hotels welcome the chance to sell vacant rooms. Volume-aggre- gating sites combine the orders of many customers and press the supplier for a deeper discount. * Get products free. Open Source, the free software movement that started with Linux, will erode margins for just about any com- pany doing software. Open-source software is popping up every- where. It's in PCs and cell phones and set-top boxes. It's in servers that power the world's Web sites, such as Google and Amazon, and in giant corporate and government systems. The biggest challenge confronting Microsoft, Oracle, IBM, and virtually every other major software producer is now: How do you compete with programs that can be had free? Sellers can: • Monitor customer behavior and tailor offers to individuals. Although shopping agent software and price comparison Web sites provide published prices, consumers may be missing out on the special deals they can get with the help of new technologies. GE Lighting, which gets 55,000 pricing requests a year, has Web programs that evaluate 300 factors that go into a pricing quote, such as past sales data and discounts, so that it can reduce pro- cessing time from up to 30 days to 6 hours. • Give certain customers access to special prices. CDNOW, an online vendor of music albums, e-mails certain buyers a special Web site address with lower prices. Unless you know the secret address, you pay full price, Business marketers are already using extranets to get a precise handle on inventory, costs, and demand at any given moment in order to adjust prices instantly. Both buyers and sellers can: * Negotiate prices in online auctions and exchanges. Want to sell hundreds of excess and slightly worn widgets? Post a sale on eBay. Want to purchase vintage baseball cards at a bargain price? Go to www.baseballplanet.com. Sources: Amy E. Cortese, "Good-Bye to Fixed Pricing?" BusinessWeek, May 4,1998, pp. 71-84; Michael Menduno, "Priced to Perfection," Business 2.0, March 6, 2001, pp. 40-42; Faith Keenan, "The Price Is Really Right," BusinessWeek, March 31, 2003, pp. 61-67; Paul Markillie, "A Perfect Market: A Survey of E-Commerce," The Economist, May 15, 2004, pp. 3-20; David Kirpatrick, "How the Open-Source World Plans to Smack Down Microsoft, and Oracle, and ", Fortune, February 23,2004, pp. 92-100. For a discussion of some of the academic issues involved, see Florian Zettelmeyer, "Expanding to the Internet: Pricing and Communication Strategies when Firms Compete on Multiple Channels," Journal of Marketing Research 37 (August 2000): 292-308; John G. Lynch Jr. and Dan Ariely, "Wine Online: Search Costs Affect Competition on Price, Quality, and Distribution," Marketing Science (Winter 2000): 83-103; Rajiv Lai and Miklos Sarvary, "When and How Is the Internet Likely to Decrease Price Competition?" Marketing Science 18, no.4 (1999): 485-503. How Companies Price Companies do their pricing in a variety of ways. In small companies, prices are often set by the boss. In large companies, pricing is handled by division and product-line managers. Even here, top management sets general pricing objectives and policies and often approves the prices proposed by lower levels of management. In industries where pricing is a key factor (aerospace, railroads, oil companies), companies will often establish a pricing department to set or assist others in determining appropriate prices. This department reports to the market- ing department, finance department, or top management. Others who exert an influence on pricing include sales managers, production managers, finance managers, and accountants. Executives complain that pricing is a big headache—and one that is getting worse by the day. Many companies do not handle pricing well, and throw up their hands at "strategies" like this: "We determine our costs and take our industry's traditional margins." Other com- mon mistakes are: Price is not revised often enough to capitalize on market changes; price is MARKETING INSIGHT 434 PART 5 SHAPING THE MARKET OFFERINGS set independently of the rest of the marketing mix rather than as an intrinsic element of market-positioning strategy; and price is not varied enough for different product items, market segments, distribution channels, and purchase occasions. Others have a different attitude: They use price as a key strategic tool. These "power pricers" have discovered the highly leveraged effect of price on the bottom line. 5 They cus- tomize prices and offerings based on segment value and costs. PROGRESSIVE INSURANCE Progressive Insurance collects and analyzes loss data in automobile insurance better than anyone else. Its understanding of what it costs to service various types of customers enables it to serve the lucrative high-risk customer no one else wants to insure. Free of competition and armed with a solid understanding of costs, Progressive makes good profits serving this customer base. 6 The importance of pricing for profitability was demonstrated in a 1992 study by McKinsey & Company. Examining 2,400 companies, McKinsey concluded that a 1 percent improve- ment in price created an improvement in operating profit of 11.1 percent. By contrast, 1 per- cent improvements in variable cost, volume, and fixed cost produced profit improvements, respectively, of only 7.8 percent, 3.3 percent, and 2.3 percent. Effectively designing and implementing pricing strategies requires a thorough under- standing of consumer pricing psychology and a systematic approach to setting, adapting, and changing prices. Consumer Psychology and Pricing Many economists assume that consumers are "price takers" and accept prices at "face value" or as given. Marketers recognize that consumers often actively process price information, interpreting prices in terms of their knowledge from prior purchasing experience, formal communications (advertising, sales calls, and brochures), informal communications (friends, colleagues, or family members), and point-of-purchase or online resources. 7 Purchase deci- sions are based on how consumers perceive prices and what they consider to be the current actual price—not the marketer's stated price. They may have a lower price threshold below which prices may signal inferior or unacceptable quality, as well as an upper price threshold above which prices are prohibitive and seen as not worth the money. Understanding how consumers arrive at their perceptions of prices is an important mar- keting priority. Here we consider three key topics—reference prices, price-quality infer- ences, and price endings. REFERENCE PRICES Prior research has shown that although consumers may have fairly good knowledge of the range of prices involved, surprisingly few can recall specific prices of products accurately. 8 When examining products, however, consumers often employ reference prices. In considering an observed price, consumers often compare it to an inter- nal reference price (pricing information from memory) or an external frame of reference (such as a posted "regular retail price"). 9 All types of reference prices are possible (see Table 14.1). Sellers often attempt to manip- ulate reference prices. For example, a seller can situate its product among expensive prod- ucts to imply that it belongs in the same class. Department stores will display women's apparel in separate departments differentiated by price; dresses found in the more expen- sive department are assumed to be of better quality. Reference-price thinking is also encouraged by stating a high manufacturer's suggested price, or by indicating that the product was priced much higher originally, or by pointing to a competitor's high price. 10 CONSUMER ELECTRONICS On JVC's Web site, the manufacturer's suggested retail price often bears no relationship to what you would be charged by a retailer for the same item. For instance, for a model of mini-digital video camcorder that doubles as a digital still camera, JVC suggests a retail price of $1,099.95, but Circuit City was selling it for $799.99 and Amazon.com for S699.99. Compared with other consumer items, from clothing to cars to furniture to tooth- brushes, the gap between the prices routinely quoted by manufacturer and retailer in consumer electronics is DEVELOPING PRICING STRATEGIES AND PROGRAMS CHAPTER 14 435 B "Fair Price" (what the product should cost) B Typical Price a Last Price Paid a Upper-Bound Price (reservation price or what most consumers would pay) a Lower-Bound Price (lower threshold price or the least consumers would pay) Q Competitor Prices a Expected Future Price E Usual Discounted Price Source: Adapted from Russell S. Winer, ''Behavioral Perspectives on Pricing: Buyers' Subjective Perceptions of Price Revisited," in Issues in Pricing: Theory and Research, edited by Timothy Devinney (Lexington, MA: Lexington Books, 1988), pp. 35-57. TABLE 14.1 Possible Consumer Reference Prices large. "The simplest thing to say is that we have trained the consumer electronics buyer to think he is getting 20 or 30 or 40 percent off," said Robert Atkins, a vice president at Mercer Management Consulting. A product man- ager for Olympus America, primarily known for its cameras, defends the practice by saying that the high manu- facturer's suggested retail price is a psychological tool, a reference price that makes people see they are getting something of value for less than top price. 11 Clever marketers try to frame the price to signal the best value possible. For example, a relatively more expensive item can be seen as less expensive by breaking the price down into smaller units. A $500 annual membership may be seen as more expensive than "under $50 a month" even if the totals are the same. 12 When consumers evoke one or more of these frames of reference, their perceived price can vary from the stated price. 13 Research on reference prices has found that "unpleasant surprises"—when perceived price is lower than the stated price—can have a greater impact on purchase likelihood than pleasant surprises. 14 PRICE-QUALITY INFERENCI S Many consumers use price as an indicator of quality. Image pricing is especially effective with ego-sensitive products such as perfumes and expensive cars. A $100 bottle of perfume might contain $10 worth of scent, but gift givers pay $100 to communicate their high regard for the receiver. Price and quality perceptions of cars interact. 15 Higher-priced cars are perceived to pos- sess high quality. Higher-quality cars are likewise perceived to be higher priced than they actually are. Table 14.2 shows how consumer perceptions about cars can differ from reality. When alternative information about true quality is available, price becomes a less signifi- cant indicator of quality. When this information is not available, price acts as a signal of quality. CKE RESTAURANTS In the fast-food business, rampant price wars are seen by some as a symptom of erosion in quality. That's why CKE Restaurants, parent company of Carl Jr.'s and Hardee's, is bucking the "dollar menu" trend and upping the price of its burgers. Its president and CEO Andrew F. Puzder says: "The problem is if you start selling something for 99 cents, then people assume its worth 99 cents. And those are the least profitable customers." When Puzder bought the troubled Hardee's chain, part of his overhaul was to focus on quality and standout menus for both chains. He cre- ated a $3.95 hamburger that is advertised as the "Six Dollar Burger" to connote both quality and value. 16 Some brands adopt scarcity as a means to signify quality and justify premium pricing. Some automakers have bucked the massive discounting craze that shook the industry and are pro- ducing smaller batches of new models, creating a buzz around them, and using the demand to raise the sticker price. 17 Waiting lists, once reserved for limited-edition cars like Ferraris, are becoming more common for mass-market models, including Volkswagen and Acura SUVs and Toyota and Honda minivans. 436 PART 5 SHAPING THE MARKET OFFERINGS TABLE 14.2 j Consumer Perceptions Versus Reality for Cars Wall Street firm Morgan Stanley used J.D. Power and Associates' 2003 Vehicle Dependability Study, which tracks reliability over three years, and CNW Market Research's Perceived Quality Survey to find out which car brands were potentially over- and undervalued. Overvalued: Brands whose perceived quality exceeds actual quality by percentage Land Rover 75.3% Kia 66.6% Volkswagen 58.3% Volvo 36.0% Mercedes 34.2% Undervalued: Brands whose actual quality exceeds perceived quality by percentage Mercury 42.3% Infiniti 34.1% Buick 29.7% Lincoln 25.3% Chrysler 20.8% Source: David Kiley, "U.S. Automakers Get a Bum Rap," USA Today, January 15,2004, p. B5. As the Beanie Baby craze demonstrated, scarcity combined with strong demand can lead to high market prices. Here is another example: DREW ESTATES Produced in Nicaragua, flavored with wine, oil, and herbs, and packed in boxes with graffiti-like labels, Drew Estates' cigars are sold in only 500 U.S. stores. Atypical blends, colorful off-beat marketing, and limited produc- tion of the three main lines of cigars—Acid, Natural, and Ambrosia—have contributed to premium prices of approximately $10 per cigar. Drew Estates is happy to keep customers guessing about the brand. As co-founder, Jonathan Drew says, "The day I go mass market, I'm out of business. When people are in a store, they'll buy a $150 box because they don't know if they will see one again for another three months." 18 PRICE CUES Consumer perceptions of prices are also affected by alternative pricing strate- gies. Many sellers believe that prices should end in an odd number. Many customers see a stereo amplifier priced at $299 instead of $300 as a price in the $200 range rather than $300 range. Research has shown that consumers tend to process prices in a "left-to-right" manner rather than by rounding. 19 Price encoding in this fashion is important if there is a mental price break at the higher, rounded price. Another explanation for "9" endings is that they convey the notion of a discount or bargain, suggesting that if a company wants a high-price image, it should avoid the odd-ending tactic. 20 One study even showed that demand was actually increased one-third by raising the price of a dress from $34 to $39, but demand was unchanged when the price was increased from $34 to $44. 21 Prices that end with "0" and "5" are also common in the marketplace as they are thought to be easier for consumers to process and retrieve from memory. 22 "Sale" signs next to prices have been shown to spur demand, but only if not overused: Total category sales are highest when some, but not all, items in a category have sale signs; past a certain point, use of addi- tional sale signs will cause total category sales to fall. 23 "Marketing Memo: When to Use Price Cues" provides some guidelines. 11 • Setting the Price A firm must set a price for the first time when it develops a new product, when it introduces its regular product into a new distribution channel or geographical area, and when it enters bids on new contract work. The firm must decide where to position its product on quality DEVELOPING PRICING STRATEGIES AND PROGRAMS CHAPTER 14 437 and price. In some markets, like the auto market, as many as eight price points or price tiers and levels can be found: Segment Example Ultimate Rolls-Royce Gold Standard Mercedes-Benz Luxury Audi Special Needs Volvo Middle Buick Ease/Convenience Ford Escort Me Too, but Cheaper Hyundai Price Alone Kia Most markets have three to five price points or tiers. Marriott Hotels is good at develop- ing different brands for different price points: Marriott Vacation Club—Vacation Villas (high- est price), Marriott Marquis (high price), Marriott (high-medium price), Renaissance (medium-high price), Courtyard (medium price), Towne Place Suites (medium-low price), and Fairfield Inn (low price). Consumers often rank brands according to price tiers in a category. 24 For example, Figure 14.1 shows the three price tiers that resulted from a study of the ice cream market. 25 In that market, as the figure shows, there is also a relationship between price and quality. Within any tier, as the figure shows, there is a range of acceptable prices, called price bands. The price bands provide managers with some indication of the flexibility and breadth they can adopt in pricing their brands within a particular price tier. The firm has to consider many factors in setting its pricing policy. 26 We will describe a six- step procedure: (1) selecting the pricing objective; (2) determining demand; (3) estimating costs; (4) analyzing competitors' costs, prices, and offers; (5) selecting a pricing method; and (6) selecting the final price. Step 1: Selecting the Pricing Objective The company first decides where it wants to position its market offering. The clearer a firm's objectives, the easier it is to set price. A company can pursue any of five major objectives through pricing: survival, maximum current profit, maximum market share, maximum mar- ket skimming, or product-quality leadership. SURVIVAL Companies pursue survival as their major objective if they are plagued with overcapacity, intense competition, or changing consumer wants. As long as prices cover variable costs and some fixed costs, the company stays in business. Survival is a short-run objective; in the long run, the firm must learn how to add value or face extinction. MAXIMUM CURRENT PROFIT Many companies try to set a price that will maximize current profits. They estimate the demand and costs associated with alternative prices and choose the price that produces maximum current profit, cash flow, or rate of return on investment. This strategy assumes that the firm has knowledge of its demand and cost functions; in reality, MARKETING MEMO WHEN TO USE PRICE CUES Pricing cues, such as sale signs and prices that end in 9, become less 2. Customers are new. effective the more they are employed. Anderson and Simester maintain that they must be used judiciously on those items where consumers' price knowledge may be poor. They cite the following examples: 1. Customers purchase the item infrequently. 3. Product designs vary over time. 4. Prices vary seasonally. 5. Quality or sizes vary across stores. Source: Adapted from Eric Anderson and Duncan Simester, "Mind Your Pricing Cues," Harvard Business Review (September 2003): 96-103. 438 PART 5 SHAPING THE MARKET OFFERINGS FIG. 14.1 j Price Tiers in the Ice Cream Market these are difficult to estimate. In emphasizing current performance, the company may sacri- fice long-run performance by ignoring the effects of other marketing-mix variables, competi- tors' reactions, and legal restraints on price. MAXIMUM MARKET SHARE Some companies want to maximize their market share. They believe that a higher sales volume will lead to lower unit costs and higher long-run profit. They set the lowest price, assuming the market is price sensitive. Texas Instruments (TI) has practiced this market-penetration pricing. TI would build a large plant, set its price as low as possible, win a large market share, experience falling costs, and cut its price further as costs fall. The following conditions favor setting a low price: (1) The market is highly price sensitive, and a low price stimulates market growth; (2) production and distribution costs fall with accumulated production experience; and (3) a low price discourages actual and potential competition. MAXIMUM MARKET SKIMMING Companies unveiling a new technology favor setting high prices to maximize market skimming. Sony is a frequent practitioner of market-skimming pricing, where prices start high and are slowly lowered over time. When Sony introduced the world's first high-definition television (HDTV) to the Japanese market in 1990, it was priced at $43,000. So that Sony could "skim" the maximum amount of revenue from the various seg- ments of the market, the price dropped steadily through the years—a 28-inch HDTV cost just over $6,000 in 1993 and a 42-inch HDTV cost about $1,200 in 2004. 27 Market skimming makes sense under the following conditions: (1) A sufficient number of buyers have a high current demand; (2) the unit costs of producing a small volume are not so high that they cancel the advantage of charging what the traffic will bear; (3) the high ini- tial price does not attract more competitors to the market; (4) the high price communicates the image of a superior product. -QUALITY LEADERSHIP A company might aim to be the product-quality leader in the market. Many brands strive to be "affordable luxuries"—products or services charac- terized by high levels of perceived quality, taste, and status with a price just high enough not to be out of consumers' reach. Brands such as Starbucks coffee, Aveda shampoo, Victoria's Secret lingerie, BMW cars, and Viking ranges have been able to position themselves as qual- ity leaders in their categories, combining quality, luxury, and premium prices with an DEVELOPING PRICING STRATEGIES AND PROGRAMS CHAPTER 14 439 intensely loyal customer base. 28 Grey Goose and Absolut carved out a superpremium niche in the essentially odorless, colorless, and tasteless vodka category through clever on-premise and off-premise marketing that made the brands seem hip and exclusive. 29 )BJECTIVES Nonprofit and public organizations may have other pricing objec- tives. A university aims for partial cost recovery, knowing that it must rely on private gifts and public grants to cover the remaining costs. A nonprofit hospital may aim for full cost recov- ery in its pricing. A nonprofit theater company may price its productions to fill the maxi- mum number of theater seats. A social service agency may set a service price geared to client income. Whatever the specific objective, businesses that use price as a strategic tool will profit more than those who simply let costs or the market determine their pricing. Step 2: Determining Demand Each price will lead to a different level of demand and therefore have a different impact on a company's marketing objectives. The relation between alternative prices and the resulting current demand is captured in a demand curve (see Figure 14.2). In the normal case, demand and price are inversely related: The higher the price, the lower the demand. In the case of prestige goods, the demand curve sometimes slopes upward. A perfume company raised its price and sold more perfume rather than less! Some consumers take the higher price to sig- nify a better product. However, if the price is too high, the level of demand may fall. PRICE SENSITIVITY The demand curve shows the market's probable purchase quantity at alternative prices. It sums the reactions of many individuals who have different price sensi- tivities. The first step in estimating demand is to understand what affects price sensitivity. Generally speaking, customers are most price sensitive to products that cost a lot or are bought frequently. They are less price sensitive to low-cost items or items they buy infre- quently. They are also less price sensitive when price is only a small part of the total cost of obtaining, operating, and servicing the product over its lifetime. A seller can charge a higher price than competitors and still get the business if the company can convince the customer that it offers the lowest total cost of ownership (TCO). Companies, of course, prefer customers who are less price sensitive. Table 14.3 lists some characteristics that are associated with decreased price sensitivity. On the other hand, the Internet has the potential to increase customers' price sensitivity. In buying a specific book online, for example, a customer can compare the prices offered by over two dozen online bookstores by just clicking mySimon.com. These prices can differ by as much as 20 percent. Although the Internet increases the opportunity for price-sensitive buyers to find and favor lower-price sites, many buyers may not be that price sensitive. McKinsey conducted a study and found that 89 percent of a sample of Internet customers visited only one book site, 84 percent visited only one toy site, and 81 percent visited only one music site, which indicates that there is less price-comparison shopping taking place on the Internet than is possible. Companies need to understand the price sensitivity of their customers and prospects and the trade-offs people are willing to make between price and product characteristics. Targeting only price-sensitive consumers may in fact be "leaving money on the table." FIG. 14.2 | Inelastic and Elastic Demand 100 105 Quantity Demanded per Period (a) Inelastic Demand (b) Elastic Demand 50 150 Quantity Demanded per Period [...]... their prices by more than the cost CHAPTER 14 455 456 PART 5 SHAPING THE MARKET OFFERINGS MARKETING INSIGHT Stelios Haji-loannou has made a fortune with easyJet, the eight-year-old airline that offers dynamically priced discount fares In a nutshell, passengers pay less for a seat the earlier they buy Stelios, as he's universally known, has applied the same yield management formula with varying degrees... Hall, and David F Pyke, "Research Brief: Smart Pricing," MIT Sloan Management Review (Winter 2004): 9-13 DEVELOPING PRICING STRATEGIES AND PROGRAMS Before Price $10 , TABLE 14. 5 $10.10 (a 1 percent price increase) Profits Before and After a Price Increase 100 $1000 $1010 Costs -970 -970 Profit $30 Revenue 457 After 100 Units sold CHAPTER 14 $ 40 (a 33'A percent profit increase) increase, in anticipation... 51 Eugene H Fram and Michael S McCarthy, "The True Price of Penalties," Marketing Management (October 1999): 49-56 52 Kissan Joseph, "On the Optimality of Delegating Pricing Authority to the Sales Force," Journal ofMarketing65 (January 2001): 62-70 36 William W Alberts, "The Experience Curve Doctrine Reconsidered," Journal of Marketing (July 1989): 36-49 53 Gary McWilliams, "How Dell Fine-Tunes Its... See also, G Dean Kortge and Patrick A Okonkvvo, "Perceived Value Approach to Pricing," Industrial Marketing Management (May 1993): 133 -140 41 James C Anderson, Dipak C Jain, and Pradeep K Chintagunta, "Customer Value Assessment in Business Markets: A State-ofPractice Study," Journal of Business-to-Business Marketing 1, no 1 (1993): 3-29 42 Bill Saporito, "Behind the Tumult at P&G," Fortune, March 7, 1994,... Response to a Major Policy Change in the Marketing Mix: Learning from Procter & Gamble's Value Pricing Strategy," Journal of Marketings (January 2001): 44-61 43 Stephen J Hoch, Xavier Dreze, and Mary J Purk, "EDLP, Hi-Lo, and Margin Arithmetic," Journal of Marketing (October 1994): 16-27; Rajiv Lai and R Rao, "Supermarket Competition: The Case of Everyday Low Pricing," Marketing Science 16, no 1 (1997):... DEVELOPING PRICING STRATEGIES AND PROGRAMS CHAPTER 14 463 NOTES : : : 1 Linda Tischler, "The Price Is Right," Fast Company, November 2003, pp 83-89 2 "The Price is Wrong," The Economist, May 25, 2002 15 Gary M Erickson and Johny K Johansson, "The Role of Price in Multi-Attribute Product-Evaluations," Journal of Consumer Research (September 1985): 195-199 3 David J Schwartz, Marketing Today: A Basic Approach,... Price Research," Marketing Science 14, no 3 (1995): G161-G169 11 Robert Strauss, "Prices You Just Can't Believe," New York Times, January 17, 2002, p Gl 12 JohnT Gourville, "Pennies-a-Day: The Effect of Temporal Reframing on Transaction Evaluation," Journal of Consumer Research (March 1998): 395-408 13 Kalyanaram and Winer, "Empirical Generalizations from Reference Research," pp 161-169 14 Glenn E Mayhew... Kenneth Wisniewski, "Price-Induced Patterns of Competition," Marketing Science 8 (Fall 1989): 291-309 25 Elliot B Ross, "Making Money with Proactive Pricing," Harvard Business Review (November-December 1984): 145 -155 26 Shantanu Dutta, Mark J Zbaracki, and Mark Bergen, "Pricing Process as a Capability: A Resource Based Perspective," Strategic Management Journal 24, no 7 (2000): 615-630 27 Kara Swisher,... "Laboratory Experiments for Estimating Consumer Demand: A Validation Study," Journal of Marketing Research (August 1974): 261-268; Jonathan Weiner, "Forecasting Demand: Consumer Electronics Marketer Uses a Conjoint Approach to Configure Its New Product and Set the Right Price," Marketing Research: A Magazine of Management and Applications (Summer 1994): 6-11 47 Chris Nelson, "Ticketmaster Auction Will... short-run volume goals When automakers get rebate-happy, the market just sits back and waits for a deal When Ford was able to buck that trend, it achieved positive results CHAPTER 14 451 452 ; PART 5 SHAPING THE MARKET OFFERINGS TABLE 14. 4 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 . respond to a competitor's price change? CHAPTER 14 DEVELOPING PRICING STRATEGIES AND PROGRAMS i l .4 Price is the one element of the marketing mix that produces rev- enue; the other. competition, and the marketing environment. Pricing decisions must be consistent with the firm's marketing strategy and its target markets and brand positionings. In this chapter, we provide. (ROI). Target pricing is used by General : DEVELOPING PRICING STRATEGIES AND PROGRAMS CHAPTER 14 445 FIG. 14. 6 | Break-Even Chart for Determining Target- Return Price and Break-Even Volume Motors,