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Chapter 11: Pricing - Coggle Diagram

- - - - Switching costs in experience goods (like laptops) increase over time as users become familiar with a product ecosystem, making it difficult for consumers to switch brands (e.g., from non-Apple products).
      - Brand identity and monopoly power give firms flexibility in pricing; they can choose how to price their products and services rather than simply accepting a market price.
      - Pricing decisions must consider rivals’ behaviour, especially in markets where firms have some market power.
      - In perfectly competitive markets, products are identical (or perceived as identical), so firms cannot set prices independently.
      - If a firm lowers its price in perfect competition, it prices below cost, earns losses, and eventually exits the market.
      - If a firm raises its price, consumers switch to competitors, causing the firm to lose all sales and exit the market.
      - As a result, only one price can prevail in perfect competition: the market price. This market price equals marginal cost, ensuring firms earn only normal profits.
      - Overall insight: market structure (perfect competition vs. monopoly or monopolistic power) plays a crucial role in determining firms’ pricing strategies and flexibility.
- - - - The great depression of '8 & '9 caused a fundamental and lasting shift in consumer attitudes toward price and quality. In response, many companies have changed their pricing approaches to bring them in line with changing economic conditions and consumer price perceptions.
      - good-value pricing— is about offering the right combination of quality and good service at a fair price.
      - In many cases, this has involved introducing less- expensive versions of established brand name products or new lower-price lines.
      - EX: Walmart launched an extreme-value store brand called Price First.
      - Good-value prices are a relative thing—even premium brands can launch value versions. ex: Mercedes-Benz recently released its CLA Class, entry-level models starting at $31,500.
    - - Rather than cutting prices to match competitors, they add quality, services, and value-added features to differentiate their offers and thus support their higher prices.
  - - - fixed costs (also known as overhead) are costs that do not vary with production or sales level.
        
        fixed costs (also known as overhead) are costs that do not vary with production or sales level.
      - Variable costs vary directly with the level of production. they are called variable costs because the total varies with the number of units produced
        
        EX: Each smartphone or tablet produced by Samsung involves a cost of computer chips, wires, plastic, packaging, and other inputs.
      - Total costs are the sum of the fixed and variable costs for any given level of production.
        
        Management wants to charge a price that will at least cover the total production costs at a given level of production.
      - The company must watch its costs carefully. If it costs the company more than its competitors to produce and sell a similar product, the company will need to charge a higher price or make less profit, putting it at a competitive disadvantage
    - - To price wisely, management needs to know how its costs vary with different levels of production.
      - the cost per tablet is high if Lenovo’s factory produces only a few per day. But as production moves up to 1,000 tablets per day, the average cost per unit decreases. This is because fixed costs are spread over more units, with each one bearing a smaller share of the fixed cost
      - Lenovo can try to produce more than 1,000 tablets per day, but average costs will increase because the plant becomes inefficient. Workers have to wait for machines, the machines break down more often, and workers get in each other’s way.
      - If they built another plant the unit cost of producing 2,000 tablets per day would be lower than the unit
        cost of producing 1,000 units per day
      - a 3,000-capacity plant would be even more efficient, according to Figure 10.3B. But a 4,000-daily production plant would be less efficient because of increasing diseconomies of scale—too many workers to manage, paper work slowing things down, and so on.
      - Thus, there is an optimal level to make if demand is high enough and string to support this level of production
    - - As Lenovo gains experience in producing tablets, it learns how to do it better. Workers learn shortcuts and become more familiar with their equipment. With practice, the work becomes better organized, and Lenovo finds better equipment and production processes. With higher volume, Lenovo becomes more efficient and gains economies of scale.
      - As a result, the average cost tends to decrease with accumulated production experience. This drop in the average cost with accumulated production experience is called the experience curve (or the learning curve).
      - If a downward-sloping experience curve exists, this is highly significant for the company. Not only will the company’s unit production cost fall, but it will fall faster if the company makes and sells more during a given time period. But the market has to stand ready to buy the higher output.
        
        This suggests the following pricing strategy: Lenovo should price its tablets lower; its sales will then in crease, its costs will decrease through gaining more experience, and then it can lower its prices further.
        
        And to take advantage of the experience curve, Lenovo must get a large market share early in the product’s life cycle.
      - However, a single-minded focus on reducing costs and exploiting the experience curve will not always work. Experience-curve pricing carries some major risks.
        
        The aggressive pricing might give the product a cheap image
        
        The strategy also assumes that competitors are weak and not willing to fight it out by meeting the company’s price cuts.
        
        Finally, while the company is building volume under one technology, a competitor may find a lower-cost technology that lets it start at prices lower than those of the market leader, which still operates on the old experience curve
    - - adding a standard markup to the cost of the product.
      - Does using standard markups to set prices make sense? Generally, no
        
        Any pricing method that ignores demand and competitor prices is not likely to lead to the best price.
      - Still, markup pricing remains popular for many reasons
        
        First, sellers are more certain about costs than about demand. By tying the price to cost, sellers simplify pricing; they do not need to make frequent adjustments as demand changes.
        
        Second, when all firms in the industry use this pricing method, prices tend to be similar, so price competition is mini mized.
        
        Third, many people feel that cost-plus pricing is fairer to both buyers and sellers. Sellers earn a fair return on their investment but do not take advantage of buyers when buyers’ demand becomes great.
    - - The firm sets a price at which it will break even or make the target return on the costs of making and marketing a product.
      - But the market may not buy even this lower volume at the higher price. Much depends on price elasticity and competitors’ prices.
      - The manufacturer should consider different prices and estimate break-even volumes, probable demand, and profits for each.
      - as price increases, the break-even volume drops (column 2). But as price increases, the demand for toasters also decreases
      - it must sell a very high volume to break even. Even though the low price attracts many buyers, demand still falls below the high break-even point, and the manufacturer loses money.
      - https://drive.google.com/file/d/1bYg8nFQI9AT3WArMgeY9elV4OICuyqxG/view?usp=sharing
  - - - how does the company’s market offering compare with competitors’ offerings in terms of customer value?
        
        If consumers perceive that the company’s product or service provides greater value, the company can charge a higher price. If consumers perceive less value relative to competing products, the company must either charge a lower price or change customer perceptions to justify a higher price.
      - how strong are current competitors, and what are their current pricing strategies?
        
        If the company faces a host of smaller competitors charging high prices relative to the value they deliver, it might charge lower prices to drive weaker competitors from the market. If the market is dominated by larger, lower-price competitors, a company may decide to target unserved market niches by offering value-added products and services at higher prices.
  - - - With this approach the firm charges the same price for every unit of product.
      - This relies on aggregate measures, such as the aggregate demand curve, and for this reason it has low market information requirements.
      - On the other hand, the main shortcoming of uniform pricing is that the ‘inframarginal’ buyers – those who would have been willing to pay more for the product – enjoy a considerable consumer surplus, and this results in an economically inefficient quantity of sales.
    - - Here the firm sets prices to earn different incremental margins on various units of the same or a similar product.
      - In this way the two shortcomings of uniform pricing are resolved.
        
        First, by pricing each unit at the buyer’s benefit, it extracts the entire consumer surplus.
        
        Second, it establishes opportunities for additional profit from increased sales, since it provides the economically sufficient quantity.
      - This is the most profitable pricing strategy for firms if every consumer’s willingness to pay is known ahead of time and resale can be prevented.
    - - With this pricing policy a firm sets different incremental margins to each identifiable segment
      - For this policy, the firm must be able to directly identify the various segments. In this way, it applies the rules of the uniform pricing in the context of each market segment.
      - The necessary conditions for the direct market segment are that there has to be a fixed and identifiable consumer characteristic that segments the market, and that there are no arbitrage (namely, resale) opportunities among the segmented markets.
      - The direct market segmentation in terms of profitability falls between complete price discrimination and uniform pricing, since it applies the rules of uniform pricing but in each segment’s context, thus reducing uniform pricing’s shortfalls.
      - Moreover, since the buyers within a segment are usually non identical, this form of price discrimination does not extract consumer surplus and does not provide economically sufficient quantities, as does the complete price discrimination.
    - - The firm structures a choice for consumers so as to earn different incremental margins within each segment.
      - The main reason for a firm to apply this type of pricing policy is because it cannot directly identify customers.
      - In this case, there are two necessary conditions:
        
        First, the firm must have some control over a variable to which buyers in the various segments are differentially sensitive, in order to structure a set of possible choices that will discriminate among the segments.
        
        Second, the consumers must not be able to circumvent the discriminating variable.
      - In terms of profitability, this type of price discrimination falls between direct market segmentation and uniform pricing; it provides an enhanced alternative to uniform pricing through effective market segmentation based on consumers’ own preferences. However, when compared with direct price discrimination it is of lower profitability because it involves higher costs, relies on the self-identification of the market segments through structured choice, and it uses product attributes as discrimination criteria, thus marginally exploiting the consumer’s surplus.
  - - - Economics focuses on strict profit maximisation.
      - Marketing views pure profit maximisation as vague and incomplete.
    - - Achieving satisfactory profit rather than optimal profit.
      - Gaining or maintaining market share.
      - Generating cash flow quickly, especially for products with short life cycles.
      - Pricing for survival, accepting short-term losses to ensure long-term viability.
      - Maintaining the status quo, particularly in markets where non-price competition dominates (e.g. Pepsi vs Coca-Cola).
      - Forestalling new entrants and limiting competition.
- - - - At that point, the title and responsibility pass to
        the customer, who pays the freight from the factory to the destination.
      - Because each customer picks up its own cost, supporters of FOB pricing feel that this is the fairest way to
        assess freight charges.
      - The disadvantage, however, is it will be a high-cost firm to distant customers.
    - - The freight charge is set at the average freight cost.
      - Disadvantage is that it charges the closer costumers higher than what they should pay yet for the distant one lower than what they should hence higher chance of capturing the distant ones
    - - In this way, the customers within a given price zone receive no price advantage from the company.
      - For example, closer customers pay the same total price to.
      - The complaint, however, is that the closer customer is paying part of the distant customer’s freight cost.
    - - But if all sellers used the same basing-point city, delivered prices would be the same for all customers, and price competition would be eliminated.
      - This is less efficient for those in closer locations hence more complicated logistics
    - - Using this strategy, the seller absorbs all or part of the actual freight charges to get the desired business.
      - The seller might reason that if it can get more business, its average costs will decrease and more than compensate for its extra freight cost.
      - Freight-absorption pricing is used for market penetration and to hold on to increasingly competitive markets
  - - - online sellers can mine their databases to gauge a specific shopper’s desires, measure his or her means, check out competitors’ prices, and instantaneously tailor offers to fit that shopper’s situation and behavior, pricing products accordingly.
    - - For example, Kohl’s uses electronic price tags in its stores to adjust prices instantly based on supply, demand, and store traffic factors. It can now stage sales that last only hours instead of days, much as its online competitors do.
      - Ride-sharing services such as Uber and Lyft adjust their fares dynamically during slow or peak times, a practice called “surge pricing.”
      - Similarly, supply and demand dictates minute-to-minute price adjustments these days for every thing from theater tickets to parking spots and golf course greens fees.
    - - Such information puts pricing power into the hands of consumers. Alert shoppers take advantage of the constant price skirmishes among sellers, snapping up good deals or lever aging retailer price-matching policies.
      - In fact, many retailers are finding that ready online access to comparison prices is giving consumers too much of an edge.
      - Showrooming
        
        Consumers armed with smart phones now routinely visit stores to see an item, compare prices online while in the store, and then request price matches or simply buy the item online at a lower price.
        
        Store retailers are now implementing strategies to combat such showrooming and cross-channel shopping or even turn it into an advantage.
  - - - For example, consumers usually perceive higher-priced products as having higher quality. When they can judge the quality of a product by examining it or by calling on past experience with it, they use price less to judge quality.
      - But when they cannot judge quality because they lack the information or skill, price becomes an important quality signal.
    - - The reference price might be formed by noting current prices, remembering past prices, or assessing the buy ing situation. Sellers can influence or use these consumers’ reference prices when setting price.
      - EX: a company might offer more expensive models that don’t sell very well to make its less expensive but still high-priced models look more affordable by comparison.
      - EX: IT might place its product next a more expensive one in order for it to seem more affordable in comparison
    - - but the lower price also raised stronger concerns about quality and risk. Some psychologists even argue that each digit has symbolic and visual qualities that should be considered in pricing. Thus, eight (8) is round and even and creates a soothing effect, whereas seven (7) is angular and creates a jarring effect.1
    - - end prices with a certain odd number in order to give a false impression of accuracy (for example, £99.95 sounds better value than £100). Unlikely as it may seem, people perceive a big difference between a .99 price and a rounded price. Also, pricing with .05 at the end induces a feeling in the consumer that the firm has calculated the exact cost of the good and is not ‘exploiting’ or extracting more consumer surplus.
  - - - including economic conditions
      - competitive situations
      - laws and regulations
      - the nature of the wholesaling and retailing system
      - Consumer perceptions and preferences also may vary from country to country calling for different prices
      - Or the company may have different marketing objectives in various world markets, which re quire changes in pricing strategy.
    - - By contrast, it’s now under pressure to discount older models and develop cheaper, more basic phone models for sizable but less affluent markets in developing countries, where even discounted older Apple phones sell at prices three to five times those of those of competing low-price models
    - - Typically, entering such markets has meant targeting the exploding middle classes in developing countries such as China, India, Russia, and Brazil, whose economies have been growing rapidly.
      - More recently, however, as the weakened global economy has slowed growth in both domestic and emerging markets, many companies are shifting their sights to include a new target—the so-called “bottom of the pyramid,” the vast untapped market consisting of the world’s poorest consumers.
      - The case used to be that brands used to paste the new price with the different currency on existing products and sell them to all markets
        
        However, this has been changing brands now modify the existing offering to make it more affordable to the emerging markets
        
        EX: Unilever, shrunk its packaging and set low prices that even the world’s poorest consumers could afford. Thus now 59 percent of Unilever’s revenues come from emerging economies.
        
        most companies are learning that selling profitably to the bottom of the pyramid requires more than just repack aging or stripping down existing products and selling them at low prices. Just like more well-to-do consumers, low-income buyers want products that are both functional and aspirational.
        
        Thus, companies today are innovating to create products that not only sell at very low prices but also give bottom-of-the-pyramid consumers more for their money, not less.
  - - - For example, museums, movie theaters, and retail stores may charge lower prices for students and senior citizens.
    - - EX: For instance, a round-trip economy seat on a flight from New York to London might cost $1,100, whereas a business-class seat on the same flight might cost $3,400 or more.
    - - EX: state universities charge higher tuition for out-of-state students
    - - For example, movie theaters charge matinee pricing during the daytime, and resorts give weekend and seasonal discounts.
    - - The market must be segmentable, and segments must show different degrees of demand
      - The costs of segmenting and reaching the market cannot exceed the extra revenue obtained from the price difference.
      - Of course, the segmented pricing must also be legal.
    - - For example, buyers reacted negatively when a New York City Department of Consumer Affairs investigation found that women often pay more for female versions of products that are virtually identical to male versions except for gender-specific packaging
      - Consumers in higher price tiers must feel that they’re getting their extra money’s worth for the higher prices paid.
      - Otherwise, segmented pricing practices can cause consumer resentment.
    - - For example, in recent years, the airlines have incurred the wrath of frustrated customers at both ends of the airplane. Passengers paying full fare for business- or first-class seats often feel that they are being gouged. At the same time, passengers in lower-priced coach seats feel that they’re being ignored or treated poorly
  - - - discounts from normal prices to increase sales and reduce inventories.
      - special-event pricing in certain seasons to draw more customers. Thus, TVs and other consumer electronics are promotionally priced in November and December to attract holiday shoppers into the stores. (carrefour birthday)
      - Limited-time offers, such as online flash sales, can create buying urgency and make buyers feel lucky to have gotten in on the deal.
      - cash rebates to consumers who buy the product from dealers within a specified time; the manufacturer sends the rebate directly to the customer (cash-back)
      - low- interest financing, longer warranties, or free maintenance to reduce the consumer’s “price.”
    - - During most holiday seasons, for example, it’s an all-out bargain war. Marketers carpet-bomb consumers with deals, causing buyer wear-out and pricing confusion.
      - Constantly reduced prices can erode a brand’s value in the eyes of customers.
      - And used too frequently, price promotions can create “deal-prone” customers who wait until brands go on sale before buying them. (Egyptian market and messed up consumerism, hence they inc their prices in sales to make up for losses)
      - EX: Bed Bath & Beyond, “Shopping with a coupon at Bed Bath & Beyond has begun to feel like a given instead of like a special treat, and that’s bad news for the chain’s bottom line.” In fact, greater recent coupon redemption rates have increasingly eaten into the retailer’s profit margins.
  - - - Trade-in allowances are most common in the automobile industry, but they are also given for other durable goods.
      - trade-in allowances are price reductions given for turning in an old item when buying a new one.
      - Promotional allowances are payments or price reductions that reward dealers for participating in advertising and sales-support programs (when they place Lipton and the middle shelf)
- - - - A firm can set prices to attract new customers or profitably retain existing ones.
      - It can set prices low to prevent competition from entering the market or set prices at competitors’ levels to stabilize the market.
      - It can price to keep the loyalty and support of resellers or avoid government intervention.
      - Prices can be reduced temporarily to create excitement for a brand.
      - Or one product may be priced to help the sales of other products in the company’s line.
    - - decision to position the product on high-performance quality will mean that the seller must charge a higher price to cover higher costs. And producers whose resellers are expected to support and promote their products may have to build larger reseller margins into their prices.
      - Companies often position their products on price and then tailor other marketing mix decisions to the prices they want to charge. Here, price is a crucial product-positioning factor that defines the product’s market, competition, and design.
      - Many firms support such price-positioning strategies with a technique called target costing. Target costing reverses the usual process of first designing a new product, determining its cost, and then asking, “Can we sell it for that?” Instead, it starts with an ideal selling price based on customer value considerations and then targets costs that will ensure that the price is met.
      - Other companies deemphasize price and use other marketing mix tools to create non price positions. Often, the best strategy is not to charge the lowest price but rather to differentiate the marketing offer to make it worth a higher price.
      - Thus, marketers must consider the total marketing strategy and mix when setting prices. But again, even when featuring price, marketers need to remember that customers rarely buy on price alone. Instead, they seek products that give them the best value in terms of benefits received for the prices paid.
      - PRICE VS QUA;LITY
        
        Pricing must align with other marketing mix decisions, especially promotion and positioning.
        
        Premium or high-quality positioning requires consistent pricing; otherwise, consumers may become confused.
        
        Pricing below the expected quality level can harm sales:
        
        Cost-conscious consumers may be deterred by the premium image.
        
        Premium-oriented consumers may perceive the low price as low quality.
        
        Consumers often associate price with quality, so pricing must reflect the targeted market niche.
        
        In the short run, price directly affects profitability by influencing:
        
        Sales volume
        
        Sales revenue
        
        Unit costs of production and marketing
        
        In the medium to long run, price affects firm objectives indirectly through its impact on:
        
        Cash flow Inventory levels Brand image Market competitiveness Customer awareness and price perceptions
        
        Firms set prices to achieve multiple objectives, including:
        
        Target return on investment Target market share Maximising short-run or long-run profits Growth and market stabilisation Reducing customer sensitivity to price Maintaining price leadership Discouraging new entrants and forcing weak firms to exit Maintaining middlemen loyalty and sales support Enhancing firm and product image Being perceived as fair by customers Creating excitement and interest in the product Supporting the sale of weaker products in the line Preventing price cuts by competitors Building store or brand traffic
  - - - In small companies, prices are often set by top management rather than by the marketing or sales departments.
      - In large companies, pricing is typically handled by divisional or product managers.
      - In industrial markets, salespeople may be allowed to negotiate with customers within certain price ranges.
      - Even so, top management sets the pricing objectives and policies, and it often approves the prices proposed by lower-level management or salespeople.
  - - - The seller’s pricing freedom varies with different types of markets.:
        
        Under pure competition, the market consists of many buyers and sellers trading in a uniform commodity, such as wheat, copper, or financial securities. No single buyer or seller has much effect on the going market price. In a purely competitive market, mar keting research, product development, pricing, advertising, and sales promotion play little or no role. Thus, sellers in these markets do not spend much time on marketing strategy.
        
        Under monopolistic competition, the market consists of many buyers and sellers trading over a range of prices rather than a single market price. A range of prices occurs because sell ers can differentiate their offers to buyers. Because there are many competitors, each firm is less affected by competitors’ pricing strategies than in oligopolistic markets. Sellers try to develop differentiated offers for different customer segments and, in addition to price, freely use branding, advertising, and personal selling to set their offers apart.
        
        Under oligopolistic competition, the market consists of only a few large sellers.
        
        In a pure monopoly, the market is dominated by one seller. The seller may be a government monopoly (the U.S. Postal Service), a private regulated monopoly (a power company), or a private unregulated monopoly (De Beers and diamonds). Pricing is handled differently in each case.
        
        the market consists of one seller and the monopoly may be static or dynamic. Static monopolies usually occur because of high barriers to entry and the impracticality of two or more firms competing in the same market
        
        Dynamic monopolies are shaped not by high fixed costs or the impracticality of having one supplier, but because the firm is acting in ways that thwart new firms from entering. These actions may be related to pricing low to keep competitors out or to new and better innovations, which make the firm a market leader. Combinations of strategies depicted above can also ensure dynamic monopolies
        
        Under Duopoly the market consists of two sellers who can interact with each other in terms of pricing in ways that can involve a varying degree of price competition. For example, in the case of Pepsi and Coca-Cola, the companies might operate a cooperative price duopoly and engage in non-price competition through other marketing-mix policies (namely, advertising and placement).
      - Cost structure considerations: Although cost is a factor that firms deal with internally, the type of industry a firm is located in often determines the prevailing cost structure present and hence the typical costs of production for firms in that industry.
        
        For example, in many industries with large start-up and fixed or sunk costs of production, such as steel and aviation, the costs per unit decline as the scale of operation increases
        
        In other words, industries with high fixed costs favour large consolidated companies and often only have a few competitors.
        
        Firms in these industries are said to have large economies of scale3 and low marginal costs of production, which would make pricing according to the traditional rule (of price equal to marginal cost), not profitable.
        
        On the other hand, when economies of scale are small, this favours many small firms and much more competition. In this situation we revert back to our simple cost-pricing rule, where prices approach marginal cost
    - - Each price the company might charge will lead to a different level of demand. The relationship between the price charged and the resulting demand level is shown in the demand curve
      - The demand curve shows the number of units the market will buy in a given time period at different prices that might be charged.
      - In the nor mal case, demand and price are inversely related—that is, the higher the price, the lower the demand. Thus, the company would sell less if it raised its price from P1 to P2. In short, consumers with limited budgets probably will buy less of something if its price is too high.
      - Most companies try to measure their demand curves by estimating demand at different prices. The type of market makes a difference. In a monopoly, the demand curve shows the total market demand resulting from different prices. If the company faces competition, its demand at different prices will depend on whether competitors’ prices stay constant or change with the company’s own prices.
      - firms may be able to differentiate on price and product attributes when consumers are sufficiently different from each other in their willingness to pay for a product. This is sometimes referred to as consumer heterogeneity
        
        Consumer heterogeneity, often in combination with low marginal costs, opens up the door to marginal benefit pricing. This is where firms charge different prices to consumers for the same good based on the benefit that each consumer derives from consuming the product.
    - - Marketers also need to know price elasticity—how responsive demand will be to a change in price. If demand hardly changes with a small change in price, we say demand is inelastic. If demand changes greatly, we say the demand is elastic.
      - If demand is elastic rather than inelastic, sellers will consider lowering their prices. A lower price will produce more total revenue. This practice makes sense as long as the extra costs of producing and selling more do not exceed the extra revenue.
      - At the same time, most firms want to avoid pricing that turns their products into commodities.
      - In recent years, forces such as deregulation and the instant price comparisons afforded by the internet and other technologies have increased consumer price sensitivity, turning products ranging from phones and computers to new automobiles into commodities in some consumers’ eyes
      - nine factors that affect a customer’s price sensitivity: :
        
        Unique-value effect: buyers are less price sensitive when the uniqueness of the product is high.
        
        Substitute awareness effect: buyers are less price sensitive when they are less aware of substitutes.
        
        Difficult comparison effect: buyers are less price sensitive when
        they cannot easily compare the quality of substitutes
        
        Total expenditure effect: buyers are less price sensitive when a
        particular expenditure is low when compared to their income
        
        End benefit effect: buyers are less price sensitive when a particular expenditure is low when compared with the total cost of the end product
        
        Price-quality effect: buyers are less price sensitive when the product is perceived to be more exclusive or prestigious
        
        Shared cost effect: buyers are less price sensitive when part of the cost is borne by another party
        
        Inventory effect: buyers are less price sensitive when they cannot
        store the product
      - willingness to pay is strongly affected by an emotional perception of fairness (fairness effect) and how gains and losses related to a purchase are perceived by consumers (framing effect). Perceived fairness is linked to assumptions about the seller’s profit margin and their motives. A feeling that a very large company is increasing prices to vulnerable individuals might be seen as unfair.
  - - - The existence of high inflation often provides firms with a cover for inefficient (costly) production practices and pricing decision errors. In other words, firms find it much easier to pass along price increases when inflation is high.
      - However, in the last few years many countries have witnessed the phenomenon of low inflation caused by production overcapacity, intensified global competition and better central bank policies. In this context,
        
        firms need to carefully rethink their pricing policies and be aware of the affect on consumer demand caused by much more noticeable price changes. Examples of marketing mix responses necessitated by low inflation are the following:
        
        • reduce discounts and promote everyday low prices
        
        • accelerate new product development
        
        • redesign products for ease and speed of manufacture
        
        • strip away costly features customers do not want
        
        • forge closer links with customers (namely, relationship marketing)
        
        • invest in information technology
    - - As a result, many marketers have increased their emphasis on value-for-the-money pricing strategies.
    - - However, such price cuts can have undesirable long-term consequences. Lower prices mean lower margins. Deep discounts may cheapen a brand in consumers’ eyes. And once a company cuts prices, it’s difficult to raise them again when the economy recovers.
- - - - First, the product’s quality and image must support its higher price, and enough buyers must want the product at that price.
      - Second, the costs of producing a smaller volume cannot be so high that they cancel the advantage of charging more.
      - Finally, competitors should not be able to enter the market easily and undercut the high price.
  - - - First, the market must be highly price sensitive so that a low price produces more market growth.
      - Second, production and distribution costs must decrease as sales volume increases
      - Finally, the low price must help keep out the competition, and the penetration pricer must maintain its low-price position. Otherwise, the price advantage may be only temporary.
- - - - Several situations may lead a firm to consider cutting its price.
        
        One such circumstance is excess capacity.
        
        Another is falling demand in the face of strong price competition or a weakened economy
        
        A company may also cut prices in a drive to dominate the market through lower costs. (Either the company starts with lower costs than its competitors, or it cuts prices in the hope of gaining market share that will further cut costs through larger volume)
      - In such cases, the firm may aggressively cut prices to boost sales and market share.
        
        But as the airline, fast-food, automobile, retailing, and other industries have learned in recent years, cutting prices in an industry loaded with excess capacity may lead to price wars as competitors try to hold on to market share.
    - - A successful price increase can greatly improve profits "if sales volume is unaffected" EVEN IF 1%
      - Price increase factors
        
        A major factor in price increases is cost inflation. Rising costs squeeze profit margins and lead companies to pass cost increases along to customers.
        
        Another factor leading to price increases is over-demand: When a company cannot supply all that its customers need, it may raise its prices, ration products to customers, or both—consider today’s worldwide oil and gas industry.
      - When raising prices, the company must avoid being perceived as a price gouger.Customers have long memories, and they will eventually turn away from companies or even whole industries that they perceive as charging excessive prices. In the extreme, claims of price gouging may even bring about increased government regulation.
      - There are some techniques for avoiding these problems
        
        One is to maintain a sense of fairness surrounding any price increase. Price increases should be supported by company communications telling customers why prices are being raised.
        
        Wherever possible, the company should consider ways to meet higher costs or demand without raising prices.
        
        For example, it might consider more cost-effective ways to produce or distribute its products.
        
        It can “unbundle” its market offering, removing features, packaging, or services and separately pricing elements that were formerly part of the offer.
        
        Or it can shrink the product or substitute less-expensive ingredients instead of raising the price.
    - - A price increase, which would normally lower sales, may have some positive meanings for buyers.
      - EX: if Rolex raised the price of its latest watch model, One might think that the watch is even more exclusive or better made. On the other hand, they might think that Rolex is simply being greedy by charging what the traffic will bear.
      - Similarly, consumers may view a price cut in several ways.
      - EX: if Rolex were to suddenly cut its prices, one might think that you are getting a better deal on an exclusive product. More likely, however, they’d think that quality had been reduced, and the brand’s luxury image might be tarnished.
      - A brand’s price and image are often closely linked. A price change, especially a drop in price, can adversely affect how consumers view the brand.
    - - A firm considering a price change must worry about the reactions of its competitors as well as those of its customers.
      - Competitors are most likely to react when the number of firms involved is small, when the product is uniform, and when the buyers are well informed about products and prices.
      - the competitor can interpret a company price cut in many ways. It might think the company is trying to grab a larger market share or that it’s doing poorly and trying to boost its sales. Or it might think that the company wants the whole industry to cut prices to increase total demand.
      - The company must assess each competitor’s likely reaction. If all competitors behave alike, this amounts to analyzing only a typical competitor. In contrast, if the competitors do not behave alike—perhaps because of differences in size, market shares, or policies—then separate analyses are necessary. However, if some competitors will match the price change, there is good reason to expect that the rest will also match it
  - - - Why did the competitor change the price?
      - Is the price change temporary or permanent?
      - What will happen to the company’s market share and profits if it does not respond?
      - Are other competitors going to respond?
      - Besides these issues, the company must also consider its own situation and strategy and possible customer reactions to price changes.
    - - It might simply decide to hold its current price and profit margin. The company might believe that it will not lose too much market share or that it would lose too much profit if it reduced its own price.
      - Or it might decide that it should wait and respond when it has more information on the effects of the competitor’s price change. However, waiting too long to act might let the competitor get stronger and more confident as its sales increase.
      - If the company decides that effective action can and should be taken
        
        it could reduce its price to match the competitor’s price. It may decide that the market is price sensitive and that it would lose too much market share to the lower-priced competitor.
        
        However, cutting the price will reduce the company’s profits in the short run.
        
        Some companies might also reduce their product quality, services, and marketing communications to retain profit margins,
        
        but this will ultimately hurt long-run market share. The company should try to maintain its quality as it cuts prices.
        
        the company might maintain its price but raise the perceived value of its offer. It could improve its communications, stressing the relative value of its product over that of the lower-price competitor.
        
        The firm may find it cheaper to maintain price and spend money to improve its perceived value than to cut price and operate at a lower margin.
        
        the company might improve quality and increase price, moving its brand into a higher price–value position.
        
        The higher quality creates greater customer value, which justifies the higher price. In turn, the higher price preserves the company’s higher margins.
        
        the company might launch a low-price “fighter brand”—adding a lower-price item to the line or creating a separate lower-price brand.
        
        This is necessary if the particular market segment being lost is price sensitive and will not respond to arguments of higher quality.