Developing Pricing

Strategies and Programs

Marketing Management, 13
th
ed
14
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-2
Chapter Questions
How do consumers process and evaluate
prices?
How should a company set prices initially for
products or services?
How should a company adapt prices to meet
varying circumstances and opportunities?
When should a company initiate a price
change?
How should a company respond to a
competitors price challenge?
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Gillette Commands a
Price Premium
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Synonyms for Price
Rent
Tuition
Fee
Fare
Rate
Toll
Premium
Honorarium
Special assessment
Bribe
Dues
Salary
Commission
Wage
Tax
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-5
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
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Consumer Psychology
and Pricing
Reference Prices
Price-quality inferences
Price endings
Price cues
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Table 14.1 Possible Consumer
Reference Prices
Fair price
Typical price
Last price paid
Upper-bound price
Lower-bound price
Competitor prices
Expected future
price
Usual discounted
price
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-8
Table 14.2 Consumer Perceptions vs.
Reality for Cars
Overvalued Brands
Land Rover
Kia
Volkswagen
Volvo
Mercedes
Undervalued Brands
Mercury
Infiniti
Buick
Lincoln
Chrysler
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Tiffanys
Price-Quality Relationship
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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
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-11
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
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-12
Steps in Setting Price
Select the price objective
Determine demand
Estimate costs
Analyze competitor price mix
Select pricing method
Select final price
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-13
Step 1: Selecting the Pricing Objective
Survival
Maximum current
profit
Maximum market
share
Maximum market
skimming
Product-quality
leadership
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-14
Step 2: Determining Demand
Price Sensitivity
Estimating
Demand Curves
Price Elasticity
of Demand
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Figure 14.2 Inelastic
and Elastic Demand
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-16
Table 14.3 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 buyers 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
Target Costing
Accumulated
Production
Activity-Based
Cost Accounting
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Cost Terms and Production
Fixed costs
Variable costs
Total costs
Average cost
Cost at different
levels of
production
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Figure 14.4 Cost per Unit as a
Function of Accumulated Production
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-20
9 Lives Uses Target Costing
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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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Figure 14.6 Break-Even Chart
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Auction-Type Pricing
English auctions
Dutch auctions
Sealed-bid auctions
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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
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Price-Adaptation Strategies
Geographical Pricing
Discounts/Allowances
Differentiated Pricing
Promotional Pricing
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Price-Adaptation Strategies
Countertrade
Barter
Compensation deal
Buyback
arrangement
Offset
Discounts/ Allowances
Cash discount
Quantity discount
Functional discount
Seasonal discount
Allowance
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Promotional Pricing Tactics
Loss-leader pricing
Special-event pricing
Cash rebates
Low-interest financing
Longer payment terms
Warranties and service
contracts
Psychological
discounting
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Differentiated Pricing
Customer-segment
pricing
Product-form pricing
Image pricing
Channel pricing
Location pricing
Time pricing
Yield pricing
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Table 14.6 Profits Before and After a
Price Increase
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Increasing Prices
Delayed quotation pricing
Escalator clauses
Unbundling
Reduction of discounts
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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 14-32
Marketing Debate
Is the right price a fair price?

Take a position:
1. Prices should reflect the value that
consumers are willing to pay.

or

2. Prices should primarily just reflect the cost
involved in making a product.
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-33
Marketing Discussion
Think of all the pricing methods
described in the chapter.
As a consumer, which pricing method
do you personally prefer to deal with?
Why?