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COSLA Ch16 Developing Pricing Strategies and Programs
- 1. Chapter 16: Developing Pricing Strategies and Programs Developing Pricing Strategies and Programs Verlaine G. Carino Ateneo Graduate School of Business Marketing Management v82 By: Verlaine Carino for v
- 2. Chapter 16: Developing Pricing Strategies and ProgramsBy: Verlaine Carino for v
- 3. Chapter 16: Developing Pricing Strategies and Programs Outline PRICING IS AFFECTED BY: 1. CONSUMER Perception 2. COMPANY Adaptation 3. Responses to COMPETITION By: Verlaine Carino for v
- 4. Chapter 16: Developing Pricing Strategies and Programs PRICING IS AFFECTED BY: 1. CONSUMER Perception 2. COMPANY Adaptation 3. Responses to COMPETITION By: Verlaine Carino for v
- 5. Chapter 16: Developing Pricing Strategies and Programs 1. Consumer Perception CONSUMER PSYCHOLOGY • Reference Prices • Price-Quality Inferences • Price Endings By: Verlaine Carino for v
- 6. Chapter 16: Developing Pricing Strategies and Programs 1. Consumer Perception CONSUMER PSYCHOLOGY – Reference Prices By: Verlaine Carino for v
- 7. Chapter 16: Developing Pricing Strategies and Programs 1. Consumer Perception CONSUMER PSYCHOLOGY – Price-Quality Inferences • PRICE = QUALITY • EXCLUSIVITY, SCARCITY = UNIQUENESS, PREMIUM PRICING By: Verlaine Carino for v
- 8. Chapter 16: Developing Pricing Strategies and Programs 1. Consumer Perception CONSUMER PSYCHOLOGY – Price Endings • Price ending in ODD NUMBER • Price ending in “9” • “SALE” signs • Limited availability By: Verlaine Carino for v
- 9. Chapter 16: Developing Pricing Strategies and Programs 1. Consumer Perception LOCAL APPLICATION By: Verlaine Carino for v
- 10. Chapter 16: Developing Pricing Strategies and Programs 1. Consumer Perception LOCAL APPLICATION By: Verlaine Carino for v
- 11. Chapter 16: Developing Pricing Strategies and Programs 1. Consumer Perception GLOBAL APPLICATION $130,000.00 By: Verlaine Carino for v
- 12. Chapter 16: Developing Pricing Strategies and Programs PRICING IS AFFECTED BY: 1. CONSUMER Perception 2. COMPANY Adaptation 3. Responses to COMPETITION By: Verlaine Carino for v
- 13. Chapter 16: Developing Pricing Strategies and Programs 2. Company Adaptation PRICE-ADAPTATION STRATEGIES • Geographical Pricing • Price Discounts and Allowances • Promotional Pricing • Differentiated Pricing By: Verlaine Carino for v
- 14. Chapter 16: Developing Pricing Strategies and Programs 2. Company Adaptation PRICE-ADAPTATION: Geographical Pricing • Pricing varies per location By: Verlaine Carino for v
- 15. Chapter 16: Developing Pricing Strategies and Programs 2. Company Adaptation PRICE-ADAPTATION: Price Discounts & Allowances • Discount • Quantity Discount • Functional Discount • Seasonal Discount • Allowance By: Verlaine Carino for v
- 16. Chapter 16: Developing Pricing Strategies and Programs 2. Company Adaptation PRICE-ADAPTATION: Promotional Pricing • Loss-leader pricing • Special-event pricing • Special customer pricing • Cash rebates • Low-interest financing • Longer payment terms • Warranties and service contracts • Psychological discounting By: Verlaine Carino for v
- 17. Chapter 16: Developing Pricing Strategies and Programs 2. Company Adaptation LOCAL APPLICATION 5/15 Net 30 5% Discount 15 Days 30 Days By: Verlaine Carino for v
- 18. Chapter 16: Developing Pricing Strategies and Programs 2. Company Adaptation LOCAL APPLICATION By: Verlaine Carino for v
- 19. Chapter 16: Developing Pricing Strategies and Programs 2. Company Adaptation LOCAL APPLICATION Warranty 1 year 2 years 3 years Suggested Price 700,000.00 750,000.00 800,000.00 By: Verlaine Carino for v
- 20. Chapter 16: Developing Pricing Strategies and Programs 2. Company Adaptation LOCAL APPLICATION By: Verlaine Carino for v
- 21. Chapter 16: Developing Pricing Strategies and Programs PRICING IS AFFECTED BY: 1. CONSUMER Perception 2. COMPANY Adaptation 3. Responses to COMPETITION By: Verlaine Carino for v
- 22. Chapter 16: Developing Pricing Strategies and Programs 3. Responses to Competition INITIATING & RESPONDING TO PRICE CHANGES • Initiating Price Cuts • Initiating Price Increases • Anticipating Competitive Responses • Responding to Competitors’ Price Changes By: Verlaine Carino for v
- 23. Chapter 16: Developing Pricing Strategies and Programs 3. Responses to Competition RESPONDING TO COMPETITORS’ PRICE CHANGES • Further differentiate the product or service • Introduce a low-cost venture • Reinvent a low-cost player By: Verlaine Carino for v
- 24. Chapter 16: Developing Pricing Strategies and Programs 3. Responses to Competition LOCAL APPLICATION By: Verlaine Carino for v
- 25. Chapter 16: Developing Pricing Strategies and Programs 3. Responses to Competition GLOBAL APPLICATION By: Verlaine Carino for v
- 26. Chapter 16: Developing Pricing Strategies and Programs Summary PRICING IS AFFECTED BY: 1. CONSUMER Perception By: Verlaine Carino for v
- 27. Chapter 16: Developing Pricing Strategies and Programs Summary PRICING IS AFFECTED BY: 1. CONSUMER Perception 2. COMPANY Adaptation By: Verlaine Carino for v 5/15 Net 30
- 28. Chapter 16: Developing Pricing Strategies and Programs Summary PRICING IS AFFECTED BY: 1. CONSUMER Perception 2. COMPANY Adaptation 3. Responses to COMPETITION By: Verlaine Carino for v
- 29. Chapter 16: Developing Pricing Strategies and Programs Summary PRICING IS AFFECTED BY: 1. CONSUMER Perception 2. COMPANY Adaptation 3. Responses to COMPETITION By: Verlaine Carino for v
Editor's Notes
- The next slides will explain how pricing is affected by Consumer perception Company Adaptation And Responses to Competition
- Let’s first look into Consumer Perception. Purchase decisions are based on how consumers perceive prices and what they consider the current actual price to be—not on the stated price. Customers may have a lower price threshold below which prices signal inferior or unacceptable quality, as well as an upper price threshold above which prices are prohibitive and the product appears not worth the money.
- There are 3 key topics in Consumer Psychology and Pricing: Reference Prices Price-Quality Inferences Price Endings
- Consumers employ “reference prices” when comparing an observed price to an internal reference price they remember or an external frame of reference such as a posted “regular retail price.” Some examples of consumer reference prices are: Fair Price – what consumers feel the product should be sold Typical Price Last Price Paid Upper-Bound Price – maximum price consumers would pay Lower-Bound Price – minimum price most consumers would pay Historical Competitors Price Expected Future Price Usual Discounted Price Prices can be manipulated A seller can situate its product among expensive competitors to imply that it belongs in the same class Dresses in the more expensive department are assumed to be of better quality CLEVER MARKETERS try to frame the price to signal the best value possible
- PRICE = QUALITY Price can be considered as an INDICATOR of QUALITY Higher-priced cars are perceived to possess high quality Higher quality cars are likewise perceived to be higher priced than they actually are. EXCLUSIVITY, SCARCITY = UNIQUENESS, PREMIUM PRICING This means when a product is exclusive, available to few people, customers are willing to pay a premium price.
- ODD NUMBER Customers perceive an item priced at $299 to be in the $200 rather than the $300 range; ENDING in 9 - Suggest a DISCOUNT or a BARGAIN SALE signs spur demand Limited availability - For example, “three days” only can spur sales among consumers
- Let’s take a look at a sample in Zalora website for the H&M brand. The “limited time only” gives a sense of urgency to the sporty consumer to “add to cart” and “check out” items which are reasonably priced at the PhP 200 range.
- Here’s another example of limited availability, with exact end date and time of the particular promo. This gives a “pressure” to the consumer to purchase this item at 50% off only until April 4 11:59 PM.
- Let’s look at a global application of how consumer perception could affect the pricing. Everyone knows Hermes Birkin bags and how expensive they are. This particular model, the Hermes Sac Faubourg Birkin is extremely rare and has limited units for VIP’s. This bag costs between $110,000.00 to $130,000.00. This shows that consumers are willing to pay a large amount of money if they know that they are one of the few who would own the item around the world.
- We have just discussed how consumer perception affects pricing. Let’s now look at the strategies companies implement to adapt to the changing environment.
- Companies do not usually set a single price, but instead implement a pricing structure that adapts to the changes in the market. Several price-adaptation strategies available are: (1) geographical pricing; (2) price discounts and allowances; (3) promotional pricing; and (4) differentiated pricing.
- In geographical pricing, pricing varies per location. Should the company charge higher prices to distant customers to cover the higher shipping costs, or a lower price to win additional business? How about foreign exchange rates and the strengths of different currencies? How should companies account for these? Another question is how to get paid. COUNTERTRADE - This is a practice wherein buyers want to offer other items in payment. - Countertrade may account for 15 percent to 20 percent of world trade and takes several forms. 1. BARTER Barter means the buyer and seller directly exchange goods, with no money and no third party involved. 2. COMPENSATION DEAL A compensation deal happens when a seller receives some percentage of the payment in cash and the rest in products. 3. BUYBACK ARRANGEMENT - A buyback arrangement happens when a seller sells a plant, equipment, or technology to another company and agrees to accept the products manufactured as partial payment. 4. OFFSET - Offset happens when the seller receives full payment in cash but agrees to spend a substantial amount of the money in that country or company within a stated time period.
- A DISCOUNT is a price reduction to buyers who pay bills promptly. For example a “2/10, net 30,” which means that payment is due within 30 days and that the buyer can deduct 2 percent by paying the bill within 10 days. A QUANTITY DISCOUNT is a price reduction to those who buy large volumes. A FUNCTIONAL or TRADE discount is offered by a manufacturer to trade channel members if they will perform certain functions, such as selling, storing, and record keeping. Manufacturers must offer the same functional discounts within each channel. A SEASONAL discount is a price reduction to those who buy merchandise or services out of season. An ALLOWANCE is an extra payment designed to gain reseller participation in special programs. Trade-in allowances are granted for turning in an old item when buying a new one. Promotional allowances reward dealers for participating in advertising and sales support programs.
- Companies can use several pricing techniques to stimulate early purchase: Loss-leader pricing means that supermarkets and department stores often drop the price on well-known brands to stimulate additional store traffic. This pays if the revenue on the additional sales compensates for the lower margins on the loss-leader items. Special event pricing means that sellers will establish special prices in certain seasons to draw in more customers. Special customer pricing means sellers will offer special prices exclusively to certain customers. Cash rebates mean that auto companies and other consumer-goods companies offer cash rebates to encourage purchase of the manufacturers’ products within a specified time period. Low-interest financing means that instead of cutting its price, the company can offer customers low interest financing. Sellers, especially mortgage banks and auto companies, stretch loans over longer periods and thus lower the monthly payments. Companies can promote sales by adding a free or low-cost warranty or service contract. Using psychological discounting is a strategy that sets an artificially high price and then offers the product at substantial savings; for example, “Was $359, now $299.” Promotional-pricing strategies are often a zero-sum game. If they work, competitors copy them and they lose their effectiveness. If they don’t work, they waste money that could have been put into other marketing tools, such as building up product quality and service or strengthening product image through advertising.
- Let’s now look at local applications of how companies adapt their pricing. Our company is part of the medical device industry and has been implementing several strategies to adapt its pricing. What do these numbers represent? This represents the discount offered to some customers as incentive for early payment. This means a 5% discount is automatically given (deducted by customer from actual payment) if payment is received 15 days from Invoice date. Otherwise, the Invoice amount is due within 30 days. This strategy has been effective both for the customer and for the company. The customer get 5% discount for all invoices, and at the same time, we receives early payment from the customer.
- Here’s another example of price adaptation being implemented. Usually, having the best or lowest price is not enough for customers. They would also want to get the longest warranty term, particularly for equipment purchases. To resolve this, our company offers different price points for different warranty options.
- This is just a sample information that we provide the customer. Different prices are given for different warranty options. Would the customer be willing to pay a small premium to cover for spare parts, service, and maintenance of the equipment they are purchasing? Providing options to the customer somewhat gives them the authority in price negotiations. They would have the final say on the price by choosing the option that would fit their budget and requirements.
- Defective machines and slow response time is a challenge not only for the hospitals but also for the medical device companies. Some machines have to be sent to manufacturers outside the Philippines for repair. This would mean at least 2 months lead time for repairs. This is not acceptable for the hospitals. To address this, we offer TRADE IN options for some defective items that are on stock. This option may be more expensive than actual repairs. But this will definitely cut the wait time and ensure the availability of the machines or instruments to the hospital.
- We have already discussed how consumer perception affects pricing and how companies adapt to the changes in the market environment. Let’s now look at the different responses to competition.
- Companies often need to cut or raise prices. A company can: Initiate Price Cuts Initiate Price Increases Anticipate Competitve Responses Respond to competitors’ Price Changes
- Market leaders often face aggressive price cutting by smaller firms trying to build market share Three possible responses to low-cost competitors are: further differentiate the product or service, introduce a low-cost venture, or reinvent as a low-cost player. The right strategy depends on the ability of the firm to generate more demand or cut costs.
- In a very price-sensitive medical industry, it’s very challenging to promote premium brands. Government, and even private accounts, consider price as a major factor in purchase decisions. We cannot just lower down our prices and sacrifice our margins because we understand that our competitors can react and further lower their prices. Which, as mentioned in an earlier slide, could start a “price war” To address this concern, our company has implemented several strategies such as: Product Packages – instead of hospitals ordering from separate suppliers, they can order from us all the items that they need for a certain medical procedure. Placement/Lease Programs – this means the hospital will not spend for purchasing and maintaining the equipment, in exchange for exclusive purchase of supplies used for the
- Let’s now look at how this can be applied to the Smartphone Industry, with Apple and Samsung as the market leaders. The graph shows the major smartphone prices over time. Apple uses a premium price strategy for iPhones. Since 2012, Apple’s iPhone prices has been consistently high compared to its competitors. As discussed in earlier slides, Apple’s high prices could reflect high quality customer perception. With this, customers will be willing to pay a premium price. But, with the rise of smartphone competitors such as Samsung, Apple has acknowledged that there are price-sensitive customers and started offering different iPhone generations and models. This started with iPhone SE and iPhone 6. There were the original models (iPhone 6, 6S, etc), which were smaller, have slower processor speed, but are priced lower than the “Plus” models. This allowed customers who cannot afford the high-end Plus models to have an option with less features and functionalities, but still getting the Apple brand. Apple will never be part of the low-priced market. It wants to maintain the brand identity that they produce high-quality, premium products. https://www.zdnet.com/article/apple-beats-samsung-in-smartphone-sales-for-first-time-in-five-years/ https://www.business-standard.com/article/technology/high-stakes-battle-how-samsung-huawei-are-taking-on-apple-in-pricing-game-119022600103_1.html https://www.macworld.com/article/234911/3-rules-to-understand-the-price-of-apple-products.html https://stratpricing.com/no-apples-pricing-strategy-was-not-wrong/?fbclid=IwAR06J-mE1cYX2Vma7ucVxsk3FOEK5TSNYM5inJn9gAg0i3BzxZ43InmaAsE
- In summary, we have seen how limited availability and prices ending in “9” affects consumers. We also learned that consumers are willing to pay more for quality products that are “exclusive” to the VIP’s.
- Pricing is also affected by how the company adapts to changes in the environment. Samples on discounts, extended warranty, and trade in’s were presented.
- Companies can implement different strategies as responses to competition price changes. This could include offering product package, placement programs, and introduction of different products options with different price range.