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MARKETING MANAGEMENT 12th edition 14 Developing Pricing Strategies and Programs Kotler Keller Chapter Questions • How do consumers process and evaluate prices? • How should a company set prices initially for products or services? • How should a company adapt prices to meet varying circumstances and opportunities? • When should a company initiate a price change? • How should a company respond to a competitor’s price challenge? 14-2 Whirlpool’s Duet combo is nearly four times the price of comparable models 14-3 Synonyms for Price • • • • • • • • Rent Tuition Fee Fare Rate Toll Premium Honorarium • • • • • • • Special assessment Bribe Dues Salary Commission Wage Tax 14-4 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 14-5 Consumer Psychology and Pricing Reference Prices Price-quality inferences Price endings Price cues 14-6 Table 14.1 Possible Consumer Reference Prices • • • • “Fair price” Typical price Last price paid Upper-bound price • • • • Lower-bound price Competitor prices Expected future price Usual discounted price 14-7 Table 14.2 Consumer Perceptions vs. Reality for Cars Overvalued Brands • Land Rover • Kia • Volkswagen • Volvo • Mercedes Undervalued Brands • Mercury • Infiniti • Buick • Lincoln • Chrysler 14-8 Price Cues • • • • • “Left to right” pricing ($299 versus $300) Odd number discount perceptions Even number value perceptions Ending prices with 0 or 5 “Sale” written next to price 14-9 When to Use Price Cues • Customers purchase item infrequently • Customers are new • Product designs vary over time • Prices vary seasonally • Quality or sizes vary across stores 14-10 Steps in Setting Price Select the price objective Determine demand Estimate costs Analyze competitor price mix Select pricing method Select final price 14-11 Step 1: Selecting the Pricing Objective • Survival • Maximum current profit • Maximum market share • Maximum market skimming • Product-quality leadership 14-12 Figure 14.1 Price Tiers in the Ice Cream Market 14-13 Step 2: Determining Demand Price Sensitivity Estimating Demand Curves Price Elasticity of Demand 14-14 Figure 14.2 Inelastic and Elastic Demand 14-15 Step 3: Estimating Costs Types of Costs Accumulated Production Activity-Based Cost Accounting Target Costing 14-16 Cost Terms and Production • • • • • Fixed costs Variable costs Total costs Average cost Cost at different levels of production 14-17 Figure 14.4 Cost per Unit as a Function of Accumulated Production 14-18 9 Lives Uses Target Costing 14-19 Step 5: Selecting a Pricing Method • Markup pricing • Target-return pricing • Perceived-value pricing • Value pricing • Going-rate pricing • Auction-type pricing 14-20 Figure 14.6 Break-Even Chart 14-21 Auction-Type Pricing English auctions Dutch auctions Sealed-bid auctions 14-22 Step 6: Selecting the Final Price • Impact of other marketing activities • Company pricing policies • Gain-and-risk sharing pricing • Impact of price on other parties 14-23 Price-Adaptation Strategies Geographical Pricing Discounts/Allowances Promotional Pricing Differentiated Pricing 14-24 Price-Adaptation Strategies Countertrade • Barter • Compensation deal • Buyback arrangement • Offset Discounts/ Allowances • Cash discount • Quantity discount • Functional discount • Seasonal discount • Allowance 14-25 Promotional Pricing Tactics • • • • • • Loss-leader pricing Special-event pricing Cash rebates Low-interest financing Longer payment terms Warranties and service contracts • Psychological discounting 14-26 Differentiated Pricing and Price Discrimination • Customer-segment pricing • Product-form pricing • Image pricing • Channel pricing • Location pricing • Time pricing • Yield pricing 14-27 Table 14.5 Profits Before and After a Price Increase 14-28 Increasing Prices Delayed quotation pricing Escalator clauses Unbundling Reduction of discounts 14-29 Figure 14.7 Price-Reaction Program for Meeting Competitor’s Price Cut 14-30 Brand Leader Responses to Competitive Price Cuts • • • • • Maintain price Maintain price and add value Reduce price Increase price and improve quality Launch a low-price fighter line 14-31 Marketing Debate Is the right price a fair price? Take a position: 1. Prices should reflect the value that consumers are willing to pay. 2. Prices should primarily just reflect the cost involved in making a product. 14-32 Marketing Discussion As a consumer, which pricing method do you personally prefer to deal with? Why? 14-33