Marketing

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

2. 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
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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How Companies Price?
• Companies do their pricing in a variety of
ways.
• In small companies, the boss often sets
prices.
• In large companies, division and product line
managers do. Even here, top management
sets general pricing objectives and policies
and often approves lower management’s
proposals.

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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

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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

20. Step 4:Analyzing competitor’s
cost, prices and offers
• If the firm’s offer contains features not
offered by the nearest competitor, it
should evaluate their worth to the
customer and add that value to the
competitor’s price.
• If the competitor’s offer contains some
features not offered by the firm, the firm
should subtract their value from its own
price.
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Step 5: Selecting a Pricing Method
• Markup pricing (adding standard markup)
• Target-return pricing (target rate of
return)
• Perceived-value pricing
• Value pricing
• Going-rate pricing
• Auction-type pricing

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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

25. Geographical pricing is used for
customers in different parts of the
country or the world
• FOB-origin pricing
• Uniformed-delivered pricing
• Zone pricing
• Basing-point pricing
• Freight-absorption pricing
Pricing Strategies
Price-Adaptation Strategies

26. • FOB-origin (free on board) pricing
means that the goods are delivered to
the carrier and the title and
responsibility passes to the customer
• Uniformed-delivered pricing means
the company charges the same price
plus freight to all customers,
regardless of location
Pricing Strategies
Price-Adaptation Strategies

27. • Zone pricing means that the company
sets up two or more zones where
customers within a given zone pay a
single total price
• Basing-point pricing means that a seller
selects a given city as a “basing point”
and charges all customers the freight cost
associated from that city to the customer
location, regardless of the city from which
the goods are actually shipped
Pricing Strategies
Price-Adaptation Strategies

28. • Freight-absorption pricing means
the seller absorbs all or part of the
actual freight charge as an incentive to
attract business in competitive
markets
Pricing Strategies
Price-Adaptation Strategies

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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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Initiating Price Cuts
Excess plant capacity
Dominate the market
through low cost

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Increasing Prices
Delayed quotation pricing
Escalator clauses
Unbundling
Reduction of discounts