©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 0 in Chapter 13 Chapter 13 Designing Pricing Strategies and Programs PowerPoint by Karen E. James Louisiana State University - Shreveport

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 1 in Chapter 13 Objectives  Understand how companies price a new good or service.  Identify how prices can be adapted to meet varying circumstances.  Learn when price changes should be initiated and how soon companies should respond to competitive price changes.

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 2 in Chapter 13 Price Has Many Names  Rent  Tuition  Fare  Monthly payment  Fee  Dues  Interest  Donation

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 3 in Chapter 13 Setting the Price Pricing Procedure  Select pricing objective  Determine demand  Estimate costs  Analyze competition  Select pricing method  Select final price  Survival  Maximize current profits  Maximize market share –Penetration strategy  Market skimming –Skimming strategy  Product quality leaders  Partial cost recovery

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 4 in Chapter 13 Setting the Price Pricing Procedure  Select pricing objective  Determine demand  Estimate costs  Analyze competition  Select pricing method  Select final price  Understand factors that affect price sensitivity  Estimate demand curves  Understand price elasticity of demand –Elasticity –Inelasticty

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 5 in Chapter 13 Marketing Strategies  Product is more distinctive  Buyers are less aware of substitutes  Buyers cannot easily compare quality of substitutes  The expenditure is a lower part of buyer’s total income  The expenditure is small compared to the total cost  Part of the cost is borne by another party  The product is used with assets previously bought  The product is assumed to have more quality, prestige, or exclusiveness  Buyers cannot store the product Conditions Under Which Consumers are Less Price Sensitive:

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 6 in Chapter 13 Marketing Strategies  There are few or no substitutes  Buyers do not readily notice the higher price  Buyers are slow to change their buying habits and search for lower prices  Buyers think higher prices are justified Conditions Under Which Demand is Less Elastic:

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 7 in Chapter 13 Setting the Price Pricing Procedure  Select pricing objective  Determine demand  Estimate costs  Analyze competition  Select pricing method  Select final price  Types of costs and levels of production must be considered  Accumulated production leads to cost reduction via the experience curve  Differentiated marketing offers create different cost levels

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 8 in Chapter 13 Setting the Price  Key Pricing Terms: –Fixed costs: do not vary directly with changes in level of production –Variable costs: vary with production –Total costs: sum of fixed and variable costs a given level of production –Average cost: cost per unit at a given level of production

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 9 in Chapter 13 Setting the Price Pricing Procedure  Select pricing objective  Determine demand  Estimate costs  Analyze competition  Select pricing method  Select final price  Firms must analyze the competition with respect to: –Costs –Prices –Possible price reactions  Pricing decisions are also influenced by quality of offering relative to competition

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 10 in Chapter 13 Setting the Price Pricing Procedure  Select pricing objective  Determine demand  Estimate costs  Analyze competition  Select pricing method  Select final price  Price-setting begins with the three “C’s”  Select method: –Markup pricing –Target-return pricing –Perceived-value pricing –Value pricing –Going-rate pricing –Auction-type pricing –Group pricing

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 11 in Chapter 13 Setting the Price Pricing Procedure  Select pricing objective  Determine demand  Estimate costs  Analyze competition  Select pricing method  Select final price  Requires consideration of additional factors: –Psychological pricing –Gain-and-risk-sharing pricing –Influence of other marketing mix variables –Company pricing policies –Impact of price on other parties

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 12 in Chapter 13 Adapting the Price  Geographical Pricing –Barter –Compensation deal –Buyback arrangement –Offset

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 13 in Chapter 13 Adapting the Price  Cash discounts  Quantity discounts  Trade-in allowances  Functional discounts  Seasonal discounts  Promotion allowances Price Discounts and Allowances:

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 14 in Chapter 13 Adapting the Price  Loss-leader pricing  Special-event pricing  Cash rebates  Low-interest financing  Longer payment terms  Warranties and service contracts  Psychological discounting Promotional Pricing Tactics:

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 15 in Chapter 13 Adapting the Price  Customer segment pricing  Product-form pricing  Image pricing  Channel pricing  Location pricing  Time pricing Discriminatory Pricing Tactics:

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 16 in Chapter 13 Adapting the Price  Price discrimination works when: –Market segments show different intensities of demand –Consumers in lower-price segments can not resell to higher-price segments –Competitors can not undersell the firm in higher-price segments –Cost of segmenting and policing the market does not exceed extra revenue

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 17 in Chapter 13 Adapting the Price  Product-line pricing  Optional-feature pricing  Captive-product pricing  Two-part pricing  By-product pricing  Product-bundle pricing Product-Mix Pricing Tactics:

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 18 in Chapter 13 Initiating and Responding to Price Changes  Strategic Options Include: –Maintain price and perceived quality; selectively prune customers –Raise price and perceived quality –Partially cut price and raise quality –Fully cut price, maintain perceived quality –Maintain price, reduce perceived quality –Introduce an economy model

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 19 in Chapter 13 Initiating and Responding to Price Changes Key Considerations  Initiating price cuts  Initiating price increases  Reactions to price changes  Responding to competitor’s price changes  Circumstances leading to price cuts: –Excess plant capacity –Declining market share –Attempt to dominate the market via lower costs  Price cutting traps: –Price/quality perceptions –Low prices don’t create market loyalty –Competition may match or beat price cuts

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 20 in Chapter 13 Initiating and Responding to Price Changes Key Considerations  Initiating price cuts  Initiating price increases  Reactions to price changes  Responding to competitor’s price changes  Circumstances leading to price increases: –Cost inflation –Overdemand  Methods of dealing with overdemand: –Delayed quotation pricing –Escalator clauses –Unbundling –Reduction of discounts

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 21 in Chapter 13 Initiating and Responding to Price Changes Key Considerations  Initiating price cuts  Initiating price increases  Reactions to price changes  Responding to competitor’s price changes  Firms must monitor both customer and competitor reactions  Competitor reactions are common when: –Few firms offer the product –The product is homogeneous –Buyers are highly informed

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 22 in Chapter 13 Initiating and Responding to Price Changes Key Considerations  Initiating price cuts  Initiating price increases  Reactions to price changes  Responding to competitor’s price changes  The degree of product homogeneity affects how firms respond to price cuts initiated by the competition  Market leaders can respond to aggressive price cutting by smaller competitors in several ways

©2003 Prentice Hall, Inc.To accompany A Framework for Marketing Management, 2 nd Edition Slide 23 in Chapter 13 Initiating and Responding to Price Changes  Maintain price and profit margin  Maintain price, add value  Increase price, improve quality  Launch a low- price fighter line Market Leader Responses to Competitor Initiated Price Cuts:  Reduce price