Marketing Management By Philip, Kevin Lane Keller, Abraham Koshy, Mithileshwar Jha logo copy.tif SUMMARY by Chapter 14 Developing Pricing Strategies and Programs Traditionally, price has been the major determinant of a buyers’ choice. And this is still the case with large segments of markets across the world. Although non-price factors have recently risen in importance, pricing remains an important factor in determining sales and profitability. Also, price is the only component in the marketing mix that provides revenue andPricing not costs.Environment: Buyers can :Many firms are • Get instant price comparisons from thousands of vendors: Websites likenowadays following pricescan.com offer data about products like prices and reviews from hundreds ofthe low-price trend merchants.and have seen success • Name their prices: The consumer can state his desired price for a product and find the seller willing to meet this price on sites like priceline.com. Also, volume-aggregatingin converting the sites collate orders from many customers and press the supplier for a deeper discount.acquired customers to • Get products free: The open source software movement has eroded margins formore expensive almost any major software player. Also, the recent emergence of low-cost airlinesproducts by providing tickets only for the amount of taxes levied on a ticket is an example howcombining unique firms have been successful with free offerings.product formulationsand engaging Sellers can :marketing campaigns. • Monitor customer behaviour and customize offers: Firms use software to analyse pricing requests with pricing factors such as past sales data, discounts, etc. to reduce processing time of these requests greatly. • Offer certain customers special prices: Certain customers are offered lower prices by firms in order to capture a certain market segment on ensure the loyalty of existing customers further. Setting the price Firms set a price when they introduce a new product, or venture into a new market with an existing product. This is usually achieved by following a six-step process as follows
Chapter 14 - Developing Pricing Strategies and ProgramsConsumer Step 1: Selecting the Pricing Objective – The firm first decides where it wants to position its market offering. The five major pricing objectives arepsychology and • Survival: Companies pursue survival if they are plagued with over-capacity, intense competition, or changing consumer wants.pricing: • Maximum current profit: Many firms try to set a price that maximises their current profits and delivers a high return on investment.• Reference prices: • Maximum market share: Here, firms believe that a higher sales volume will lead to Consumers often employ lower unit costs and higher long-run profits and thereby maximise their market reference prices, share. comparing an observed • Maximum market skimming: Companies offering new technologies often set high price to an internal prices initially in order to gain high profits from various segments of the market early on. reference price or a posted • Product-Quality Leadership: Many firms aspire to be the product-quality leader in ‘regular retail price’. the market. Sellers manipulate this by product positioning, Step 2: Determining Demand – Each price leads to a different level of demand and suggesting that the actual therefore has a different impact on a company’s marketing objectives. The factors price of the product is entailing this are • Price Sensitivity: The relation between price and demand, i.e. the demand curve can much higher or by be analysed to determine the market’s probable purchase quantity at various prices. pointing to a competitor’s This helps a firm to maximise its profits. high price. • Estimating Demand Curves: Most companies use the following methods to estimate• Price-Quality inferences: demand curves: Market Surveys, Price Experiments, Statistical Analysis, etc. Many consumers use price • Price Elasticity: Marketers need to know how responsive, or elastic, the demand as an indicator of quality. would be, to a change in price. If the price elasticity is high, increasing prices would lead to a great reduction in demand, while decreasing prices would lead to increase High-price cars are in demand. Hence, marketers prefer inelastic markets where price changes do not perceived to be of higher elicit great shifts in demand. quality and vice versa.• Price cues: Consumer Step 3: Estimating Costs – While demand sets a ceiling on the range of price a firm can perceptions of prices are charge for its product, costs determine the floor. also affected by the • Types of Costs and Levels of Production: Costs are classified as Fixed costs and Variable costs. Fixed costs include salaries, electricity bills, etc. which do not depend manner in which prices are upon quantity produced. Variable costs include processing costs, packaging costs, displayed. Many sellers shipping costs, etc. which depend upon quantity produced. Hence, companies must believe setting a price of decide on a level of production which will more or less guarantee no losses on the Rs.2999 puts a product cost of production. into the 2000 range • Accumulated Production: As firms gain experience in production of a good, the instead of the 3000 range costs involved begin to decline. This is due to various factors such as workers finding shortcuts, smoother flow of materials, etc. This decline in cost with production as perceived by the experience is called experience curve. consumer. Putting ‘Sale’ • Target Costing: Other than production scale and experience, costs also change a signs near the price result of concentrated efforts by designers, engineers, purchase agents etc. They display have also been examine each cost component and try to find ways to reduce the costs involved in known to be effective. each of these.
Chapter 14 - Developing Pricing Strategies and Programs Trends Step 4: Analyzing Competitors – The introduction of any change in price, cost, offers given byInitiating and any seller can elicit a response in the market. A firm must analyse the value offered by a competitor to a customer in terms of prices, add-responding to ons, post-sale services, etc. and thereby modify its own price in order to be competitive in the market.price changes: Step 5: Selecting Pricing Methods – There are six major pricing methods:• Initiating price • Mark-up Pricing: The most elementary pricing method is to add a standard mark-up tocuts: Companies the producer’s cost.sometimes initiate • Target-return Pricing: In target-return pricing, the firm determines the price that wouldprice cuts in order to yield its target return on investment. • Perceived-value Pricing: Perceived-value pricing is made up of several factors like thedominate the market buyer’s image of the product, the channel deliverables, warranty quality, customerthrough lower prices. support, supplier’s reputation, etc.• Initiating price • Value Pricing: Here, high quality products are assigned a fairly low price. The basic aim here is to attract a value-conscious customer base by reengineering the company toincreases: Companies become a low-cost producer without sacrificing quality.initiate price increase • Going-rate Pricing: Here, firms base their prices largely on competitors’ prices, chargingto increase their profits nearly the same as major competitors in the market do.by taking into account • Auction-type Pricing: There are three types in this pricing method –the feasibility of the English Auctions (Ascending bids): Here, the seller puts up an item and the bidders raise the price until the top price is reached.price rise. A major Dutch Auctions (Descending bids): Here, the seller announces a high price and then goesfactor leading to these on lowering the price until a bidder accepts it. Or, a buyer announces his desire for aprice increases is over product and sellers compete to offer him the lowest price.demand, where the Sealed-bid Auctions: Here, potential suppliers submit their bids without knowledge ofcompany cannot other bids made and the best bid is selected.supply all its customers Step 6: Selecting the Final Price – After the pricing methods have narrowed the range of theand hence raises its price, the company selects the final price by taking into account factors as listed below:prices. • Impact of other marketing activities: The final price must take into account the brand’s quality and advertising relative to the competition.• Responding to • Company Pricing Policies: The final price must be compliant with the company’s pricingcompetitors’ price policies.changes: Firms respond • Gain-and-Risk-sharing Pricing: Buyers may resist accepting a supplier’s proposal becauseto price cuts/raises by of a high perceived level of risk. Hence, the seller has the option of offering to absorb partcompetitors by or all of the risk if the promised value is not delivered. • Impact of price on other parties: The final price’s effect on other parties such asconsidering various distributors, dealers, competitors, government should also be taken into account by thefactors like the management.product’s stage in thelife cycle, its Adapting the Priceimportance in the • Geographical Pricing • Price Discounts and Allowancescompany portfolio, etc. • Promotional Pricing • Differentiated Pricing