DEVELOPING PRICING

STRATEGIES &
PROGRAMS
UNDERSTANDING
PRICING
 Price has operated as the
major determinant of buyer
choice, especially in poorer
nations, and with commodity-
type products
 Although non-price factors
have become more important
in recent decades, price still
remains one of the most
important elements
determining market share and
profitability
CONSUMER
PSYCHOLOGY &
PRICING
 Consumers often actively process
price information, interpreting
prices in terms of their knowledge
from prior purchasing experience,
formal communications, informal
communications, and point-of-
purchase or online resources
 Purchase decisions are based on
how consumers perceive prices
and what they consider to be the
current actual price, not the
marketer’s stated price
REFERENCE
PRICES
 When examining products,
consumers often employ
reference prices
 In considering an observed price,
consumers often compare it to an
internal reference price or an
external frame of reference
 PRICE-QUALITY
INFERENCES
 Many consumers use price as an
indicator of quality
 When alternative information about
true quality is available, price
becomes a less significant indicator
of quality. However, when the
information is not available, price acts
as a signal of quality
 Price Endings
 Many Sellers believe prices should
end in an odd number
 Customer tend to process prices in
a “left-to-right” manner rather than
by rounding
 Number 9 : convey the notion of
discount or bargain
 Number 0 & 5 : to be easier for
customers to process and retrieve
from memory
PROCEDURES IN SETTING
PRICING STRATEGY
 SELECTING THE PRICING
OBJECTIVE
 DETERMINING DEMAND
 ESTIMATING COSTS
 ANALYZING COMPETITORS’
COSTS, PRICES, AND OFFERS
 SELECTING PRICING METHODS
 SELECTING THE PRICE
SELECTING THE
PRICE OBJECTIVE
 SURVIVAL
 MAXIMUM CURRENT PROFIT
 MAXIMUM MARKET SHARE
 MAXIMUM MARKET SKIMMING
 PRODUCT-QUALITY LEADERSHIP
 OTHER OBJECTIVE
Marketing Objectives that Affect
Pricing Decisions
Survival
Low Prices to Cover Variable Costs and
Some Fixed Costs to Stay in Business.

Current Profit Maximization

Choose the Price that Produces the
Maximum Current Profit, Cash Flow or ROI.

Marketing Market Share Leadership

Low as Possible Prices to Become
Objectives the Market Share Leader.

Product Quality Leadership

High Prices to Cover Higher
Performance Quality

Maximum Market Skimming

Setting a High Price for a New Product to
Maximize Revenues from the Target Market.
Determining Demand
A. Inelastic Demand -
Demand Hardly Changes
With
Price

P2 a Small Change in Price.

P1

Q2 Q1
Quantity Demanded per Period
B. Elastic Demand -
Demand Changes Greatly With
a Small Change in Price.
Price

P’2
P’1

Q2 Q1
Quantity Demanded per Period
Types of Cost Factors
that
Affect Pricing Decisions
Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production

Fixed Costs Variable Costs

(Overhead)
Costs that don’t Costs that do vary
vary with sales or directly with the
production levels. level of production.
Executive Salaries Raw materials
Rent
Responding to
Competitor Price
Changes- Example
Hold our price
Has competitor No at present level;
cut his price? continue to watch
competitor’s
No No price
Yes

Is the price Is it likely to be How much has

likely to a permanent his price been
significantly Yes Yes
hurt our sales? price cut? cut?

By less than 2% By 2-4% By more than 4%

Include a Drop price by Drop price to
cents-off coupon half of the competitor’s
for the next competitor’s price
purchase price cut
SELECTING A
PRICING METHOD
 MARKUP PRICING
 TARGET RETURN PRICING
 PERCEIVED VALUE PRICING
 VALUE PRICING
 GOING RATE PRICING
 AUCTION TYPE PRICING
Selecting the
final Price
 Impact of other marketing
activities
 Company pricing policies
 Gain and risk sharing pricing
 Impact of price on other
parties
ADAPTING THE PRICE
 GEOGRAPHICAL PRICING
 PRICE DISCOUNTS &
ALLOWANCES
 PROMOTIONAL PRICING
 DIFFERENTIATED PRICING