12Developing Pricing Strategies

and Programs

Chapter Questions

How do consumers process and evaluate prices?How should a company set prices initially for its offerings?How should a company adapt prices to meet varying circumstances and opportunities?How should a company initiate a price change and respond to a competitor’s price change?

12-2

Various Forms of a Price

RentTuitionFeeFareInterestTollPremium

HonorariumSpecial assessmentSalaryCommissionWageTax Bribe

12-3

The Internet Changes the Pricing Environment –

By Providing Information

12-4

12-5

Common Pricing Mistakes

Determine costs and take traditional industry marginsFailure to revise price to capitalize on market changesSetting price independently of the rest of the marketing mixFailure to vary price by product item, market segment, distribution channels, and purchase occasion

12-6

Consumer Psychology and Pricing

Reference prices Price-quality inferencesPrice endings and cues

Possible Consumer Reference Prices

“Fair price”Typical priceLast price paidUpper-bound price

Lower-bound priceCompetitor pricesExpected future priceUsual discounted price

12-7

Price Cues

“Left to right” pricing ($299 vs. $300)Odd number discount perceptionsEven number value perceptionsEnding prices with 0 or 5“Sale” written next to price

12-8

When to Use Price Cues

Customers purchase item infrequentlyCustomers are newProduct designs vary over timePrices vary seasonallyQuality or sizes vary across stores

12-9

Tiers in Pricing

12-10

Steps in Setting Price

Select the price objective

Determine demand

Estimate costs

Analyze competitor price mix

Select pricing method

Select final price12-11

Step 1: Selecting the Pricing Objective

SurvivalMaximum current profitMaximum market shareMaximum market skimmingProduct-quality leadershipOther

12-12

Step 2: Determining Demand

Price Sensitivity

Estimating Demand Curves

Price Elasticity of Demand

12-13

Factors Leading to Less Price Sensitivity

The product is more distinctiveBuyers are less aware of substitutesBuyers cannot easily compare the quality of substitutesExpenditure is a smaller part of buyer’s total incomeExpenditure is small compared to the total costPart of the cost is paid by another partyProduct is used with previously purchased assetsProduct is assumed to have high quality and prestigeBuyers cannot store the product

12-14

Inelastic and Elastic Demand

12-15

Step 3: Estimating Costs

Types of Costs

Target Costing

Activity-Based Cost Accounting

Accumulated Production

12-16

Cost Terms and Production

Fixed costsVariable costsTotal costsAverage costCost at different levels of production

12-17

Cost Per Unit at Different Levels of Production

12-18

Cost per Unit as a Function of Accumulated Production

12-19

Target Costing

12-20

Step 4: Analyzing Competitor’s Costs, Prices and Offers

12-21

Step 5: Selecting a Pricing Method

12-22

Markup pricingTarget-return pricingPerceived-value pricingValue pricingGoing-rate pricingAuction-type pricing

Determining Target-Return Price and Break-Even Volume

12-23

Dollar Store Pricing

12-24

12-25

Auction-Type Pricing

English

Dutch

Sealed-Bid

Step 6: Selecting the Final Price

Impact of other marketing activitiesCompany pricing policiesGain-and-risk sharing pricingImpact of price on other parties

12-26

Price-Adaptation Strategies

Geographical Pricing

Discounts/Allowances

Differentiated Pricing

Promotional Pricing

12-27

12-28

Geographical Pricing

Pricing varies by location

Price Discounts and Allowances

DiscountQuantity discountFunctional discountSeasonal discountAllowances

12-29

12-30

Promotional Pricing Tactics

Loss-leader pricingSpecial-event pricingCash rebatesLow-interest financingLonger payment termsWarranties and service contractsPsychological discounting

12-31

Differentiated Pricing

Customer-segment pricingProduct-form pricingImage pricingChannel pricingLocation pricingTime pricingYield pricing

Should We Raise Prices?Profits Before and After a Price Increase

12-32

Traps in Price Cutting Strategies

Low-quality trapFragile-market-share trap Shallow-pockets trapPrice-war trap

12-33

12-34

Methods for Increasing Prices

Delayed quotation pricingEscalator clausesUnbundlingReduction of discounts

12-35

Responses to Competitors’ Price Changes

Maintain priceMaintain price and add valueReduce priceIncrease price and improve qualityLaunch a low-price fighter line