Chapter Seven: Developing Pricing

Strategies and Programs

Discussion Questions
1. How do consumers process and evaluate prices?
2. How should a company set prices initially for
products or services?
3. How should a company adapt prices to meet
varying circumstances and opportunities?
4. When should a company initiate a price change?
5. How should a company respond to a
competitor’s price change?

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7.1 Understanding Pricing

Marketing Mix

Cost
Revenue
Product Price Producer

Cost Place Promotion Cost

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Pricing
• Price is not just a number on a tag.
• It comes in many forms and performs many
functions.
– Rent, tuition, fares, fees, rates, tolls, wages, and
commissions are all the price you pay for some
good or service.
• Price also has many components.
• If you buy a new car, the sticker price may be
adjusted by rebates and dealer incentives.

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 Pricing
•Throughout most of history, prices were set
by negotiation between buyers and sellers.
• Bargaining is still a sport in some areas.
•Setting one price for all buyers is a relatively
modern idea that arose with the
development of large-scale
$31.50 $33.50
retailing at the end of the
nineteenth century.

Bargaining
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 Changing Price Environment
Buyers

I’ll pay $235.00

Instant Price Comparisons

Get Products Free

Name Your Own Price

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 Changing Price Environment
Sellers $29.99 $19.99 $24.99

Selective Pricing

Negotiate Prices
Monitor Customers
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 How Companies Price ?
Product-line Managers
(with guidance)

Small Business Owner

Pricing Department
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Consumer Psychology and Pricing
Price-Quality Inferences

Reference Prices

Price Endings

$1.99

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A Black T-Shirt

Armani - $275

Gap - $14.90

H&M - $7.90
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 7.2 Setting the Price

6 Select Final Price

5 Price Method
4 Competitor Analysis
3 Estimate Costs
2 Determine Demand
1 Pricing Objective

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Step 1: Selecting the Pricing Objective

Survival
Maximum Current Profit
Maximum Market Share
Maximum Market Skimming
Product-Quality Leadership
Other Objectives

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 Step 2: Determining Demand

Price sensitivity
Estimating demand curves
Price Elasticity of Demand

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 Cont.…
• The demand curve sums the reactions of many
individuals with different price sensitivities.

• Customers are less price sensitive to low-cost items

or items they buy infrequently. They are also less
price sensitive when:
1) there are few or no substitutes or competitors;
2) they do not readily notice the higher price;
3) they are slow to change their buying habits;
4) they think the higher prices are justified; and
5) price is only a small part of the total cost of
obtaining, operating, and servicing the product
over its lifetime.
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Cont.…
• Firms estimate demand curves using: surveys, price experiments,
and statistical analysis.
• Marketers need to know how responsive, or elastic, demand is to a
change in price. Research findings show that:
1) The average price elasticity across all products, markets, and time
periods studied was –2.62.
2) Price elasticity magnitudes were higher for durable goods than for
other goods, and higher for products in the introduction/growth
stages of the product life cycle than in the mature/decline stages.
3) Inflation led to substantially higher price elasticities, especially in
the short run.
4) Promotional price elasticities were higher than actual price
elasticities in the short run (although the reverse was true in the
long run).
5) Price elasticities were higher at the individual item or SKU level
than at the overall brand level.

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 Inelastic and Elastic Demand

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 Step 3: Estimating Costs

Demand Price Ceiling

Price

Profit Price Floor

Costs

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 Estimating Costs
Types of costs

Fixed Costs
Variable Costs Total Costs
(overhead)

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 Costs at Varying Levels of Production

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 Estimating Costs
Accumulated Production

Experience Curve
(Learning Curve)

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 The Experience Curve

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 Estimating Costs
Target Costing

Market research Design engineers

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Step 4: Analyzing Competitors’ Offers

Price

Costs Reaction

Worth to Customer
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Step 5: Selecting a Pricing Method

Pricing Methods
• Markup
• Target-return
• Perceived-Value
• Value
• Going-rate
• Auction-type
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 High Price
(No possible
demand at this price)

Ceiling price

Three Cs Customers’ assessment

of unique product

Model for features

Orienting point
Price Setting Competitors’ prices
and prices of
substitutes

Costs
Floor Price

Low Price
(No possible
profit at this price)
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 Markup Pricing

Variable cost per toaster $10

Fixed costs $300,000
Expected unit sales 50,000

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Target-Return Pricing

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 Target-Return Pricing

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Perceived-Value Pricing
Customer’s perceived-value

• Performance $$$
• Warranty $
• Customer support $
• Reputation $$

Caterpillar

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 Value Pricing
EDLP
THOUSANDS OF

LOW PRICES
Level of
Quality EVERY DAY
throughout the store

P1 C1 P2 C2 High
PricingLow
(via reengineering)

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 Going-Rate Pricing

Commodities

Follow the Leader

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Auction Pricing
English auction
(ascending bids)

Dutch auction
(descending bids)

Sealed-bid auction
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Step 6: Selecting the Final Price
Impact on others

Brand
Quality

Pricing Policies

Gain-and-risk-sharing
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 7.3 Adapting the Price

Geographic Pricing

Price Discounts
and Allowances

Differentiated Pricing

Promotional Pricing
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Cont...
Differentiated Pricing Promotional Pricing
•Customer-segment pricing • Loss-leader pricing
•Product-form pricing • Special event pricing
•Image pricing • Special customer pricing
•Channel pricing • Cash rebates
•Location pricing • Low-interest financing
•Time pricing • Longer payment terms
• Low cost warranties and
service contracts
• Psychological discounting

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Initiating and Responding to Price Changes
Raising Prices
•Cost Inflation
•Anticipatory Pricing
•Over demand

Cutting Prices
• Excess plant capacity
• To dominate the market
through lower costs.

Competitor Moves
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