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14
Developing Pricing
Strategies and Programs
Chapter Questions
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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
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
14-3
Pricing Decisions are Creating Major Challenges
for Many Companies
Examples Include:
1. Threats to major airlines by discount carriers.
2. Pressures on drug companies to reduce
prices.
3. Intense price competition on supermarket
chains.
4. Threats to strong brands by counterfeit
products.
STRATEGIC ROLE OF PRICE
…requires that we put pricing at the beginning of
the process. For example, a multi-part marketing
strategy usually is required in value-based pricing.
Airlines’ complicated service packages with arcane
restrictions, and their multiple channels of
distribution must support pricing that reflects
different values of the service to different
segments. Without such a strategy, airlines would
capture a much smaller portion of the value they
have the potential to create.
T. Nagle, Marketing News, 11/9/98, 4.
STRATEGIC ROLE OF PRICE
‘”Part of the reason that pricing is
misused and poorly understood is
the common practice of making it
the last marketing decision. We
think that we must design
products, communication plans,
and a method of distribution before
we have something to price. We
then use pricing tactically to
capture whatever value we can.”
Common Pricing Mistakes
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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
14-7
Consumer Psychology and Pricing
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Reference prices
Price-quality inferences
Price endings
Price cues
14-8
Remembering vs Knowing
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Could you remember how much you last paid for a
product you purchase periodically?
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Many consumers will not remember this information, yet
they will judge the advertised or actual price of the
product to be “too expensive”, “a great deal,” or “about
average”.
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We all “know” things for which we cannot recall the
source or even the exact nature of our knowledge.
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Remembering = memory, ability to recall the specific
items ---- EXPLICIT MEMORY
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Knowing = nonconscious retrieval of previously
encountered stimuli --- IMPLICIT MEMORY
14-9
Mental Accounting
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Consumers tend to…
 Segregate
gains
 Integrate losses
 Integrate smaller losses with larger gains
 Segregate small gains from large losses
6-10
Possible Consumer Reference Prices
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“Fair price”
Typical price
Last price paid
Upper-bound price
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Lower-bound price
Competitor prices
Expected future price
Usual discounted price
14-11
Consumer Perceptions vs. Reality for Cars
Overvalued Brands
 Land Rover
 Kia
 Volkswagen
 Volvo
 Mercedes
Undervalued Brands
 Mercury
 Infiniti
 Buick
 Lincoln
 Chrysler
14-12
Price Cues
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“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
14-13
Table 14.3 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
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
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14-15
Steps in Setting Price
Select the price objective
 Determine demand
 Estimate costs
 Analyze competitor price mix
 Select pricing method
 Select final price
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14-16
Step 1: Selecting the Pricing Objective
Survival
 Maximum current profit
 Maximum market share
 Maximum market skimming
 Product-quality leadership
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14-17
Step 2: Determining Demand
Price sensitivity
 Estimating demand curves
 Price elasticity of demand
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14-18
Step 3: Estimating Costs
Types of Costs
 Accumulated Production
 Activity-Based Cost Accounting
 Target Costing
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14-19
Cost Terms and Production
Fixed costs
 Variable costs
 Total costs
 Average cost
 Cost at different
levels of production
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14-20
Step 5: Selecting a Pricing Method
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Markup pricing
Target-return pricing
Perceived-value pricing
Value pricing
Going-rate pricing
Auction-type pricing
14-21
Auction-Type Pricing
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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
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14-23
Price-Adaptation Strategies
Geographical pricing
 Discounts/allowances
 Promotional pricing
 Differentiated pricing
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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
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14-26
Placebo Effects of Marketing Actions:
Consumer May Get What They Pay For
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Beliefs and expectations can affect more than
judgments and subjective consumption
experiences.
Can consuming an energy drink that is
purchased at a discount lead not only to
judgments of lower quality or to a less favorable
consumption experience and even less
productive activities?
Price can also trigger a placebo effect.
14-27
Price promotions
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why could price promotions be bad?
 placebo
effect
quality
price
promotion
price
Differentiated Pricing and Price Discrimination
Customer-segment pricing
 Product-form pricing
 Image pricing
 Channel pricing
 Location pricing
 Time pricing
 Yield pricing
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14-29
What kind of
pricing strategy?
14-30
Increasing Prices
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Delayed quotation pricing
Escalator clauses
Unbundling
Reduction of discounts
14-31
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
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14-32
Placebo Effects of
Marketing Actions:
Consumers May Get
What They Pay For
THE PLACEBO EFFECT
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Consumers' beliefs and expectations, shaped by
experiences in their daily lives, often influence
their judgments of products and services.
Marketing actions, such as pricing, can alter the
actual efficacy of products to which they are
applied.
This is called the ‘placebo effect’ which stems fro:
the activation of expectancies about the efficacy of
the product, a process that appears not to be
conscious.
Placebo Effect in the Medical Domain
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Placebo phenomenon in the medical
domain. Patients' beliefs and expectations
about the treatment they are receiving
(e.g., an antidepression medication) can
yield real changes to their health, even if
the treatment is actually inert and has no
inherent power to produce health effects
(e,g., an inert sugar pill that lcx)ks like the
antidepression medication).
Theories underlying Placebo Effects
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Two notions are believed to account for placebo effects:
expectancy theory and classical conditioning.
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According to expectancy theory, placebo effects arise
because beliefs about a substance/procedure serving as
a placebo activate expectations that a particular effect
will occur, which then affect the subsequent
effectiveness of the substance/procedure.
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The classical conditioning view considers consuming
substances with known therapeutic effects to be
conditioning trials.
Empirical Study on Placebo Effects of Pricing Strategy
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A study in which 38 members of a fitness center who exercised regularly
(at least three times a week) consumed Twinlab Ultra Fuel before and
during a workout session.
Before consuming the energy drink, participants were shown the list of its
ingredients and were told that the drink was from the most recently
manufactured batch.
One group of participants was told that we purchased the drink at the
regular price of $2.89; another group was told that the regular price of the
drink was $2.89 but that we had purchased it at a discounted price of $.89
because we bought it in bulk as institutional purchase.
After exercising, participants rated the intensity of their workout on a scale
that ranged from -3 ("not at all intense") to +3 ("very intense") and how
fatigued they felt on a scale that ranged frotn 1 ("not at all") to 7 ("very").
The results show that participants in the reduced-price condition rated their
workout intensity as lower (M = -.4) than did those in the regular-price
condition (M = .6; F( 1, 36) = 7.5, p < .01 ), and participants in the reducedprice condition indicated that they were more fatigued (M = 4.5) than did
those in the regular-price condition (M = 3.7; F(l. 36) = 3.5, p < .10).
Empirical Study on Placebo Effect of Price
Number of Puzzles Solved
12
10
8
6
4
2
0
1Low expectancy strength
2
Discounted price
High expectancy strength
3
4
Full price
Notes: The number of puzzles solved in the control condition = 9.1.