1. Developing Pricing Strategies and Programs
Chapter 14
Kotler & Keller 13th Ed.
Prepared for:
IBM Program – UC

2. Marketing Process

3. Objectives Understanding Pricing Setting the Price Adapting the Price
Initiating and Responding to Price Changes

4. Understanding Pricing
Common Pricing Mistakes
Determine costs and take traditional industry margin
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

5. Consumer Psychological Pricing [1]
Reference Price
Fair Price (what the product should cost)
Typical Price
Last Price Paid
Upper-bound Price (reservation price or what consumers would pay)
Lower-bound Prices (lower threshold price or the least consumers would pay)
Competitor Price
Expected Future Price
Usual Discounted Price
Lower bound price and usual discounted price: discounted jewelry (diamond ring); from 120million discounted into 25mill only. Will u buy it?

6. Consumer Psychological Pricing [2]
Price Ending
Price end at odd number/left to Right Pricing (Rp vs Rp40.000)
Ending price of 0 or 5; easier to process and retrieve from memory
“SALE” written next to price
“Sale” and price end at “9” less effective when employed frequently 

7. Setting the Price Selecting the Price Objective Determining Demand
Estimating Costs
Analyzing Competitor’s Costs, Prices and Offers
Selecting a Pricing Method
Selecting the Final Price

8. 1. Selecting the Price Objective
Survival
Maximize Current Profit
Maximize Market Share / Market Penetration Pricing
Market is highly price-sensitive; and a low price stimulate market growth
Production and Distribution costs fall within accumulated production experience, and
Low price discourages actual and potential competition
Maximize Market Skimming
Product Quality Leadership
Survival: in a tough competition, over supply, changing consumer’s want. P = TC. Is a short-term strategy, in long-term company should learn how to add consumer’s value
Max market share: high sales volume will reduce the production cost (economies of scale). Marketer sets a lower price with assumption that the market is sensitive.
Max market skimming: charging higher price at the beginning, then reduce the price. E.g. most of the electronic devices are sold at a higher price when they are launched at the first time. Then the price will decrease slowly.
Market skimming make sense when:
A sufficient number of buyers have a high current demand
The unit cost producing a small volume are not so high that they cancel the advantage of charging what the traffic will bear
The high initial price does not attract more competitors to the market
The high price communicates the image of a superior product
Product Quality Leadership: believe that the product is valuable to be charged at a maximum price (gain high profit margin) due to the quality it brings.

9. 2. Determining Demand[1] Price. Quantity Demand Price Sensitivity
Demand Elastic
Demand Inelastic Rp Rp
Price.
Quantity Demand

10. 2. Determining Demand[2] Factor leading to price sensitivity
The product is more distinctive
Buyers are less aware about product substitutes
Buyers can’t easily compare the quality of substitutes
The expenditure is small compared to the total cost of the end product
Part of the cost is borne by other party
The product is used in conjunction with assets previously bought
The product is assume to have more quality, prestige, or exclusiveness
Buyers can’t store the product

11. Accumulated Production
3. Estimating Cost[1]
Types of Cost & Level of Production
TC = FC + (VC x Qty)
AV = TC / Qty
Accumulated Production
$10 $8 $6 $4 $2
Current Price
Cost per Unit
Accumulated Production: By the time we have more experience in producing something, we can produce it more effectively (shorter time, minimum error) that lead to cost reduction
Experienced Curve
Accumulated Production

12. 3. Estimating Cost[2] Differentiated Marketing Offers Target Costing
Activity-Based Cost (ABC) Accounting
Target Costing
These two methods allow company to breakdown the cost precisely hence we can estimate the cost correctly.

13. 4. Analyzing Competitors’ Costs, Prices and Offers
Within the range of possible prices determined by market demand and company costs, the firm must take competitors’ costs, prices and possible price reaction into account

14. 5. Selecting a Pricing Method
High Price
(no possible demand at this price)
Ceiling Price
Customers’ assessment of unique product features
Orienting Point
Competitors’ prices and prices of substitutions
Costs
Floor Price
Low Price
(No possible profit at this price)
5. Selecting a Pricing Method
3 major consideration in price setting

15. 5. Selecting a Pricing Method[1]
Markup Pricing
UC = VC + (FC/Qty unit sales)
Markup Price = UC/(1-desired return on sales)
Target-Return Pricing
Target-Return Price =
UC + (desired return % x investment capital) / unit sale
Break-even Volume = FC/(P–VC)

16. 5. Selecting a Pricing Method[2]
Perceived-Value Pricing
Price based on customer’s perceived value
Made up of:
Buyer’s image of product performance
Channel deliverables
The warranty quality
Customer support
Softer attributes (e.g. supplier’s reputation, trustworthiness, esteem)
Deliver more value than competitors
Demonstrate the value to prospective buyers

17. 5. Selecting a Pricing Method[3]
Value Pricing
Every Day Value Pricing (EDVP): charges a constant low price with little / no price promotions & special sales
High-low Pricing: charges higher price on an every day basis but then runs frequent promotions in which prices are temporarily lowered below the EDLP level
Going-Rate Pricing
Price charged based largely on competitors’ price

18. 5. Selecting a Pricing Method[4]
Auction-Type Pricing
English Auctions (ascending bids): low to high price; one seller - many buyers
Dutch Auctions (descending bids): high to low price; one seller – many buyers or many sellers – one buyer
Sealed-bid Auctions: suppliers submit one bid and cannot know other bids
Group Pricing
Internet is facilitating a method whereby consumers and business buyers can join groups to buy at a lower price

19. 6. Selecting the Final Price[1]
Impact of other marketing activities
Final price must take into account brand’s quality & advertising relative to competition
Brands with average relative quality but high relative advertising budgets charged premium prices
Brands with high relative quality and high relative advertising budgets obtained the highest prices
The positive relationship between high advertising budgets and high prices held most strongly in the later stages of the product life cycle for market leaders
Company Pricing Policy
Price must be consistent with company pricing policies

20. 6. Selecting the Final Price[2]
Gain-and-Risk-Sharing Pricing
Buyers resist accepting a seller’s proposal because of high perceived level of risk
Impact of Price on Other Parties *

21. Adapting the Price[1]
Geographical Pricing (Cash, Counter Trade, Barter)
Barter: direct exchange of goods, with no money and no other party involved
Compensation Deal: seller receives some percentage of the payment in cash and rest in products
Buyback Arrangement: seller sells a plant, equipment, or technology to another country and agrees to accept as partial payment products manufactured with the supplied equipment
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

22. Prices Discounts & Allowances
Adapting the Price[2]
Prices Discounts & Allowances
A price reduction to buyers who pay bills promptly
Cash Discount
A price reduction to those who buy large volumes
Quantity Discount
Discount (or trade discount) offered by manufacturer to trade-channel members if they will perform certain functions such as selling, storing, and record keeping
Functional Discount
A price reduction to whose who buy merchandise or service out of season
Seasonal Discount
An extra payment design to gain reseller participation in special programs
Allowance
Cash Back images on automotive product

23. Adapting the Price[3] Promotional Pricing
Pricing technique to stimulate early purchase
Loss-leader pricing: supermarkets and department stores often drop the price on well-known brands to stimulate additional store traffic
Special-event pricing: seller will establish special price in certain seasons to draw in more customers
Cash rebates: to encourage purchase of the manufacture’s products within a specified time period
Low-interest financing: instead of cutting its price, company offer low- interest financing
Longer payments term: sellers, especially mortgage banks and auto companies, extend loans over longer periods and thus lower the monthly payments
Warranties and service contracts: companies can promote sales by adding a free or low-cost warranty or service contracts
Psychological Discounting: setting an artificially high price and then offering the product at substantial savings.

24. Differentiated Pricing
Adapting the Price[4]
Differentiated Pricing
Price Discrimination:
a company sells a product or service at two or more prices that do not reflect a proportional difference in costs
The seller charges a separate prices to each customer depending on the intensity and or volume of his or her demand
The seller charges different amounts to different classes of buyers, as in the following cases:
Customer segment pricing Product-form pricing
Image pricing Channel pricing
Location pricing Time pricing
Yield pricing *
Customer segment pricing: different customer group pay different price for the same product/service (e.g. museum ticket is different for student, adult, children)
Product-form pricing: different versions of the product are priced differently but not proportionately to their cost. (e.g. Evian mineral ounces = USD 2. The same water is ounces as moisturizer spray and charged USD6. For mineral water, 1 ounce = $0.04; for spray 1 ounce = $3.5)
Image pricing: producer charge different price for the same product positioned as different level (e.g. Face Masker by SKII and Olay by PnG are set with different prices)
Channel pricing: the same product is charged differently when bought in different place (e.g. mineral water in supermarket is different with mineral water in a fine restaurant; Finna product is charged cheaper in Bonnet than in Carefour)
Location pricing: the same product is charged differently when bought at (geographically) different location (e.g McD at Kuta is more expensive than in Denpasar)
Time pricing: Price of the same product/service is different in different season, day, time (e.g. beauty salon in taiwan will give discounted price for the first guest of the day; cinema in nl will charge cheaper price for the 1st show)
Yield pricing: offer lower rates on unsold inventory just before it expires (e.g. airlines ticket – airasia 0 price; nomad)

25. Initiating and Responding to Price Changes [1]
Initiating Price Cuts
Low Quality Trap:
consumer will assume that the quality is low
Fragile-market-share Trap:
a low price buys market share but not market loyalty
Shallow-pocket Trap:
higher-priced competitors may cut their prices and may have longer staying power because of deeper cash reserves
Price-war Trap:
competitors respond by lowering the price even more

26. Initiating and Responding to Price Changes [2]
Initiating price increase:
Cost Inflation
Over Demand
Possible responses to higher costs or overhead without raising price include:
Shrinking the amount of product instead of raising the price
Substituting less expensive materials or ingredients
Reducing or removing product features
Removing or reducing product services, such as installation or free delivery
Using less expensive packaging material or larger package sizes
Reducing the number of sizes and models offered
Creating new economy brands

27. Initiating and Responding to Price Changes [3]
Reaction to Price Changes
Customer Reaction:
Question the motivation behind prices changes
Competitor Reaction:
React when the number of firms are few, the product is homogenous, and buyers are highly informed

28. Initiating and Responding to Price Changes [3]
Responding Competitor’s Price Change
Maintain Price
Maintain Price and Add Value
Reduce Price
Increase Price and Improve Quality
Launch a low-price fighter line

29. End of Chap. 14