Developing Pricing Strategies and Programs 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

Gillette Commands a Price Premium Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-3

Synonyms for Price Special assessment Rent Bribe Tuition Dues Fee Salary Commission Wage Tax Rent Tuition Fee Fare Rate Toll Premium Honorarium Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-4

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 14-5

Consumer Psychology and Pricing Reference Prices Price-quality inferences Price endings Price cues Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-6

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

Table 14.2 Consumer Perceptions vs. Reality for Cars Overvalued Brands Land Rover Kia Volkswagen Volvo Mercedes Undervalued Brands Mercury Infiniti Buick Lincoln Chrysler Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-8

Tiffany’s Price-Quality Relationship Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-9

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 14-10

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 14-11

Steps in Setting Price Select the price objective Determine demand Estimate costs Analyze competitor price mix Select pricing method Select final price Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-12

Step 1: Selecting the Pricing Objective Survival Maximum current profit Maximum market share Maximum market skimming Product-quality leadership Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-13

Step 2: Determining Demand Price Sensitivity Estimating Demand Curves Price Elasticity of Demand Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-14

Figure 14.2 Inelastic and Elastic Demand Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-15

Table 14.3 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 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 14-16

Step 3: Estimating Costs Types of Costs Accumulated Production Activity-Based Cost Accounting Target Costing Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-17

Cost Terms and Production Fixed costs Variable costs Total costs Average cost Cost at different levels of production Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-18

Figure 14.4 Cost per Unit as a Function of Accumulated Production Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-19

9 Lives Uses Target Costing Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-20

Step 5: Selecting a Pricing Method Markup pricing Target-return pricing Perceived-value pricing Value pricing Going-rate pricing Auction-type pricing Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-21

Figure 14.6 Break-Even Chart Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-22

Auction-Type Pricing English auctions Dutch auctions Sealed-bid auctions Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-23

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 Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-24

Price-Adaptation Strategies Geographical Pricing Discounts/Allowances Promotional Pricing Differentiated Pricing Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-25

Price-Adaptation Strategies Countertrade Barter Compensation deal Buyback arrangement Offset Discounts/ Allowances Cash discount Quantity discount Functional discount Seasonal discount Allowance Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-26

Promotional Pricing Tactics Loss-leader pricing Special-event pricing Cash rebates Low-interest financing Longer payment terms Warranties and service contracts Psychological discounting Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-27

Differentiated Pricing Customer-segment pricing Product-form pricing Image pricing Channel pricing Location pricing Time pricing Yield pricing Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-28

Table 14.6 Profits Before and After a Price Increase Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-29

Increasing Prices Delayed quotation pricing Escalator clauses Unbundling Reduction of discounts Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-30

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 14-31

Marketing Debate Is the right price a fair price? Take a position: Prices should reflect the value that consumers are willing to pay. or 2. Prices should primarily just reflect the cost involved in making a product. Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-32

Marketing Discussion Think of all the pricing methods described in the chapter. As a consumer, which pricing method do you personally prefer to deal with? Why? Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-33