Pricing

Introduction

Just like all of the 4P's of marketing, pricing can make or break a company. One pricing debacle was with Netflix. Netflix is an innovative company that basically bankrupted Blockbuster. In 2011, Netflix decided to change their $9.99 per month service for DVD rentals and streaming to $7.99 for each service individually, that's $16 bucks a month, a 60% increase! Netflix had customers leaving in droves, 800,000 customers left almost overnight. Wall Street wasn't happy either; Netflix stock went from $300 per share to $155. That is almost a 50% drop. Netflix didn't do a great job of handling the price change or the outraged customers either. There were several comedy skits about the pricing debacle like this one: comedy segment. The lessons that can be learned from the Netflix pricing fiasco are: First, know your customers, know your product, and know your place in the market. Then make sure to choose pricing strategies that will best suit your business. Lastly know what stage of the product life cycle your product is in. Many businesses have made similar mistakes to Netflix. We need to use them as a guide to avoiding the same situation.

Essential Question

What is the nature and scope of the pricing function?
What is the difference between marketing share and market position as it relates to price?
How does markup, markdown, sales price, discount dollars and discount percentage compare and contrast?
What are the factors that affect price?
What are the key price mix strategies?
What is the impact of product life cycles on marketing decisions?

Key Terms

Price - The formal ratio that indicates the quantities of money goods or services needed to acquire a given quantity of goods or services.
Market Share - the percentage of a market (defined in terms of either units or revenue) accounted for by a specific entity.
Market Position - Positioning refers to the customer's perceptions of the place a product or brand occupies in a market segment. In some markets, a position is achieved by associating the benefits of a brand with the needs or life style of the segments. More often, positioning involves the differentiation of the company's offering from the competition by making or implying a comparison in terms of specific attributes.
Cost - The money expended to produce and market a product or service.
Markup - The difference between merchandise cost and the retail price.
Margin - The difference between the selling price and total unit costs for an item.
Markdown - The amount of a reduction from the selling price.
Break-Even Point - The sales volume at which total revenues are equal to total costs.
Elasticity - The degree that an economic variable changes in response to a change in another economic variable.
Price Competition - The rivalry among firms seeking to attract customers on the basis of price, rather than by the use of other marketing factors.
Nonprice Competition - rivalry based on quality of service, distribution, and promotion that highlights the benefits and features of their products.
Price Fixing - The practice of two or more sellers agreeing on the price to charge for similar products or services.
Price Discrimination - The practice of charging different buyers different prices for the same quantity and quality of products or services.
Market Share - Market share is the percentage of a market (defined in terms of either units or revenue) accounted for by a specific entity.
Return on Investment (ROI) - Return on investment (ROI) is one way of considering profits in relation to capital invested.
Cost-Based Pricing - A pricing method in which a fixed sum or a percentage of the total cost is added to the cost of the product to arrive at its selling price.
Demand-Based Pricing - A method of pricing in which the seller attempts to set price at the level that the intended buyers are willing to pay. It is also called value-in-use pricing or value-oriented pricing.
Flexible-Price Policy - A practice of selling at different prices to different customers. This practice could be suspect under the Robinson-Patman Act.
One-Price Policy - A policy that, at a given time, all customers pay the same price for any given item of merchandise.
Psychological Pricing - A method of setting prices intended to have special appeal to consumers.
Prestige Pricing - higher than average prices to suggest status and high quality to the customer.
Odd/Even Pricing - A form of psychological pricing that suggests buyers are more sensitive to certain ending digits. Odd price refers to a price ending in an odd number (e.g., 1,3,5,7,9), or to a price just under a round number (e.g., $0.89, $3.99, $44.98). Even price refers to a price ending in a whole number or in tenths (e.g., $0.50, $5.00, $8.10, $75.00).
Price Lining - A limited number of predetermined price points at which merchandise will be offered for sale-e.g., $7.95, $10.95, $14.95.
Promotional Pricing - when prices are reduced for a short period of time during a sales promotion.
Cash Discounts - A premium for advance payment at a rate that is usually higher than the prevailing rate of interest. It also is a reduction in price allowed the buyer for prompt payment.
Quantity Discounts - A reduction in price for volume purchases.
Trade Discounts - The discount allowed to a class of customers (manufacturers, wholesalers, retailers) on a list price before consideration of credit terms. It applies to any allowance granted without reference to the date of payment.
Promotional Discounts - An allowance given by vendors to retailers to compensate the latter for money spent in advertising a particular item in local media, or for preferred window and interior display space used for the vendor's product.
Seasonal Discounts - A special discount to all retailers who place orders for seasonal merchandise well in advance of the normal buying period.
Skimming Pricing - A method of pricing that attempts to first reach those willing to buy at a high price before marketing to more price-sensitive customers.
Penetration Pricing - A pricing policy that sets a low initial price in an attempt to increase market share rapidly. This policy is effective if demand is perceived to be fairly elastic.

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