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LECTURE-11 Developing Pricing Strategies and Programs 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? Synonyms for Price • • • • • • • • Rent Tuition Fee Fare Rate Toll Premium Honorarium • • • • • • • Special assessment Bribe Dues Salary Commission Wage Tax 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 Comparing an observed price to an internal reference price. 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 Consumer Psychology and Pricing Price-quality inferences Many consumers use price as an indicator of quality. Consumer Perceptions vs. Reality for Cars Overvalued Brands Undervalued Brands • • • • • • • • • • Land Rover Kia Volkswagen Volvo Mercedes Mercury Infiniti Buick Lincoln Chrysler Consumer Psychology and Pricing Price endings or Price cues Consumer perceptions of prices are also affected by alternative pricing strategies. Price Cues • • • • • “Left to right” pricing (Rs. 299 vs. Rs. 300) Odd number discount perceptions Even number value perceptions Ending prices with 0 or 5 “Sale” written next to price 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 Steps in Setting Price • • • • • • 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 Maximum current profit Maximum market share Maximum market skimming Product-quality leadership Step 2: Determining Demand • Price sensitivity • The market’s probable purchase quantity at alternative prices. • Estimate demand curves • e.g. Surveys, price experiments & statistical analysis. • Price elasticity of demand • Marketers need to know how responsive, or elastic, the demand would be to a change price. Factors Leading to Less Price Sensitivity • • • • • The product is more distinctive • • • • Part of the cost is paid by another party Buyers are less aware of substitutes Buyers cannot easily compare the quality of substitutes The expenditure is a smaller part of buyer’s total income The expenditure is small compared to the total cost of the end product The product is used with previously purchased assets The product is assumed to have high quality and prestige Buyers cannot store the product Step 3: Estimating Costs • • • • Types of costs Accumulated production Activity-based cost accounting Target costing Cost Terms and Production • Fixed costs or Overhead • Costs that do not vary with production level or sales revenue. • Variable costs • Costs vary directly with the level of production. • Total costs • Sum of the fixed & variable costs for any given level of production. • Average cost • Cost per unit at that level of production; it equals total costs divided by production. Step 4: Analyzing Competitor’s costs, prices & Offers With in the range of possible prices determined by market demand and company costs, the firm must take competitors costs, prices and possible price reactions into account. Step 5: Selecting a Pricing Method • Markup pricing • The most elementary pricing method is to add a standard markup to the product’s cost. • Target-return pricing • The firm determines the price that would yield its target rate of ROI. • Perceived-value pricing • Made up of several elements, i.e. buyers image of the product performance, the channel deliverables, the warranty, quality & customer support etc. Step 5: Selecting a Pricing Method • Value pricing • Charging a fairly low price for a high quality offering. • Going-rate pricing • Firm bases its price largely on competitors prices, charging the same, more or less than major competitor. • Auction-type pricing Auction-Type Pricing… • English auctions (Ascending bids) • One seller and many buyers. • Dutch auctions (Descending bids) • One seller and many buyers or one buyer and many sellers. • Sealed-bid auctions • Supplier can submit only one bid and cannot know the other bids. 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 Price-Adaptation Strategies • Geographical pricing • Company decides how to price its products to different customers in different locations & countries. • Discounts/allowances • Promotional pricing • Differentiated pricing Price-Adaptation Strategies Countertrade • Barter • Buyer & seller exchange goods, no money & third party involve. • Compensation deal • Seller receive some payment in cash remaining in products. • Buyback arrangement • Seller sell a plant & agrees to accept as partial payment & finish products from the plant. • Offset • Seller receives full amount in cash but spend some amount in the country. Discounts/ Allowances • • • • • Cash discount Quantity discount Functional discount Seasonal discount Allowance Promotional Pricing Tactics • Loss-leader pricing • Departmental store often drop the price on well known brands to stimulate additional store traffic. • • • • • • Special-event pricing Cash rebates Low-interest financing Longer payment terms Warranties and service contracts Psychological discounting Differentiated Pricing • • • • • • Customer-segment pricing Product-form pricing Image pricing Channel pricing Location pricing Time pricing Think About It • This Coke machine charges more on a hot day. • Would this change the way you think about Coke? Increasing Prices • • • • Delayed quotation pricing Escalator clauses Unbundling Reduction of discounts 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 Bibliography Marketing Management – A South Asian Perspective by Philip Kotler, Kevin Lane Keller, Abraham Koshy & Mithileshwar Jha, 13th Edition, Published by Pearson Education, Inc. Strategic Marketing Management – Meeting The Global Marketing Challenges by Carol H. Anderson & Julian W. Vincze Published by Houghton Mifflin Company. Principles of Advertising & IMC by Tom Duncan 2nd Edition, Published by McGraw-Hill Irwin. Principles of Marketing by Philip Kotler & Gary Armstrong Thirteenth Edition, Published by Prentice Hall "The man who does not read good books has no advantage over the man who cannot read them." Mark Twain The End…