Download LECTURE 11

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
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Rent
Tuition
Fee
Fare
Rate
Toll
Premium
Honorarium
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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
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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
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
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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
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“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
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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
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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
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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
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The product is more distinctive
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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
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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
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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
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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.
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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
Think About It
• This Coke machine charges
more on a hot day.
• Would this change the way
you think about Coke?
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
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…