14 Developing Pricing Strategies and Programs 1

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?

14-3 Synonyms for Price Rent Tuition Fee Fare Rate Toll Premium Honorarium Special assessment Bribe Dues Salary Commission Wage Tax

Pricing Decisions are Creating Major Challenges for Many Companies Examples Include: 1.Threats to major airlines by discount carriers. 2.Pressures on drug companies to reduce prices. 3.Intense price competition on supermarket chains. 4.Threats to strong brands by counterfeit products.

…requires that we put pricing at the beginning of the process. For example, a multi-part marketing strategy usually is required in value-based pricing. Airlines’ complicated service packages with arcane restrictions, and their multiple channels of distribution must support pricing that reflects different values of the service to different segments. Without such a strategy, airlines would capture a much smaller portion of the value they have the potential to create. T. Nagle, Marketing News, 11/9/98, 4. STRATEGIC ROLE OF PRICE

‘”Part of the reason that pricing is misused and poorly understood is the common practice of making it the last marketing decision. We think that we must design products, communication plans, and a method of distribution before we have something to price. We then use pricing tactically to capture whatever value we can.”

14-7 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

14-8 Consumer Psychology and Pricing Reference prices Price-quality inferences Price endings Price cues

14-9 Remembering vs Knowing Could you remember how much you last paid for a product you purchase periodically? Many consumers will not remember this information, yet they will judge the advertised or actual price of the product to be “too expensive”, “a great deal,” or “about average”. We all “know” things for which we cannot recall the source or even the exact nature of our knowledge. Remembering = memory, ability to recall the specific items ---- EXPLICIT MEMORY Knowing = nonconscious retrieval of previously encountered stimuli --- IMPLICIT MEMORY

6-10 Mental Accounting Consumers tend to…  Segregate gains  Integrate losses  Integrate smaller losses with larger gains  Segregate small gains from large losses

14-11 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

14-12 Consumer Perceptions vs. Reality for Cars Overvalued Brands Land Rover Kia Volkswagen Volvo Mercedes Undervalued Brands Mercury Infiniti Buick Lincoln Chrysler

14-13 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

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 Expenditure is a smaller part of buyer’s total income Expenditure is small compared to the total cost Part of the cost is paid by another party Product is used with previously purchased assets Product is assumed to have high quality and prestige Buyers cannot store the product

14-15 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

14-16 Steps in Setting Price Select the price objective Determine demand Estimate costs Analyze competitor price mix Select pricing method Select final price

14-17 Step 1: Selecting the Pricing Objective Survival Maximum current profit Maximum market share Maximum market skimming Product-quality leadership

14-18 Step 2: Determining Demand Price sensitivity Estimating demand curves Price elasticity of demand

14-19 Step 3: Estimating Costs Types of Costs Accumulated Production Activity-Based Cost Accounting Target Costing

14-20 Cost Terms and Production Fixed costs Variable costs Total costs Average cost Cost at different levels of production

14-21 Step 5: Selecting a Pricing Method Markup pricing Target-return pricing Perceived-value pricing Value pricing Going-rate pricing Auction-type pricing

14-22 Auction-Type Pricing English auctions Dutch auctions Sealed-bid auctions

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

14-24 Price-Adaptation Strategies Geographical pricing Discounts/allowances Promotional pricing Differentiated pricing

14-25 Price-Adaptation Strategies Countertrade Barter Compensation deal Buyback arrangement Offset Discounts/ Allowances Cash discount Quantity discount Functional discount Seasonal discount Allowance

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

Placebo Effects of Marketing Actions: Consumer May Get What They Pay For Beliefs and expectations can affect more than judgments and subjective consumption experiences. Can consuming an energy drink that is purchased at a discount lead not only to judgments of lower quality or to a less favorable consumption experience and even less productive activities? Price can also trigger a placebo effect

Price promotions why could price promotions be bad?  placebo effect price quality price promotion

14-29 Differentiated Pricing and Price Discrimination Customer-segment pricing Product-form pricing Image pricing Channel pricing Location pricing Time pricing Yield pricing

14-30 What kind of pricing strategy?

14-31 Increasing Prices Delayed quotation pricing Escalator clauses Unbundling Reduction of discounts

14-32 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

Placebo Effects of Marketing Actions: Consumers May Get What They Pay For

THE PLACEBO EFFECT Consumers' beliefs and expectations, shaped by experiences in their daily lives, often influence their judgments of products and services. Marketing actions, such as pricing, can alter the actual efficacy of products to which they are applied. This is called the ‘placebo effect’ which stems fro: the activation of expectancies about the efficacy of the product, a process that appears not to be conscious.

Placebo Effect in the Medical Domain Placebo phenomenon in the medical domain. Patients' beliefs and expectations about the treatment they are receiving (e.g., an antidepression medication) can yield real changes to their health, even if the treatment is actually inert and has no inherent power to produce health effects (e,g., an inert sugar pill that lcx)ks like the antidepression medication).

Theories underlying Placebo Effects Two notions are believed to account for placebo effects: expectancy theory and classical conditioning. According to expectancy theory, placebo effects arise because beliefs about a substance/procedure serving as a placebo activate expectations that a particular effect will occur, which then affect the subsequent effectiveness of the substance/procedure. The classical conditioning view considers consuming substances with known therapeutic effects to be conditioning trials.

Empirical Study on Placebo Effects of Pricing Strategy A study in which 38 members of a fitness center who exercised regularly (at least three times a week) consumed Twinlab Ultra Fuel before and during a workout session. Before consuming the energy drink, participants were shown the list of its ingredients and were told that the drink was from the most recently manufactured batch. One group of participants was told that we purchased the drink at the regular price of $2.89; another group was told that the regular price of the drink was $2.89 but that we had purchased it at a discounted price of $.89 because we bought it in bulk as institutional purchase. After exercising, participants rated the intensity of their workout on a scale that ranged from -3 ("not at all intense") to +3 ("very intense") and how fatigued they felt on a scale that ranged frotn 1 ("not at all") to 7 ("very"). The results show that participants in the reduced-price condition rated their workout intensity as lower (M = -.4) than did those in the regular-price condition (M =.6; F( 1, 36) = 7.5, p <.01 ), and participants in the reduced- price condition indicated that they were more fatigued (M = 4.5) than did those in the regular-price condition (M = 3.7; F(l. 36) = 3.5, p <.10).

Empirical Study on Placebo Effect of Price Low expectancy strength High expectancy strength Discounted priceFull price Number of Puzzles Solved Notes: The number of puzzles solved in the control condition = 9.1.