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13Developing
Pricing Strategies and Programs
1
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-2
Consumer Psychology and Pricing
Price-quality inferences Image pricing
Higher prices signals high quality products
When information about true quality is available, price becomes a less significant indicator of quality and vice versa.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-3
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 (overcapacity, intense competition, or changing
consumer wants)
Maximum current profit
Maximum market share (They believe a higher sales volume will lead to lower unit costs and higher long-run profit)
Maximum market skimming
Product-quality leadership
Table 13.3 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 Expenditure is a smaller part of buyer’s total income Product is used with previously purchased assets Few or no substitutes slow to change their buying habits the higher prices are justified, product is assumed to
have high quality and prestige
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-5
Estimating Demand Curves
Surveys can explore how many units consumers would buy at different proposed prices.
Price experiments can vary the prices of different products in a store.
Statistical analysis of past prices, quantities sold can reveal their relationships.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-6
Figure 14.1 Inelastic and Elastic Demand
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-7
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-8
Step 3: Estimating Costs
The company wants to charge a price that covers its cost of producing, distributing, and selling the product, including a fair return for its effort and risk.
Figure 13.2 Cost Per Unit at Different Levels of Production
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-9
Cost Terms and Production
Fixed costs Variable costs Total costs Average cost Cost at different
levels of production
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-10
Figure 14.3 Cost per Unit as a Function of Accumulated Production
The decline in the average cost with accumulated production experience is called the experience/learning curve.
Target Costing
Market research establishes a new product’s desired functions and the price at which it will sell, given its appeal and competitors’ prices.
This price less desired profit margin leaves the target cost the marketer must achieve.
The firm must examine each cost element and bring down costs so the final cost projections are in the target range.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-12
Step 4: Analyzing Competitor’s Costs, Prices and Offers
Within the range of possible prices determined by market demand and company costs, the firm must account for competitors costs, prices or possible price reactions.
If the firm’s offer contains features not offered by competitors, it should evaluate their worth to the customer and add that value to the competitors price.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-13
Figure 13.4 The Three Cs Model for Price-Setting
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-14
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-15
Step 5: Selecting a Pricing Method
Markup pricing Target-return pricing: the firm determines the
price that yields its target rate of return on investment
Perceived-value pricing: It made up of a host of inputs, such as the
buyer’s image of the product performance, the warranty quality, customer support, supplier’s reputation, trustworthiness.
Figure 13.5 Break-Even Chart for Determining Target-Return Price and Break-Even Volume
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-16
Step 5: Selecting a Pricing Method
Value pricing Winning loyal customers by charging a fairly
low price for a high quality offering.
Low cost producers without sacrificing quality
Everyday low pricing (EDLP)
High-low pricingCopyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-17
Step 5: Selecting a Pricing Method
Going-rate pricing the firm bases its price largely on competitors’
prices.
Steel, paper, fertilizer
Industry’s collective wisdom
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-18
Step 5: Selecting a Pricing MethodAuction-type pricing English auction (ascending bids): highest bidder
gets the item
Dutch auctions (descending bids) feature one seller many buyers or one buyer many sellers Auctioneer announces a high price and then
slowly decreases until a bidder accepts one buyer many sellers: sellers compete to offer
the lowest price Sealed-bid auctions
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-20
Step 6: Selecting the Final Price
Impact of other marketing activities Impact of price on other parties
Price Adaptation Strategies
Geographical Pricing Company decides how to price its products
to different customers in different locations and countries.
Should the company charge higher prices to distant customers to cover the higher shipping costs, or a lower price to win additional business?
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-21
Price Discounts and Allowances Discount: price reduction to buyers who pay
bills promptly Quantity discount Functional discount/trade discount Seasonal discount Allowance: an extra payment designed to gain
reseller participation. Trade-in allowances are granted for turning in an old item when buying a new one.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-22
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-23
Promotional Pricing Tactics
Loss-leader pricing Special-event pricing Special customer pricing Cash rebates Low-interest financing Longer payment terms Warranties and service contracts Psychological discounting
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-24
Differentiated Pricing
Price discrimination occurs when a company sells a product or service at two or more prices that do not reflect a proportional difference in costs.
Differentiated Pricing Customer-segment pricing (senior citizen
discounts) Product-form pricing (1.5 water bottle 40 rupees,
family size 90 rupees) Image pricing Channel pricing (price of Coke at lse or Aylanto?) Location pricing (ticket difference of CineGold
Bahria or SuperCinema Vogue towers) Time pricing (Breakfast discount at butlers from
7:30 am till 10:30 am)
Traps in Price Cutting Strategies
Low-quality trap Fragile-market-share trap Shallow-pockets trap Price-war trap
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-26
Should We Raise Prices?
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-27
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-28
Reasons for Increasing Prices
A major circumstance provoking price increases is cost inflation. Companies often raise their prices by more than the cost increase, in anticipation of further inflation in a practice called anticipatory pricing.
Another factor leading to price increases is overdemand.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-29
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
Quiz
Explain each type of pricing objectives with the use of examples. Give proper reasoning as to why would a company pursue each kind of pricing objective.
How can user status be used as a variable to segment the market. Use an example to explain your answer.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-30