14

Developing Pricing
Strategies and Programs

Marketing Management, 13th ed

 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?
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-2
 Synonyms for Price

• Rent • Special assessment

• Tuition • Bribe
• Fee • Dues
• Fare • Salary
• Rate • Commission
• Toll • Wage
• Premium • Tax
• Honorarium

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-3

 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

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-4

 Consumer Psychology
and Pricing
• Reference prices —comparing an observed
price to an internal reference price they
remember or to an external frame of
reference such as a posted “regular retail
price.”
• Price-quality inferences —use of price as
an indicator of quality
• Price endings —price ending in odd
numbers
• Price cues----sales signs
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-5
 Possible Consumer Reference Prices

• “Fair price” • Lower-bound price

• Typical price • Competitor prices
• Last price paid • Expected future
• Upper-bound price price
• Usual discounted
price

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-6

Consumer Perceptions vs. Reality for Cars

Overvalued Brands Undervalued Brands

• Land Rover • Mercury
• Kia • Infiniti
• Volkswagen • Buick
• Volvo • Lincoln
• Mercedes • Chrysler

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-7

 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

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

 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

14-9
 Steps in Setting Price
Select the price objective

Determine demand

Estimate costs

Analyze competitor price mix

Select pricing method

Select final price

14-10
Step 1: Selecting the Pricing Objective
• Survival—cover
variable and part of
fixed cost
• Maximum current
profit—rate of return
• Maximum market
share—penetration
pricing
• Maximum market
skimming—set high
price and slowly drop
over time
• Product-quality
leadership—
affordable luxuries
14-11
 Step 2: Determining Demand
• Price sensitivity—probable purchase quantity at
alternative prices
• Estimate demand curves
• Surveys—explore number of units consumers
would buy at different proposed prices
• Price experiments—vary prices of different
products in a store or charge different prices for the
same product in similar territories to see how the
change affects sales
• Statistical analysis—review of past prices,
quantities sold, and other factors can reveal their
relationships.
• Price elasticity of demand—how responsive, or
elastic, demand would be to a change in price
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-12
 Inelastic and Elastic Demand

14-13
 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

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

 Step 3: Estimating Costs

• Types of costs
• Accumulated production
• Activity-based cost accounting
• Target costing—effort by
designers, engineers, and
purchasing agents to reduce cost.

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-15

 Cost Terms and Production
• Fixed costs—cost that do
not vary with production
(overhead)
• Variable costs—vary with
level of production
• Total costs—sum of fixed
and variable costs
• Average cost —cost per
unit at that level of
production (total
costs/production)
• Cost at different levels
of production--
Experience or learning
14-16 curve
 Cost per Unit as a Function of
Accumulated Production

14-17
Step 5: Selecting a
Pricing Method
• Markup pricing
• Target-return
pricing
• Perceived-value
pricing
• Value pricing
• Going-rate pricing
• Auction-type
pricing
14-18
Objectives Should Guide Strategy Planning for
Price
Objectives Should Guide Strategy Planning for
Price
Objectives Should Guide Strategy Planning for
Price
Average Cost Pricing Is Common and Can Be
Dangerous
More Demand-Oriented Methods

Value-in-Use
Value-in-Use
Prestige
Prestige Auctions
Auctions

Demand-
Demand- Sequential
Sequential
Backward
Backward Types
Typesofof Reductions
Reductions
Demand-Oriented
Demand-Oriented
Price
Price Lining
Lining
Pricing
Pricing Reference
Reference

Odd-Even
Odd-Even Leader
Leader && Bait
Bait

Psychological
Psychological
 Break-Even Chart

14-24
 Auction-Type Pricing

English auctions
(ascending)

Dutch auctions
(descending)

Sealed-bid auctions

14-25
 Step 6: Selecting the Final
Price
• Impact of other marketing
activities—brand quality and
advertising relative to the
competition
• Company pricing policies—
premium, discount
• Gain-and-risk sharing pricing
—seller offering to absorb part or
all of the risk
• Impact of price on other parties
—reaction of other parties—
distributors, dealers, sales force,
competitors, suppliers.
Government may intervene and
prevent price from being charged
14-26
 Price-Adaptation Strategies
• Geographical pricing —
products priced to different
customers in different
locations and countries
• Discounts/allowances —
price reduction to buyers
• Promotional pricing
• Differentiated pricing

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-27

List Price May Depend on Geographic Pricing Policies

F.O.B.
F.O.B. Zone
Zone
seller
sellerpays
paystotohave
havethe
theproduct
product applying
applyingananaverage
averagefreight
F.O.B.
F.O.B.
loaded on a transportation
loaded on a transportation
vehicle at which time the title is
Zone
Zone
charge
freight
charge to all customersininthe
to all customers the
vehicle at which time the title is same
transferred samespecified
specifiedgeographic
geographic
transferredto
tothe
thebuyer
buyer area
area

Common
Common
Geographic
Geographic
Policies
Policies
Uniform
Uniform Delivered
Delivered
Freight
Freight Absorption
Absorption
company
companypays paysthe
thecost
costof
of Uniform
Uniform
charges
charges one
one price
price to
to
shipping
shipping without changingthe
without changing all
all buyers
buyers
price
priceininorder
orderto
toget
getthe
thesale
the
sale Delivered
Delivered
 Price-Adaptation Strategies
Countertrade
• Barter—buyer and seller directly
Discounts/ Allowances
exchange goods, with no money
and no third party involved
• Cash discount
• Compensation deal—seller
receives some % of the payment in
• Quantity discount
cash and the rest in products
• Buyback arrangement—seller
• Functional discount
sells a plant, equipment, or
technology to another country and
• Seasonal discount
agrees to accept as partial
payment products that are
• Allowance
manufactured with the supplied
equipment
• Offset—seller receives full
payment in cash but agrees to
spend a substantial amount of the
money in that country within a
stated time period
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-29
Discount Policies: Reductions from List Prices
Quantity
Quantity
Cumulative
Cumulativequantity
quantity
discounts:
discounts: applyto
apply toall
all
purchases
purchasesininaagiven
given
period
period Seasonal
Seasonal
Quantity
Quantity
Non-cumulative
Non-cumulative
discounts:
Seasonal
Seasonal
encourage
encourage buyers
buyers to
to
discounts:apply
applyonly
onlyto to
individual orders
individual orders
buy
buy sooner
sooner

From
From
Allowance(Sale)
Allowance(Sale) List
List Price
Price Cash
Cash
reduce
reducelist
to
listprices
pricestemporarily
temporarily Cash
Cash
2/10
2/10 net
net 30
30
toencourage
encourageimmediate
immediate
buying
buying

Functional
Functional (Trade)
(Trade)
reductions
reductionsininlist
listprice
pricegiven
givento
to
Trade
Trade
channel members that perform
channel members that perform
one
oneor
ormore
moremarketing
marketing
functions
functionsfor
forthe
theproducer
producer
Allowance Policies – Off List Prices

Advertising
Advertising Stocking
Stocking
Advertising
Advertising
price
price
ininthe
reductions
reductionsgiven
givento
tofirms
firms Stocking
Stocking
get
get attention
attention and
and shelf
shelf
the channel to promotethe
channel to promote the
supplier’s
supplier’sproducts
productslocally
locally
space
space for
for aa product
product

Common
Common Types
Types
Of
Of Allowances
Allowances
given
givento tochannel
channelmembers
members
or final consumers
or final consumers
for
fordoing
doingsomething
somethingoror
accepting less of something
accepting less of something

Trade-Ins
Trade-Ins Push
Push Money Money
to
toretailers
retailersto
tobebeused
usedas
price
pricereduction
reductionfor
products
forused
used Push
Push forMoney
incentives
incentives Money
for their
as
salesclerks
their salesclerks
productswhen
whensimilar
similarnew
new to
toaggressively
aggressivelypush
pushthe
the
products are bought
products are bought targeted
targeteditems
items
Legality of Pricing Policies

Unfair
Unfair Trade
Trade Dumping
Dumping
Unfair
PracticeTrade
Practice
Unfair Acts
Trade
Acts pricing
pricingaaproduct
productsold
soldininaa
put
putaalower
lowerlimit
limiton
onprices, Dumping
Dumping
foreign
foreignmarket
marketbelow
belowthe
thecost
Practice
Practice Acts
Acts
especially at the
prices,
wholesale
especially at the wholesale of
ofproducing
producingititininits
cost
itsdomestic
domestic
and
andretail
retaillevels
levels market
market

Key
Key
Issues
Issues

Price
Price Fixing
Fixing Phony
Phony List
List Prices
Prices
competitors
competitors getting
getting
Phony
Phony List
prices List
pricesshown
showntoto
consumers
consumersto tosuggest
suggestthat
that
together
together toto raise,
raise, lower,
lower, Prices
Prices
the price has been
the price has been
or
or stabilize
stabilize prices
prices discounted
discountedfrom
fromlist
list
Promotional Pricing Tactics
• Loss-leader pricing—drop price
on well known brands to stimulate
store traffic
• Special-event pricing—special
price in certain seasons to draw in
more customers
• Cash rebates—to encourage
purchase within a specific time
period
• Low-interest financing—instead
of cutting prices
• Longer payment terms—to lower
payments
• Warranties and service contracts
—free or low-cost
• Psychological discounting—set
an artificially high price and then
offer product as substantial savings
14-33
Differentiated Pricing and Price Discrimination
• Customer-segment pricing—different
customer groups pay different prices for
the same product or service (e.g.,
museums price for students and senior
citizens)
• Product-form pricing—different
versions of the product are priced
differently, but not proportionately to
their costs (48 ounce miner water--
$2.00; 1.7 ounce moisturizer spray
$6.00)
• Image pricing—same product at two
different levels base on image
differences (perfume $10.00 per ounce
same perfume different name and
image $30.00 per ounce)
• Channel pricing—Coca-cola—
restaurant versus theater
• Location pricing—priced differently at
different locations (e.g., theater seats)
• Time pricing ( season, time of day,
weekend )
• Yield pricing--discounts with early
purchases

14-34
 Increasing Prices
• Delayed quotation pricing—final price is
set once product is finished or delivered
• Escalator clauses—requires customer to
pay today’s price and all or part of any
inflation increase that take place before
delivery
• Unbundling—maintains its price but
removes or prices separately one or more
elements that were part of the former offer,
such as free delivery or installation
• Reduction of discounts—do not offer
normal cash and quantity discounts
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-35
 Brand Leader Responses to
Competitive Price Cuts

• Maintain price
• Maintain price and add value
• Reduce price
• Increase price and improve quality
• Launch a low-price fighter line

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-36

 Study Question 1

Traditionally, ________ has operated as

the major determinant of buyer choice.

A.Promotion
B.Packaging
C.Placement
D.Distribution
E.price
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-37
 Study Question 2
The definition of ________ prices is: In considering an
observed price, consumers often compare it to an
Internal memory reference price or an external frame of
reference (such as a posted “regular retail price”).

A. historical
B. reference
C. promotional
D. everyday low price
E. none of the above

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-38

 Study Question 3
Many consumers use price as an indicator of
________. Image pricing is especially effective
with ego-sensitive products such as perfumes
And expensive cars.

A.status
B.Quality
C.ability
D.Capability
E.size

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-39

 Study Question 4
A firm must set a price for the first time when it
develops a new product, when it introduces its
regular product into a new distribution channel
or geographical area, and when it ________.

A.needs to increase bottom-line results

B.raises prices due to cost escalation
C.rolls out an improved product
D.enters bids on new contract work
E.changes styles

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-40

 Study Question 5
In market-penetration pricing, the company’s
objective is to ________, believing that higher
sales volume will lead to lower unit costs and
higher long run profits.

A.block competitive launches

B.maximize their market share
C.minimize their market share
D.maximize volume
E.none of the above

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-41