PRICING STRATEGY
Module 4 – Pricing and Costing
Midterm Examination
VALUE COMMUNICATION
● Value communication can have a great
effect on sales and price realization when
your product or service creates value
that is not otherwise obvious to potential
buyers.
ADAPTING THE MESSAGE FOR PRODUCT
CHARACTERISTICS
● Product characteristics that influence
buyer perceptions of key value drivers:
○ Relative costs for information of the
buyer.
○ Type of benefits sought— monetary
or psychological.
ADAPTING THE MESSAGE FOR PRODUCT
CHARACTERISTICS
★ Relative cost of search – is the financial
and nonfinancial cost, relative to the
expenditure in the category, that a
customer must incur to determine
differences in features and benefits
across alternatives.
○ Search goods
○ Experience goods
● Value-based communications must not
only be adjusted for product
characteristics such as cost of search
and benefit type, but also for the
customer’s purchase context.
● Consider how the message would have
to be adjusted depending on the
specifics of the purchase context.
THE BUYING PROCESS
● Awareness of need
● Search for more information
● Evaluation of alternatives
● Actual purchase decision
● Post-purchase contact with the firm
THE BUYING PROCESS: CUSTOMER
★ Origination – become aware of needs.
★ Information gathering – collects initial
product data to narrow down the choice
set.
★ Selection – gathers more detailed
information to make a choice based on
price and value.
★ Fulfillment – selects the distribution
channel from which to make purchases
and conducts transactions.
THE BUYING PROCESS: SELLER
★ Origination – encourage customers to
consider a purchase within the category.
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★ Information gathering – emphasize value
drivers for which the product has an
advantage.
★ Selection – create awareness of the
brand and its superiority in terms of the
most important value drivers.
★ Fulfillment – justify the price.
PRICE COMMUNICATION
● There are four aspects of price
perceptions that have implications for
price communications:
○ Proportional Price Evaluations
○ Reference Prices
○ Perceived Fairness
○ Gain-loss Framing
PROPORTIONAL PRICE EVALUATIONS
● Buyers tend to evaluate price differences
proportionally rather than in absolute
terms.
● Psychologists call this tendency the
Weber-Fechner effect.
● This can explain the appeal of “free”
services, which represent a 100%
reduction in price, over other lesser
discounts that have the same or even
greater value.
REFERENCE PRICES
★ Reference price – is what a buyer
considers a reasonable and fair price for
a product.
● Marketers also influence reference prices
by suggesting potential reference points.
● Promotional deals such as coupons,
rebates, and special package sizes can
influence reference prices strategically.
PERCEIVED FAIRNESS
● Fairness is, as one would suspect,
subjective. However, because of this, it is
also more manageable than one might
think.
● Companies that frequently adjust prices
are careful to set the “regular” price at
the highest possible level, rather than at
the average or most common price.
GAIN-LOSS FRAMING
● To make prices less objectionable, make
their opportunity costs (forgone gains)
rather than out-of-pocket costs.
● When a product is priced differently to
different customers and at different
times, set the list price at the highest
level and give most people discounts.
● Unbundle gains and bundle losses.
PRICE PROMOTION
★ Price promotion – is a marketing
technique where the price of a product is
kept reduced for a short period to build
customer loyalty and swell sales volume,
and then increased later on.
MODEL OF COMMUNICATION BY
PROMOTIONAL DISCOUNTS
★ Source – intended message
★ Target actions – inducement (low price)
★ Reciever – received message
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● Positive effects of price promotions
○ Price segmentation
○ Market size and share
● Negative effects of price promotions
○ Imperfect segmentation hedge
○ Customer churn
○ Reference price effect
○ Loss of price credibility
PRICE PROMOTION DESIGN
● Targeted
● Temporary
● Special
● Irregular
POPULAR FORMS OF PROMOTION DESIGN
● Coupons
● Trial offers
● Rebates
● Promotional bundles
★ Coupons – documents that entitles the
holder to a reduced price or X cents off a
product or service.
● Purpose
○ Reduce a price to price-sensitive
customers who will spend the
effort to clip coupons.
○ Induce customer to try products
for ____
○ Convert first time users to ____
○ Encourage large purchases
○ Increase usage
○ Protect market share against
competitors
★ Trial offers
● Trial offers – are simple price
promotions that the seller uses to
induce trial of its product.
● Made in the form of free samples,
small packages priced significantly
lower, or leased services and
software as a service wherein the
cost to enter the market is greatly
reduced from the full, regular price.
★ Rebates – money returned to the
customer based on a portion of the
purchase price.
● Retailers’ perspective: more
advantageous than coupons since
they increase demand, but the
retailer has no handling costs.
● Manufacturers like rebates because:
○ Many customers don't redeem.
○ They can offer price cuts to
customers directly.
★ Promotional bundles
● Price bundling: practice of offering
two or more different products or
services at one price.
● Multiple-unit pricing: similar to price
bundling except products or services
are similar rather than different.
★ Early purchase discount – payment of
the services in advance or paid in full to
avail of the discount.
Example: booking hotel accommodation,
airline tickets, and paying the tuition in
full.
SUMMARY
● An effective pricing strategy depends on
more than just value.
● Buyers are also influenced by how that
value is presented and communicated
through the price.
● Most customers lack the time or the
incentive to fully inform themselves about
their alternatives.
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● If you want them to recognize your value,
you have to make the process easier for
them by supplying them with information
about your offer and what you think it
should mean to them.

● When communicating prices, you should

actively minimize customers’ adverse
feelings about paying it.

● By controlling price progressions,

reference prices, and perceptions of
fairness, you can reduce negative
reactions without reducing your margins.

● Price promotions are a form of price

segmentation in which prices are
reduced for those with a lower
willingness to pay and regular prices are
offered to those with a higher willingness
to pay.

● Price promotions generate increased

sales primarily through encouraging
brand switching and secondarily through
increasing the size of the market.

● In general, price promotions should strive

to be targeted toward marginal
customers. Other design criteria for price
promotions include a desire for them to
be temporary, special, and irregular.

● Price promotions take many forms,

including specially marked packages,
coupons, trial offers, trade deals,
promotional sales, discounts, promotional
bundles, and rebates. Each format of a
price promotion has its strengths and
weaknesses in targeting specific types of
customers and achieving different
marketing objectives.