1. DESIGNING PRICING STRATEGIES AND PROGRAMS
CHAPTER 15
DESIGNING PRICING STRATEGIES AND PROGRAMS

2. Important Topics of This Chapter
Setting Pricing policy
Price-quality relationships
Adapting the Price
Initiating & Responding to Price Changes

3. Setting Pricing Policy
1. Selecting the pricing
objective
2. Determining demand
3. Estimating costs
4. Analyzing competitors’
costs, prices, and offers
5. Selecting a pricing
method
6. Selecting final price

4. Setting the Price Pricing Objectives: Survival:
Short-run, low price policy.
Maximum current profit:
High price policy.
Maximum current revenue:
Maximum sales growth:
Low price policy when:
Market is highly price sensitive
Production and distribution costs are low
Low price discourages the competitors.

5. Setting the Price (Cont.)
Maximum market skimming:
High price policy when:
There are sufficient number of buyers.
The unit cost of producing is not high.
High price does not attract competitors.
The product is superior.
Product-quality leadership:
High price policy.

6. Price - Quality Strategies
High Medium Low
High
Low
Product Quality
Med
Premium
Value
Medium
Economy
High
Value
Super
Good-Value
Overcharging
Rip-Off
False
Economy

7. Determining the Demand
Relationships between price and demand
Factors Effecting Price sensitivity:
Unique-value
substitute-awareness
Difficult comparison
Total-expenditures
End-benefit
Shared-cost
Sunk-investment
Price- quality
Inventory effect

8. Determining Demand (Cont.)
Estimating demand curve:
Statistical analysis (time-series data)
Conducting experiments
Total sales at different price
Price elasticity:
Inelastic demand:
There are no substitutes.
Buyer would like to pay higher price.
Buyers are slow in searching for lower price.
Price-quality is right.
Buyers will continue purchasing if price increase is insignificant and risk is high if they switch.
Elastic demand:
Price should be low.

9. Estimating Cost Types of costs: Accumulated Production:
Fixed cost, variable cost and total cost.
Accumulated Production:
Experience curve approach.
Differentiated Marketing Offers:
Cost behaviors as a function of differentiated marketing offer (different delivery systems)
Target costing:
Research to decide the best price.
Analyzing Competitors’ Costs, Price, and Offers:
Cost advantage and disadvantage.

10. Selecting a Pricing Method
Markup pricing:
The most elementary pricing strategy.
Markup=unit cost/1-desired return on sales
Advantages:
simplifies the pricing task
Prices will be similar if everyone use it
It is fair to buyers and sellers
Target-return:
It based upon target rate of return on investment(ROI):
T-R=unit cost+desired return X invested capital/unit sales
B-E point help to determine the total sales.

11. Selecting the Pricing Method (Cont.)
Perceived-value Pricing:
Buyers’ perception of value rather than sellers’ cost.
Price-quality decision for the target market.
Value pricing:
Very low price for high quality products:.
Everyday low pricing(EDLP).
High/low pricing.
Going-rate pricing:
Company pays less attention to its cost.
Sealed-bid pricing:
Based upon expected profit.

12. Selecting the Final Price
Psychological Pricing:
Odd pricing
Reference price.
Influence of other marketing mix elements:
Average quality/high advertising lead to high price
High quality/high advertising lead to high price
Relationship between price and advertising are seen strongly at later stages of PLC, or for low-cost producers.

13. Selecting the Final Price (Cont.)
Pricing policies:
To be consistent with company pricing policy.
Impact of price on other parties:
Distributors/ dealers’ reaction.
Competitors’ reaction.
Government policies on prices-price fixing, price discrimination, and predatory pricing are illegal.

14. Adopting the Price Geographical pricing:
Pricing policy may based upon geographical demand/cost, market segments, orders and service:
Countertrade arrangements.
Barter:
No money involved
Compensation deal:
Some cash payment and some products
Buyback arrangement:
Sells plant and equipment, and agree to buy the production.
Offset:
Receive cash and purchase goods

15. Price Discounts and Allowances
Cash discounts.
Quantity discounts.
Functional discounts:
Trade discounts to channel members for storage, etc.
Seasonal discounts.
Allowances:
Trade-in allowances.
Promotional allowances.

16. Promotional Pricing Loss-leader pricing. Special-event pricing.
Cash rebates.
Low-interest financing.
Longer payment terms.
Warranties and service contracts .
Psychological discounting:
Setting a high price, and discounting to a lower price.

17. Discriminatory Pricing
Customer segment pricing:
Senior citizens pay less.
Product-form pricing:
Higher price for larger size boxes.
Image Pricing:
Creates image differentiation.
Location pricing:
Theaters charge varies prices for different locations.
Time pricing:
Seasonal or week-end specials.
Yield pricing.

18. Discriminatory Pricing (Cont.)
Conditions for discriminatory pricing:
Market must be segmentable and shows different intensities of demand.
Members of lower price segments must not be able to re-sell in the higher price segment.
Competitors must not be able to undersell the firm in the higher-price segment
Cost of segmenting must not exceed the revenue derived from discrimination
The practice must not create customer resentment
The practice must not be illegal.
Typical practice-yield management: airlines deregulation allowed them to charge different fare depending on time of purchase seating class or time of flight.

19. Product Mix Pricing Product-line pricing: Optional-features pricing:
Price steps for different models.
Optional-features pricing:
auto manufacturers add optional air condition.
Captive-product pricing:
Razors and Cameras.
Two-part pricing:
Telephone companies.
Byproduct pricing:
Petroleum products.
Product-bundling pricing:
Option package in auto industry.

20. Initiating and Responding to Price Changes
Initiating Price cuts:
Excess capacity.
Lower market share.
Lower cost(cost leader).
Risk involved:
Low-quality image.
Lower product loyalty.
Leaders treat with higher cash reserves..
Initiating Price increases:
Inflation.
Anticipatory pricing:
Response to government control.
Increased demand.

21. Initiating and Responding to Price Changes (cont.)
Reactions to Price Changes:
Customers’ reaction:
Customers may question the reason behind the price increases
Competitors’ reaction:
Anticipation of competitors’ response is necessary.
Competitors’ response:
Homogenous products
Non-homogenous products.

22. Initiating and Responding to Price Changes (cont.)
Leader’s Strategic Options:
Maintain Price.
Maintain price and add value.
Reduce price.
Increase price and improve quality.
Lunch a low price fighter.