Ch-16 Pricing Strategies and Programs PDF

2/17/2018
Marketing Mix
1
16
Developing Pricing
Strategies and Programs
15/e Copyright © 2018 Pearson Education, Inc. Publishing as Prentice Hall 16-2
Pricing Pricing
 Pricing decisions are  Must be consistent with  Not just a # on a tag

complex ̶ Marketing strategy
̶ Target markets
 Comes in may forms
 Must take into ̶ Rent, tuition, fees, rates,
̶ Brand positions
account: tolls, wages, commissions
̶ The three Cs
(company, customers,
 Has many components
and competition) ̶ Cash, rebates, discounts,
incentives
̶ The marketing
environment ̶ Payment can be made in
frequent flyer miles
Copyright © 2018 Pearson Education, Inc. Publishing as Prentice Hall 16-3 Copyright © 2018 Pearson Education, Inc. Publishing as Prentice Hall 16-4
Pricing in a Digital World Pricing in a Digital World

Buyers can: Sellers can:
Check prices at the POP

Instant Price Comparisons Use: Smart phone Monitor customer behavior Get certain customers
Click: mySimon.com and tailor offers to individuals access to special prices
$33.50
$31.50
I‟ll pay $235.00
Both buyers and
sellers can:
Name your price and have it met
Get products free
Use: Priceline.com Negotiate Prices
1
2/17/2018
A Changing Pricing Environment Common Pricing Mistakes
 Great recession  Access to credit

̶ Shift from luxury to basic and debit cards
 Follow cost-based pricing
needs ̶ Enables firms to offer
̶ Less spending, smart buying expensive products  Failure to vary price to
capitalize on market changes
̶ Shift to more economic  Intelligent shopping
purchases with the help of  Setting price independently
̶ Sharing economy (renting, internet
borrowing, and sharing),  Failure to vary price by…
where trust and reputation  Bartering
are imperative ̶ Goods for goods
How Companies Price Consumer Psychology and Pricing
 Economists assume  Marketers assume

̶ Consumers are price ̶ Consumers process
takers who accept the price information,
price at face value interpreting it from the
Small Business Large company context of
Boss Product-line Managers • Prior buying experience
• Formal or informal
communications
• POP or online resources
When very important Special case

Pricing Department Salespeople
Consumer Psychology and Pricing Some Reference Prices
“Fair price”
Typical price
Last price paid

Reference Prices Price-Quality Inferences
Upper-bound price
The prices that buyers carry in minds and
refer to when looking at a given product
Lower-bound price
$299.99 Competitor prices
Expected future price

$290 Price Endings
Usual discounted price
2
2/17/2018
A Black T-Shirt New-Product Pricing Strategies
“A Black T-Shirt” example illustrates the large part

consumer psychology in determining three different
prices for essentially the same item
 Market-skimming
Armani - $275 pricing
 Market- penetration
pricing
Gap - $14.90
H&M - $7.90
Market-skimming Pricing Market-penetration Pricing
• Quality and image must support

 A pricing strategy with • Price sensitive market
 A pricing strategy the price
with a high initial • Buyers must want the product a low initial price to • Inverse relationship of
penetrate the market production and
price to “skim” at the price
distribution cost to sales
revenue layers • Costs of producing small quickly and deeply,
growth
from the market volume should not cancel the attract a large number
• Low prices must keep
and then lower it advantage of higher prices of buyers quickly, and
competition out of the
• Competitors should not be able gain market share market
to enter the market easily
Steps in Setting Price Step-1: Selecting the Pricing Objective

Survival
6 Select Final Price Maximum Current Profit
Maximum Market Share
5 Price Method Maximum Market Skimming
4 Competitor Analysis Product-Quality Leadership
Other Objectives
3 Estimate Costs
2 Determine Demand
1 Pricing Objective
3
2/17/2018
Step 2: Determining Demand Step 2: Determining Demand
• There are few or no  Estimating demand

 Price sensitivity substitutes or competitors curves
̶ See demand curve • They don‟t readily notice the ̶ Surveys
̶ The market‟s probable higher price ̶ Price experiments
purchase quantity at • They are slow to change their ̶ Statistical analysis
alternative prices buying habits
̶ Know what factors • They think that higher prices  Price elasticity of
affect price sensitivity are justified demand
̶ How responsive demand
• Price is only a small part of
the total cost is to a change in price
Step 3: Estimating Costs Types of costs

Costs at Varying Levels of Production
Demand Price Ceiling
Price
Fixed Costs
(overhead)
Price Floor
Fair return Profit
Costs
FC Total Costs
VC Variable Costs
Accumulated Production Target Costing

Design engineers
Experience curve or
learning curve refers to Target costing helps achieve Market research establishes
the decline in the average cost target with concentrated a new product‟s desired
Cost per Unit as a Function of cost with accumulated effort of designers, engineers, functions and the price at
Accumulated Production production experience. and purchasing agents which it will sell
4
2/17/2018
Step 4: Analyzing Competitors‟ Costs,

Step 5: Selecting a Pricing Method
Prices, Offers, and Price Reactions
Prices Offers
Three Cs
Model for Price
Costs Reactions Setting
• Customers‟ demand schedule

• Cost function
• Competitors‟ prices
Worth to Customer
Step 5: Selecting a Pricing Method Markup or Cost Plus Pricing
 Markup pricing
 Target-return pricing
 Perceived-value pricing
 Value pricing
 Going-rate pricing
 Auction-type pricing
Markup or Cost Plus Pricing Target-Return Pricing

Variable cost per toaster $10
Fixed costs $300,000
 Pros and cons Expected unit sales 50,000
 Markups vary with Invested capital $1000,000
management ̶ Simple method
Desired return 20%
decisions ̶ Perceived as fairer to
both
̶ Markups are higher on
seasonal, specialty, slow- ̶ Keeps competition
moving, and inelastic minimum
demand items
̶ Ignores demand and
competition
5
2/17/2018
Break-Even Chart Determining Target-Return

Price and Break-Even Volume Perceived Value Pricing
Customer’s perceived value
 Product performance $$$

 Channel deliverables $
 Warranty $
 Customer support $
 Supplier‟s reputation $$
FC $300,000
BEV    30,000(units)
Price - VC $20 - $10
Perceived Value Determination Methods Three Types of Buyers
 Managerial judgments They place importance on different elements

 Value of similar products
Conjoint analysis is  Price buyers
 Focus groups used to determine how
 Surveys people value different  Value buyers
features that make up
 Experimentation an individual product or  Loyal buyers
 Analysis of historical data service
 Conjoint analysis
Two faces or a vase?
Value Pricing Going Rate Pricing

Charging a fairly low price as a low-cost producer achieved • Collective wisdom of the industry
through reengineering operations, without sacrificing • Ignoring costs and demand
quality, and thus winning loyal customers
• Used when difficult to measure costs,
EDLP demand-elasticity, and competitive response
The same
level of quality THOUSANDS OF
LOW PRICES
Level of EVERY DAY
throughout the store
Quality
Low price
High
Low cost
Pricing
Low Follow the leader Commodities
P1 C1 P2 C2
6
2/17/2018
Auction-Type Pricing Step 6: Selecting the Final Price
English auction Impact on other parties

(ascending bids) & marketing activities
Brand
Quality
Dutch auction
(descending bids)
Pricing Policies
Sealed-bid auction Gain-and-risk-sharing
Adapting the Price Geographical Pricing

Geographical Pricing  Pricing varies by locations
 Forms of countertrade (15%-20%)
Price Discounts and
Allowances
Differentiated Pricing
Promotional Pricing
Geographical Pricing Methods Price Discounts and Allowances

 FOB-Origin– the buyer pays  Zone pricing– customers
the freight from the factory to in different zones pay for
the buyer‟s destination different prices
 FOB-Port– the seller pays the  Basing-point pricing– the
freight plus loading cost from seller charges all
the factory to the port of customers a base price
shipment plus the freight cost from
 FOB-Destination– the seller that city to the customer
pays the freight from the factory location
to buyer‟s unloading dock
 Freight-absorption
 Uniform-delivered pricing– the pricing– the seller Functional or
seller charges one price to all absorbs all or part of the trade discount
customers, regardless of their freight charges to get
location desired business
7
2/17/2018
Promotional Pricing Promotional Pricing: A „Zero-sum Game‟
 Loss-leader pricing If they work,

competitors copy  Creates deal-prone
 Special-event pricing consumers
them and they lose
 Cash rebates their effectiveness  Erodes brand‟s
image and value
 Low-interest financing
 Leads to industry
 Longer payment If they don‟t work, price wars
terms they are a waste of  Not a legitimate
money which could substitute for
 Psychological have been used for strategic planning
discounting other purposes
Differentiated Pricing Basis of Price Discrimination
 Charging different
 Customer-segment
prices to different pricing
groups of
customers Degrees of price
 Product-form pricing
discrimination
 Image pricing
 1st Degree: Intensity of
the DEMAND  Channel pricing
 2nd
Degree: As per  Location pricing
VOLUME
 Time pricing
 3rd Degree: As per the
CLASS of the buyer  Yield pricing
Legal Aspects and Ethics of Pricing Price Changes
Reasons for price cuts

• Excess plant capacity
• Dominate market through lower price
• To increase market share
• Recession
Reasons for price increases

• Cost inflation and expected inflation
• Overdemand
• Shortage of supply
8
2/17/2018
Buyer Reactions to Pricing Changes Traps in Price Cutting Strategies
Price increases Price cuts

 Low-quality trap
• Product is “hot” • New models will be  Fragile-market-share trap
• Company is greedy available
• Models are not selling  Shallow-pocket trap
well
• Quality issues  Price-war trap
• Price cut is imminent
• Financial trouble
Ways to Increase Price Indirect Ways to Increase Price
 Product amount shrinkage

 Substituting the expensive inputs
 Delayed quotation pricing by low ones
 Escalator clauses  Reducing or removing product or
service features
 Unbundling
 Using less expensive packaging
 Reduction of discounts
 Reducing the number of sizes and
models of product
 Creating new economy brands
Responding to Price Changes Responding to Price Changes
Questions Solutions
 Why did the competitor change the price? • Reduce price to match competition
 Is the price cut permanent or temporary? • Maintain price but raise the perceived value
through communications
 What is the effect on market share and profits?
• Improve quality and increase price
 Will competitors respond?
• Launch a lower-price “fighting” brand
9
2/17/2018
Responding to Price Changes
Copyright © 2018 Pearson Education, Inc. Publishing as Prentice Hall 16-55
10

Ch-16 Pricing Strategies and Programs PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ch-16 Pricing Strategies and Programs PDF

Uploaded by

Copyright:

Available Formats

2/17/2018

 Pricing decisions are  Must be consistent with  Not just a # on a tag

Pricing in a Digital World Pricing in a Digital World

Check prices at the POP

A Changing Pricing Environment Common Pricing Mistakes

 Great recession  Access to credit

How Companies Price Consumer Psychology and Pricing

 Economists assume  Marketers assume

When very important Special case

Consumer Psychology and Pricing Some Reference Prices

Last price paid

$299.99 Competitor prices

Expected future price

A Black T-Shirt New-Product Pricing Strategies

“A Black T-Shirt” example illustrates the large part

Market-skimming Pricing Market-penetration Pricing

• Quality and image must support

Steps in Setting Price Step-1: Selecting the Pricing Objective

Step 2: Determining Demand Step 2: Determining Demand

• There are few or no  Estimating demand

Step 3: Estimating Costs Types of costs

Accumulated Production Target Costing

Step 4: Analyzing Competitors‟ Costs,

• Customers‟ demand schedule

Step 5: Selecting a Pricing Method Markup or Cost Plus Pricing

Markup or Cost Plus Pricing Target-Return Pricing

Break-Even Chart Determining Target-Return

Customer’s perceived value

 Product performance $$$

Perceived Value Determination Methods Three Types of Buyers

 Managerial judgments They place importance on different elements

Value Pricing Going Rate Pricing

Auction-Type Pricing Step 6: Selecting the Final Price

English auction Impact on other parties

Adapting the Price Geographical Pricing

Geographical Pricing Methods Price Discounts and Allowances

Promotional Pricing Promotional Pricing: A „Zero-sum Game‟

 Loss-leader pricing If they work,

Differentiated Pricing Basis of Price Discrimination

Legal Aspects and Ethics of Pricing Price Changes

Reasons for price cuts

Reasons for price increases

Buyer Reactions to Pricing Changes Traps in Price Cutting Strategies

Price increases Price cuts

Ways to Increase Price Indirect Ways to Increase Price

 Product amount shrinkage

Responding to Price Changes Responding to Price Changes

Responding to Price Changes

Copyright © 2018 Pearson Education, Inc. Publishing as Prentice Hall 16-55

You might also like