Marketing Management

Sixteenth Edition, Global Edition

Chapter 11
Managing Pricing and
Sales Promotions

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Learning Objectives
11.1 Describe the role that pricing plays in marketing
management.
11.2 Identify the key psychological factors that influence
how consumers perceive prices.
11.3 Explain the factors that a manager must consider
when setting prices.
11.4 Discuss how to respond to competitive price cuts.
11.5 Explain how to design and manage incentives.

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Understanding Pricing
• Negotiations between buyers and sellers
• One price for all buyers
• Internet pricing

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Consumer Psychology and Pricing
• Reference prices
• Image pricing
• Price cues

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Setting the Price
• Six main steps:
– Defining the pricing objective
– Determining demand
– Estimating costs
– Analyzing competitors’ costs, prices, and offers
– Selecting a pricing method
– Setting the final price

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Defining the Pricing Objective
• Common pricing objectives:
– Short-term profit
– Market penetration
– Market skimming
– Quality leadership

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Determining Demand
• Price elasticity of demand
– The degree to which a change in price leads to a
change in quantity sold

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Figure 11.1 Inelastic And Elastic Demand

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Estimating Costs (1 of 2)
• Fixed costs
– Costs that do not vary with production level or sales
revenue
• Variable costs
– Vary directly with the level of production
• Total costs
– The sum of the fixed and variable costs

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Estimating Costs (2 of 2)
• Experience curve effects
– Experience curve
– Experience curve pricing

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Analyzing Competitors’ Prices
• Firm must take competitors’ costs, prices, and reactions
into account
– Value-priced competitors

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Selecting a Pricing Method (1 of 6)
• Three major considerations in price
– Costs
▪ Set a price floor
– Competitors’ prices
▪ Provide an orienting point
– Customers’ assessment of unique features
▪ Establish a price ceiling

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Selecting a Pricing Method (2 of 6)
• Markup pricing
– Add a standard markup to the product’s cost

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Selecting a Pricing Method (3 of 6)
• Target-return pricing
– Price that yields its target rate of return on investment

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Figure 11.2 Break-Even Chart for Determining
Target-Return Price and Break-Even Volume

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Selecting a Pricing Method (4 of 6)
• Economic value-to-customer pricing
– Based on buyer’s image of product, channel
deliverables, warranty quality, customer support, and
softer attributes

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Selecting a Pricing Method (5 of 6)
• Competitive pricing
– The firm bases its price largely on competitors’ prices

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Selecting a Pricing Method (6 of 6)
• Auction pricing
– English (ascending)
– Dutch (descending)
– Sealed-bid

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Setting the Final Price (1 of 2)
• Price discrimination
– Occurs when a company sells a product or service at
two or more prices that do not reflect a proportional
difference in costs
▪ First degree
▪ Second degree
▪ Third degree

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Setting the Final Price (2 of 2)
• Third degree price discrimination:
– Customer segment pricing
– Product form pricing
– Channel pricing
– Location pricing
– Time pricing

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Product Mix Pricing
• Loss-leader pricing
• Optional feature pricing
• Captive pricing
• Two-part pricing
• By-product pricing
• Product bundling pricing

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Initiating and Responding to Price
Changes (1 of 2)
• Initiating price cuts
– Excess plant capacity
– Domination of market

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Initiating and Responding to Price
Changes (2 of 2)
• Initiating price increases
– Cost inflation
▪ Rising costs unmatched by productivity gains
squeeze profit margins and lead companies to
regular rounds of price increases
– Anticipatory pricing

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Responding to Price Changes
• Anticipating competitive
responses
• Responding to competitors’ price
changes

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Managing Incentives
• Incentives
– Sales promotion tools, mostly short-term, designed to
stimulate quicker or greater purchase of particular
products or services by consumers or the trade

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Incentives as a Marketing Device
• Sales promotions
– Can produce a high sales response in the short run
but little permanent gain over the longer term
– Can prompt consumers to engage in stockpiling
– Can devalue the company’s offering in buyers’ minds

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Major Incentive Decisions (1 of 5)
• Establishing the objectives of incentives
– Consumer incentives
– Retailer incentives

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Major Incentive Decisions (2 of 5)
• Defining the size and approach for incentives
– Determine size
– Establish conditions for participation
– Decide on duration
– Choose a distribution vehicle
– Establish timing
– Set total sales promotion budget

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Major Incentive Decisions (3 of 5)
• Selecting Consumer Incentives

Price reductions Frequency programs

Coupons Prizes
Cash refunds Tie-in promotions
Price packs Seasonal discounts
Premiums Financing

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Major Incentive Decisions (4 of 5)
• Selecting trade incentives
– Allowances
– Free goods
– Price-off
– Payment discount

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Major Incentive Decisions (5 of 5)
• Selecting sales force incentives
– Aim to encourage the sales force to support a new
product or model, boosting prospecting and
stimulating off-season sales

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Discussion Questions (1 of 2)
• Fast food restaurants usually offer a variety of “meal
deals” comprising a sandwich, a side dish, and a drink.
– Which pricing objective are companies pursuing with
this type of product pricing?
– How do consumers view “meal deals” as compared to
individually priced menu items?

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Discussion Questions (2 of 2)
• Uber riders have become accustomed to surge pricing,
knowing that following a concert or sporting event they
may pay two or three times as much as usual for a ride.
– How has technology changed pricing strategy?
– Compare and contrast surge pricing on Uber with
peak pricing on airlines. Could airlines use an Uber
pricing model?

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