1. Marketing Management • 14e
Kotler • Keller
Phillip
Kevin Lane
Marketing Management • 14e

2. Developing Pricing Strategies and Programs
Chapter 14
Developing Pricing Strategies and Programs

3. Discussion 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 change?

4. Marketing Mix Product Price Place Promotion Revenue Producer Cost Cost
Price is the only one of the 4 P’s that produces revenue, all over elements produce costs. Price is also the easiest element of the marketing mix to adjust, and communicates the intended value of the offering.
Place
Promotion
Cost
Cost

5. Pricing Price Forms Functions Components Bargaining $31.50 $33.50
Holistic marketers take into account the company, their customers, the competition, and the marketing environment in determine prices. Pricing decisions must be consistent with the firm’s marketing strategy and its target market and brand positioning's.
Pricing takes many forms and performs many functions. Rent, tuition, fares, fees, rates, tolls, retainers, wages, and commissions are all the price people pay for some good or service.
Price also has many components. Prices can be altered through rebates and incentives, and payment can be made with more than cash, such as through the use of frequent flyer miles.
Bargaining

6. Changing Price Environment
Buyers
I’ll pay $235.00
Instant Price Comparisons
Instant price comparisons: mySimon.com. PriceSCAN.com, Intelligent shopping agents (“bots”).
Name your own price: Priceline.com.
Free products: Open Source, the free software movement.
Get Products Free
Name Your Own Price

7. Changing Price Environment
Sellers
$29.99
$19.99
$24.99
Selective Pricing
Negotiate Prices
Monitor Customers

8. Product-line Managers (w/guidance)
How Companies Price
Product-line Managers (w/guidance)
Small Business Owner
Effectively designing and implementing pricing strategies requires a thorough understanding of consumer pricing psychology and a systematic approach to setting, adapting, and changing prices.
Pricing Department

9. Consumer Psychology and Pricing
Price-Quality Inferences
Reference Prices
Purchase decisions are based on how consumers perceive prices and what they consider the current actual price to be—not on the marketer’s stated price.
Reference prices: consumers compare an observed price to an internal reference price they remember or an external frame of reference such as a posted “regular retail price.”
Price-quality inferences: consumers use price as an indicator of quality. Image pricing is especially effective with ego-sensitive products such as perfumes, expensive cars, and designer clothing.
Price endings: Many sellers believe prices should end in an odd number. Customers see an item priced at $299 as being in the $200 rather than the $300 range; they tend to process prices “left-to-right” rather than by rounding. Another explanation for the popularity of “9” endings is that they suggest a discount or bargain. Prices that end with 0 and 5 are also popular and are thought to be easier for consumers to process and retrieve from memory.
$1.99
Price Endings

10. A Black T-Shirt Armani - $275 Gap - $14.90 H&M - $7.90
“A Black T-Shirt” example illustrates the large part consumer psychology plays in determining three different prices for essentially the same item.
Gap - $14.90
H&M - $7.90

11. Setting the Price 6 Select Final Price 5 Price Method 4
Competitor Analysis 3
Estimate Costs
A firm must consider many factors in setting its pricing policy.31 The chart above summarizes the six steps in the process. 2
Determine Demand 1
Pricing Objective

12. Selecting the Pricing Objective
Survival
Maximum Current Profit
Maximum Market Share
Maximum Market Skimming
Product-Quality Leadership
Other Objectives
Survival is a short-run objective for firms to deal with overcapacity, intense competition, or changing consumer wants.
Maximize current profits emphasis current performance . But firms may sacrifice long-run performance by ignoring the effects of other marketing variables, competitors’ reactions, and legal restraints on price.
Maximum market share utilizes a market-penetration pricing strategy, in which a higher sales volume will lead to lower unit costs and higher long-run profit.
Maximum market skimming utilizes a market-skimming pricing strategy, in which prices start high and slowly drip over time. This strategy can be fatal if competitors price low.
A firm striving to be a product-quality leader offers brands that are “affordable luxuries” –products or services characterized by high levels of perceived quality, taste, and status with a price just high enough not to be out of consumers’ reach.
Other objectives: Nonprofit and public organizations may have other pricing objectives.

13. Determining Demand Price sensitivity Estimating demand curves
Price Elasticity of Demand
The demand curve sums the reactions of many individuals with different price sensitivities.
Customers are less price sensitive to low-cost items or items they buy infrequently. They are also less price sensitive when (1) there are few or no substitutes or competitors; (2) they do not readily notice the higher price; (3) they are slow to change their buying habits; (4) they think the higher prices are justified; and (5) price is only a small part of the total cost of obtaining, operating, and servicing the product over its lifetime.
Firms estimate demand curves using: surveys, price experiments, and statistical analysis.
Marketers need to know how responsive, or elastic, demand is to a change in price. Research findings show that (1) The average price elasticity across all products, markets, and time periods studied was –2.62. (2) Price elasticity magnitudes were higher for durable goods than for other goods, and higher for products in the introduction/growth stages of the product life cycle than in the mature/decline stages. (3) Inflation led to substantially higher price elasticities, especially in the short run. (4) Promotional price elasticities were higher than actual price elasticities in the short run (although the reverse was true in the long run). (5) Price elasticities were higher at the individual item or SKU level than at the overall brand level.

14. Inelastic and Elastic Demand
Figure 14.1
Inelastic and Elastic Demand
The normally inverse relationship between price and demand is captured in a demand curve shown above: The higher the price, the lower the demand. For prestige goods, the demand curve sometimes slopes upward.

15. Estimating Costs Demand Price Ceiling Price Price Floor Profit Costs
Demand sets the price ceiling while costs set the floor. Costs include production, distribution, and selling expenses, plus a fair return (profit) to cover effort and risk. The company wants to charge a price that covers its cost of producing, distributing, and selling the product, including a fair return for its effort and risk. Yet when companies price products to cover their full costs, profitability isn’t always the net result.

16. Fixed Costs (overhead)
Estimating Costs
Types of costs
Fixed Costs (overhead)
Fixed costs, also known as overhead, are costs that do not vary with production level or sales revenue. Variable costs vary directly with the level of production. Total costs consist of the sum of the fixed and variable costs for any given level of production. Average cost is the cost per unit at that level of production; it equals total costs divided by production.
Variable Costs
Total Costs

17. Costs at Varying Levels of Production
Figure 14.2
Costs at Varying Levels of Production
To price intelligently, management needs to know how its costs vary with different levels of production. Figure 14.2 provides an example of choosing optimal size for a production plant at TI.

18. Estimating Costs Accumulated Production Experience Curve
(Learning Curve)
Experience curve or learning curve refers to the decline in the average cost with accumulated production experience.

19. Estimating Costs Target Costing Design engineers Market research
Costs can also change as a result of a concentrated effort by designers, engineers, and purchasing agents to reduce them through target costing. Market research establishes a new product’s desired functions and the price at which it will sell, given its appeal and competitors’ prices. This price less desired profit margin leaves the target cost the marketer must achieve.
Design engineers
Market research

20. The Experience Curve Figure 14.3
Figure 14.3 shows that average cost falls with accumulated production experience.

21. Analyzing Competitors’ Offers
Price
Costs
Reaction
“A”
“B”
Within the range of possible prices determined by market demand and company costs, the firm must take competitors’ costs, prices, and possible price reactions into account. If the firm’s offer contains features not offered by the nearest competitor, it should evaluate their worth to the customer and add that value to the competitor’s price. If the competitor’s offer contains some features not offered by the firm, the firm should subtract their value from its own price. Now the firm can decide whether it can charge more, the same, or less than the competitor.
Worth to Customer

22. Selecting a Pricing Method
Pricing Methods
Markup
Target-return
Perceived-Value
Value
Going-rate
Auction-type
Prices fall between the price floor (costs) and price ceiling (customer demand based on their assessment of unique features). The price of competitive offerings and substitute goods serve as an orientation point.

23. Three Cs Model for Price Setting
Figure 14.4
Ceiling price Customers’ assessment of unique product features
Orienting point
Competitors’ prices and prices of substitutes
Costs
Floor Price
High Price
(No possible demand at this price)
Low Price
(No possible profit at this price)
Three Cs Model for Price Setting
Figure 14.4 summarizes the three major considerations in price setting. Companies select a pricing method that includes one or more of these three considerations.

24. Markup Pricing Variable cost per toaster $10 Fixed costs $300,000
Expected unit sales 50,000
Standard markup is the most basic method used to calculate price, used by construction companies, lawyers, and accountants. This method does not take into account current demand, perceived value, or competition.

25. 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.

26. Target-Return Pricing
Figure 14.5
Target-Return Pricing
Break-Even Chart for Determining Target- Return Price and Break-Even Volume.

27. Perceived-Value Pricing
Customer’s perceived-value
Performance $$$
Warranty $
Customer support $
Reputation $$
Customer’s perceived value is determined by the buyer’s image of the product performance, the channel deliverables, the warranty quality, customer support, and softer attributes such as the supplier’s reputation, trustworthiness, and esteem. Companies must deliver the value promised by their value proposition, and the customer must perceive this value. Firms use the other marketing program elements, such as advertising, sales force, and the Internet, to communicate and enhance perceived value in buyers’ minds.

28. THOUSANDS OF LOW PRICES EVERY DAY
Value Pricing P1 P2 C1 C2
EDLP
THOUSANDS OF LOW PRICES EVERY DAY
throughout the store
Level of Quality
Value pricing is not just setting lower prices; it is a matter of reengineering the company’s operations to become a low-cost producer without sacrificing quality. As shown in the graph, the company reduces costs from C1 to C2, while maintaining the same level of quality. Prices are reduced giving buyers greater value.
EDLP – Retailers that maintains an everyday low price policy charges a constant price with little or no price promotions and special sales. Consistent prices eliminates week-to-week price uncertainty. Retailers adopt an EDLP is that constant sales and promotions are costly and have eroded consumer confidence in everyday shelf prices.
High-low pricing is where the retailer charges higher prices on an everyday basis but runs frequent promotions with prices temporarily lower than the EDLP level.
High
Low
Pricing

29. Going-Rate Pricing Commodities Follow the Leader
Going-rate pricing is popular for commodities such as steel, paper, and fertilizer as all firms normally charge the same price. Small firms follow the leader, changing prices when the market leader prices change.
Follow the Leader

30. Auction Pricing English auction (ascending bids)
Dutch auction (descending bids)
Auction-type pricing is growing more popular in the electronic marketplaces.
English auctions (ascending bids) have one seller and many buyers. E.g., eBay, Amazon.com.
Dutch auctions (descending bids) feature one seller and many buyers (an auctioneer announces a high price for a product and then slowly decreases the price until a bidder accepts) , or one buyer and many sellers (the buyer announces something he or she wants to buy, and potential sellers compete to offer the lowest price. E.g., FreeMarkets.com.
Sealed-bid auctions let would-be suppliers submit only one bid; they cannot know the other bids. The U.S. government often uses this method to procure supplies.
Sealed-bid auction

31. Selecting the Final Price
Impact on others
Brand Quality
In selecting the final price, firms must consider factors including impact of other marketing activities, company pricing policies, gain-and-risk-sharing pricing, and the impact of price on other parties.
Pricing Policies
Gain-and-risk-sharing

32. Adapting the Price Geographic Pricing Price Discounts and Allowances
Differentiated Pricing
Companies rarely realize the same profit from each unit of a product that it sells due to variations in geographical demand and costs, market-segment requirements, purchase timing, order levels, delivery frequency, guarantees, service contracts, and other factors.
Several price-adaptation strategies company usually use are: geographical pricing, price discounts and allowances, promotional pricing, and differentiated pricing.
Promotional Pricing

33. Dealing with Price Changes
Raising Prices
Cutting Prices
Companies increase prices to raise profits, to reduce rising cost due to cost inflation, or when facing overdemand. Companies must carefully manage customer perceptions when raising prices.
Companies cut prices to utilize excess plant capacity, to dominate the market through lower costs, or to deal with declining market share or economic recession.
Companies must anticipate competitor price changes and prepare contingent responses. The firm facing a competitor’s price change must try to understand the competitor’s intent and the likely duration of the change. Strategy often depends on whether a firm is producing homogeneous or nonhomogeneous products. A market leader attacked by lower-priced competitors can seek to better differentiate itself, introduce its own low-cost competitor, or transform itself more completely.
Competitor Moves