10/23/2020

Marketing Mix
1
16
Developing Pricing
Strategies and
Programs

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Definition of Price Pricing

• Pricing decisions are complex and must take

• The sum of all the values that customers into account:
give up to gain the benefits of a having a ̶ The three Cs
product ̶ The marketing environment
̶ It is NOT the amount of money charged for a
product • Pricing decision must be consistent with
̶ Marketing strategy
̶ Target markets
̶ Brand positions

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Common Pricing Mistakes Consumer Psychology and Pricing

Economists’ View Marketers’ View

• Follow cost-based pricing
• Consumers are price • Consumers process price
• Failure to vary price to capitalize on market takers who accept the info, interpreting it from
changes price at face value the context of
− Prior buying experience
• Setting price independently
− Formal or informal
• Failure to vary price for different products, Purchase decisions are communications
based on how consumers − POP or online resources
market segments, distribution channels, etc.
perceive prices and what
they consider the current
actual price to be

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Consumer Psychology and Pricing Some Reference Prices

―Fair price‖
Reference prices are the prices
that buyers carry in minds and Typical price
refer to when looking at a given
product Last price paid
Price-Quality Inferences
Upper-bound price

Lower-bound price
$299.99 Competitor prices
Reference Prices
$290 Price Endings Expected future price

Usual discounted price

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A Black T-Shirt Major Pricing Strategies

―A Black T-Shirt‖ example illustrates the large part

consumer psychology in determining three different • Customer value-based pricing— Setting prices
prices for essentially the same item based on buyers’ perceptions of value rather than on
the seller’s cost

Armani - $275 • Cost-based pricing— Setting prices based on the

costs of producing, distributing, and selling the
product plus a fair rate of return for effort & risk

• Competition-based pricing— Setting price based

Gap - $14.90 on competitors’ strategies, prices, costs, and
offerings

H&M - $7.90
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New-Product Pricing Strategies Steps in Setting Price

6 Select Final Price

• Market-penetration pricing— setting a initial low
price to penetrate the market quickly and deeply, 5 Price Method
attract a large number of buyers quickly, and gain
market share 4 Competitor Analysis
• Market-skimming pricing — setting a high initial 3 Estimate Costs
price to ―skim‖ revenue layers from the market
and then lower it 2 Determine Demand

1 Pricing Objective

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Step-1: Selecting the Pricing Objective Step 2: Determining Demand

• Survival
Price sensitivity— quantity
• Maximum Current Profit
purchased at alternative prices
• Maximum Market Share
• Maximum Market Skimming Estimating demand curves—
• Product-Quality Leadership how responsive or elastic
• Other Objectives demand would be to a change in
price

Price Elasticity of Demand—

elastic or inelastic

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Step 2: Determining Demand Step 3: Estimating Costs

Demand Price Ceiling

Price

Price Floor
Fair return Profit

Costs
FC

VC

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Types of costs Costs at Varying Levels of Production

Fixed Costs
(overhead) Variable Costs Total Costs

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Accumulated Production Experience Curve

Accumulated Production

Experience (Learning) Curve

refers to the decline in the average
cost with accumulated production
experience.

Cost per Unit as a Function of Accumulated Production

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Step 4: Analyzing Competitors’ Costs,

Target Costing
Prices, and Offers
Design engineers

Prices Offers

Costs Reactions

Target costing helps achieve Market research establishes

cost target with concentrated a new product’s desired
effort of designers, engineers, functions and the price at
and purchasing agents which it will sell Worth to Customer
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Step 5: Selecting a Pricing Method Step 5: Selecting a Pricing Method

• Markup (Cost Plus) Pricing

• Target-return Pricing

3 Major Considerations: • Perceived-value Pricing

• Customers’ demand schedule
• Cost function • Value Pricing
• Competitors’ prices
• Going-rate Pricing

• Auction-type Pricing

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Markup (Cost Plus) Pricing Target-Return Pricing

Adds a standard markup to the cost of the product The firm determines the price that yields its target rate
of return on investment

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Target-Return Pricing Perceived Value Pricing

Perceived value is made up of:

• Product performance $$$

• Channel deliverables $

• Warranty $

• Customer support $

• Supplier’s reputation $$

FC $300,000
BEV    30,000(units )
Price - VC $20 - $10

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Value Pricing Going Rate Pricing

Charge a fairly low price as a low-cost producer Charge a price based on competitors’
achieved through reengineering operations, without prices
sacrificing quality, and thus winning loyal
• Collective wisdom of the industry
customers
• Ignoring costs and demand

Follow the leader Commodities

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Auction-Type Pricing Step 6: Selecting the Final Price

English auction Impact on other marketing

(ascending bids) activities

Company Pricing Policies Impact on other parties

Dutch auction
(descending bids) Brand
Quality
Gain-and-risk-sharing

Sealed-bid auction
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Adapting the Price Geographical Pricing

Geographical Pricing Adjusting prices to account for the geographic
location of customers

Price Discounts and • Forms of countertrade (15%-20%)

Allowances
 Barter—direct exchange of goods
 Compensation deal—payment of products and cash (UK
Aircraft vs. Brazil: 70% cash and 30% coffee)
Differentiated Pricing  Buyback arrangement—payment in form of products
manufactured by the supplied equipment and cash
 Offset—receive payment in cash but agrees to spend
some of the money in the products of that country
(PepsiCo)

Promotional Pricing
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Geographical Pricing Methods Price Discounts and Allowances

• FOB-origin–the buyer pays the • Zone pricing– customers
freight from the factory to the in different zones pay for • Cash discount— discount given to buyers who pay
destination different prices promptly (2/10,n 30
• FOB-port– the seller pays the • Basing-point pricing– the • Quaintly discount— discount given for large volume
freight from the factory to the seller charges all purchase
port of shipment plus loading customers a base price
cost plus the freight cost from • Functional discount/ trade discount— discount given
that city to the customer to channel members
• FOB-destination– the seller
pays the freight from the factory location • Seasonal discount— discount given to out-of-season
to buyer’s unloading dock buyers
• Freight-absorption
• Uniform-delivered pricing– the pricing– the seller • Allowance— an extra payment designed to gain
seller charges the same price absorbs all or part of the reseller participation in special program (trade-in
plus freight to all customers, freight charges to get allowances & promotional allowances)
regardless of their location desired business

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Promotional Pricing Differentiated Pricing

Temporarily pricing products below the list price or A company sells a product at two or more prices
cost to increase demand even though the difference is not based on cost

• Loss-leader pricing • Customer-segment pricing

• Special-event pricing • Product-form pricing
• Special customer pricing Types of • Image pricing Types of
• Cash rebates Promotional Differentiated
• Channel pricing
• Low-interest financing Pricing Pricing
• Location pricing
• Longer payment terms
• Time pricing
• Warranties and service contracts
• Yield pricing
• Psychological discounting

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Price Changes Buyer Reactions to Pricing Changes

Reasons for price cuts Price increases Price cuts

• Excess plant capacity
• Dominate market through lower price • Product is ―hot‖ • New models will be
• Company is greedy available
• To increase market share
• Models are not selling
• Recession well
Reasons for price increases • Quality issues
• Cost inflation and expected inflation • Price cut is imminent
• Overdemand • Financial trouble
• Shortage of supply

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Traps in Price Cutting Strategies Increasing Prices

• Low-quality trap • Delayed quotation pricing

• Fragile-market-share trap • Escalator clauses
• Shallow-pocket trap • Unbundling
• Price-war trap • Reduction of discounts

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Indirectly Increasing Prices Responding to Price Changes

• Product amount shrinkage

• Substituting the expensive inputs by
Questions
low ones
• Why did the competitor change the price?
• Reducing or removing product or
service features • Is the price cut permanent or temporary?

• Using less expensive packaging • What is the effect on market share and profits?

• Reducing the number of sizes and • Will competitors respond?

models of product
• Creating new economy brands

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Responding to Price Changes Responding to Price Changes

Solutions
• Reduce price to match competition
• Maintain price but raise the perceived value
through communications
• Improve quality and increase price
• Launch a lower-price ―fighting‖ brand

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