CHAPTER 14: DEVELOPING PRICING AND STRATEGIES PROGRAMS

Synonyms of Price: Rent, Tuition, Fee, Fare, Rate, Toll, Premium, Honorarium, Special
assessment, Bribe, Dues, Salary, Commission, Wage, Tax
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 Pricing information a consumer retains in memory that is used to
interpret and evaluate a new price.
Price-quality inferences Consumers use price as an indicator of quality.
Price endings Many sellers believe prices should end in an odd number.
Price cues any marketing tactic used to persuade customers that prices offer good
value compared to competitors prices, past prices or future prices.
o
Left to right pricing ($299 versus $300)
o
Odd number discount perceptions
o
Even number value perceptions
o
Ending prices with 0 or 5
o
Sale written next to price
Table 14.1 Possible Consumer Reference Prices
Fair price (what consumers feel the product should cost)
Typical price
Last price paid
Upper-bound price (reservation price or the maximum most consumers with pay)
Lower-bound price (lower threshold price or the minimum most consumers would
pay)
Historical Competitor prices
Expected future price
Usual discounted 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
Steps in
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6.

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 - the company first decides where it
wants to position its market offering
Survival As long as prices cover variable costs & some fixed costs, the company
stays in business.
Maximum current profit They estimate the demand & costs associated with
alternative prices & choose the price that produces maximum current profit, cash
flow, or rate of return of investment.
Maximum market share They believe a higher sales volume will lead to lower unit
cost & higher long- run profit. They set the lowest price, assuming the market is
price sensitive.
Maximum market skimming Prices start high & slowly drop over time.
Product-quality leadership Products or services characterized by high levels of
perceived quality, taste, & status with a price just high enough not to be out of
consumers reach.
Step 2: Determining Demand - Each price will lead to different level of demand &
have a different impact on a companys marketing objectives.
Price sensitivity Customers are less price sensitive to low- cost items or items they
buy infrequently.
Estimating demand curves Most companies attempt to measure their demand
curves using several different methods such as surveys, price experiments &
statistical analysis.
Price elasticity of demand Price elasticity depends on the magnitude & direction of
the contemplated price change. It may be negligible with a small price change &
substantial with a large price change.
Step 3: Estimating Costs - Demand sets a ceiling on the price the company can
charge for its product. Costs set the floor.
Types of Costs (1) FIXED COSTS are costs that do not vary with production level or
sales revenue. (2)TOTAL COSTS consist of the sum of the fixed & variable costs for
any given level of production. (3)VARIABLE COSTS vary directly with the level of
production. (4)AVEREGE COST is the cost per unit at the level of production; it
equals total cost divided by production.
Accumulated Production The strategy leads the company to build more plants to
meet demand, but a competitor may choose to innovate with a lower- cost
technology.
Activity-Based Cost Accounting Procedures that can quantify the true profitability of
different activities by identifying their actual costs.
Target Costing Cost change with production scale & experience.
Step 4: Analyzing Competitors Costs, Prices & Offers
If the firms offer contains features not offered by the nearest competitor, it should
evaluate their worth to the customer & add that value to the competitors price.
If the competitors offer contains some features not offered by the firm, the firm
should subtract their value from its own price.
Step 5: Selecting a Pricing Method - Given the customers demand schedule, the
cost function, & competitors prices, the company is now ready to select a price.
Markup pricing The most elementary pricing method is to add a standard mark up
to the products cost.
Target-return pricing - The firm determines the price that yields its target rate of
return on investment.

 Perceived-value pricing The value promised by the companys value proposition &
perceived by the customer.
Value pricing - The winning loyal customers by charging fairly low price for a high
quality offering.
Going-rate pricing - The firm bases its price largely on competitors prices.

Auction-Type Pricing (3 Types of Auction)

English auctions (Ascending bids) Have one seller & many buyers.

Dutch auctions (Descending bids) Feature one seller & many buyers, or one
buyer & many sellers.

Sealed-bid auctions Let would-be suppliers submit only one bid; they cannot
know the other bids.
Step 6: Selecting the Final Price

Impact of other marketing activities The final price must take into account the
brands quality & advertising relative to the competition.

Company pricing policies The price must be consistent with company pricing
policies.

Gain-and-risk sharing pricing Buyers may resist accepting a sellers proposal

because of a high perceived level of risk.

Impact of price on other parties How will distributors & dealers feel about the
contemplated price?
Price-Adaptation Strategies

Geographical pricing The company decides how to price its products to

different customers in different locations & countries.

Discounts/allowances - Most companies will adjust their list price & give
discounts & allowances for early payment, volume purchases, & off season
buying.

Promotional pricing Companies can use several pricing techniques to stimulate

early purchase.

Differentiated pricing Companies often adjust their basic price to accommodate

differences in customers, products, locations & so on.
Price-Adaptation Strategies
Countertrade

Barter the buyer and the seller directly exchange goods with no money and no
third-party involved

Compensation deal the seller receives some percentage in cash and the rest in
products

Buyback arrangement the seller sells a plant, equipment, or technology to

another country and agrees to accept as partial payment products manufactured
with the supplied equipment

Offset the seller receives full payment in cash but agrees to spend a substantial
amount of the money in that country within a stated time period
Discounts/ Allowances

Cash discount - A price reduction to buyers who pay bills promptly

Quantity discount - A price reduction to those who buy large volumes

Functional discount - (also called trade discount ) offered by a manufacturer to

trade channel members if they will perform certain functions, such as selling,
storing, and record keeping

Seasonal discount - A price reduction to those who buy merchandise or services

out of season. Hotels, motels, and airlines offer seasonal discounts in slow selling
periods
Allowance - An extra payment designed to gain reseller participation in special
programs. Trade-in allowances are granted for turning in an old item when buying
a new one. Promotional allowances reward dealers for participating in advertising
and sales support programs

Promotional Pricing Tactics

Loss-leader pricing - Supermarkets and department stores often drop the price
on well-known brands to stimulate additional store traffic

Special-event pricing - Sellers will establish special prices in certain seasons to

draw in more customers

Cash rebates - Auto companies and other consumer-goods companies offer

encourage purchase of the manufacturers products within a specified time
period
Low-interest financing - Instead of cutting its price, the company can offer customers
lowinterest financing. Automakers have used no-interest financing to try to attract
more customers
Longer payment terms - stretch loans over longer periods and thus lower the monthly
payments
Warranties and service contracts - Companies can promote sales by adding a free or
low-cost warranty or service contract
Psychological discounting - This strategy sets an artificially high price and then offers
the product at substantial savings; for example, Was $359, now $299.
Differentiated Pricing and Price Discrimination
Customer-segment pricing - Different customer groups pay different prices for the
same product or service
Product-form pricing - Different versions of the product are priced differently, but not
proportionately to their costs
Image pricing - pricing the same product at two different levels based on image
differences
Channel pricing different price depending on the channels of the product being sold;
e.g. Coca-Cola in fine restaurant, fast-food restaurant or vending machine
Location pricing - The same product is priced differently at different locations even
though the cost of offering it at each location is the same. A theater varies its seat
prices according to audience preferences for different locations.
Time pricing - Prices are varied by season, day, or hour. Public utilities vary energy
rates to commercial users by time of day and weekend versus weekday.
Restaurants charge less to early bird customers, and some hotels charge less on
weekends.
Yield pricing
Increasing Prices
Delayed quotation pricing - the company does not set a final price until the product is
finished or delivered
Escalator clauses - The company requires the customer to pay todays price and all or
part of any inflation increase that takes place before delivery
Unbundling - The company 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 - The company instructs its sales force not to offer its normal
cash and quantity discounts.
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