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Developing Pricing
Strategies and
Programs
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Learning Objectives
1. How do consumers process and evaluate prices?
2. How should a company set prices initially for
products or services?
3. How should a company adapt prices to meet
varying circumstances and opportunities?
4. When and how should a company initiate a price
change?
5. How should a company respond to a competitor’s
price change?
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Understanding Pricing
• Pricing in a digital world
Get instant vendor price comparisons
Check prices at the point of purchase
Name your price and have it met
Get products free
Monitor customer behavior & tailor offers
Give customers access to special prices
Negotiate prices online or even in person
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Understanding Pricing
• A changing pricing environment
– Sharing economy
– Bartering
– Renting
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Understanding Pricing
• How companies price
– Small companies: boss
– Large companies: division/product line
managers
• How companies should price
– Understanding of consumer pricing
psychology
– a systematic approach to setting, adapting,
and changing prices
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Consumer Psychology and Pricing
Reference prices
Price-quality inferences
Price endings
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Reference Prices
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Setting the Price
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Step 1: Selecting the Pricing
Objective
SurvivalMaximum
current profit
Maximum
market share
Maximum
market
skimming
Product-quality
leadership
Other
objectives
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Step 2:
Determining Demand
• Price sensitivity
• Estimating demand curves
– Surveys, price
experiments, &
statistical analysis
• Price elasticity of demand
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Figure 16.1
Inelastic And Elastic Demand
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Price Sensitivity
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Step 3: Estimating Costs
• Types of costs and levels of production
– Fixed vs. variable costs
– Total costs
– Average cost
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Step 3: Estimating Costs
• Accumulated production
– Experience/learning curve
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Step 4: Analyzing Competitors’
Prices
• Firm must take competitors’ costs, prices, & reactions into account
– Value-priced competitors
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Step 5: Selecting a Pricing Method
• Figure 16.4: three major considerations in price
– Costs = price floor
– Competitors’ prices =
orienting point
– Customers’ assessment of
unique features = price
ceiling
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Step 5: Selecting a Pricing Method
• Perceived-value pricing
– Based on buyer’s image of product, channel
deliverables, warranty quality, customer
support, and softer attributes (e.g., reputation)
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TATA NANO CASE
11-18
28.11.2016
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AUTO RİCKSHAW
11-19
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Step 5: Selecting a Pricing Method
• Value pricing
• EDLP
– High-low pricing
• Going-rate pricing
• Auction-type pricing
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Step 6: Selecting the Final Price
Impact of other marketing activities
Company pricing policies
Gain-and-risk-sharing pricing
Impact of price on other parties
• Additional factors to select final price:
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MICHAEL O’LEARY SAID: “I HAVE THIS VISION THAT
IN THE NEXT FIVE-TO-10 YEARS THE AIR FARES ON
RYANAIR WILL BE FREE,”
• Between April and September 2016, every minute of every hour of every day 250 people stepped aboard a Ryanair flight, and the average profit made from each of those passengers was £15
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RYANAIR CASE
• Offering lower fares, eliminating some comfort and services that were traditionally guaranteed
• Full-cost carriers choose price discrimination techniques based on different fare classes, complex systems of discounts with limited access, customer loyalty schemes, and overbooking techniques.
• Low-cost carriers instead use «dynamic pricing».
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Adapting the Price
• Price discounts and allowances
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Adapting the Price
• Loss-leader pricing
• Special event pricing
• Special customer
pricing
• Low-interest financing
• Longer payment terms
• Warranties/service
contracts
• Psychological
discounting
• Promotional pricing:
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Adapting the Price
• Price discrimination
Customer-
segment
pricing
Product-form
pricing
Image
pricing
Channel
pricing
Location
pricing
Time pricing
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Initiating and Responding to Price
Changes
• Initiating price cuts
– Excess plant capacity
– Domination of market
• Price-cutting traps
– Price concessions
– Low-quality
– Price war
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Initiating and Responding to Price
Changes
• Anticipating competitive responses
• Responding to competitors’ price changes
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AIR ARABIA CASE