Developing Pricing Strategies and Programs

14-2 Synonyms for Price Rent Tuition Fee Fare Rate Toll Premium Honorarium Special assessment Bribe Dues Salary Commission Wage Tax

14-3 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

14-4 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

14-5 Steps in Setting Price Select the price objective Determine demand Estimate costs Analyze competitor price mix Select pricing method Select final price

14-6 Step 1: Selecting the Pricing Objective Survival (cover variable and some fixed costs) Maximum current profit Maximum market share Maximum market skimming Product-quality leadership (affordable luxuries)

14-7 Step 2: Determining Demand Price Sensitivity (purchase quantity at alternative prices ) Estimating Demand Curves (Statistical, experiments, surveys) Price Elasticity of Demand (Response to change in price)

14-8 Inelastic and Elastic Demand

14-9 Step 3: Estimating Costs Types of Costs (fixed, variable, total, average) Target Costing (costs based on profit) Accumulated Production (experience curve) Activity-Based Cost Accounting (costs/customer)

14-10 Cost Terms and Production Fixed costs Variable costs Total costs Average cost Cost at different levels of production

14-11 Cost per Unit as a Function of Accumulated Production

14-12 Step 5: Selecting a Pricing Method Markup pricing Target-return pricing Perceived-value pricing (brand equity) Value pricing (EDLP/H-L Pricing) Going-rate pricing (competitive pricing) Auction-type pricing

14-13 Break-Even Chart

14-14 Auction-Type Pricing English auctions (ascending bids) Dutch auctions (descending bids) Sealed-bid auctions (submit one bid)

14-15 Step 6: Selecting the Final Price Impact of other marketing activities –Quality and advertising Company pricing policies Gain-and-risk sharing pricing Impact of price on other parties

14-16 Price-Adaptation Strategies Countertrade Barter Compensation deal Buyback arrangement Offset Discounts/ Allowances Cash discount Quantity discount Functional discount Seasonal discount Allowance

14-17 Promotional Pricing Tactics Loss-leader pricing Special-event pricing (seasonal) Cash rebates Low-interest financing Longer payment terms Warranties and service contracts (free or low cost) Psychological discounting (set artificially high price and then lowering the price)

14-18 Differentiated Pricing and Price Discrimination Customer-segment pricing –(students, senior citizens) Product-form pricing –(various package sizes) Image pricing –(various names) Channel pricing –(Cola Cola purchase in restaurant or vending machine) Location pricing –(theater seat prices) Time pricing –(early bird specials in restaurants) Yield pricing –(time of airplane ticket purchase)

14-19 Increasing Prices Delayed quotation pricing (price based on finished/delivered) Escalator clauses (inflation increases) Unbundling (elements of offer) Reduction of discounts (no cash/quantity)

14-20 Brand Leader Responses to Competitive Price Cuts Maintain price Maintain price and add value Reduce price Increase price and improve quality (introduce a new brand) Launch a low-price fighter line