MARKETING MANAGEMENT

14
Developing Pricing
Strategies and
Programs
What is Price?

Price: is the sum of

all values that
consumers
exchange for the
benefits of having
or using the
product or service.

14-2
Price has many names:

• Rent • Fee
• Tuition • Dues
• Fare • Interest
• Rate • Donation
• Commission • Salary
• Wage

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 Common Pricing Mistakes
• Determining costs and taking traditional
industry margins
• Failure to revise price to capitalize on
market changes
• Setting price independently of the rest of
the marketing mix
• Failure to vary price by product item,
market segment, distribution channels, and
purchase occasion
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Steps in Setting
Pricing

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Setting the Price

Pricing Steps • Survival

• Maximize current profits
1. Select pricing objective • Maximize market share
2. Determine demand
– Penetration strategy
3. Estimate costs
• Market skimming
4. Analyze competition
5. Select pricing method
– Skimming strategy
6. Select final price • Product quality leaders
• Partial cost recovery

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Setting the Price

Pricing Steps • Understand factors that

affect price sensitivity
1. Select pricing objective • Estimate demand curves
2. Determine demand  Statistical analysis
3. Estimate costs  Price experiments
4. Analyze competition  Surveys
5. Select pricing method • Understand price
6. Select final price elasticity of demand
 Elasticity
 Inelasticity

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Consumers are less price sensitive when:

• Product is more distinctive • Part of the cost is borne

• Buyers are less aware of
substitutes
• Buyers cannot easily
compare quality of
substitutes
• The expenditure is a lower
part of buyer’s total income
• The expenditure is small
compared to the total cost
by another party
• The product is used with
assets previously bought
• The product is assumed
to have more quality,
prestige, or exclusiveness
• Buyers cannot store the
product

Internet increases customers’ price sensitivity

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Inelastic & Elastic Demand

14-9
Demand is less elastic under these
conditions:

• There are few or no substitutes/competitors

• Buyers do not readily notice the higher price
• Buyers are slow to change their buying habits
and search for lower prices
• Buyers think higher prices are justified

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Setting the Price

Pricing Steps • Types of costs and levels

of production must be
1. Select pricing objective considered
2. Determine demand • Accumulated production
3. Estimate costs leads to cost reduction
4. Analyze competition via the experience curve
5. Select pricing method • Differentiated marketing
6. Select final price offers create different
cost levels (Activity-
based cost ABC)

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Setting the Price
Key Pricing Terms:
 Fixed costs/overhead: costs that don’t
vary with production or sales revenue.
 Variable costs: vary with the level of
production.
 Total costs: sum of fixed and variable
costs at a given level of production
 Average cost: cost per unit at a given
level of production = total cost/quantity
of production.
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COST BEHAVIOR OVER DIFFERENT–SIZE PLANT

1 SRAC
2
3 4

LRAC
COST
PER
UNIT

1000 2000 3000 4000

QUANTITY PRODUCED PER

DAY
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Cost per Unit as a Function of Accumulated Production: The
Experience Curve

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Setting the Price

Pricing Steps • Firms must analyze the

competition with respect
1. Select pricing objective to:
2. Determine demand  Costs
3. Estimate costs  Prices
4. Analyze competition  Possible price reactions
5. Select pricing method • Pricing decisions are
6. Select final price also influenced by quality
of offering relative to
competition

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Setting the Price

Pricing Procedure • Price-setting begins with

the three “Cs”
1. Select pricing objective
• Select pricing method:
2. Determine demand
– Markup pricing
3. Estimate costs
– Target-return pricing
4. Analyze competition
– Perceived-value pricing
5. Select pricing method
– Value pricing
6. Select final price
– Going-rate pricing
– Auction-type pricing
– Group pricing

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 The Three C’s Model for Price Setting

Low Price Costs Competitors’ Customers’ High Price

prices and assessment
No possible prices of of unique No possible
profit at demand at
this price substitutes product this price
features

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Pricing Methods:

1. Markup pricing
Variable cost per unit =10$ , fixed cost =300,000$
Expected unit sales = 50,000 unit

the unit cost is given by:

Unit cost = 10$ + 300,000/50,000 =16$

Assume the manufacturer wants to earn a 20 percent

markup on sales, the markup price is given by:
Markup price = unit cost /(1- desired return on sales)
=16/(1- 0.2)= 20$
It will make profit of 4$ per unit
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Pricing Methods:

2.Target-Return Pricing
pricing used to achieve a planned or target rate of return on
investment

Target-return price = unit cost + desired return * invested capital

Unit sales

Target-return price =16$ + 0.20 * 1,000,000

$50,000

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

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Pricing Methods:

3. Perceived-Value Pricing
• Companies base their price on the customer’s perceived
value.
• The key to perceived-value pricing is to deliver more
value than the competitor and to demonstrate this to
prospective buyers.
• There are three groups of buyers :
 Price buyers
 Value buyers
 Loyal buyers

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Pricing Methods:

4. Value Pricing
• Win loyal customer by charging a fairly low price
for a high-quality offering, that means :
reengineering the companies operations to be
low-cost without sacrificing quality.

5. Going-Rate Pricing
• The firm bases its price largely on competitors’
prices. (smaller firms “follow the leader”).
• It is quite popular where costs are difficult to
measure or competitive response is uncertain.
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Pricing Methods:

6. Auction-Type Pricing
• One major purpose of auctions is to dispose of excess
inventories or used goods.
• Three major types of auctions:
1- English auctions (ascending bids).
2- Dutch auctions (descending bids).
3- Sealed-bid auctions.

7. Group Pricing
• Consumers and business buyers join groups to buy at a
lower price (www.volumebuy.com).
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Setting the Price

Pricing Steps • Requires consideration

of additional factors:
1. Select pricing objective – Psychological pricing
2. Determine demand – Influence of other
3. Estimate costs marketing mix variables
4. Analyze competition – Company pricing policies
5. Select pricing method – Gain-and-risk-sharing
6. Select final price pricing
– Impact of price on other
parties

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 Adapting the Price

1. Geographical Pricing
 Barter: the direct exchange of goods with no money and
no third party involved
 Compensation deal: the seller receives some
percentage of the payment in cash and the rest in
products
 Buyback arrangement: the seller sell a plant equipment
or technology to another country and agrees to accept
as partial payment products manufactured with the
supplied equipment
 Offset: the seller receives full payment in cash but
agrees to spend a substantial amount of the money in
that country within a stated time period. 14-25
Adapting the Price

2. Price Discounts and Allowances

•Quantity discount: The more you buy, the cheaper it

becomes-- cumulative and non-cumulative.
•Trade discounts: Reductions from list for functions
performed-- storage, promotion.
•Cash discount: A deduction granted to buyers for paying
their bills within a specified period of time, (after first
deducting trade and quantity discounts from the base price)

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Adapting the Price

•Functional discount: discount offered by a manufacturer to

trade-channel members if they will perform certain functions.
•Seasonal discount: a price reduction to those who buy out
of season.
•Allowance: an extra payment designed to gain reseller
participation in special programs.

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Adapting the Price

3. Promotional Pricing
• Loss-leader pricing: supermarkets and department
stores often drop the price on well known brands to
stimulate additional store traffic
• Special-event pricing: sellers well establish special
pricing in certain seasons to draw in more customers
• Cash rebates: companies offer cash rebates to
encourage purchase of the manufacturers products
within a specified time period
• Low-interest financing: the company can offer
customers low-interest financing

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Adapting the Price

• Longer payment terms: sellers especially mortgage

banks and auto companies stretch loans over longer
periods and thus lower the monthly payment
• Warranties and service contracts: companies can
promote sales by adding a free or low cost warranty or
service contract
• Psychological discounting: this strategy involves
setting an artificially high price and then offering the
product at substantial savings

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Adapting the Price

4. Discriminatory Pricing

• Price discrimination works when:

– Market segments show different intensities of demand
– Consumers in lower-price segments can not resell to
higher-price segments
– Competitors can not undersell the firm in higher-price
segments
– Cost of segmenting and policing the market does not
exceed extra revenue

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Adapting the Price

Discriminatory Pricing Tactics:

– Customer segment pricing
– Product-form pricing
– Image pricing
– Channel pricing
– Location pricing
– Time pricing

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 Adapting the Price

5. Discriminatory Pricing
There are six situations involving product mix pricing:
1) Product line pricing:
Companies normally develop product lines rather
than single products and introduce price steps.
2) Optional feature pricing:
Many companies offer optional products, features
and service along with their main product.
3) Captive product pricing:
Some products require the use of ancillary or captive
products.
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 Adapting the Price

4) Two part pricing product:

Service firms often engage in two-part pricing
consisting of affixed fee plus variable usage fee.

5) By-product pricing:
The production of certain goods-meat petroleum
products often results in by-products.

6) Product bundling:
Sellers often bundle products and features.
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Initiating and Responding to Price Changes

Key Considerations • Circumstances leading to

price cuts:
1. Initiating price cuts – Excess plant capacity
2. Initiating price increases – Declining market share
3. Reactions to price changes – Attempt to dominate the
4. Responding to competitor’s market via lower costs
price changes
• Price cutting traps:
– Price/quality perceptions
– Low prices don’t create
market loyalty
– Competition may match or
beat price cuts

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Initiating and Responding to Price Changes

Key Considerations • Circumstances leading to

price increases:
1. Initiating price cuts – Cost inflation
2. Initiating price increases – Over demand
3. Reactions to price changes
• Methods of dealing with
4. Responding to competitor’s over demand:
price changes
– Delayed quotation pricing
– Escalator clauses
– Unbundling
– Reduction of discounts

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Initiating and Responding to Price Changes

Key Considerations • Firms must monitor both

customer and competitor
1. Initiating price cuts
reactions
2. Initiating price increases
3. Reactions to price • Competitor reactions are
changes common when:
4. Responding to competitor’s – Few firms offer the product
price changes
– The product is
homogeneous
– Buyers are highly informed

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Initiating and Responding to Price Changes

Key Considerations • The degree of product

homogeneity affects how
1. Initiating price cuts
firms respond to price
2. Initiating price increases
3. Reactions to price changes
cuts initiated by the
4. Responding to competition
competitor’s price • Market leaders can
changes
respond to aggressive
price cutting by smaller
competitors in several
ways

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Initiating and Responding to Price Changes

Market Leader can respond to competitor

initiated price cuts in several ways:

• Maintain price and profit margin (vulnerable)

• Maintain price and add value
• Reduce price (and cost)
• Increase price and improve quality (add new
brand)
• Launch a low-price fighter line

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Price-Reaction Program for Meeting
Competitor’s Price Cut

14-39