Dr. Saleh Alqahtani

Chapter 16 Chapter 16 Developing Price Strategies Developing Price Strategies and Programsand Programsbyby

Dr. Saleh Alqahtani

Sell value, Sell value, not price.not price.

Kotler on Marketing

Dr. Saleh Alqahtani

Chapter Objectives In this chapter, we focus on three In this chapter, we focus on three

questions:questions: How should a price be set on a product or How 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 meet How should the price be adapted to meet

varying circumstances and opportunities?varying circumstances and opportunities? When should the company initiate a price When should the company initiate a price

change, and how should it respond to a change, and how should it respond to a competitor’s price change?competitor’s price change?

Dr. Saleh Alqahtani

PriceHigh Medium Low

High

Low

Pro

du

ct Q

ual

ity

Med

Premium Value

Premium Value

Medium Value

Economy

Overcharging

Rip-OffFalse

Economy

High Value

SuperValue

Good-Value

Price - Quality Strategies

Dr. Saleh Alqahtani

Figure 16.2: Price Should Align with Value

Dr. Saleh Alqahtani

Setting Pricing Policy

1. Selecting the pricingobjective

2. Determining demand

3. Estimating costs

4. Analyzing competitors’costs, prices, and offers

5. Selecting a pricingmethod

6. Selecting final price

Dr. Saleh Alqahtani

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

Dr. Saleh Alqahtani

Table 16.2: Price Discounts and Allowances

Cash Discount:Cash Discount: A price reduction to buyers who pay bills A price reduction to buyers who pay bills promptly. A typical example is “2/10, net promptly. A typical example is “2/10, net 30,” which means that payment is due 30,” which means that payment is due within 30 days and that the buyer can within 30 days and that the buyer can deduct 2 percent by paying the bill within 10 deduct 2 percent by paying the bill within 10 days.days.

Quantity Discount:Quantity Discount: A price reduction to those who buy large A price reduction to those who buy large volumes. A typical example is “$10 per unit volumes. A typical example is “$10 per unit for less than 100 units; $9 per unit for 100 or for less than 100 units; $9 per unit for 100 or more units.” Quantity discounts must be more units.” Quantity discounts must be offered equally to all customers and must offered equally to all customers and must not exceed the cost savings to the seller. not exceed the cost savings to the seller. They can be offered on each order placed or They can be offered on each order placed or on the number of units ordered over a given on the number of units ordered over a given period.period.

See text for complete table

Dr. Saleh Alqahtani

Types of Costs

Total CostsSum of the Fixed and Variable Costs for a Given

Level of Production

Total CostsSum of the Fixed and Variable Costs for a Given

Level of Production

Fixed Costs(Overhead)

Costs that don’tvary with sales or production levels.

Executive SalariesRent

Fixed Costs(Overhead)

Costs that don’tvary with sales or production levels.

Executive SalariesRent

Variable Costs

Costs that do varydirectly with the

level of production.

Raw materials

Variable Costs

Costs that do varydirectly with the

level of production.

Raw materials

Dr. Saleh Alqahtani

The Three C’s Modelfor Price Setting

Costs Competitors’prices andprices ofsubstitutes

Customers’assessmentof uniqueproductfeatures

Low Price

No possibleprofit at

this price

High Price

No possibledemand atthis price

Dr. Saleh Alqahtani

Pricing Methods

Markup PricingMarkup Pricing Target Return PricingTarget Return Pricing Perceived Value PricingPerceived Value Pricing Value PricingValue Pricing Going-Rate PricingGoing-Rate Pricing Sealed-Bid PricingSealed-Bid Pricing

Dr. Saleh Alqahtani

Some important pricing definitions

Utility: The attribute Utility: The attribute that makes it capable of that makes it capable of want satisfactionwant satisfaction

Value: The worth in Value: The worth in terms of other productsterms of other products

Price: The monetary Price: The monetary medium of exchange.medium of exchange.

Value Example: Caterpillar

Tractor is $100,000 vs. Market $90,000

$90,000 if equal 7,000 extra durable 6,000 reliability 5,000 service 2,000 warranty $110,000 in benefits -

$10,000 discount!!

Dr. Saleh Alqahtani

Promotional 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 & service contractsWarranties & service contracts Psychological discountingPsychological discounting

Dr. Saleh Alqahtani

Psychological Pricing

Most Attractive?Most Attractive?

Better Value?Better Value?

Psychological reason Psychological reason to price this way?to price this way?

A32 oz.

$2.19

B26 oz.

$1.99

Assume Equal Quality

Dr. Saleh Alqahtani

Discriminatory Pricing

Time

Product-form

Customer Segment

Location

Dr. Saleh Alqahtani

Price-Reaction Program for Meeting a Competitor’s Price Cut

Has competitorcut his price?

NoNoHold our price

at present level;continue to watch

competitor’sprice

Is the pricelikely to

significantlyhurt our sales?

YesYes

Is it likely to bea permanent

price cut?YesYes

By more than 4%Drop price tocompetitor’s

price

By 2-4%Drop price by

half of thecompetitor’s

price cut

How much hashis price been

cut?YesYes

NoNo NoNo

By less than 2%Include a

cents-off couponfor the nextpurchase

Dr. Saleh Alqahtani

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

Dr. Saleh Alqahtani

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

Dr. Saleh Alqahtani

Adapting the Price Product-mix pricingProduct-mix pricing

Product-Line PricingProduct-Line Pricing Optional-Feature PricingOptional-Feature Pricing Captive-Product PricingCaptive-Product Pricing

Captive productsCaptive products Two-Part PricingTwo-Part Pricing By-Product PricingBy-Product Pricing Product-Bundling PricingProduct-Bundling Pricing

Pure bundlingPure bundling Mixed bundlingMixed bundling

Dr. Saleh Alqahtani

Initiating and Responding to Price Changes

Initiating Price CutsInitiating Price Cuts Drive to dominate the market Drive to dominate the market

through lower coststhrough lower costs Low quality trapLow quality trap Fragile-market-share trapFragile-market-share trap Shallow-pockets trapShallow-pockets trap