DEVELOPING PRICING STRATEGIES AND PROGRAMS

LEARNING OBJECTIVES
In this chapter, we will address the following 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 and how should a company initiate a price change?
5. How should a company respond to a competitor’s price change?

DETAILED CHAPTER OUTLINE

Quick background of our Report

Price is the one element of the marketing mix that produces revenue; the other elements
produce costs. Price also communicates the company’s intended value positioning of its
product or brand. A well-designed and marketed product can still command a price
premium and reap big profits. But new economic realities have caused many consumers
to reevaluate what they are willing to pay for products and services, and companies have
had to carefully review their pricing strategies as a result.

Pricing decisions are complex and must take into account many factors—the company,
the customers, the competition, and the marketing environment.

The first topic entitle “Understanding Pricing” will be discussed by Mr. Pinpin.

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 Setting the Price

A firm must set a price for the first time when it develops a new product,
introduces its regular product into a new distribution channel or geographical
area, and enters bids on new contract work. The firm must decide where to
position its product on quality and price.

When setting the price of a new product, marketers must consider the
competition’s prices, estimated consumer demand, costs, and expenses, as well as
the firm’s pricing objectives and strategies.

Here are the steps on how to set a price products:

Steps in Setting a Pricing Policy

1. Selecting the Pricing Objective

The company first decides where it wants to position its market offering. The
clearer a firm’s objectives, the easier it is to set price.
Five major objectives are:
 Survival - Companies pursue survival as their major objective if they are
plagued with overcapacity, intense competition, or changing consumer
wants.
As long as prices cover variable costs and some fixed costs, the
company stays in business.
Survival is a short-run objective; in the long run, the firm must learn
how to add value or face extinction.
 Maximum current profit- Many companies try to set a price that will
MAXIMIZE CURRENT PROFITS.
They estimate the demand and costs associated with alternative prices
and choose the price that produces maximum current profit, cash flow,
rate of return on investment.
This strategy assumes that the firm has knowledge of its demand and
cost functions; these are difficult to estimate.
In focusing current performance the company may ignore the effects
of other marketing mix variables, competitors, and legal restraints on
price.
is where companies with weak competition set a high price that
produces the most cash flow or return on investment.
 Maximum market share – Some companies want maximize their market
share so that the higher sales volume will lead to lower units costs and
higher long run profit.
They believe a higher sales volume will lead to lower unit costs and
higher long-run profit, so they set the lowest price, assuming the
market is price sensitive.
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  Maximum market skimming
Companies unveiling a new technology favour setting high prices to
maximize market skimming.
- a pricing approach in which the producer sets a high introductory
price to attract buyers with a strong desire for the product and the
resources to buy it, and then gradually reduces the price to attract the
next and subsequent layers of the market.
 Product-quality leadership- is where a company aims to provide the best
quality product in the market, and therefore charges more than its
competitors.

2. Determining Demand
Each price will lead to a different level of demand and have a different
impact on a company’s marketing objectives.
The normally inverse relationship between price and demand is captured in
a demand curve. The higher the price, the lower the demand
In able for the marketer to determine the demand he/she mush consider the
following:

A. Price sensitivity
estimating demand is to understand what affects price sensitivity.
Price sensitivity is a measurement of how much the price of goods
and services affects customers’ willingness to buy them.
The price is the controlling factor whether or not to buy a good or
service.

Generally speaking, customers are less price-sensitive to low-cost

items or items they buy infrequently.
The market is 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.

B. Demand Curve
Most companies attempt to measure their demand curves using several
different methods.
 Surveys - can explore how many units’ consumers would buy at

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 different proposed prices. Although consumers might understate
their purchase intentions at higher prices to discourage the
company from pricing high, they also tend to actually exaggerate
their willingness to pay for new products or services.
 Price experiments - can vary the prices of different products in a
store or of the same product in similar territories to see how the
change affects sales.
 Statistical analysis - of past prices, quantities sold, and other
factors can reveal their relationships.

C. Price Elasticity of Demand

Is a measurement of the change in consumption of a product in
relation to a change in its price.
 A good is elastic if a price change causes a substantial change
in demand or supply.

 A good is inelastic if a price change does not cause demand

or supply to change very much.

For example, if the price of a name-brand microwave increases

20% and consumer purchases of this product subsequently drop
by 25%, the microwave has a price elasticity of demand of 25%
divided by 20%, or 1.25.
This product would be considered highly elastic because it has a
score higher than 1, meaning the demand is greatly influenced
by the price change.
The next step will be discussed by Ms. Urieta.

3. Estimating Costs
Demand sets a ceiling on the price the company can charge for its product.
Costs set the floor. The company wants to charge a price that covers its cost o
producing, distributing, and selling the product, including a fair return for its
effort and risk.
For determine the price of product company should estimate the cost of
product.
 Fixed costs, also known as overhead, are costs that do not vary
with production level or sales revenue.
A company must pay bills each month for rent, heat, interest,
salaries, and so on, regardless of output.
 Variable costs vary directly with the level of production. A
variable cost is a corporate expense that changes in proportion to
how much a company produces or sells. Variable costs increase or
decrease depending on a company's production or sales volume.

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 Examples of variable costs include a manufacturing company's
costs of raw materials and packaging—or a retail company's credit
card transaction fees or shipping expenses.
 Total costs - sums of all expenses paid to produce a product (Fixed
Cost + Variable Cost)
 Average cost - the per-unit cost of production obtained by dividing
the total cost (TC) by the total output (Q). By per unit cost of
production, we mean that all the fixed and variable cost is taken
into the consideration for calculating the average cost.

4. Analyzing Competitors’ Costs, Prices, and Offers

The firm should benchmark its price against competitors, learn about the
quality of competitors offering, & learn about competitor’s costs.

Companies offering the powerful combination of low price and high

quality are capturing the hearts and wallets of consumers all over the world

If the competitor’s offer contains some features not offered by the firm, the
firm should subtract their value from its own price.

5. Selecting a Pricing Method

A. Steps in Setting a Pricing Policy: Step Five—Selecting a Pricing Method

i. Costs set a floor to the price.
ii. Competitors’ prices and the price of substitutes provide an orienting
point.
iii. Customers’ assessment of unique features establishes the price ceiling.
iv. Price-setting methods: markup pricing, target-return pricing,
perceived-value pricing, value pricing, EDLP, going-rate pricing, and
auction-type pricing.

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