1. Ch. 14 Developing Pricing Strategies and Programs.
MARKETING MANAGEMENT
Ch. 14
Developing Pricing Strategies and Programs.

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?

3. What Is a Price? , dues Price is
the only element in the marketing mix that produces revenue; all other elements represent costs
“it is the sum of all Values that consumers exchange for the benefits of having or using the product or service .
the amount of money charged for a product or service
Examples of “price?”
Tuition, rent, fare, retainer, toll, salary/wage , Interest
, dues

4. Price = Cost + Profit

5. The Importance of Price?
, dues
What is Price?
To the seller... Price is revenue
and profit source
To the consumer... Price is the cost of something

6. The Importance of Price to Marketing Managers
, dues
Revenue
The price charged to customers multiplied by the number of units sold.
Profit
Revenue minus expenses

7. Factors to Consider when Setting Prices

8. Factors in Setting Price

9. Trends Influencing Price Setting
in the
Market
High rate of
new product introduction
Increased availability of
bargain-priced dealer and
generic brands
Price cutting as a strategy to maintain or regain
market share
More efficient and better
informed buyers

10. Common Pricing Mistakes
Determining costs and taking 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

11. Company misses potential profits
Higher price
Lower perceived value
Company misses potential profits

12. Company fails to harvest potential profits
Lower price
Lower perceived value
Company fails to harvest potential profits

13. What must I consider before setting price?
Know how much it costs to make and deliver product or service. Direct and Indirect costs. Fixed and Variable costs.
Know your breakeven point
Research current prices in the market .
Consider your market positioning and competitive advantage as this is likely to impact directly on your choice of pricing strategy.

14. psychological pricing
Pricing Strategies
market skimming
value pricing
loss leader
psychological pricing
competitor pricing
predatory pricing
cost-plus pricing
penetration pricing
contribution pricing
©ARC Consulting cc 2012

15. steps in setting price

16. Volume Sales Maximization
Pricing Objectives
Volume Sales Maximization
Market Share
Profit-Maximization
Profitability
Target Return Goals
Meet
Business
Objectives
Other Pricing Objectives
Status Quo
Image
Social & Ethical Considerations

17. Profit Maximization
Setting prices so that total revenue is as large as possible relative to total costs.

18. Net profit after taxes divided by total assets.
Return on Investment
Net profit after taxes divided by total assets.
ROI = Net Profit after taxes
Total assets

19. Market Share
A company’s product sales as a percentage of total sales for that industry.

20. Sales Maximization Short-term objective to maximize sales
Ignores profits, competition, and the marketing environment
May be used to sell off excess inventory

21. Pricing objective
The company first decides where it wants to position its market offering. The objective could be :-
Survival
Maximize current profit
Maximize market share
Maximize market skimming
Product - quality leadership

22. 1:Pricing objective
Survival : Companies pursue survival as their major objective if they are plagued with overcapacity, intense competition, or changing consumer wants. As long as prices cover variable costs and some fixed costs, the company stays in business.
Maximize current profits : Companies who try to maximize their current profit, estimate the demand and costs associated with alternative prices and choose the price that produces maximum current profit, cash flow, or rate of return on investment. This strategy assumes the firm knows its demand and cost functions, but in reality, these are difficult to estimate

23. Pricing Objective
Maximize market share(Penetration strategy) :Companies that want to maximize their market share believe that a higher sales volume will lead to lower unit costs and higher long-run profit. They set the lowest price, assuming the market is price sensitive. This is a market-penetration pricing strategy.

24. Pricing objective
Market skimming(Skimming strategy): is a strategy for setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price, the company make fewer but more profitable sales.
Product quality and image must support the price
Buyers must want the product at the price
Costs of producing the product in small volume should not cancel the advantage of higher prices
Competitors should not be able to enter the market easily
For example when Sony introduced the world first high definition television (HDTV) to the Japanese market , the high tech sets cost 43,000$ . These televisions were purchased only by customers who really wanted the new technology and afford to pay high prices

25. Pricing objective
Product quality leaders : Companies that aim to be product quality leaders strive to be affordable luxuries, i.e., they want their products and services to be characterized by high levels of perceived quality, taste, and status with a price just high enough not to be out of the consumer's reach.

26. 2:Determine demand Demand
The quantity of a product that will be sold in the market at various prices for a specified period.

27. Demand Curves
Shows the quantity of a product that customers will buy in a market during a period of time at various prices if all other factors remain the same
Vertical axis represents the different prices a firm might charge
Horizontal axis shows the number of units

28. Demand Curves

29. Determining Demand
Each price will lead to a different level of demand and have a different impact on a company’s marketing objectives.
Demand and price are inversely related i.e.
Higher the price, lower the demand
Company needs to consider :-
Price elasticity of demand
Price sensitivity

30. Consumers’ responsiveness or sensitivity to changes in price.
Elasticity of Demand
Consumers’ responsiveness or sensitivity to changes in price.

31. Elasticity of Demand Elastic Demand Inelastic Demand
Consumers buy more or less of a product when the price changes
Inelastic Demand
An increase or decrease in price will not significantly affect demand
Chapter 16 Version 3e

32. Elastic and Inelastic Demand Curves

33. Elasticity of Demand Inelastic Demand Elastic Demand Price Electricity
measure of the sensitivity of demand to changes in prices
Inelastic Demand
Q2 Q1
Quantity P1 P2
Electricity
Price
Elastic Demand Q2
Quantity P1 P2
Fast food Q1
Price
not price sensitive - no real change in demand
price sensitive - changes in demand

34. Factors that Affect Elasticityof
Demand
Availability of Substitutes
Price relative to
Purchasing Power
Product Durability
Product’s Other Uses

35. Elasticity of Demand Price Goes... Revenue Goes... Demand is... DownUp
Elastic
Inelastic

36. Demand is less elastic under these conditions:
There are few or no substitutes/competitors
Buyers do not readily notice the higher price
Buyers are slow to change their buying habits and search for lower prices
Buyers think higher rpices are justified

37. Factor that reduce price sensitivity :
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
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
Internet increases customers’ price sensitivity

38. What affects the sensitivity of pricing
1- unique value effect.
2- substitute awareness.
3- difficult comparison effect.
4- total expenditure effect.
5-end benefit effect.
6-shared cost effect.
7- sunk investment effect.
8- price quality effect

39. The Cost Determinant of Price
Deviate with changes
in level of output
Types of Costs
Variable
Costs
Fixed Costs
Do not deviate
as level of output changes

40. Setting the Price Key Pricing Terms:
Fixed costs/overhead: costs that don’t vary with production or sales revenue.
Variable costs: vary with the level of production.
Total costs: sum of fixed and variable costs at a given level of production
Average cost: cost per unit at a given level of production = total cost/quantity of production.

41. COST BEHAVIOR OVER DIFFERENT–SIZE PLANT4 3 2 1
SRAC
LRAC
1000
2000
3000
4000
COST
PER
UNIT
QUANTITY PRODUCED PER DAY

42. Cost per Unit as a Function of Accumulated Production: The Experience Curve

43. Setting the Price Pricing Steps
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

44. 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 “Cs”
Select pricing method:
Markup pricing
Target-return pricing
Perceived-value pricing
Value pricing
Going-rate pricing
Auction-type pricing
Group pricing

45. The Three C’s Model for Price Setting
Low Price
No possible
profit at
this price
High Price
No possible
demand at
this price
Costs
Competitors’
prices and
prices of
substitutes
Customers’
assessment
of unique
product
features

46. Pricing Methods: Markup Pricing. Target Return Pricing.
Perceived Value Pricing.
Value Pricing.
Going Rate Pricing.
Auction Type Pricing.
Group Pricing.

47. Markup Pricing
The most elementary pricing method is to add a standard markup to the product’s cost. Construction companies submit job bids by estimating the total project cost and adding a standard markup for profit. Lawyers and accountants typically price by adding a standard markup on their time and costs.

48. Markup Pricing Example:
Variable cost per unit =10$ , fixed cost =300,000$
Expected unit sales = 50,000 unit
the unit cost is given by:
Unit cost = 10$ + 300,000/50,000 =16$
Assume the manufacturer wants to earn a 20 percent markup on sales, the markup price is given by:
Markup price = unit cost /(1- desired return on sales)
=16/(1- 0.2)= 20$
It will make profit of 4$ per unit

49. TARGET-RETURN PRICING
In target return pricing the firm determines the price that yields its target rate of return on investment. Public utilities, which need to make a fair return on investment, often use this method. Suppose the toaster manufacturer has invested $1 million in the business and wants to set a price to earn a 20 percent ROI, specifically $200,000.

50. Pricing Methods: 2.Target-Return Pricing
pricing used to achieve a planned or target rate of return on investment
Target-return price = unit cost + desired return * invested capital Unit sales
Target-return price =16$ * 1,000,000
$50,000

51. Break-Even Chart for Determining Target-Return Price and Break-Even Volume

52. Pricing Methods: 3. Perceived-Value Pricing
Companies base their price on the customer’s perceived value.
The key to perceived-value pricing is to deliver more value than the competitor and to demonstrate this to prospective buyers.
There are three groups of buyers :
Price buyers
Value buyers
Loyal buyers

53. Perceived-Value Pricing
Caterpillar uses perceived value to set prices on its construction equipment. It might price its tractor at $100,000, though a similar competitor’s tractor might be priced at $90,000. When a prospective customer asks a Caterpillar dealer why he should pay $10,000 more for the Caterpillar tractor, the dealer answers:

54. Example
$90,000 is the tractor’s price if it is only equivalent to the competitor’s tractor
$7,000 is the price premium for Caterpillar’s superior durability
$6,000 is the price premium for Caterpillar’s superior reliability
$5,000 is the price premium for Caterpillar’s superior service
$2,000 is the price premium for Caterpillar’s longer warranty on parts
$110,000 is the normal price to cover Caterpillar’s superior value
– $10,000 discount
$100,000 final price

55. Pricing Methods: 4. Value Pricing
Win loyal customer by charging a fairly low price for a high-quality offering, that means : reengineering the companies operations to be low-cost without sacrificing quality.
5. Going-Rate Pricing
The firm bases its price largely on competitors’ prices. (smaller firms “follow the leader”).
It is quite popular where costs are difficult to measure or competitive response is uncertain.

56. Pricing Methods: 6. Auction-Type Pricing 7. Group Pricing
One major purpose of auctions is to dispose of excess inventories or used goods.
Three major types of auctions:
1- English auctions (ascending bids).
2- Dutch auctions (descending bids).
3- Sealed-bid auctions.
7. Group Pricing
Consumers and business buyers join groups to buy at a lower price (

57. Setting the Price Pricing Steps
Select pricing objective
Determine demand
Estimate costs
Analyze competition
Select pricing method
Select final price
Requires consideration of additional factors:
Psychological pricing
Influence of other marketing mix variables
Company pricing policies
Gain-and-risk-sharing pricing
Impact of price on other parties

58. Adapting the Price 1. Geographical Pricing
Barter: the direct exchange of goods with no money and no third party involved
Compensation deal: the seller receives some percentage of the payment in cash and the rest in products
Buyback arrangement: the seller sell 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.

59. Adapting the Price 2. Price Discounts and Allowances
Quantity discount: The more you buy, the cheaper it becomes-- cumulative and non-cumulative.
Trade discounts: Reductions from list for functions performed-- storage, promotion.
Cash discount: A deduction granted to buyers for paying their bills within a specified period of time, (after first deducting trade and quantity discounts from the base price)

60. Adapting the Price
Functional discount: discount offered by a manufacturer to trade-channel members if they will perform certain functions.
Seasonal discount: a price reduction to those who buy out of season.
Allowance: an extra payment designed to gain reseller participation in special programs.

61. Adapting the Price 3. Promotional Pricing
Loss-leader pricing: supermarkets and department stores often drop the price on well known brands to stimulate additional store traffic
Special-event pricing: sellers well establish special pricing in certain seasons to draw in more customers
Cash rebates: companies offer cash rebates to encourage purchase of the manufacturers products within a specified time period
Low-interest financing: the company can offer customers low-interest financing

62. Adapting the Price
Longer payment terms: sellers especially mortgage banks and auto companies stretch loans over longer periods and thus lower the monthly payment
Warranties and service contracts: companies can promote sales by adding a free or low cost warranty or service contract
Psychological discounting: this strategy involves setting an artificially high price and then offering the product at substantial savings

63. Adapting the Price 4. Discriminatory (DIFFERENTIATED) Pricing
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

64. Adapting the Price Discriminatory Pricing Tactics:
Customer segment pricing
Product-form pricing
Image pricing
Channel pricing
Location pricing
Time pricing

65. Adapting the Price 5. Discriminatory Pricing
There are six situations involving product mix pricing:
1) Product line pricing:
Companies normally develop product lines rather than single products and introduce price steps.
2) Optional feature pricing:
Many companies offer optional products, features and service along with their main product.
3) Captive product pricing:
Some products require the use of ancillary or captive products.

66. Adapting the Price 4) Two part pricing product:
Service firms often engage in two-part pricing consisting of affixed fee plus variable usage fee.
5) By-product pricing:
The production of certain goods-meat petroleum products often results in by-products.
6) Product bundling:
Sellers often bundle products and features.

67. 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

68. 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
Over demand
Methods of dealing with over demand:
Delayed quotation pricing
Escalator clauses
Unbundling
Reduction of discounts

69. 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

70. 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

71. Responding to Price Changes

72. Initiating and Responding to Price Changes
Market Leader can respond to competitor initiated price cuts in several ways:
Maintain price and profit margin (vulnerable)
Maintain price and add value
Reduce price (and cost)
Increase price and improve quality (add new brand)
Launch a low-price fighter line

73. Price-Reaction Program for Meeting Competitor’s Price Cut