1. Developing Pricing Strategies and Programs14
Developing Pricing Strategies and Programs
Marketing Management, 13th ed

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?
Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

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

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

5. Consumer Psychology and Pricing
Reference prices—comparing an observed price to an internal reference price they remember or to an external frame of reference such as a posted “regular retail price.”
Price-quality inferences—use of price as an indicator of quality
Price endings—price ending in odd numbers
Price cues----sales signs
Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

6. Possible Consumer Reference Prices
Fair price
(what the product should cost)
Typical price
Last price paid
Upper-bound price
(reservation price or what most consumers would pay)
Lower-bound price
(lower threshold price or the least consumers would pay)
Competitor prices
Expected future price
Usual discounted price
Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

7. Consumer Perceptions vs. Reality for Cars USA Today, January 15, 2004
Overvalued Brands
Land Rover
Kia
Volkswagen
Volvo
Mercedes
Undervalued Brands
Mercury
Infiniti
Buick
Lincoln
Chrysler
Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

8. 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

9. 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

10. Steps in Setting Price Select the price objective Determine demand
Estimate costs
Analyze competitor price mix
Select pricing method
Select final price

11. Step 1: Selecting the Pricing Objective
Survival—cover variable and part of fixed cost
Maximum current profit—rate of return
Maximum market share—penetration pricing (Texas Instruments)
Maximum market skimming—set high price and slowly drop over time (HDTV)
Product-quality leadership—affordable luxuries (Starbucks coffee; Victoria’s Secret lingerie)

12. Step 2: Determining Demand
Price sensitivity—probable purchase quantity at alternative prices
Estimate demand curves
Surveys—explore number of units consumers would buy at different proposed prices
Price experiments—vary prices of different products in a store or charge different prices for the same product in similar territories to see how the change affects sales
Statistical analysis—review of past prices, quantities sold, and other factors can reveal their relationships.
Price elasticity of demand—how responsive, or elastic, demand would be to a change in price
Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

13. Inelastic and Elastic Demand

14. 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

15. Step 3: Estimating Costs
Types of costs
Accumulated production
Activity-based cost accounting—identifies the real costs associated with serving each customer (i.e., variable and overhead costs).
Target costing—effort by designers, engineers, and purchasing agents to reduce cost.
Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

16. Cost Terms and Production
Fixed costs—cost that do not vary with production (overhead)
Variable costs—vary with level of production
Total costs—sum of fixed and variable costs
Average cost —cost per unit at that level of production (total costs/production)
Cost at different levels of production--Experience or learning curve

17. Cost per Unit as a Function of Accumulated Production

18. Step 5: Selecting a Pricing Method
Markup pricing—add standard markup to production cost
Target-return pricing--ROI
Perceived-value pricing (Caterpillar)
Value pricing—low price for high quality offering (IKEA, Southwest Airlines)
Going-rate pricing—based on competitors’ price—CSCO and ACRO gasoline prices
Auction-type pricing

19. Objectives Should Guide Strategy Planning for Price
This slide relates to material on pp
: Indicates place where slide “builds” to include the corresponding point.
Summary Overview
Company-level and marketing objectives provide the guidance for setting pricing objectives. Pricing objectives should be explicitly stated because of their effect on the pricing policies adopted by the company. Pricing policies also affect other aspects of the marketing mix as marketing managers use strategy planning to support the information communicated to consumers through the product’s price.
Key Issues
Two types of profit-oriented objectives are common:
Target return objective: sets specific guidelines for a level of profit.
Prices may be linked to a percentage of sales or return on investment. Some companies just want satisfactory profits that ensure the firm’s survival and provide adequate returns to shareholders.
Companies that are industry leaders, as well as public service companies, often pursue satisfactory profits because of the public scrutiny they receive.
Profit maximization objective: the firm sets prices to seek as much profit as possible. This objective may be used to recoup high investment costs or it may be simply a matter of company policy.
Profit maximization can be socially responsible, as it does not always lead to high prices. Prices that are initially high during market introduction can go down in the later stages of the product life cycle, thus expanding sales and profits.
Discussion Question: Can you provide examples of products that entered the market at a high price and got progressively less expensive as they matured? : : : :

20. Objectives Should Guide Strategy Planning for Price
This slide relates to material on pp
: Indicates place where slide “builds” to include the corresponding point.
Summary Overview
With sales-oriented objectives, pricing supports the objective of increasing sales, without regard to their effects on profit.
Key Issues
Sales growth doesn’t necessarily mean big profits, because marketers may overlook the costs associated with delivering those sales.
Market share growth objectives are popular.
Coupled with a long-run view of the overall market growth rate and attention to costs, this approach can lead to long-term competitive advantages.
In recent years, as profit margins in the personal computer industry have shrunk, Dell Computer has reduced prices to protect its market share.
Discussion Question: What is the danger of pricing a product too low in an attempt to maintain market share?
Giving your product away helps you charge more. Some firms use low prices or giveaways to help sell another product or sell to other customers.
Examples: Some computer printers are free with a computer purchase, but the customer has to buy the print cartridges which are quite expensive.
Google is free to consumers, but Google sells advertising to firms. : : :

21. Objectives Should Guide Strategy Planning for Price
This slide relates to material on pp
: Indicates place where slide “builds” to include the corresponding point.
Summary Overview
For firms content with the way things are, two status quo objectives are often used. They might be termed “don’t rock the boat” objectives.
Key Issues
Meeting competition stabilizes market prices because no firm benefits from raising or lower prices.
This objective is often used when the total market for a product is not growing.
With nonprice competition, aggressive action is taken in the other three areas of the 4Ps, staying clear of price as a competitive “battleground.”
Many specialty goods compete using nonprice competition aimed at the consumer who is seeking advantages other than price—such as a prestige image or high quality.
Discussion Question: For some specialty products, there is an old saying, “If you have to ask how much it costs, you can’t afford it.” Can you give examples of these kinds of products? Is price emphasized in their promotion? : : :

22. Average Cost Pricing Is Common and Can Be Dangerous
This slide relates to material on pp
: Indicates place where slide “builds” to include the corresponding point.
Summary Overview
Average-cost pricing means adding a reasonable markup to the average cost of a product. A manager usually finds the average cost per unit by dividing the total cost for the year by all the units produced and sold in that period.
Key Issues
This exhibit gives an example of how average cost pricing works. In this example, the costs for the year include $30,000 in fixed overhead expenses and $32,000 in labor and materials.
If the company produced and sold 40,000 units, the total cost of $62,000 is divided by the 40,000 units to yield a cost of $1.55 per unit.
Discussion Question: If the company wants $18,000 in profit, how would one go about determining the markup needed per unit to achieve the desired profit?
In this case, $18,000 divided by 40,000 units yields a markup of 45 cents per unit. To get the selling price per unit, the company adds the 45 cents of markup to the cost of $1.55, so the price is $2.00 per unit.
In the second example, suppose the firm maintains a price of $2.00, but it only produces and sells 20,000 units. This change decreases the labor and materials costs, but fixed overhead expenses remain the same, so the total cost is $46,000. However, revenue from sales is only $40,000, so the firm loses $6000.
Average cost pricing is simple, but it’s easy to lose money with average cost pricing, because it does not make allowances for cost variations as output changes.
Average cost tends to goes down as output increases due to economies of scale, but average cost pricing doesn’t consider this change. : :

23. More Demand-Oriented Methods
This slide relates to material on pp
: Indicates place where slide “builds” to include the corresponding point.
Value-in-Use
Types of Demand-Oriented Pricing
Prestige
Auctions
Demand-Backward
Demand-Backward
Sequential Reductions
Summary Overview
There are other demand-oriented approaches for determining prices.
Key Issues
Psychological pricing attempts to discover the price range a customer prefers for a given product. Price cuts within the range don’t affect demand very much.
Discussion Question: Odd-even pricing sets prices to end in certain numbers: $49 (not $50), $24.95 (not $25), or $99 (not $100). Why do marketers use it?
Price lining sets a few price levels for a product line and then marks all items at these prices, so a few prices cover the field. For example, groups of neckties may sell at $10, $15, or $20 each.
Demand-backward pricing involves setting an acceptable final consumer price and working backward to what a producer can charge. The keys to successful pricing are an accurate estimate of what constitutes an acceptable price and making sure that the firm can still cover its costs.
Prestige pricing sets a rather high price to indicate high quality or high status. Prestige pricing is common for luxury products, such as furs, jewelry and perfume. : :
Price Lining
Price Lining
Reference : :
Odd-Even
Odd-Even
Leader & Bait
Psychological
Psychological : :

24. Break-Even Chart

25. Auction-Type Pricing Sealed-bid auctions English auctions (ascending)
Dutch auctions
(descending)
Sealed-bid auctions

26. Step 6: Selecting the Final Price
Impact of other marketing activities—brand quality and advertising relative to the competition
Company pricing policies—premium, discount
Gain-and-risk sharing pricing —seller offering to absorb part or all of the risk
Impact of price on other parties —reaction of other parties—distributors, dealers, sales force, competitors, suppliers. Government may intervene and prevent price from being charged

27. Price-Adaptation Strategies
Geographical pricing —products priced to different customers in different locations and countries
Discounts/allowances —price reduction to buyers
Promotional pricing
Differentiated pricing
Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

28. List Price May Depend on Geographic Pricing Policies
This slide relates to material on pp
: Indicates place where slide “builds” to include the corresponding point.
F.O.B.
seller pays to have the product loaded on a transportation vehicle at which time the title is transferred to the buyer
F.O.B.
Zone
Zone
applying an average freight charge to all customers in the same specified geographic area
Common Geographic Policies
Summary Overview
Retail prices sometimes vary according to the location of the buyer relative to the seller. For many industries, geographic pricing policies are an important component of the price variable of the marketing mix.
Key Issues
F.O.B.: free on board.
The seller pays to have the product loaded on a transportation vehicle at which time the title is transferred to the buyer, who pays shipping and is responsible for the product at that point.
F.O.B. pricing is easy for the seller but may limit the range of the market.
Zone pricing smoothes delivered prices by applying an average freight charge to all customers in the same specified geographic area.
This simplifies billing and helps buyers know the delivery charges in advance.
Uniform delivered pricing charges one price to all buyers.
In effect, all buyers are in the same “zone,” helping open large-area markets.
Discussion Question: In the catalog business, uniform delivered pricing is used as a competitive tool. If all buyers pay the same delivery charge, and it also does not vary by order size, what might the effect be on order size?
Freight absorption pricing: the company pays the cost of shipping without changing the price in order to get the sale.
Freight absorption helps a distant company to compete on equal grounds in another territory. :
Freight Absorption
company pays the cost of shipping without changing the price in order to get the sale
Uniform Delivered
charges one price to all buyers
Uniform Delivered : : :

29. Price-Adaptation Strategies--Countertrade
Buyback arrangement—seller sells a plant, equipment, or technology to another country and agrees to accept as partial payment products that are manufactured with the supplied equipment (e.g., U.S. Chemical plant built for Indian Company and accepted partial payment in chemicals produced)
Offset—seller receives full payment in cash but agrees to spend a substantial amount of the money in that country within a stated time period (e.g., PepsiCo sells syrup to Russia for rubles and buy vodka at a certain rate for sales in the United States)
Barter—buyer and seller directly exchange goods, with no money and no third party involved
Compensation deal—seller receives some % of the payment in cash and the rest in products (e.g., British Aircraft manufacturer sold plans to Brazil for 70% cash and 30% coffee)
Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

30. Price-Adaptation Strategies Discounts and Allowances
Cash discount
Quantity discount
Functional discount
Seasonal discount
Allowance
Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

31. Discount Policies: Reductions from List Prices
This slide relates to material on pp
: Indicates place where slide “builds” to include the corresponding point.
Quantity
Cumulative quantity discounts: apply to all purchases in a given period
Non-cumulative discounts: apply only to individual orders
Quantity
Seasonal
Seasonal
encourage buyers to buy sooner
From
List Price
Summary Overview
Most prices start with a basic list price: the price final consumers or users are normally asked to pay for products. Discounts are reductions from list price given to buyers who either give up a marketing function or provide it themselves.
Key Issues
Quantity discounts encourage volume buying; the customer pays less per unit.
Cumulative quantity discounts: apply to all purchases in a given period.
Noncumulative discounts: apply only to individual orders.
Seasonal discounts encourage buyers to buy sooner.
Manufacturers use this policy to help shift the storing function down the channel and to stabilize demand.
Cash discounts are reductions in the net--the face value of the invoice due immediately--to encourage buyers to pay quickly.
2/10 net 30: 2% off the price if the invoice is paid in 10 days, with the net due within 30 days, and an additional interest charge after 30 days.
Discussion Question: A 2% discount doesn’t sound like much. Why are cash discounts given and why should buyers evaluate them?
Trade discounts: reductions in list price given to channel members that perform one or more marketing functions for the producer.
Sale prices reduce list prices temporarily to encourage immediate buying; they can condition buyers and sellers to shop for sales and may erode brand loyalty.
Everyday low pricing: using low list prices rather than relying on frequent sales, discounts, or allowances.
Allowance(Sale)
reduce list prices temporarily to encourage immediate buying
Cash
Cash
2/10 net 30 : :
Trade
Functional (Trade)
reductions in list price given to channel members that perform one or more marketing functions for the producer : : :

32. Allowance Policies – Off List Prices
This slide relates to material on pp
: Indicates place where slide “builds” to include the corresponding point.
Advertising
Advertising
price reductions given to firms in the channel to promote the supplier’s products locally
Stocking
Stocking
get attention and shelf space for a product
Common Types
Of Allowances
given to channel members
or final consumers
for doing something or
accepting less of something
Summary Overview
Allowances are given to channel members or final consumers for doing something or accepting less of something.
Key Issues
Advertising allowances exchange something for something else: price reductions given to firms in the channel to promote the supplier’s products locally.
Stocking allowances: Also called slotting allowances, these are given to middlemen to get attention and shelf space for a product.
Stocking allowances are used mainly in supermarkets, where space is at a premium, forcing producers to pay for product placement.
Are stocking allowances unethical?
Some producers think so, calling them a form of extortion.
Small producers think that stocking allowances put them at a real disadvantage compared to larger producers with more resources.
Retailers, on the other hand, call stocking allowances an insurance against product failures. Producers must produce better products that consumers really want in order to secure shelf space.
Discussion Question: Do stocking allowances harm consumers?
Manufacturers or wholesalers give push money allowances to retailers to be used as incentives for their salesclerks to aggressively push the targeted items.
Trade-in allowances: the customer receives a price reduction for used products when similar new products are bought. : :
Trade-Ins
price reduction for used products when similar new products are bought
Push Money
Push Money
to retailers to be used as incentives for their salesclerks to aggressively push the targeted items : :

33. Legality of Pricing Policies
This slide relates to material on pp
: Indicates place where slide “builds” to include the corresponding point.
Unfair Trade Practice Acts
put a lower limit on prices, especially at the wholesale and retail levels
Unfair Trade Practice Acts
Dumping
Dumping
pricing a product sold in a foreign market below the cost of producing it in its domestic market
Key Issues
Summary Overview
Some pricing decisions are limited by government legislation.
Key Issues
Minimum prices are sometimes controlled.
Unfair trade practice acts: put a lower limit on prices, especially at the wholesale and retail levels.
These acts protect the viability of certain types of middlemen, and indirectly benefit the consumer by providing more choices.
Dumping is pricing a product sold in a foreign market below the cost of producing it in its domestic market.
Antidumping laws protect domestic producers from foreign competition.
Even very high prices may be OK—firms can charge high prices as long as they do not conspire with competitors to fix prices or discriminate against some of their customers.
You can’t lie about prices. Phony list prices: prices shown to consumers to suggest that the price has been discounted from list.
In the U.S., the Federal Trade Commission (FTC) tries to stop this practice, using the Wheeler-Lea Amendment, which bans “unfair or deceptive actions in commerce.”
Discussion Question: Why do phony list prices still exist, if they are illegal?
Price fixing: competitors getting together to raise, lower, or stabilize prices. It is considered conspiracy under the FTC Act and the Sherman Act. Price fixing is illegal—you could go to jail! :
Price Fixing
competitors getting together to raise, lower, or stabilize prices
Phony List Prices
Phony List Prices
prices shown to consumers to suggest that the price has been discounted from list : : :

34. Promotional Pricing Tactics
Loss-leader pricing—drop price on well known brands to stimulate store traffic
Special-event pricing—special price in certain seasons to draw in more customers
Cash rebates—to encourage purchase within a specific time period
Low-interest financing—instead of cutting prices
Longer payment terms—to lower payments
Warranties and service contracts—free or low-cost
Psychological discounting—set an artificially high price and then offer product as substantial savings

35. Differentiated Pricing and Price Discrimination
Customer-segment pricing—different customer groups pay different prices for the same product or service (e.g., museums price for students and senior citizens)
Product-form pricing—different versions of the product are priced differently, but not proportionately to their costs (48 ounce mineral water--$2.00; 1.7 ounce moisturizer spray $6.00)
Image pricing—same product at two different levels base on image differences (perfume $10.00 per ounce same perfume different name and image $30.00 per ounce)
Channel pricing—Coca-cola—restaurant versus theater
Location pricing—priced differently at different locations (e.g., theater seats)
Time pricing ( season, time of day, weekend )
Yield pricing--discounts with early purchases

36. Increasing Prices
Delayed quotation pricing—final price is set once product is finished or delivered
Escalator clauses—requires customer to pay today’s price and all or part of any inflation increase that take place before delivery
Unbundling—maintains its price but removes or prices separately one or more elements that were part of the former offer, such as free delivery or installation
Reduction of discounts—do not offer normal cash and quantity discounts
Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

37. 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

38. Traditionally, ________ has operated as
Study Question 1
Traditionally, ________ has operated as
the major determinant of buyer choice.
Promotion
Packaging
Placement
Distribution
price
Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

39. Study Question 2
The definition of ________ prices is: In considering an
observed price, consumers often compare it to an
Internal memory reference price or an external frame of
reference (such as a posted “regular retail price”).
historical
reference
promotional
everyday low price
none of the above
Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

40. Study Question 3 Many consumers use price as an indicator of
________. Image pricing is especially effective
with ego-sensitive products such as perfumes
And expensive cars.
status
Quality
ability
Capability
size
Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

41. Study Question 4 A firm must set a price for the first time when it
develops a new product, when it introduces its
regular product into a new distribution channel
or geographical area, and when it ________.
needs to increase bottom-line results
raises prices due to cost escalation
rolls out an improved product
enters bids on new contract work
changes styles
Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

42. Study Question 5 In market-penetration pricing, the company’s
objective is to ________, believing that higher
sales volume will lead to lower unit costs and
higher long run profits.
block competitive launches
maximize their market share
minimize their market share
maximize volume
none of the above
Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall