Page 409 - Marketing Management

386 PART 5 SHAPING THE MARKET OFFERINGS

• Give certain customers access to special prices. Ruelala is a members-only Web site that sells
upscale women’s fashion, accessories, and footwear through limited-time sales, usually two-
day events. Other 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 or even in person. 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. With the advent of the recession,
many consumers began to take the practice of haggling over price honed at car dealers and flea
markets into other realms like real estate, jewelry, or virtually any retail durable purchase.
Almost three-quarters of U.S. consumers reported negotiating for lower prices in recent years,
up a third from the five years before the recession hit. 7

How Companies Price
Companies do their pricing in a variety of ways. In small companies, the boss often sets prices. In
large companies, division and product line managers do. Even here, top management sets general
pricing objectives and policies and often approves lower management’s proposals.
Where pricing is a key factor (aerospace, railroads, oil companies), companies often establish a
pricing department to set or assist others in setting appropriate prices. This department reports to
the marketing department, finance department, or top management. Others who influence pricing
include sales managers, production managers, finance managers, and accountants.
Executives complain that pricing is a big headache—and getting worse by the day. Many compa-
nies do not handle pricing well and fall back on “strategies”such as:“We determine our costs and take
our industry’s traditional margins.” Other common mistakes are not revising price often enough to
capitalize on market changes; setting price independently of the rest of the marketing program rather
than as an intrinsic element of market-positioning strategy; and not varying price enough for differ-
ent product items, market segments, distribution channels, and purchase occasions.
For any organization, effectively designing and implementing pricing strategies requires a
thorough understanding of consumer pricing psychology and a systematic approach to setting,
adapting, and changing prices.

Consumer Psychology and Pricing

Many economists traditionally assumed that consumers were “price takers” and accepted prices at
“face value” or as given. Marketers, however, recognize that consumers often actively process price
information, interpreting it from the context of prior purchasing experience, formal communica-
tions (advertising, sales calls, and brochures), informal communications (friends, colleagues, or
8
family members), point-of-purchase or online resources, and other factors.
Purchase decisions are based on how consumers perceive prices and what they consider the
current actual price to be—not on the marketer’s stated price. Customers may have a lower
price threshold below which prices signal inferior or unacceptable quality, as well as an upper
price threshold above which prices are prohibitive and the product appears not worth the money.
The following example helps illustrate the large part consumer psychology plays in determining
three different prices for essentially the same item: a black T-shirt.

A Black T-Shirt The black T-shirt for women looks pretty ordinary. In fact,
it’s not that different from the black T-shirt sold by Gap and by Swedish discount clothing
chain H&M. Yet, the Armani T-shirt costs $275.00, whereas the Gap item costs $14.90 and
the H&M one $7.90. Customers who purchase the Armani T-shirt are paying for a T-shirt
made of 70 percent nylon, 25 percent polyester, and 5 percent elastane, whereas the Gap and
H&M shirts are made mainly of cotton. True, the Armani T is a bit more stylishly cut than the other two and
sports a “Made in Italy” label, but how does it command a $275.00 price tag? A luxury brand, Armani is
primarily known for suits, handbags, and evening gowns that sell for thousands of dollars. In that context,
it can sell its T-shirts for more. But because there aren’t many takers for $275.00 T-shirts, Armani doesn’t