This document discusses strategies and concepts for developing pricing plans, including: 1) How companies should determine pricing objectives, estimate demand curves and costs, analyze competitors' prices, and select an appropriate pricing method. 2) Common consumer psychology factors that influence how people perceive and evaluate prices, such as reference prices and price cues. 3) Different pricing strategies companies can use such as geographical pricing, promotional pricing, and differentiated pricing to adapt prices for varying circumstances.

1. Developing Pricing
Strategies and Programs
Marketing Management, 13th ed
14

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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
competitor’s 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

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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

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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

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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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Tiffany’s
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

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

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Step 2: Determining Demand
Price Sensitivity
Estimating
Demand Curves
Price Elasticity
of Demand

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Figure 14.2 Inelastic
and Elastic Demand

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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 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
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

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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

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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.

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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?