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14
Developing Pricing
Strategies and Programs
Marketing Management, 13th ed
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
Synonyms for Price
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Rent
Tuition
Fee
Fare
Rate
Toll
Premium
Honorarium
14-3
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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
14-4
Consumer Psychology
and Pricing
• Reference prices—comparing an observed
price to an internal reference price they
remember or to an external frame of
reference such as a posted “regular retail
price.”
• Price-quality inferences—use of price as
an indicator of quality
• Price endings—price ending in odd
numbers
• Price cues----sales signs
14-5
Possible Consumer Reference Prices
• Fair price
• (what the product
should cost)
• Typical price
• Last price paid
• Upper-bound price
• (reservation price or
what most
consumers would
pay)
14-6
• Lower-bound price
• (lower threshold price
or the least
consumers would
pay)
• Competitor prices
• Expected future price
• Usual discounted
price
Consumer Perceptions vs. Reality for Cars
USA Today, January 15, 2004
Overvalued Brands
• Land Rover
• Kia
• Volkswagen
• Volvo
• Mercedes
14-7
Undervalued Brands
• Mercury
• Infiniti
• Buick
• Lincoln
• Chrysler
Price Cues
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“Left to right” pricing ($299 vs. $300)
Odd number discount perceptions
Even number value perceptions
Ending prices with 0 or 5
“Sale” written next to price
14-8
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
14-9
Steps in Setting Price
Select the price objective
Determine demand
Estimate costs
Analyze competitor price mix
Select pricing method
Select final price
14-10
Step 1: Selecting the Pricing Objective
• Survival—cover variable
and part of fixed cost
• Maximum current
profit—rate of return
• Maximum market share—
penetration pricing (Texas
Instruments)
• Maximum market
skimming—set high price and
slowly drop over time (HDTV)
• Product-quality
leadership—affordable
luxuries (Starbucks coffee;
Victoria’s Secret lingerie)
14-11
Step 2: Determining Demand
• Price sensitivity—probable purchase quantity at
alternative prices
• Estimate demand curves
• Surveys—explore number of units consumers
would buy at different proposed prices
• Price experiments—vary prices of different
products in a store or charge different prices for the
same product in similar territories to see how the
change affects sales
• Statistical analysis—review of past prices,
quantities sold, and other factors can reveal their
relationships.
• Price elasticity of demand—how responsive, or
elastic, demand
would be to a change in price
14-12
Inelastic and Elastic Demand
14-13
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
The expenditure is a smaller part of buyer’s total income
The expenditure is small compared to the total cost of
the end product
Part of the cost is paid by another party
The product is used with previously purchased assets
The product is assumed to have high quality and
prestige
Buyers cannot store the product
14-14
Step 3: Estimating Costs
• Types of costs
• Accumulated production
• Activity-based cost accounting—
identifies the real costs associated with
serving each customer (i.e., variable
and overhead costs).
• Target costing—effort by designers,
engineers, and purchasing agents to
reduce cost.
14-15
Cost Terms and Production
• Fixed costs—cost that do
not vary with production
(overhead)
• Variable costs—vary with
level of production
• Total costs—sum of fixed
and variable costs
• Average cost —cost per unit
at that level of production
(total costs/production)
• Cost at different levels of
production--Experience or
learning curve
14-16
Cost per Unit as a Function of Accumulated
Production
14-17
Step 5: Selecting a Pricing Method
• Markup pricing—add standard
markup to production cost
• Target-return pricing--ROI
• Perceived-value pricing
(Caterpillar)
• Value pricing—low price for
high quality offering (IKEA,
Southwest Airlines)
• Going-rate pricing—based on
competitors’ price—CSCO and
ACRO gasoline prices
• Auction-type pricing
14-18
Objectives Should Guide Strategy
Planning for Price
Objectives Should Guide Strategy
Planning for Price
Objectives Should Guide Strategy
Planning for Price
Average Cost Pricing Is Common
and Can Be Dangerous
More Demand-Oriented Methods
Value-in-Use
Prestige
DemandBackward
Price Lining
Auctions
Types
Typesofof
Demand-Oriented
Demand-Oriented
Pricing
Pricing
Odd-Even
Sequential
Reductions
Reference
Leader & Bait
Psychological
Break-Even Chart
14-24
Auction-Type Pricing
English auctions
(ascending)
Dutch auctions
(descending)
Sealed-bid auctions
14-25
Step 6: Selecting the Final Price
• Impact of other marketing
activities—brand quality and
advertising relative to the
competition
• Company pricing policies—
premium, discount
• Gain-and-risk sharing pricing
—seller offering to absorb part or
all of the risk
• Impact of price on other parties
—reaction of other parties—
distributors, dealers, sales force,
competitors, suppliers.
Government may intervene and
prevent price from being charged
14-26
Price-Adaptation Strategies
• Geographical pricing —
products priced to different
customers in different
locations and countries
• Discounts/allowances —
price reduction to buyers
• Promotional pricing
• Differentiated pricing
14-27
List Price May Depend on Geographic
Pricing Policies
F.O.B.
Zone
applying an average freight
Zone
charge
to all customers in the
seller pays to have the product
loaded on a transportation
vehicle at which time the title is
transferred to the buyer
F.O.B.
same specified geographic
area
Common
Geographic
Policies
Freight Absorption
company pays the cost of
shipping without changing the
price in order to get the sale
Uniform Delivered
charges one price to
Uniform
all buyers
Delivered
Price-Adaptation Strategies-Countertrade
• Barter—buyer and seller
directly exchange goods, with
no money and no third party
involved
• Compensation deal—seller
receives some % of the
payment in cash and the rest
in products (e.g., British
Aircraft manufacturer sold
plans to Brazil for 70% cash
and 30% coffee)
14-29
Buyback arrangement—seller sells a
plant, equipment, or technology to
another country and agrees to
accept as partial payment products
that are manufactured with the
supplied equipment (e.g., U.S.
Chemical plant built for Indian
Company and accepted partial
payment in chemicals produced)
Offset—seller receives full payment in
cash but agrees to spend a
substantial amount of the money in
that country within a stated time
period (e.g., PepsiCo sells syrup to
Russia for rubles and buy vodka at a
certain rate for sales in the United
States)
Price-Adaptation Strategies
Discounts and Allowances
Cash discount
Quantity discount
Functional discount
Seasonal discount
Allowance
14-30
Discount Policies: Reductions from List Prices
Quantity
Cumulative quantity
discounts: apply to all
purchases in a given
period
Non-cumulative
discounts: apply only to
individual orders
Seasonal
Seasonal
encourage buyers to
Quantity
Allowance(Sale)
buy sooner
From
List Price
reduce list prices temporarily
to encourage immediate
buying
Functional (Trade)
reductions in list price given to
channel members that perform
one or more marketing
functions for the producer
Trade
Cash
2/10 net 30
Cash
Allowance Policies – Off List Prices
Advertising
price
reductions given to firms
Advertising
in the channel to promote the
Stocking
Stocking
get attention and shelf
space for a product
supplier’s products locally
Common Types
Of Allowances
given to channel members
or final consumers
for doing something or
accepting less of something
Trade-Ins
price reduction for used
products when similar new
products are bought
Push Money
to retailers to be used as
Push
Money
incentives for
their salesclerks
to aggressively push the
targeted items
Legality of Pricing Policies
Unfair Trade
PracticeTrade
Acts
Unfair
Dumping
pricing a product sold in a
Dumping
foreign market below the cost
put a lower limit on prices,
especially at the wholesale
and retail levels
Practice Acts
of producing it in its domestic
market
Key
Issues
Price Fixing
competitors getting
together to raise, lower,
or stabilize prices
Phony List Prices
Phony List
Prices
prices shown to
consumers to suggest that
the price has been
discounted from list
Promotional Pricing Tactics
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Loss-leader pricing—drop price
on well known brands to stimulate
store traffic
Special-event pricing—special
price in certain seasons to draw in
more customers
Cash rebates—to encourage
purchase within a specific time
period
Low-interest financing—instead
of cutting prices
Longer payment terms—to lower
payments
Warranties and service
contracts—free or low-cost
Psychological discounting—set
an artificially high price and then
offer product as substantial savings
14-34
Differentiated Pricing and Price Discrimination
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Customer-segment pricing—different
customer groups pay different prices for
the same product or service (e.g.,
museums price for students and senior
citizens)
Product-form pricing—different versions
of the product are priced differently, but
not proportionately to their costs (48
ounce mineral water--$2.00; 1.7 ounce
moisturizer spray $6.00)
Image pricing—same product at two
different levels base on image differences
(perfume $10.00 per ounce same perfume
different name and image $30.00 per
ounce)
Channel pricing—Coca-cola—restaurant
versus theater
Location pricing—priced differently at
different locations (e.g., theater seats)
Time pricing ( season, time of day,
weekend )
Yield pricing--discounts with early
purchases
14-35
Increasing Prices
• Delayed quotation pricing—final price is
set once product is finished or delivered
• Escalator clauses—requires customer to
pay today’s price and all or part of any
inflation increase that take place before
delivery
• Unbundling—maintains its price but
removes or prices separately one or more
elements that were part of the former offer,
such as free delivery or installation
• Reduction of discounts—do not offer
normal cash and quantity discounts
14-36
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
14-37