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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 • • • • • • • • Rent Tuition Fee Fare Rate Toll Premium Honorarium 14-3 • • • • • • • 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 • • • • • “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 • • • • • • • • • 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 • • • • • • • 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 • • • • • • • 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 • • • • • Maintain price Maintain price and add value Reduce price Increase price and improve quality Launch a low-price fighter line 14-37