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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?

Synonyms for Price


Tuition

Special assessment
Bribe

Fee

Dues

Fare

Salary

Rate

Commission

Toll

Wage

Premium

Tax

Rent

Honorarium

Changing price environment


Get instant price comparisons
Name their price and have it met.
Get products free.

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

Reference Prices
Price-quality inferences
Price endings

Possible Consumer Reference Prices


Fair price
Typical price

Lower-bound price
Competitor prices

Last price paid


Upper-bound price

Expected future

price
Usual discounted
price

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

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

14-9

Select the price objective


Determine demand
Estimate costs
Analyze competitor price mix
Select pricing method
Select final price

Step 1: Selecting the Pricing


Objective
Survival
Maximum

current profit
Maximum
market share
Maximum
market
skimming
Product-quality
leadership

14-11

Step 2: Determining
Demand
Price Sensitivity
Estimating
Demand Curves
Price Elasticity
of Demand
14-12

Price sensitivity
Reactions of the customer to the increase or decrease in

prices
The customers are less price sensitive1. There are few or n substitutes or competitors
2. They do not readily notice the higher price
3. They are slow to change their buying habits
4. Hey think the higher price are justified
5. Price is only a small part of the total cost of obtaining,
operating and servicing the product

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
14

Inelastic and Elastic Demand

Estimating demand curves


Surveys:- Can explore how many units consumers would buy

at different proposed prices.


Price experiments :- vary the prices of different products in
a store or charge different prices for the same product in
similar territories to see how the change effects sales.
Statistical analysis:- of past prices, quantities sold, and
other factors can reveal their relationships.

Step 3: Estimating Costs


Types of Costs
Accumulated
Production
Activity-Based
Cost Accounting
Target Costing

Cost Terms and Production


Fixed costs
Variable costs
Total costs
Average cost
Cost at

different levels
of production

14-18

Cost per Unit as a Function of Accumulated


Production

Step 4: Analyzing competitors


The firm should first consider
the nearest competitors price
costs,prices,and
offers
If the firm offer contains features not offered by the

competitors, it shd evaluate their worth and add to the price


of the product and vice versa
The introduction of any price or the change of any existing

price can provoker a response from


customers,competitors,distributors,suppliers and even govt.

Step 5: Selecting a Pricing


Method
Markup pricing
Target-return

pricing
Perceived-value
pricing
Value pricing
Going-rate pricing
Auction-type pricing

14-21

Step 5: Selecting a Pricing Method


Markup pricing- to add a standard mark up to the product's cost
Target return pricing- the firm determines the price that would

yield its target rate of ROI


Perceived value pricing- perceived value is made up of several
elements such as buyers image of the product performance,
channel deliverables, the warranty,quality,support and other softer
attributes such as suppliers reputation, trustworthiness and
esteem.
Value pricing- value pricing is a pricing wherein charging a fairly
low price for a high quality offering. it is not a matter of simply
setting low price but re-engineering the companys operations to
become a low cost producer sacrificing quality, to attract a larger
number.
Going rate pricing-the firms bases its price on competitors
pricing, change it more or less.
Auction type pricing- modern web sites

Auction-Type Pricing
English auctions
Dutch auctions
Sealed-bid auctions

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

14-24

Adapting the price


Companies do not seta single price but rater develop a pricing

structure that reflects variations in


geographical demand and costs,
mkt segment requirements,
purchasing timing,
order levels,
delivery frequency,
Guarantees
Service contracts

Geographical Pricing
Discounts/Allowances
Promotional Pricing
Differentiated Pricing

Price-Adaptation
Discounts/
Strategies
Countertrade
Allowances
Barter
Compensation deal
Buyback

arrangement
Offset

Cash discount
Quantity discount
Functional discount
Seasonal discount
Allowance

Promotional Pricing
Tactics
Loss-leader pricing
Special-event pricing
Cash rebates
Low-interest

financing
Longer payment
terms
Warranties and
service contracts
Psychological
discounting
14-28

Differentiated Pricing
Customer-segment

pricing
Product-form
pricing
Image pricing
Channel pricing
Location pricing
Time pricing
Yield pricing
Predatory pricing
14-29

Initiating and responding to price


changes
Several circumstances lead a firm to cut prices
1.Excess capacity of the plant
2.Firm needs additional business and cannot

generate it through increased sales effort


3.Product improvement
Initiating price cuts
Low quality trap
Fragile market share trap
Shallow pocket trap
Price war trap

Initiating and responding to price


changes
Circumstances leading to price increase.
Cost inflation
Rising costs unmatched by productivity gains

squeeze profit margins and lead to companies


to regular rounds of price increases.
Companies raise their prices in anticipation of
further inflation or govt. price controls.
Overdemand

Delayed quotation pricing


Escalator clauses
Unbundling
Reduction of discounts

Alternative approaches that will


allow
them
avoid
increasing
Shrinking
the to
amount
of product
instead of
raising the prices.
prices
Substituting less expensive materials or

ingredients
Reducing or removing product features
Reducing or removing product services
Using less expensive packaging materials or
larger package sizes
Reducing the number of sizes and models
offered
Creating new economy brands.

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

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.

Think of all the pricing methods


described in the chapter.
As a consumer, which pricing method
do you personally prefer to deal with?
Why?

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