This document discusses developing price strategies and programs. It outlines the objectives of setting prices for new products, adapting prices for varying circumstances, and responding to competitor price changes. The document then describes a six step process for setting prices that includes selecting a pricing objective, determining demand, estimating costs, analyzing competitors, selecting a pricing method, and setting the final price. It also discusses ways to adapt prices for different geographic regions, promotions, customer segments, products, channels, locations, times, and yields.

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Chapter 16Chapter 16
Developing Price StrategiesDeveloping Price Strategies
and Programsand Programs
byby
PowerPoint byPowerPoint by
Milton M. PressleyMilton M. Pressley
University of New OrleansUniversity of New Orleans

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Sell value,Sell value,
not price.not price.
Kotler on
Marketing

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Chapter Objectives
 In this chapter, we focus on threeIn this chapter, we focus on three
questions:questions:
 How should a price be set on a product orHow should a price be set on a product or
service for the first time?service for the first time?
 How should the price be adapted to meetHow should the price be adapted to meet
varying circumstances and opportunities?varying circumstances and opportunities?
 When should the company initiate a priceWhen should the company initiate a price
change, and how should it respond to achange, and how should it respond to a
competitor’s price change?competitor’s price change?

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Figure 16.1: Nine Price-Quality Strategies

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Setting the Price
 Step 1: Selecting the pricing objectiveStep 1: Selecting the pricing objective
 SurvivalSurvival
 Maximize current profitsMaximize current profits
 Maximize market shareMaximize market share
 Market-penetration pricingMarket-penetration pricing
 Best when:Best when:
 Market is highly price-sensitive, and a low priceMarket is highly price-sensitive, and a low price
stimulates market growth,stimulates market growth,
 Production and distribution costs fall withinProduction and distribution costs fall within
accumulated production experience, andaccumulated production experience, and
 Low price discourages actual and potentialLow price discourages actual and potential
competitioncompetition

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Many companies engage in “marketMany companies engage in “market
skimming,” offering new products atskimming,” offering new products at
whatever price the market will bear, thenwhatever price the market will bear, then
over time decreasing the price in order toover time decreasing the price in order to
gain the maximum profit from eachgain the maximum profit from each
market segment. Can you think of anymarket segment. Can you think of any
products that wouldn’t fitproducts that wouldn’t fit
this pricing model?this pricing model?
Why not?Why not?

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 Step 2: Determining DemandStep 2: Determining Demand
 Price sensitivityPrice sensitivity
 Total Cost of Ownership (TCO)Total Cost of Ownership (TCO)
 Estimating Demand CurvesEstimating Demand Curves
 Price Elasticity of DemandPrice Elasticity of Demand
 InelasticInelastic
 ElasticElastic
 Price indifference bandPrice indifference band

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 Step 3: Estimating CostStep 3: Estimating Cost
 Types of Cost and Levels of ProductionTypes of Cost and Levels of Production
 Fixed costs (overhead)Fixed costs (overhead)
 Variable costVariable cost
 Total costTotal cost
 Average costAverage cost
 Accumulated ProductionAccumulated Production
 Experience curve (Learning curve)Experience curve (Learning curve)
 Differentiated Marketing OffersDifferentiated Marketing Offers
 Activity-based cost (ABC) accountingActivity-based cost (ABC) accounting
 Target costingTarget costing

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 Step 4: Analyzing Competitors’ Cost,Step 4: Analyzing Competitors’ Cost,
Prices, and OffersPrices, and Offers
 Step 5: Selecting a Pricing MethodStep 5: Selecting a Pricing Method
 Markup PricingMarkup Pricing
Unit Cost = variable cost + (fixed cost/unit sales)Unit Cost = variable cost + (fixed cost/unit sales)
 Markup priceMarkup price
Markup price= unit cost/ (1 – desired return on sales)Markup price= unit cost/ (1 – desired return on sales)
 Target-Return PricingTarget-Return Pricing
Target-return price =Target-return price =
unit cost + (desired return X investment capital)/unit salesunit cost + (desired return X investment capital)/unit sales

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 Break-even volumeBreak-even volume
Break-even volume = fixed cost / (price – variable cost)Break-even volume = fixed cost / (price – variable cost)
 Perceived-Value PricingPerceived-Value Pricing
 Perceived valuePerceived value
 Price buyersPrice buyers
 Value buyersValue buyers
 Loyal buyersLoyal buyers
 Value-in-use priceValue-in-use price
Figure 16.8: Break-Even Chart for
Determining Target-Return Price and
Break-Even Volume

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 Value PricingValue Pricing
 Everyday low pricing (EDLP)Everyday low pricing (EDLP)
 High-low pricingHigh-low pricing
 Going-Rate PricingGoing-Rate Pricing
 Auction-Type PricingAuction-Type Pricing
 English auctions (ascending bids)English auctions (ascending bids)
 Dutch auctions (descending bids)Dutch auctions (descending bids)
 Sealed-bid auctionsSealed-bid auctions
 Group PricingGroup Pricing

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 Step 6: Selecting the Final PriceStep 6: Selecting the Final Price
 Psychological PricingPsychological Pricing
 Reference priceReference price
 Gain-and-Risk-Sharing PricingGain-and-Risk-Sharing Pricing
 Influence of the Other Marketing ElementsInfluence of the Other Marketing Elements
 Brands with average relative quality but high relativeBrands with average relative quality but high relative
advertising budgets charged premium pricesadvertising budgets charged premium prices
 Brands with high relative quality and high relativeBrands with high relative quality and high relative
advertising budgets obtained the highest pricesadvertising budgets obtained the highest prices
 The positive relationship between high advertisingThe positive relationship between high advertising
budgets and high prices held most strongly in the laterbudgets and high prices held most strongly in the later
stages of the product life cycle for market leadersstages of the product life cycle for market leaders

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 Brands with average relative quality but high relativeBrands with average relative quality but high relative
advertising budgets charged premium pricesadvertising budgets charged premium prices
 Brands with high relative quality and high relativeBrands with high relative quality and high relative
advertising budgets obtained the highest pricesadvertising budgets obtained the highest prices
 The positive relationship between high advertisingThe positive relationship between high advertising
budgets and high prices held most strongly in the laterbudgets and high prices held most strongly in the later
stages of the product life cycle for market leadersstages of the product life cycle for market leaders
 Company Pricing PoliciesCompany Pricing Policies
 Impact of Price on Other PartiesImpact of Price on Other Parties

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Adapting the Price
 Geographical Pricing (Cash,Geographical Pricing (Cash,
Countertrade, Barter)Countertrade, Barter)
 CountertradeCountertrade
 BarterBarter
 Compensation dealCompensation deal
 Buyback arrangementBuyback arrangement
 OffsetOffset
 Price Discounts and AllowancesPrice Discounts and Allowances

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Adapting the Price
 Promotional PricingPromotional Pricing
 Loss-leader pricingLoss-leader pricing
 Special-event pricingSpecial-event pricing
 Cash rebatesCash rebates
 Low-interest financingLow-interest financing
 Longer payment termsLonger payment terms
 Warranties and service contractsWarranties and service contracts
 Psychological discountingPsychological discounting

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Adapting the Price
 Discriminatory PricingDiscriminatory Pricing
 Customer segment pricingCustomer segment pricing
 Product-form pricingProduct-form pricing
 Image pricingImage pricing
 Channel pricingChannel pricing
 Location pricingLocation pricing
 Time pricingTime pricing
 Yield pricingYield pricing