Download Lecture 15

Developing Pricing Strategies and Programs
Synonyms for Price
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Rent
Tuition
Fee
Fare
Rate
Toll
Premium
Honorarium
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Special assessment
Bribe
Dues
Salary
Commission
Wage
Tax
The Internet Changes the Pricing
Environment
By Providing Information
Buyers
•Get Instant price comparison from thousands
of vendors
•Name their price and have it met
•Get products free
Sellers
•Monitor customer behaviour and tailors offers
to an individual
•Give certain customers access to special
prices
Both Buyers and Sellers
Negotiate price in online auctions
Common Pricing Mistakes
• Determine costs and take 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
Consumer Psychology
and Pricing
• Reference Prices: Pricing information a consumer
retains in memory that is used to interpret and
evaluate a new price
• Price-quality inferences: Many consumers use
price as an indicator of quality.
• Price endings: Sellers believe price end in odd
number.
• Price cues: Any marketing tactic used to persuade
customers that prices offer good value compared
to competitors' prices, past prices or future
prices.
Steps in Setting Price
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Select the price objective
Determine demand
Estimate costs
Analyze competitor price mix
Select pricing method
Select final price
Step 1: Selecting the Pricing
Objective
• Survival: Short term strategy to overcome
overcapacity, intense competition, or changing
consumer wants Objective should be to cover
all variable costs and if possible some fixed
costs
• Maximize Current Profit: cash flow or return
on investment
• Maximum Market Share: (market-penetration
pricing) – Assuming high price sensitivity, firms
will lower price which should precipitate a
dramatic increase in volume.
Step 1: Selecting the Pricing
Objective
• Market Skimming - appeals to high-end
market segments, early adopter segments
especially in rapidly changing technology
markets (e.g. phones, tablets). Prices start
high and drop lower over time. Good strategy
when:
– A sufficient number of buyers have a high
current demand
– Unit costs of producing a small volume are
not so high that they cancel the advantage
of charging what the market will bear
Step 1: Selecting the Pricing
Objective
– Initial high price does not attract
competitors
– High price communicates the image of a
superior product
• Product-Quality Leadership - premium quality
connotes premium price
Step 2: Determining Demand
Price Sensitivity - some characteristics associated with
decreased price sensitivity
‒ Customers are less sensitive to low-cost items or
items purchased infrequently
‒ Seller can charge a higher price than
competitors if customers are convinced it offers a
lower total cost of ownership (TCO)
‒ Internet has potential to increase price sensitivity
but must also target non-price-sensitive consumers
as well as to not leave “money on the table”
Factors Leading to Less Price
Sensitivity
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The product is more distinctive
Buyers are less aware of substitutes
Buyers cannot easily compare the quality of substitutes
Expenditure is a smaller part of buyer’s total income
Expenditure is small compared to the total cost
Part of the cost is paid by another party
Product is used with previously purchased assets
Product is assumed to have high quality and prestige
Buyers cannot store the product
Step 2: Determining Demand
Estimating Demand Curves – several different
methods of measurements
–Conduct surveys – information somewhat
subjective
–Experiment by changing prices for same product
without alienating consumers or violating
regulatory requirements
–Statistically analyze past prices, quantities sold
and other factors to gain understanding of
price/demand relationships
Step 2: Determining Demand
• Price elasticity of demand
–Determination of the affect of a change in price
on overall demand
–If demand changes considerably with a change in
price, it is elastic. If demand does not change
significantly or in parallel with the price, it is
inelastic
–Long-run price elasticity – buyers continue to
purchase from current supplier after a price
increase but eventually switch suppliers.
Step 3: Estimating Costs
• Types of Costs and Levels of Production fixed, variable, total, and average costs
– To price intelligently, companies need to
know its costs with different levels of
production
– To estimate the real profitability of
selling to different types of retailers or
customers, firms should use activity-basedcost (ABC) accounting instead of standard
cost accounting
Step 3: Estimating Costs
• Accumulated Production
–Average cost falls with accumulated production
experience also referred to as experience curve or
learning curve
–Experience-curve pricing can be risky because
aggressive pricing might create a cheap image
–Advantages from experience curve may lead to
expansion which is a risk if there is a major
technology improvement which eliminates
competitive advantage and passes the advantage
to other firms who adopt new technology
rendering current technology obsolete
Step 3: Estimating Costs
• Target costing - determine price that
must be charged according to market
research
Analyzing Competitor’s Costs
Step 5: Selecting a Pricing Method
• Markup pricing: Standard mark-up,
but can vary according to product
categories. Markup price = unit cost /
(1 – desired return on sales)
• Target return pricing: To make a
fair return on investment. Targetreturn-price = unit cost/(desired
return X invested capital)/unit sales.
Step 5: Selecting a Pricing Method
• Perceived value pricing - based on buyer perceptions.
Many firms are now adopting this approach.
• Value pricing – fairly low price for a high quality offering
– Everyday low pricing (EDLP),no promotions and no
change to price. This eliminates week-to-week price
uncertainty. The reason firms have adopted this price
strategy is that constant sales and promotions are
costly and have eroded consumer confidence in
everyday shelf prices.
– High-low pricing – Charge higher prices on an
everyday basis but run frequent promotions with
prices temporarily lower than the EDLP level.
Step 5: Selecting a Pricing Method
• Going rate pricing - base price
on that of competitors
(“follow the leader”)
Auction-Type Pricing
Must qualify supplier pool before using price/cost as
major decision variable in B2B situations.
English auction - ascending bids with one seller and
many buyers
Dutch auctions (descending bids) – two types
Auctioneer announces a high price for a product and
then lowers the price until a bidder accepts
Buyers announce something they want to buy and
potential sellers compete to offer the lowest price
Sealed-bid auctions – would-be suppliers submit only
one bid and do not know the contents of the other
bids. The government uses this method frequently to
secure goods and services.
Step 6: Selecting the Final Price
• The influence of other marketing activities brand’s quality and advertising relative to the
competition (know brands with high quality
and high relative advertising can command
higher prices)
• The influence of other marketing-mix
elements - note relationships between
relative price, relative quality, and
relative advertising
Step 6: Selecting the Final Price
• Company pricing policies - contemplated
price must be consistent
• Gain-and-risk sharing pricing - risk losing
customers if cannot deliver full promised
value
• Impact of price on other parties distributors, sales force, competitors,
suppliers, government, etc.
Thank you
Geographical Pricing
• Pricing varies by location
Price Discounts and Allowances
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Discount
Quantity discount
Functional discount
Seasonal discount
Allowance
Promotional Pricing Tactics
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Loss-leader pricing
Special-event pricing
Cash rebates
Low-interest financing
Longer payment terms
Warranties and service contracts
Psychological discounting
Differentiated Pricing
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Customer-segment pricing
Product-form pricing
Image pricing
Channel pricing
Location pricing
Time pricing
Yield pricing
Methods for Increasing Prices
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Delayed quotation pricing
Escalator clauses
Unbundling
Reduction of discounts
Brand Leader Responses to Competitive Price
Cuts
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Maintain price
Maintain price and add value
Reduce price
Increase price and improve quality
Launch a low-price fighter line