14

Developing Pricing
Strategies and Programs

Marketing Management, 13th ed

 Synonyms for Price

• Rent • Special assessment

• Tuition • Bribe
• Fee • Dues
• Fare • Salary
• Rate • Commission
• Toll • Wage
• Premium • Tax
• Honorarium

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 Common Pricing Mistakes

• Determine costs and take traditional industry

margins
• 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

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-3

 Consumer Psychology
and Pricing
• Reference prices —comparing an observed price
to an internal reference price they remember or to
an external frame of reference such as a posted
“regular retail price.”
• Price-quality inferences —use of price as an
indicator of quality
• Price endings —price ending in odd numbers
• Price cues----sales signs

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 Possible Consumer Reference Prices

• “Fair price” • Lower-bound price

• Typical price • Competitor prices
• Last price paid • Expected future
• Upper-bound price price
• Usual discounted
price

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Consumer Perceptions vs. Reality for Cars

Overvalued Brands Undervalued Brands

• Land Rover • Mercury
• Kia • Infiniti
• Volkswagen • Buick
• Volvo • Lincoln
• Mercedes • Chrysler

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-6

 Price Cues

• “Left to right” pricing ($299 vs. $300)

• Odd number discount perceptions
• Even number value perceptions
• Ending prices with 0 or 5
• “Sale” written next to price

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 When to Use Price Cues
• Customers purchase
item infrequently
• Customers are new
• Product designs vary
over time
• Prices vary seasonally
• Quality or sizes vary
across stores

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 Steps in Setting Price
Select the price objective

Determine demand

Estimate costs

Analyze competitor price mix

Select pricing method

Select final price

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Step 1: Selecting the Pricing Objective
• Survival—cover
variable and part of
fixed cost
• Maximum current
profit—rate of return
• Maximum market
share—penetration
pricing
• Maximum market
skimming—set high
price and slowly drop
over time
• Product-quality
leadership—affordable
luxuries
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 Step 2: Determining Demand
• Price sensitivity—probable purchase quantity at
alternative prices
• Estimate demand curves
• Surveys—explore number of units consumers
would buy at different proposed prices
• Price experiments—vary prices of different
products in a store or charge different prices for the
same product in similar territories to see how the
change affects sales
• Statistical analysis—review of past prices,
quantities sold, and other factors can reveal their
relationships.
• Price elasticity of demand—how responsive, or
elastic, demand would be to a change in price
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 Inelastic and Elastic Demand

14-12
 Factors Leading to Less Price Sensitivity

• The product is more distinctive

• Buyers are less aware of substitutes
• Buyers cannot easily compare the quality of substitutes
• The expenditure is a smaller part of buyer’s total income
• The expenditure is small compared to the total cost of
the end product
• Part of the cost is paid by another party
• The product is used with previously purchased assets
• The product is assumed to have high quality and
prestige
• Buyers cannot store the product

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 Step 3: Estimating Costs

• Types of costs
• Accumulated production
• Activity-based cost accounting
• Target costing—effort by
designers, engineers, and
purchasing agents to reduce cost.

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-14

 Cost Terms and Production
• Fixed costs—cost that do
not vary with production
(overhead)
• Variable costs—vary with
level of production
• Total costs—sum of fixed
and variable costs
• Average cost —cost per
unit at that level of
production (total
costs/production)
• Cost at different levels of
production--Experience
or learning curve
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 Cost per Unit as a Function of
Accumulated Production

14-16
Step 5: Selecting a
Pricing Method
• Markup pricing
• Target-return
pricing
• Perceived-value
pricing
• Value pricing
• Going-rate pricing
• Auction-type
pricing
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Objectives Should Guide Strategy Planning for
Price
 Break-Even Chart

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 Auction-Type Pricing

English auctions
(ascending)

Dutch auctions
(descending)

Sealed-bid auctions

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 Step 6: Selecting the Final
Price
• Impact of other marketing
activities—brand quality and
advertising relative to the
competition
• Company pricing policies—
premium, discount
• Gain-and-risk sharing pricing
—seller offering to absorb part or
all of the risk
• Impact of price on other parties
—reaction of other parties—
distributors, dealers, sales force,
competitors, suppliers.
Government may intervene and
prevent price from being charged
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 Price-Adaptation Strategies
• Geographical pricing —
products priced to different
customers in different
locations and countries
• Discounts/allowances —
price reduction to buyers
• Promotional pricing
• Differentiated pricing

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-22

 Price-Adaptation Strategies
Countertrade
• Barter—buyer and seller directly
Discounts/ Allowances
exchange goods, with no money and
no third party involved
• Cash discount
• Compensation deal—seller
receives some % of the payment in
• Quantity discount
cash and the rest in products
• Buyback arrangement—seller sells
• Functional discount
a plant, equipment, or technology to
another country and agrees to • Seasonal discount
accept as partial payment products
that are manufactured with the • Allowance
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

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-23

Discount policies reduction Allowance policies off list
From list price price

• Quantity • Advertising
• Cash • Stocking
• Seasonal • Push money
• Functional(trade) • Trade ins
• Allowance(sale)

Legality of pricing policies

• unfair trade practice act dumping phony list price price fixing

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-24

Promotional Pricing Tactics
• Loss-leader pricing—drop price
on well known brands to stimulate
store traffic
• Special-event pricing—special
price in certain seasons to draw in
more customers
• Cash rebates—to encourage
purchase within a specific time
period
• Low-interest financing—instead
of cutting prices
• Longer payment terms—to lower
payments
• Warranties and service contracts
—free or low-cost
• Psychological discounting—set
an artificially high price and then
offer product as substantial savings
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Differentiated Pricing and Price Discrimination
• Customer-segment pricing—different
customer groups pay different prices for
the same product or service (e.g.,
museums price for students and senior
citizens)
• Product-form pricing—different
versions of the product are priced
differently, but not proportionately to
their costs (48 ounce miner water--
$2.00; 1.7 ounce moisturizer spray
$6.00)
• Image pricing—same product at two
different levels base on image
differences (perfume $10.00 per ounce
same perfume different name and
image $30.00 per ounce)
• Channel pricing—Coca-cola—
restaurant versus theater
• Location pricing—priced differently at
different locations (e.g., theater seats)
• Time pricing ( season, time of day,
weekend )
• Yield pricing--discounts with early
purchases

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 Increasing Prices
• Delayed quotation pricing—final price is
set once product is finished or delivered
• Escalator clauses—requires customer to
pay today’s price and all or part of any
inflation increase that take place before
delivery
• Unbundling—maintains its price but
removes or prices separately one or more
elements that were part of the former offer,
such as free delivery or installation
• Reduction of discounts—do not offer
normal cash and quantity discounts
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-27
 Brand Leader Responses to
Competitive Price Cuts

• Maintain price
• Maintain price and add value
• Reduce price
• Increase price and improve quality
• Launch a low-price fighter line

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-28

 15
Designing and Managing
Integrated
Marketing Channels

Marketing Management, 13th ed

 What is a Marketing Channel?

A marketing channel system is the particular

set of interdependent organizations involved
in the process of making a product or service
available for use or consumption.
•Push strategy
•Pull strategy

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 Buyer Expectations for
Channel Integration
• Ability to order a product
online and pick it up at a
convenient retail location
• Ability to return an online-
ordered product to a
nearby store
• Right to receive
discounts based on total
online and offline
purchases

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 Categories of Buyers
• Habitual shoppers—purchase from the same
places in the same manner over time
• High value deal seekers—know their needs and
“channel surf” a great deal before buying at the
lowest possible price
• Variety-loving shoppers—gather information in
many channels, regardless of price
• High-involvement shoppers—gather information in
all channels, make their purchases in a low-cost
channel, but takes advantage of customer support
from a high-touch channel

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 15-32

 Increasing Efficiency

15-33
 Types of Shoppers

• Service/quality customers—care most

about the variety and performance of
products in stores as well as the service
provided
• Price/value customers—most concerned
about spending their money wisely
• Affinity customers—sought stores that
suited people like themselves or the
members of groups they aspired to join

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 15-34

 Channel Member Functions

• Gather information
• Develop and disseminate persuasive
communications
• Reach agreements on price and terms
• Acquire funds to finance inventories
• Assume risks
• Provide for storage
• Provide for buyers’ payment of their bills
• Oversee actual transfer of ownership
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 15-35
 Designing a Marketing
Channel System
Analyze customer needs

Establish channel objectives

Identify major channel alternatives

Evaluate major channel alternatives

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 Channel Service Outputs
• Lot size—number of units the channel permits a
typical customer to purchase on one occasion
• Waiting/delivery time—average time customers of
that channel wait for receipt of the goods
• Spatial convenience—degree to which the
marketing channel makes it easy for customers to
purchase the product
• Product variety—assortment breadth provided by
the marketing channel
• Service backup—add-on services (credit, delivery,
installation, repairs) provided by the channel

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 15-37

 Channel objectives
• State in terms of targeted service output levels
• Minimize total cost and still provide desired levels of
service output
• Channel Objectives vary with product characteristics
• Perishable products—more direct marketing
• Bulky products—minimize shipping distance
• Nonstandard products—sold directly by sales
representatives
• Products requiring installation or maintenance
service—sold and maintained by company or
franchised dealers

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 15-38

 Identifying Channel
Alternatives

Types of
intermediaries

Number of
intermediaries

Terms and
responsibilities
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 Consumer Marketing Channels

15-40
 Industrial Marketing Channels

15-41
 Number of Intermediaries

Exclusive

Selective

Intensive

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 Terms and Responsibilities
of Channel Members
• Price policy—price list and schedule of discounts and
allowances that intermediaries see as equitable and sufficient
• Condition of sale —payment terms and producer guarantees
• Distributors’ territorial rights—distributors’ territories and the
terms under with the producer will enfranchise other distributors
• Mutual services and responsibilities (e.g., McDonald’s
provide franchisees with a building, promotion support,
recordkeeping system, training, and general administrative and
technical assistance; franchisees are expected to satisfy
company standards for the physical facilities, cooperate with
new promotion programs, furnish requested information, and
buy supplies from specified vendors)

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 15-43

 The Value-Adds Versus Costs of
Different Channels

15-44
 Break-Even Chart for the Choice Between A
Company Sales Force and Manufacturer’s
Sales Agency

15-45
 Channel-Management
Decisions
Selecting channel members

Training channel members

Motivating channel members

Evaluating channel members

Modifying channel members

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 Channel Power

• Coercive--threat
• Reward—extra
benefit
• Legitimate--contract
• Expert--knowledge
• Referent—proud to
be associated

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 Channel Integration and Systems

Type of channel

Characteristics Vertical marketing systems

Traditional
Administered Contractual Corporate

Amount of Little or Some to Fairly good

Complete
cooperation none good to good

Economic One
Control maintained None power and Contracts company
by leadership ownership

Typical
General
Examples “inde- McDonald’s Florsheim
Electric
pendents”
 What is Channel Conflict?

• Channel conflict occurs when one

member’s actions prevent another
channel from achieving its goal.
• Types of channel conflict
• Vertical
• Horizontal
• Multichannel

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 15-49

 Managing Channel Conflict
• Adoption of superordinate goals —
jointly seeking goals
• Cooptation--efforts by one
organization to win the support of the
leaders of another organization by
including them in advisory councils,
boards of directors, etc
• Diplomacy--each side sends a person
or group to meet with its counterpart to
resolve a conflict
• Mediation--resorting to a neutral third
party to conciliate two parties interest
• Arbitration--two parties agree to
present arguments to one or more
arbitrators and accept the arbitration
decision

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 Causes of Channel Conflict
• Goal incompatibility—manufacturer want rapid
penetration with low prices but dealers want high
margins and pursue short-run profitability
• Unclear roles and rights—company’s sales force
competing with dealers
• Differences in perception—manufacturers optimistic
about short-term economic outlook and want dealers
to carry higher inventory than dealers want to carry
because they are pessimistic
• Intermediaries’ dependence on manufacturer—
dealers affected by manufacturer’s product and pricing
decisions
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 15-51
e-Commerce Marketing
Practices

• Pure-click
• Brick-and-click
• Brick-and-mortar

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