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MARKETING MANAGEMENT
14
Developing Pricing
Strategies and
Programs
What is Price?
Price: is the sum of
all values that
consumers
exchange for the
benefits of having
or using the
product or service.
14-2
Price has many names:
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Rent
Tuition
Fare
Rate
Commission
Wage
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Fee
Dues
Interest
Donation
Salary
14-3
Common Pricing Mistakes
• Determining costs and taking traditional
industry margins
• Failure to revise price to capitalize on
market changes
• Setting price independently of the rest of
the marketing mix
• Failure to vary price by product item,
market segment, distribution channels, and
purchase occasion
14-4
Steps in Setting
Pricing
14-5
Setting the Price
Pricing Steps
1.
2.
3.
4.
5.
6.
Select pricing objective
Determine demand
Estimate costs
Analyze competition
Select pricing method
Select final price
• Survival
• Maximize current profits
• Maximize market share
– Penetration strategy
• Market skimming
– Skimming strategy
• Product quality leaders
• Partial cost recovery
14-6
Setting the Price
Pricing Steps
1.
2.
3.
4.
5.
6.
Select pricing objective
Determine demand
Estimate costs
Analyze competition
Select pricing method
Select final price
• Understand factors that
affect price sensitivity
• Estimate demand curves
 Statistical analysis
 Price experiments
 Surveys
• Understand price
elasticity of demand
 Elasticity
 Inelasticity
14-7
Consumers are less price sensitive when:
• Product is more distinctive
• Buyers are less aware of
substitutes
• Buyers cannot easily
compare quality of
substitutes
• The expenditure is a lower
part of buyer’s total income
• The expenditure is small
compared to the total cost
• Part of the cost is borne
by another party
• The product is used with
assets previously bought
• The product is assumed
to have more quality,
prestige, or exclusiveness
• Buyers cannot store the
product
Internet increases customers’ price sensitivity
14-8
Inelastic & Elastic Demand
14-9
Demand is less elastic under these
conditions:
• There are few or no substitutes/competitors
• Buyers do not readily notice the higher price
• Buyers are slow to change their buying habits
and search for lower prices
• Buyers think higher prices are justified
14-10
Setting the Price
Pricing Steps
1.
2.
3.
4.
5.
6.
Select pricing objective
Determine demand
Estimate costs
Analyze competition
Select pricing method
Select final price
• Types of costs and levels
of production must be
considered
• Accumulated production
leads to cost reduction
via the experience curve
• Differentiated marketing
offers create different
cost levels (Activitybased cost ABC)
14-11
Setting the Price
Key Pricing Terms:
 Fixed costs/overhead: costs that don’t
vary with production or sales revenue.
 Variable costs: vary with the level of
production.
 Total costs: sum of fixed and variable
costs at a given level of production
 Average cost: cost per unit at a given
level of production = total cost/quantity
of production.
14-12
COST BEHAVIOR OVER DIFFERENT–SIZE PLANT
1
SRAC
2
4
3
LRAC
COST
PER
UNIT
1000
2000
3000
4000
QUANTITY PRODUCED PER
DAY
14-13
Cost per Unit as a Function of Accumulated Production: The
Experience Curve
14-14
Setting the Price
Pricing Steps
1.
2.
3.
4.
5.
6.
Select pricing objective
Determine demand
Estimate costs
Analyze competition
Select pricing method
Select final price
• Firms must analyze the
competition with respect
to:
 Costs
 Prices
 Possible price reactions
• Pricing decisions are
also influenced by quality
of offering relative to
competition
14-15
Setting the Price
Pricing Procedure
1.
2.
3.
4.
5.
6.
Select pricing objective
Determine demand
Estimate costs
Analyze competition
Select pricing method
Select final price
• Price-setting begins with
the three “Cs”
• Select pricing method:
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Markup pricing
Target-return pricing
Perceived-value pricing
Value pricing
Going-rate pricing
Auction-type pricing
Group pricing
14-16
The Three C’s Model for Price Setting
Low Price
No possible
profit at
this price
Costs
Competitors’ Customers’
prices and
prices of
substitutes
assessment
of unique
product
features
High Price
No possible
demand at
this price
14-17
Pricing Methods:
1. Markup pricing
Variable cost per unit =10$ , fixed cost =300,000$
Expected unit sales = 50,000 unit
the unit cost is given by:
Unit cost = 10$ + 300,000/50,000 =16$
Assume the manufacturer wants to earn a 20 percent
markup on sales, the markup price is given by:
Markup price = unit cost /(1- desired return on sales)
=16/(1- 0.2)= 20$
It will make profit of 4$ per unit
14-18
Pricing Methods:
2.Target-Return Pricing
pricing used to achieve a planned or target rate of return on
investment
Target-return price = unit cost + desired return * invested capital
Unit sales
Target-return price =16$ +
0.20 * 1,000,000
$50,000
14-19
Break-Even Chart for Determining TargetReturn Price and Break-Even Volume
14-20
Pricing Methods:
3. Perceived-Value Pricing
• Companies base their price on the customer’s perceived
value.
• The key to perceived-value pricing is to deliver more
value than the competitor and to demonstrate this to
prospective buyers.
• There are three groups of buyers :
 Price buyers
 Value buyers
 Loyal buyers
14-21
Pricing Methods:
4. Value Pricing
• Win loyal customer by charging a fairly low price
for a high-quality offering, that means :
reengineering the companies operations to be
low-cost without sacrificing quality.
5. Going-Rate Pricing
• The firm bases its price largely on competitors’
prices. (smaller firms “follow the leader”).
• It is quite popular where costs are difficult to
measure or competitive response is uncertain.
14-22
Pricing Methods:
6. Auction-Type Pricing
•
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One major purpose of auctions is to dispose of excess
inventories or used goods.
Three major types of auctions:
1- English auctions (ascending bids).
2- Dutch auctions (descending bids).
3- Sealed-bid auctions.
7. Group Pricing
•
Consumers and business buyers join groups to buy at a
lower price (www.volumebuy.com).
14-23
Setting the Price
Pricing Steps
1.
2.
3.
4.
5.
6.
Select pricing objective
Determine demand
Estimate costs
Analyze competition
Select pricing method
Select final price
• Requires consideration
of additional factors:
– Psychological pricing
– Influence of other
marketing mix variables
– Company pricing policies
– Gain-and-risk-sharing
pricing
– Impact of price on other
parties
14-24
Adapting the Price
1. Geographical Pricing
 Barter: the direct exchange of goods with no money and
no third party involved
 Compensation deal: the seller receives some
percentage of the payment in cash and the rest in
products
 Buyback arrangement: the seller sell a plant equipment
or technology to another country and agrees to accept
as partial payment products manufactured with the
supplied equipment
 Offset: the seller receives full payment in cash but
agrees to spend a substantial amount of the money in
that country within a stated time period.
14-25
Adapting the Price
2. Price Discounts and Allowances
•Quantity discount: The more you buy, the cheaper it
becomes-- cumulative and non-cumulative.
•Trade discounts: Reductions from list for functions
performed-- storage, promotion.
•Cash discount: A deduction granted to buyers for paying
their bills within a specified period of time, (after first
deducting trade and quantity discounts from the base price)
14-26
Adapting the Price
•Functional discount: discount offered by a manufacturer to
trade-channel members if they will perform certain functions.
•Seasonal discount: a price reduction to those who buy out
of season.
•Allowance: an extra payment designed to gain reseller
participation in special programs.
14-27
Adapting the Price
3. Promotional Pricing
• Loss-leader pricing: supermarkets and department
stores often drop the price on well known brands to
stimulate additional store traffic
• Special-event pricing: sellers well establish special
pricing in certain seasons to draw in more customers
• Cash rebates: companies offer cash rebates to
encourage purchase of the manufacturers products
within a specified time period
• Low-interest financing: the company can offer
customers low-interest financing
14-28
Adapting the Price
• Longer payment terms: sellers especially mortgage
banks and auto companies stretch loans over longer
periods and thus lower the monthly payment
• Warranties and service contracts: companies can
promote sales by adding a free or low cost warranty or
service contract
• Psychological discounting: this strategy involves
setting an artificially high price and then offering the
product at substantial savings
14-29
Adapting the Price
4. Discriminatory Pricing
• Price discrimination works when:
– Market segments show different intensities of demand
– Consumers in lower-price segments can not resell to
higher-price segments
– Competitors can not undersell the firm in higher-price
segments
– Cost of segmenting and policing the market does not
exceed extra revenue
14-30
Adapting the Price
Discriminatory Pricing Tactics:
– Customer segment pricing
– Product-form pricing
– Image pricing
– Channel pricing
– Location pricing
– Time pricing
14-31
Adapting the Price
5. Discriminatory Pricing
There are six situations involving product mix pricing:
1) Product line pricing:
Companies normally develop product lines rather
than single products and introduce price steps.
2) Optional feature pricing:
Many companies offer optional products, features
and service along with their main product.
3) Captive product pricing:
Some products require the use of ancillary or captive
products.
14-32
Adapting the Price
4) Two part pricing product:
Service firms often engage in two-part pricing
consisting of affixed fee plus variable usage fee.
5) By-product pricing:
The production of certain goods-meat petroleum
products often results in by-products.
6) Product bundling:
Sellers often bundle products and features.
14-33
Initiating and Responding to Price Changes
Key Considerations
1.
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4.
Initiating price cuts
Initiating price increases
Reactions to price changes
Responding to competitor’s
price changes
• Circumstances leading to
price cuts:
– Excess plant capacity
– Declining market share
– Attempt to dominate the
market via lower costs
• Price cutting traps:
– Price/quality perceptions
– Low prices don’t create
market loyalty
– Competition may match or
beat price cuts
14-34
Initiating and Responding to Price Changes
Key Considerations
1.
2.
3.
4.
Initiating price cuts
Initiating price increases
Reactions to price changes
Responding to competitor’s
price changes
• Circumstances leading to
price increases:
– Cost inflation
– Over demand
• Methods of dealing with
over demand:
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Delayed quotation pricing
Escalator clauses
Unbundling
Reduction of discounts
14-35
Initiating and Responding to Price Changes
Key Considerations
1.
2.
3.
4.
Initiating price cuts
Initiating price increases
Reactions to price
changes
Responding to competitor’s
price changes
• Firms must monitor both
customer and competitor
reactions
• Competitor reactions are
common when:
– Few firms offer the product
– The product is
homogeneous
– Buyers are highly informed
14-36
Initiating and Responding to Price Changes
Key Considerations
1.
2.
3.
4.
Initiating price cuts
Initiating price increases
Reactions to price changes
Responding to
competitor’s price
changes
• The degree of product
homogeneity affects how
firms respond to price
cuts initiated by the
competition
• Market leaders can
respond to aggressive
price cutting by smaller
competitors in several
ways
14-37
Initiating and Responding to Price Changes
Market Leader can respond to competitor
initiated price cuts in several ways:
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Maintain price and profit margin (vulnerable)
Maintain price and add value
Reduce price (and cost)
Increase price and improve quality (add new
brand)
• Launch a low-price fighter line
14-38
Price-Reaction Program for Meeting
Competitor’s Price Cut
14-39