STEP 4: ANALYZING COMPETITORS' COSTS, PRICES, AND OFFERS

 Within the range of possible prices determined by market demand and

company costs, the firm must take into account its competitors' costs,
prices, and possible price reactions. If the firm's offer is similar to a
major competitor's offer, then the firm will have to price close to the
competitor or lose sales.
STEP 5: SELECTING A PRICING METHOD
1. Markup Pricing- The most elementary pricing method is to add a standard
markup to the product's cost. Construction companies submit job bids by
estimating the total project cost and adding a standard markup for profit.
Lawyers and accountants typically price by adding a standard markup on their
time and costs.
2. Target-Return Pricing- A pricing method in which a formula is used to
calculate the price to be set for a product to return a desired profit or rate of
return on investment assuming that a particular quantity of the product is sold.
The firm determines the price that would yield its target rate of return on
investment (ROI). Target pricing is used by General Motors, which prices its
automobiles to achieve a 15 to 20 percent ROI. This method is also used by
public utilities, which need to make a fair return on investment.
3. Perceived-Value Pricing- Is that value which customers are willing to pay for a
particular product or service based on their perception about the product. ...
Description: Perceived value pricing is an important marketing strategy which helps
firms to price a particular product in the markets
An increasing number of companies now base their price on the customer's
perceived value. They must deliver the value promised by their value proposition, and
the customer must perceive this value. They use the other marketing-mix elements,
such as advertising and sales force, to communicate and enhance perceived value in
buyers' minds. Perceived value is made up of several elements, such as the buyer's
image of the product performance, the channel deliverables, the warranty quality,
customer support, and softer attributes such as the supplier's reputation,
trustworthiness, and esteem. Furthermore, each potential customer places different
weights on these different elements, with the result that some will be price buyers,
others will be value buyers, and still others will be loyal buyers. Companies need
different strategies for these three groups. For price buyers, companies need to offer
stripped-down products and reduced services. For value buyers, companies must
keep innovating new value and aggressively reaffirming their value. For loyal
buyers, companies must invest in relationship building and customer intimacy.
4. Value Pricing
In recent years, several companies have adopted value pricing: They win
loyal customers by charging a fairly low price for a high-quality offering. Among
the best practitioners of value pricing are IKEA and Southwest Airlines. In the early
1990s, Procter & Gamble created quite a stir when it reduced prices on supermarket
staples such as Pampers and Luvs diapers, liquid Tide detergent, and Folger's coffee
to value price them. In the past, a brand-loyal family had to pay what amounted to a
$725 premium for a year's worth of P&G products versus private-label or low-
priced brands. To offer value prices, P&G underwent a major overhaul. It
redesigned the way it developed, manufactured, distributed, priced, marketed, and
sold products to deliver better value at every point in the supply chain.Value pricing
is not a matter of simply setting lower prices; it is a matter of reengineering the
company's operations to become a low-cost producer without sacrificing quality,
and lowering prices significantly to attract a large number of value-conscious
customers.An important type of value pricing is everyday low pricing (EDLP),
which takes place at the retail level. A retailer who holds to an EDLP pricing policy
charges a constant low price with little or no price promotions and special sales.
These constant prices eliminate week-to-week price uncertainty and can be
contrasted to the "high-low" pricing of promotion-oriented competitors. In high-low
pricing, the retailer charges higher prices on an everyday basis but then runs
frequent promotions in which prices are temporarily lowered below the EDLP
level.43 The two different pricing strategies have been shown to affect consumer
price judgments—deep discounts (EDLP) can lead to lower perceived prices by
consumers over time than frequent, shallow discounts (high-low), even if the actual
averages are the same. The most important reason retailers adopt EDLP is that
constant sales and promotions are costly and have eroded consumer confidence in
the credibility of everyday shelf prices. Consumers also have less time and patience
for such time-honored traditions as watching for supermarket specials and clipping
coupons. Yet, there is no denying that promotions create excitement and draw
shoppers. For this reason, EDLP is not a guarantee of success. As supermarkets face
heightened competition from their counterparts and from alternative channels, many
find that the key to drawing shoppers is using a combination of high-low and
everyday low pricing strategies, with increased advertising and promotions.
5. Going-Rate Pricing- In going-rate pricing, the firm bases its price largely on
competitors' prices. The firm might charge the same, more, or less than major
competitor(s).
In oligopolistic industries that sell a commodity such as steel, paper, or fertilizer,
firms normally charge the same price. The smaller firms "follow the leader,"
changing their prices when the market leader's prices change rather than when their
own demand or costs change. Some firms may charge a slight premium or slight
discount, but they preserve the amount of difference. Thus minor gasoline retailers
usually charge a few cents less per gallon than the major oil companies, without
letting the difference increase or decrease.Going-rate pricing is quite popular.
Where costs are difficult to measure or competitive response is uncertain, firms feel
that the going price is a good solution because it is thought to reflect the industry's
collective wisdom.
6. Auction-Type Pricing- this type of pricing method is growing popular where it
is a process of buying and selling goods by offering them up for bid, taking
bids, and then selling the item to the highest bidder.
Is growing more popular, especially with the growth of the Internet. There are over
2,000 electronic marketplaces selling everything from pigs to used vehicles to cargo
to chemicals. One major purpose of auctions is to dispose of excess inventories or
used goods
This type of pricing method is growing popular with the more usage of internet.
Several online sites such as eBay, Quikr, OLX, etc. provides a platform to
customers where they buy or sell the commodities.
Companies need to be aware of the Three major types of auctions and
their separate pricing procedures.
 English auctions (ascending bids). One seller and many buyers.
On sites such as Yahoo! and eBay, the seller puts up an item and
bidders raise the offer price until the top price is reached. English
auctions are being used today for selling antiques, cattle, real
estate, and used equipment and vehicles.
  Dutch auctions (descending bids). One seller and many buyers,
or one buyer and many sellers. In the first kind, an auctioneer
announces a high price for a product and then slowly decreases the
price until a bidder accepts the price. In the other, the buyer
announces something that he wants to buy and then potential
sellers compete to get the sale by offering the lowest price. Each
seller sees what the last bid is and decides whether to go lower.
 Sealed-bid auctions- is a type of auction process in which all
bidders simultaneously submit sealed bids to the auctioneer so that
no bidder knows how much the other auction participants have bid.
The highest bidder is usually declared the winner of the bidding
process.
Would-be suppliers can submit only one bid and cannot know the other
bids. The U.S. government often uses this method to procure supplies.
A supplier will not bid below its cost but cannot bid too high for fear of
losing the job. The net effect of these two pulls can be described in
terms of the bid's expected profit. Using expected profit for setting
price makes sense for the seller that makes many bids. The seller who
bids only occasionally or who needs a particular contract badly will not
find it advantageous to use expected profit. This criterion does not
distinguish between a $1,000 profit with a 0.10 probability and a $125
profit with a 0.80 probability. Yet the firm that wants to keep
production going would prefer the second contract to the first.
STEP 6: SELECTING THE FINAL PRICE
 Pricing methods narrow the range from which the company must
select its final price. In selecting that price, the company must
consider additional factors, including the impact of other marketing
activities, company pricing policies, gain-and-risk-sharing pricing,
and the impact of price on other parties.
1. Impact Of Other Marketing Activities The final price must take into account
the brand's quality and advertising relative to the competition. In a classic study,
Farris and Reibstein examined the relationships among relative price, relative
quality, and relative advertising for 227 consumer businesses, and found the
following:
 Brands with average relative quality but high relative advertising budgets
were able to charge premium prices. Consumers apparently were willing
to pay higher prices for known products than for unknown products.
 Brands with high relative quality and high relative advertising obtained
the highest prices. Conversely, brands with low quality and low
advertising charged the lowest prices.
 The positive relationship between high prices and high advertising held
most strongly in the later stages of the product life cycle for market
leaders.
These findings suggest that price is not as important as quality and other benefits in
the market offering. One study asked consumers to rate the importance of price and
other attributes in using online retailing. Only 19 percent cared about price; far more
cared about customer support (65 percent), on-time delivery (58 percent), and product
shipping and handling (49 percent).
2. Company Pricing Policies- it is a company's approach to determining the price
at which it offers a good or service to the market. Pricing policies help companies
make sure they remain profitable and give them the flexibility to price separate
products differently. Your company might value having a well-defined pricing
policy so it can make price adjustments quickly and take advantage of
products' strengths in one or more markets.
the price must be consistent with company pricing policies. At the same time,
companies are not averse to establishing pricing penalties under certain
circumstances.
Airlines charge $150 to those who change their reservations on discount
tickets.
Banks charge fees for too many withdrawals in a month or for early
withdrawal of a certificate of deposit.
Car rental companies charge $50 to $100 penalties for no-shows for specialty
vehicles. Although these policies are often justifiable, they must be used judiciously
so as not to unnecessarily alienate customers.
Many companies set up a pricing department to develop policies and establish or
approve decisions. The aim is to ensure that salespeople quote prices that are
reasonable to customers and profitable to the company.
3. Gain-And-Risk-Sharing Pricing- This type of pricing is used for pricing
complex, high valued products or services. Many times buyers refrain from
accepting sellers proposal due to the high risk if the promised value is not
delivered. Buyers may resist accepting a seller's proposal because of a high
perceived level of risk. The seller has the option of offering to absorb part or all
of the risk if it does not deliver the full promised value.
4. Impact Of Price On Other Parties Management must also consider the
reactions of other parties to the contemplated price. How will distributors and
dealers feel about it? If they do not make enough profit, they may not choose to
bring the product to market. Will the sales force be willing to sell at that price?
How will competitors react? Will suppliers raise their prices when they see the
company's price? Will the government intervene and prevent this price from
being charged?

Marketers need to know the laws regulating pricing. U.S. legislation states that sellers
must set prices without talking to competitors: Price-fixing is illegal. Many federal
and state statutes protect consumers against deceptive pricing practices. For example,
it is illegal for a company to set artificially high "regular" prices, then announce a
"sale" at prices close to previous everyday prices.