Ch 13 Pricing

13Developing

Pricing Strategies and Programs

1

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-2

Consumer Psychology and Pricing

Price-quality inferences Image pricing

Higher prices signals high quality products

When information about true quality is available, price becomes a less significant indicator of quality and vice versa.


Steps in Setting Price

Select the price objective Determine demand Estimate costs Analyze competitor price mix Select pricing method Select final price

Step 1: Selecting the Pricing Objective Survival (overcapacity, intense competition, or changing

consumer wants)

Maximum current profit

Maximum market share (They believe a higher sales volume will lead to lower unit costs and higher long-run profit)

Maximum market skimming

Product-quality leadership

Table 13.3 Factors Leading to Less Price Sensitivity

The product is more distinctive Buyers are less aware of substitutes Buyers cannot easily compare the quality of substitutes Expenditure is a smaller part of buyer’s total income Product is used with previously purchased assets Few or no substitutes slow to change their buying habits the higher prices are justified, product is assumed to

have high quality and prestige


Estimating Demand Curves

Surveys can explore how many units consumers would buy at different proposed prices.

Price experiments can vary the prices of different products in a store.

Statistical analysis of past prices, quantities sold can reveal their relationships.


Figure 14.1 Inelastic and Elastic Demand



Step 3: Estimating Costs

The company wants to charge a price that covers its cost of producing, distributing, and selling the product, including a fair return for its effort and risk.

Figure 13.2 Cost Per Unit at Different Levels of Production


Cost Terms and Production

Fixed costs Variable costs Total costs Average cost Cost at different

levels of production


Figure 14.3 Cost per Unit as a Function of Accumulated Production

The decline in the average cost with accumulated production experience is called the experience/learning curve.

Target Costing

Market research establishes a new product’s desired functions and the price at which it will sell, given its appeal and competitors’ prices.

This price less desired profit margin leaves the target cost the marketer must achieve.

The firm must examine each cost element and bring down costs so the final cost projections are in the target range.


Step 4: Analyzing Competitor’s Costs, Prices and Offers

Within the range of possible prices determined by market demand and company costs, the firm must account for competitors costs, prices or possible price reactions.

If the firm’s offer contains features not offered by competitors, it should evaluate their worth to the customer and add that value to the competitors price.


Figure 13.4 The Three Cs Model for Price-Setting



Step 5: Selecting a Pricing Method

Markup pricing Target-return pricing: the firm determines the

price that yields its target rate of return on investment

Perceived-value pricing: It made up of a host of inputs, such as the

buyer’s image of the product performance, the warranty quality, customer support, supplier’s reputation, trustworthiness.

Figure 13.5 Break-Even Chart for Determining Target-Return Price and Break-Even Volume



Value pricing Winning loyal customers by charging a fairly

low price for a high quality offering.

Low cost producers without sacrificing quality

Everyday low pricing (EDLP)

High-low pricingCopyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 14-17


Going-rate pricing the firm bases its price largely on competitors’

prices.

Steel, paper, fertilizer

Industry’s collective wisdom


Step 5: Selecting a Pricing MethodAuction-type pricing English auction (ascending bids): highest bidder

gets the item

Dutch auctions (descending bids) feature one seller many buyers or one buyer many sellers Auctioneer announces a high price and then

slowly decreases until a bidder accepts one buyer many sellers: sellers compete to offer

the lowest price Sealed-bid auctions


Step 6: Selecting the Final Price

Impact of other marketing activities Impact of price on other parties

Price Adaptation Strategies

Geographical Pricing Company decides how to price its products

to different customers in different locations and countries.

Should the company charge higher prices to distant customers to cover the higher shipping costs, or a lower price to win additional business?


Price Discounts and Allowances Discount: price reduction to buyers who pay

bills promptly Quantity discount Functional discount/trade discount Seasonal discount Allowance: an extra payment designed to gain

reseller participation. Trade-in allowances are granted for turning in an old item when buying a new one.



Promotional Pricing Tactics

Loss-leader pricing Special-event pricing Special customer pricing Cash rebates Low-interest financing Longer payment terms Warranties and service contracts Psychological discounting


Differentiated Pricing

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.

Differentiated Pricing Customer-segment pricing (senior citizen

discounts) Product-form pricing (1.5 water bottle 40 rupees,

family size 90 rupees) Image pricing Channel pricing (price of Coke at lse or Aylanto?) Location pricing (ticket difference of CineGold

Bahria or SuperCinema Vogue towers) Time pricing (Breakfast discount at butlers from

7:30 am till 10:30 am)

Traps in Price Cutting Strategies

Low-quality trap Fragile-market-share trap Shallow-pockets trap Price-war trap


Should We Raise Prices?



Reasons for Increasing Prices

A major circumstance provoking price increases is cost inflation. Companies often raise their prices by more than the cost increase, in anticipation of further inflation in a practice called anticipatory pricing.

Another factor leading to price increases is overdemand.


Brand Leader Responses to Competitive Price Cuts

Maintain price Maintain price and add value Reduce price Increase price and improve quality Launch a low-price fighter line

Quiz

Explain each type of pricing objectives with the use of examples. Give proper reasoning as to why would a company pursue each kind of pricing objective.

How can user status be used as a variable to segment the market. Use an example to explain your answer.


Ch 13 Pricing

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