CH 16 S Pricing Strategies and Programs

8/1/2020
Marketing Mix
1
16
Developing Pricing
Strategies and
Programs
16/e Copyright © 2020 Pearson Education, Inc. Publishing as Prentice Hall 16-2
Definition of Price Pricing
• Pricing decisions are complex and must take

• The sum of all the values that customers into account:
give up to gain the benefits of a having a ̶ The three Cs
product ̶ The marketing environment
̶ It is NOT the amount of money charged for a
product • Pricing decision must be consistent with
̶ Marketing strategy
̶ Target markets
̶ Brand positions
Copyright © 2020 Pearson Education, Inc. Publishing as Prentice Hall 16-3 Copyright © 2020 Pearson Education, Inc. Publishing as Prentice Hall 16-4
Common Pricing Mistakes Consumer Psychology and Pricing
• Economists’ view • Marketers’ view

• Follow cost-based pricing consumers are price consumers process price
takers who accept the info, interpreting it from
• Failure to vary price to capitalize on market price at face value the context of
changes
− Prior buying experience
• Setting price independently Purchase decisions are − Formal or informal
based on how consumers communications
• Failure to vary price for different products, perceive prices and what
− POP or online resources
they consider the current
market segments, distribution channels actual price to be
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Consumer Psychology and Pricing Some Reference Prices

―Fair price‖
Reference prices are the prices
that buyers carry in minds and Typical price
refer to when looking at a given
product Last price paid
Price-Quality Inferences
Upper-bound price
Lower-bound price
$299.99 Competitor prices
Reference Prices
$290 Price Endings Expected future price
Usual discounted price

A Black T-Shirt Major Pricing Strategies
―A Black T-Shirt‖ example illustrates the large part

consumer psychology in determining three different • Customer value-based pricing— Setting prices
prices for essentially the same item based on buyers’ perceptions of value rather than on
the seller’s cost
Armani - $275 • Cost-based pricing— Setting prices based on the

costs of producing, distributing, and selling the
product plus a fair rate of return for effort & risk
• Competition-based pricing— Setting price based

Gap - $14.90 on competitors’ strategies, prices, costs, and
offerings
H&M - $7.90
New-Product Pricing Strategies Steps in Setting Price
6 Select Final Price

• Market-penetration pricing— setting a initial low
price to penetrate the market quickly and deeply, 5 Price Method
attract a large number of buyers quickly, and gain
market share 4 Competitor Analysis
• Market-skimming pricing — setting a high initial 3 Estimate Costs
price to ―skim‖ revenue layers from the market
and then lower it 2 Determine Demand
1 Pricing Objective
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Step-1: Selecting the Pricing Objective Step 2: Determining Demand

• Survival
Price sensitivity— quantity
• Maximum Current Profit
purchased at alternative prices
• Maximum Market Share
• Maximum Market Skimming Estimating demand curves—
• Product-Quality Leadership how responsive or elastic
• Other Objectives demand would be to a change in
price
Price Elasticity of Demand—

elastic or inelastic
Step 2: Determining Demand Step 3: Estimating Costs

Demand Price Ceiling
Price
Price Floor
Fair return Profit
Costs
FC
VC
Types of costs Costs at Varying Levels of Production
Fixed Costs
(overhead) Variable Costs Total Costs
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Accumulated Production Experience Curve
Accumulated Production
Experience (Learning) Curve

refers to the decline in the average
cost with accumulated production
experience.
Cost per Unit as a Function of Accumulated Production
Step 4: Analyzing Competitors’ Costs,

Target Costing
Prices, and Offers
Design engineers
Prices Offers
Costs Reactions
Target costing helps achieve Market research establishes

cost target with concentrated a new product’s desired
effort of designers, engineers, functions and the price at
and purchasing agents which it will sell Worth to Customer
Step 5: Selecting a Pricing Method Step 5: Selecting a Pricing Method
• Markup (Cost Plus) Pricing
• Target-return Pricing
3 Major Considerations: • Perceived-value Pricing

• Customers’ demand schedule
• Cost function • Value Pricing
• Competitors’ prices
• Going-rate Pricing
• Auction-type Pricing
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Markup (Cost Plus) Pricing Target-Return Pricing

Adds a standard markup to the cost of the product The firm determines the price that yields its target rate
of return on investment
Target-Return Pricing Perceived Value Pricing
Perceived value is made up of:
• Product performance $$$
• Channel deliverables $
• Warranty $
• Customer support $
• Supplier’s reputation $$
FC $300,000
BEV    30,000(units )
Price - VC $20 - $10
Value Pricing Going Rate Pricing

Charge a fairly low price as a low-cost producer Charge a price based on competitors’
achieved through reengineering operations, without prices
sacrificing quality, and thus winning loyal
• Collective wisdom of the industry
customers
• Ignoring costs and demand
Follow the leader Commodities
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Auction-Type Pricing Step 6: Selecting the Final Price
English auction Impact on other marketing

(ascending bids) activities
Company Pricing Policies Impact on other parties
Dutch auction
(descending bids) Brand
Quality
Gain-and-risk-sharing
Sealed-bid auction
Adapting the Price Geographical Pricing

Geographical Pricing Adjusting prices to account for the geographic
location of customers
Price Discounts and • Forms of countertrade (15%-20%)

Allowances
 Barter—direct exchange of goods
 Compensation deal—payment of products and cash (UK
Aircraft vs. Brazil: 70% cash and 30% coffee)
Differentiated Pricing  Buyback arrangement—payment in form of products
manufactured by the supplied equipment and cash
 Offset—receive payment in cash but agrees to spend
some of the money in the products of that country
(PepsiCo)
Promotional Pricing
Geographical Pricing Methods Price Discounts and Allowances

• FOB-origin–the buyer pays the • Zone pricing– customers
freight from the factory to the in different zones pay for • Cash discount— discount given to buyers who pay
destination different prices promptly
• FOB-port– the seller pays the • Basing-point pricing– the • Quaintly discount— discount given for large volume
freight from the factory to the seller charges all purchase
port of shipment plus loading customers a base price
cost plus the freight cost from • Functional discount/ trade discount— discount given
that city to the customer to channel members
• FOB-destination– the seller
pays the freight from the factory location • Seasonal discount— discount given to out-of-season
to buyer’s unloading dock buyers
• Freight-absorption
• Uniform-delivered pricing– the pricing– the seller • Allowance— an extra payment designed to gain
seller charges the same price absorbs all or part of the reseller participation in special program (trade-in
plus freight to all customers, freight charges to get allowances & promotional allowances)
regardless of their location desired business
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Promotional Pricing Differentiated Pricing

Temporarily pricing products below the list price or A company sells a product at two or more prices
cost to increase demand even though the difference is not based on cost
• Loss-leader pricing • Customer-segment pricing

• Special-event pricing • Product-form pricing
• Special customer pricing Types of • Image pricing Types of
• Cash rebates Promotional Differentiated
• Channel pricing
• Low-interest financing Pricing Pricing
• Location pricing
• Longer payment terms
• Time pricing
• Warranties and service contracts
• Yield pricing
• Psychological discounting
Price Changes Buyer Reactions to Pricing Changes
Reasons for price cuts Price increases Price cuts

• Excess plant capacity
• Dominate market through lower price • Product is ―hot‖ • New models will be
• Company is greedy available
• To increase market share
• Models are not selling
• Recession well
Reasons for price increases • Quality issues
• Cost inflation and expected inflation • Price cut is imminent
• Overdemand • Financial trouble
• Shortage of supply
Traps in Price Cutting Strategies Increasing Prices
• Low-quality trap • Delayed quotation pricing

• Fragile-market-share trap • Escalator clauses
• Shallow-pocket trap • Unbundling
• Price-war trap • Reduction of discounts
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Indirectly Increasing Prices Responding to Price Changes
• Product amount shrinkage

• Substituting the expensive inputs by
Questions
low ones
• Why did the competitor change the price?
• Reducing or removing product or
service features • Is the price cut permanent or temporary?
• Using less expensive packaging • What is the effect on market share and profits?
• Reducing the number of sizes and • Will competitors respond?

models of product
• Creating new economy brands
Responding to Price Changes Responding to Price Changes
Solutions
• Reduce price to match competition
• Maintain price but raise the perceived value
through communications
• Improve quality and increase price
• Launch a lower-price ―fighting‖ brand

CH 16 S Pricing Strategies and Programs

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CH 16 S Pricing Strategies and Programs

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8/1/2020

Definition of Price Pricing

• Pricing decisions are complex and must take

Common Pricing Mistakes Consumer Psychology and Pricing

• Economists’ view • Marketers’ view

Consumer Psychology and Pricing Some Reference Prices

Usual discounted price

A Black T-Shirt Major Pricing Strategies

―A Black T-Shirt‖ example illustrates the large part

Armani - $275 • Cost-based pricing— Setting prices based on the

• Competition-based pricing— Setting price based

New-Product Pricing Strategies Steps in Setting Price

6 Select Final Price

Step-1: Selecting the Pricing Objective Step 2: Determining Demand

Price Elasticity of Demand—

Step 2: Determining Demand Step 3: Estimating Costs

Types of costs Costs at Varying Levels of Production

Accumulated Production Experience Curve

Experience (Learning) Curve

Cost per Unit as a Function of Accumulated Production

Step 4: Analyzing Competitors’ Costs,

Target costing helps achieve Market research establishes

Step 5: Selecting a Pricing Method Step 5: Selecting a Pricing Method

• Markup (Cost Plus) Pricing

3 Major Considerations: • Perceived-value Pricing

Markup (Cost Plus) Pricing Target-Return Pricing

Target-Return Pricing Perceived Value Pricing

Perceived value is made up of:

• Product performance $$$

Value Pricing Going Rate Pricing

Follow the leader Commodities

Auction-Type Pricing Step 6: Selecting the Final Price

English auction Impact on other marketing

Company Pricing Policies Impact on other parties

Adapting the Price Geographical Pricing

Price Discounts and • Forms of countertrade (15%-20%)

Geographical Pricing Methods Price Discounts and Allowances

Promotional Pricing Differentiated Pricing

• Loss-leader pricing • Customer-segment pricing

Price Changes Buyer Reactions to Pricing Changes

Reasons for price cuts Price increases Price cuts

Traps in Price Cutting Strategies Increasing Prices

• Low-quality trap • Delayed quotation pricing

Indirectly Increasing Prices Responding to Price Changes

• Product amount shrinkage

• Reducing the number of sizes and • Will competitors respond?

Responding to Price Changes Responding to Price Changes

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