Developing Pricing

Strategies and Programs

CHAPTER 13
Chapter Questions
How do consumers process and evaluate prices?
How should a company set prices initially for
products or services?
How should a company adapt prices to meet
varying circumstances and opportunities?
When should a company initiate a price change?
How should a company respond to a competitor’s
price challenge?
Changing price environment
Get instant price comparisons
Name their price and have it met.
Get products free.
Common Pricing Mistakes
Determine costs and take traditional industry margins
Failure to revise price to capitalize on market changes
Setting price independently of the rest of the
marketing mix
Failure to vary price by product item, market
segment, distribution channels, and purchase occasion
Consumer Psychology
and Pricing
Reference Prices

Price-quality inferences

Price endings
Possible Consumer Reference Prices

“Fair price” Lower-bound price

Typical price Competitor prices
Last price paid Expected future price
Upper-bound price Usual discounted price
Price Cues
“Left to right” pricing ($299 vs. $300)
Odd number discount perceptions
Even number value perceptions
Ending prices with 0 or 5
“Sale” written next to price
 When to Use Price Cues
Customers purchase
item infrequently
Customers are new
Product designs vary
over time
Prices vary seasonally
Quality or sizes vary
across stores

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-8

Steps in Setting Price
Select the price objective

Determine demand

Estimate costs

Analyze competitor price mix

Select pricing method

Select final price

Step 1: Selecting the Pricing Objective

Survival
Maximum current
profit
Maximum market
share
Maximum market
skimming
Product-quality
leadership

14-10
Step 2: Determining Demand

Price Sensitivity

Estimating
Demand Curves

Price Elasticity
of Demand

14-11
Price sensitivity
Reactions of the customer to the increase or decrease in prices
The customers are less price sensitive-
1. There are few or n substitutes or competitors
2. They do not readily notice the higher price
3. They are slow to change their buying habits
4. Hey think the higher price are justified
5. Price is only a small part of the total cost of obtaining,
operating and servicing the product
Factors Leading to Less Price Sensitivity
The product is more distinctive
Buyers are less aware of substitutes
Buyers cannot easily compare the quality of substitutes
The expenditure is a smaller part of buyer’s total income
The expenditure is small compared to the total cost of the end
product
Part of the cost is paid by another party
The product is used with previously purchased assets
The product is assumed to have high quality and prestige
Buyers cannot store the product

14
Inelastic and Elastic Demand
Estimating demand curves

Surveys:- Can explore how many units consumers would buy at

different proposed prices.
Price experiments :- vary the prices of different products in a
store or charge different prices for the same product in similar
territories to see how the change effects sales.
Statistical analysis:- of past prices, quantities sold, and other
factors can reveal their relationships.
Step 3: Estimating Costs

Types of Costs

Accumulated
Production
Activity-Based
Cost Accounting

Target Costing
Cost Terms and Production
Fixed costs
Variable costs
Total costs
Average cost
Cost at different
levels of
production

14-17
 Step 4: Analyzing competitor’s costs,prices,and offers

The firm should first consider the nearest competitors price

If the firm offer contains features not offered by the competitors,
it shd evaluate their worth and add to the price of the product and
vice versa

The introduction of any price or the change of any existing price

can provoker a response from
customers,competitors,distributors,suppliers and even govt.
Step 5: Selecting a Pricing Method

Markup pricing
Target-return pricing
Perceived-value pricing
Value pricing
Going-rate pricing
Auction-type pricing

14-19
 Step 5: Selecting a Pricing Method

 Markup pricing- to add a standard mark up to the product's cost

 Target return pricing- the firm determines the price that would yield its target
rate of ROI
 Perceived value pricing- perceived value is made up of several elements
such as buyers image of the product performance, channel deliverables, the
warranty,quality,support and other softer attributes such as suppliers
reputation, trustworthiness and esteem.
 Value pricing- value pricing is a pricing wherein charging a fairly low price
for a high quality offering. it is not a matter of simply setting low price but re-
engineering the company’s operations to become a low cost producer
sacrificing quality, to attract a larger number.
 Going rate pricing-the firms bases its price on competitors pricing, change it
more or less.
 Auction type pricing- modern web sites
Step 6: Selecting the Final Price
Impact of other
marketing activities
Company pricing
policies
Gain-and-risk sharing
pricing
Impact of price on other
parties

14-21
 Adapting the price
Companies do not seta single price but rater develop a
pricing structure that reflects variations in
geographical demand and costs,
mkt segment requirements,
purchasing timing,
order levels,
delivery frequency,
Guarantees
Service contracts
Price-Adaptation Strategies

Geographical Pricing

Discounts/Allowances

Promotional Pricing

Differentiated Pricing
Price-Adaptation Strategies
Discounts/ Allowances
Countertrade Cash discount
Barter Quantity discount
Compensation deal Functional discount
Buyback arrangement Seasonal discount
Offset Allowance
Promotional Pricing Tactics
Loss-leader pricing
Special-event pricing
Cash rebates
Low-interest financing
Longer payment terms
Warranties and service
contracts
Psychological discounting

14-25
Differentiated Pricing
Customer-segment
pricing
Product-form pricing
Image pricing
Channel pricing
Location pricing
Time pricing
Yield pricing
Predatory pricing

14-26
Initiating and responding to price changes
Several circumstances lead a firm to cut prices
1. Excess capacity of the plant
2. Firm needs additional business and cannot generate it
through increased sales effort
3. Product improvement

Initiating price cuts

Low quality trap
Fragile market share trap
Shallow pocket trap
Price war trap
Increasing Prices

Delayed quotation pricing

Escalator clauses

Unbundling

Reduction of discounts
 Alternative approaches that will allow them
to avoid increasing prices
Shrinking the amount of product instead of raising the
prices.
Substituting less expensive materials or ingredients
Reducing or removing product features
Reducing or removing product services
Using less expensive packaging materials or larger package
sizes
Reducing the number of sizes and models offered
Creating new economy brands.’