MARKETING MANAGEMENT12th edition

14 Developing Pricing

Strategies and Programs

Kotler Keller 14-2

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?

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Whirlpool’s Duet combo is nearly four times the price of comparable models

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Synonyms for Price

• Rent• Tuition• Fee• Fare• Rate• Toll• Premium• Honorarium

• Special assessment• Bribe• Dues• Salary• Commission• Wage• Tax

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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

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Consumer Psychology and Pricing

Reference Prices

Price-quality inferences

Price endings

Price cues

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Table 14.1 Possible Consumer Reference Prices

• “Fair price”• Typical price• Last price paid• Upper-bound price

• Lower-bound price• Competitor prices• Expected future price• Usual discounted

price

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Table 14.2 Consumer Perceptions vs. Reality for Cars

Overvalued Brands• Land Rover• Kia• Volkswagen• Volvo• Mercedes

Undervalued Brands• Mercury• Infiniti• Buick• Lincoln• Chrysler

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Price Cues

• “Left to right” pricing ($299 versus $300)• Odd number discount perceptions• Even number value perceptions• Ending prices with 0 or 5• “Sale” written next to price

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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

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Steps in Setting Price

Select the price objective

Determine demand

Estimate costs

Analyze competitor price mix

Select pricing method

Select final price14-12

Step 1: Selecting the Pricing Objective

• Survival• Maximum current

profit• Maximum market

share• Maximum market

skimming• Product-quality

leadership

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Figure 14.1 Price Tiers in the Ice Cream Market

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Step 2: Determining Demand

Price Sensitivity

Estimating Demand Curves

Price Elasticity of Demand

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Figure 14.2 Inelastic and Elastic Demand

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Step 3: Estimating Costs

Types of Costs

Target Costing

Accumulated Production

Activity-Based Cost Accounting

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Cost Terms and Production

• Fixed costs• Variable costs• Total costs• Average cost• Cost at different levels

of production

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Figure 14.4 Cost per Unit as a Function of Accumulated Production

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9 Lives Uses Target Costing

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Step 5: Selecting a Pricing Method

• Markup pricing• Target-return pricing• Perceived-value

pricing• Value pricing• Going-rate pricing• Auction-type pricing

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Figure 14.6 Break-Even Chart

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Auction-Type Pricing

English auctions

Dutch auctions

Sealed-bid auctions

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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

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Price-Adaptation Strategies

Geographical Pricing

Discounts/Allowances

Differentiated Pricing

Promotional Pricing

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Price-Adaptation Strategies

Countertrade• Barter• Compensation deal• Buyback

arrangement• Offset

Discounts/ Allowances• Cash discount• Quantity discount• Functional discount• Seasonal discount• Allowance

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Promotional Pricing Tactics• Loss-leader pricing• Special-event pricing• Cash rebates• Low-interest financing• Longer payment terms• Warranties and

service contracts• Psychological

discounting

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Differentiated Pricing and Price Discrimination

• Customer-segment pricing

• Product-form pricing• Image pricing• Channel pricing• Location pricing• Time pricing• Yield pricing

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Table 14.5 Profits Before and After a Price Increase

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Increasing Prices

Delayed quotation pricing

Escalator clauses

Unbundling

Reduction of discounts

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Figure 14.7 Price-Reaction Program for Meeting Competitor’s Price Cut

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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

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Marketing Debate

Is the right price a fair price?

Take a position:1. Prices should reflect the value that consumers are willing to pay.2. Prices should primarily just reflect the costinvolved in making a product.

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Marketing Discussion

As a consumer, which pricingmethod do you personallyprefer to deal with? Why?