Developing Pricing Strategies and Programs

Key Concepts

Marketing Management at Gillette

Commands a 70% share of the global market for razors and blades and charges premium prices.

Pricing Re-ConsiderationsFocusing on costs and striving for the

industry’s traditional margins.

Not revising price often enough to capitalize on market changes.

Setting price independently rather than as an intrinsic element of market-positioning strategy.

Not varying price enough for different products, segments, channels, and purchase occasions.

Marketing Skills: Giving It Away?

“Freemium” strategy —giving some offering away for free while profiting from extras that are priced appropriately.

SKYPE—free Internet calling but charges for calls made to non-Internet phones.

Ryannair—fly free, pay for everything else.

Consumer Psychology and Pricing

Price-quality inferences

Reference prices

Price cues

Steps in Setting Price Policy

Select the objective

Determine demand

Estimate costs

Select the final price

Analyze competitors

Step 1: Selecting the Pricing Objective

SurvivalMaximum

current profitMaximum

market share

Product-quality leadership

Maximum market

skimming

Step 2: Determining Demand

Price sensitivity

Estimating demand curvesSurvey consumersSet different prices

in similar territoriesStatistical analysis of

past prices, quantities sold, and other factors

Price elasticity of demandInelastic—small

change in demand with small change in price.

Elastic—considerable change in demand with small change in price.

Step 3: Estimating Costs

Fixed costs

Variable costs

Total costs

Average cost

The Experience Curve

Target Costing

Establish a new product’s desired functions, the price at which it will sell, and the desired profit margin.

Step 4: Analyzing Competitors’ Costs, Prices, and Offers

Does the firm offer features not offered by competitors?

Given this point of comparison, should the price be higher, lower, or the same?

Step 5: Selecting a Pricing Method

The three Cs in selecting a price:Customers’

demand scheduleCost functionCompetitors’

prices

Price-Setting MethodsMarkup pricing

Target-return pricing

Perceived-value pricing

Value pricing

Going-rate pricing

Auction-type pricing

Break-Even Chart

Breakthrough Marketing: eBay

$7.3 billion in annual sales.It’s not all rosy worldwide, though!

Step 6: Selecting the Final Price

Factors to consider: Impact of other marketing activitiesCompany pricing policiesGain-and-risk sharing pricing Impact of price on other parties

Price Adaptation Strategies

Geographical pricing

Price discounts

and allowances

Promotional pricing

Product-mix pricing

Differentiated pricing

Geographical PricingBarter

Compensation deal

Buyback arrangement

Offset

Price Discounts and Allowances

Discounts—price reductionsCashQuantityFunctionalSeasonal

Allowance—extra payment

Promotional Pricing

Loss-leader pricing

Special-event pricing

Cash rebates

Low-interest financing

Longer payment terms

Warranties and service contracts

Psychological discounting

Differentiated Pricing

Customer-segment pricing

Product-form pricing

Image pricing

Channel pricing

Location pricing

Time pricing

Product-Mix Pricing

Product-line

Optional-feature

Captive-product

Two-part

By-product

Product-bundling

Product-Mix Pricing

Product-line

Optional-feature

Captive-product

Two-part

By-product

Product-bundling

Traps of Price-Cutting

Customers assume quality is low.

A low price buys market share but not loyalty.

Higher-priced competitors match the lower prices but have longer staying power because of deeper cash reserves.

Trigger a price war.

Increasing Prices

Delayed quotation pricing

Escalator clauses

Unbundling

Reduction of discounts

How to Respond to Low-Cost Rivals