16.9.11: Summary

The chapter begins by defining price from the perspective of the consumer, society, and the business. Each contributes to our understanding of price and positions it as a competitive advantage.

The objectives of price are five-fold: (a) survival, (b) profit, (c) sales, (d) market share, and (e) image. In addition, a pricing strategy can target to: meet competition, price above competition, and price below competition.

Several pricing tactics were discussed. They include new product pricing, price lining, price flexibility, price bundling, and the psychological aspects of pricing. The chapter concludes with a description of the three alternative approaches to pricing: cost-oriented, demand-oriented, and value-based.

Key terms

Demand curve Quantity demanded at various price levels.

Nonprice competition Organization uses strategies other than price to attract customers.

Price war Pricing significantly lower than competition.

Penetration pricing Accepting a lower profit margin during the introduction of a product.

Price skimming Price set relatively high to generate a high profit margin.

Price lining Selling a product with several price points.

Quantity discounts Reduction in base price given as the result of a buyer purchasing some predetermined quantity of merchandise.

Seasonal discounts Price discount given on out-of-season merchandise.

Cash discounts Reduction on base price given to customers for paying cash or paying within a short period of time.

Trade discount Price reductions given to middlemen to encourage them to stock and give preferred treatment to an organization's product.

Spiffs Prize money given to retailers to pass on to the retailer's sales personnel for selling certain items.

Price bundling Grouping similar complementary products and charging a total price that is lower than if they were sold separately.

Mark-up Difference between the average cost and price of a product.

Break-even price Price that will produce enough revenue to cover all costs at a given level of production. Value-based pricing What that product is worth to that customer at that point in time.

Questions

➢ Why is price an important part of the marketing mix?

➢ Who typically has responsibility for setting prices in most organizations? Why?

➢ Discuss the objectives which pricing policies can be established to accomplish.

➢ What conditions are necessary if a "pricing above the competition" strategy is to be successful?

➢ Discuss the alternative strategies that can be adopted in new product pricing. Under what conditions should each be used?

➢ List some advantages of psychological pricing. What are some of the risks?

➢ What are some of the more common types of discounts and allowances and the purpose of each?

➢ What is price lining? What benefits does price lining hold for customers?

➢ What advantage might a uniform delivered price have for a seller?

➢ How do organizations decide whether to price to meet, price above, or price below competition? How do organizations measure the success or failure of their chosen strategy?

➢ Are you price sensitive to any products? Do you engage in comparative shopping, searching for the "best deal"?

➢ How has the Internet affected pricing strategies? How do Internet companies compete with traditional "brick and mortar" companies in pricing?

➢ Should penetration pricing be used or would skimming be better?

➢ What should be the base price for the new product?

Project

Interview a marketing person responsible for pricing in their organization. Assess the type of pricing strategy they use and why. Write a three to five page report.

Case applications

United Techtronics

United Techtronics faced a major pricing decision with respect to its new video screen television. "We're really excited here at United Techtronics," exclaimed Roy Cowing, founder and president of United Techtronics. "We've made a most significant technological breakthrough in large screen, video television systems." He went on to explain that the marketing plan for this product was now his major area of concern and that what price to charge was the marketing question that was giving him the most difficulty.

Cowing founded United Techtronics (UT) in Boston in 1959. Prior to that time, Cowing had been an associate professor of electrical engineering at MIT. Cowing founded UT to manufacture and market products making use of some of the electronic inventions he had developed while at MIT. Sales were made mostly to the space program and the military.

For a number of years, Cowing had been trying to reduce the company's dependency on government sales. One of the diversification projects that he had committed research and development monies to was the so-called video screen project. The objective of this project was to develop a system whereby a television picture could be displayed on a screen as big as eight to ten feet diagonally. One of UT's engineers made the necessary breakthrough and developed working prototypes. Up to that point, UT had invested USD 600,000 in the project.

Extra-large television systems were not new. There were a number of companies who sold such systems both to the consumer and commercial (tavern restaurants, and so on) markets. Most current systems made use of a special magnifying screen. The result of this process is that the final picture lacked much of the brightness of the original small screen. As a result, the picture had to be viewed in a darkened room. There were some other video systems that did not use the magnifying process. These systems used special tubes, but they also suffered from a lack of brightness.

UT had developed a system that was bright enough to be viewed in regular daylight on a screen up to 10 feet diagonally. Cowing was unwilling to discuss how this was accomplished. He would only say that a patent protected the process and that he thought it would take at least two to three years for any competitor to duplicate the results of the system.

A number of large and small companies were active in this area. Admiral, General Electric, RCA, Zenith, and Sony were all thought to be working on developing large-screen systems directed at the consumer market. Sony was rumored to be ready to introduce a 60 inch or 152.4 centimeter diagonal screen system that would retail for about USD 2,500. A number of small companies were already producing systems. Advent Corporation, a small New England company, claimed to have sold 4,000 84 inch or 203.2 centimeter diagonal units at prices from USD 1,500 to USD 2,500. Cowing was adamant that none of these systems gave as bright a picture as UT's, He estimated that about 10,000 large screen systems were sold in 1996.

Cowing expected about 50 per cent of the suggested retail-selling price to go for wholesaler and retailer margins. He expected that UT's direct manufacturing costs would vary depending on the volume produced. He expected direct labor costs to fall at higher production volumes due to the increased automation of the process and improved worker skills.

Material costs were expected to fall due to less waste due to automation. The equipment costs necessary to automate the product process were USD 70,000 to produce in the 0-5,000 unit range; an additional USD 50,000 to produce in the 5,001-10,000 unit range; and an additional USD 40,000 to produce in the 10,001-20,000 unit range. The useful life of this equipment was put at five years. Cowing was sure that production costs were substantially below those of current competitors including Sony. Such was the magnitude of UT's technological breakthrough. Cowing was unwilling to produce over 20,000 units a year in the first few years due to the limited cash resources of the company to support inventories and so on.

Cowing wanted to establish a position in the consumer market for his product. He felt that the long-run potential was greater there than in the commercial market. With this end in mind, he hired a small economic research-consulting firm to undertake a consumer study to determine the likely reaction to alternative retail prices for the system. These consultants took extensive pricing histories of competitive products. They concluded that: "UT's video screen system would be highly price-elastic across a range of prices from USD 500 to USD 5,000 both in a primary and secondary demand sense." They went on to estimate the price elasticity of demand in this range to be between 4.0 and 6.5.

Mr. Cowing was considering a number or alternative suggested retail prices. He said: "I can see arguments for pricing anywhere from above Advent to substantially below Muntz's lowest price” A decision on pricing was needed soon.

References

1. Thomas Nagle, "Pricing as Creative Marketing Business Horizons, July-August 1983, pp.14-19.

2. Robert A. Robicheaux, "How Important is Pricing in Competitive Strategy?" Proceedings of the Southern Marketing Association 1975, pp. 55-57.

3. Bernard F. Whalen, "Strategic Mix of Odd, Even Prices Can Lead to Retail Profits," Marketing News March 1976, p. 24.

4. Peter Coy, ''The Power of Smart Marketing," Business Week, April 10, 2000, pp. 160-162.

AD 1: A traditional retail ad