CHAPTER 15CHAPTER 15

DESIGNING PRICING DESIGNING PRICING STRATEGIES AND PROGRAMSSTRATEGIES AND PROGRAMS

Important Topics of This ChapterImportant Topics of This Chapter

Setting Pricing policySetting Pricing policy Price-quality relationshipsPrice-quality relationships Adapting the PriceAdapting the Price Initiating & Responding to Price ChangesInitiating & Responding to Price Changes

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

Setting the PriceSetting the Price

Pricing Objectives:Pricing Objectives: Survival:Survival:

Short-run, low price policy.Short-run, low price policy. Maximum current profit:Maximum current profit:

High price policy.High price policy. Maximum current revenue:Maximum current revenue:

High price policy.High price policy. Maximum sales growth:Maximum sales growth:

Low price policy when:Low price policy when:• Market is highly price sensitiveMarket is highly price sensitive• Production and distribution costs are lowProduction and distribution costs are low• Low price discourages the competitors. Low price discourages the competitors.

Setting the Price (Cont.)Setting the Price (Cont.)

Maximum market skimming:Maximum market skimming: High price policy when:High price policy when:

• There are sufficient number of buyers.There are sufficient number of buyers.

• The unit cost of producing is not high.The unit cost of producing is not high.

• High price does not attract competitors.High price does not attract competitors.

• The product is superior.The product is superior.

Product-quality leadership:Product-quality leadership: High price policy.High price policy.

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 StrategiesPrice - Quality Strategies

Determining the DemandDetermining the Demand

Relationships between price and demandRelationships between price and demand Factors Effecting Price sensitivity:Factors Effecting Price sensitivity:

Unique-valueUnique-value substitute-awarenesssubstitute-awareness Difficult comparisonDifficult comparison Total-expendituresTotal-expenditures End-benefitEnd-benefit Shared-costShared-cost Sunk-investmentSunk-investment Price- qualityPrice- quality Inventory effectInventory effect

Determining Demand (Cont.)Determining Demand (Cont.)

Estimating demand curve: Estimating demand curve: Statistical analysis (time-series data)Statistical analysis (time-series data) Conducting experimentsConducting experiments Total sales at different priceTotal sales at different price

Price elasticity:Price elasticity: Inelastic demand:Inelastic demand:

• There are no substitutes.There are no substitutes.• Buyer would like to pay higher price.Buyer would like to pay higher price.• Buyers are slow in searching for lower price.Buyers are slow in searching for lower price.• Price-quality is right. Price-quality is right. • Buyers will continue purchasing if price increase is insignificant and Buyers will continue purchasing if price increase is insignificant and

risk is high if they switch.risk is high if they switch. Elastic demand:Elastic demand:

• Price should be low. Price should be low.

Estimating CostEstimating Cost

Types of costs:Types of costs: Fixed cost, variable cost and total cost.Fixed cost, variable cost and total cost.

Accumulated Production:Accumulated Production: Experience curve approach.Experience curve approach.

Differentiated Marketing Offers:Differentiated Marketing Offers: Cost behaviors as a function of differentiated marketing offer Cost behaviors as a function of differentiated marketing offer

(different delivery systems)(different delivery systems) Target costing:Target costing:

Research to decide the best price.Research to decide the best price. Analyzing Competitors’ Costs, Price, and Offers:Analyzing Competitors’ Costs, Price, and Offers:

Cost advantage and disadvantage.Cost advantage and disadvantage.

Selecting a Pricing MethodSelecting a Pricing Method

Markup pricing:Markup pricing: The most elementary pricing strategy.The most elementary pricing strategy.

Markup=unit cost/1-desired return on sales Markup=unit cost/1-desired return on sales Advantages:Advantages:

• simplifies the pricing tasksimplifies the pricing task• Prices will be similar if everyone use itPrices will be similar if everyone use it• It is fair to buyers and sellersIt is fair to buyers and sellers

Target-return:Target-return: It based upon target rate of return on investment(ROI): It based upon target rate of return on investment(ROI):

T-R=unit cost+desired return X invested capital/unit T-R=unit cost+desired return X invested capital/unit sales sales

B-E point help to determine the total sales.B-E point help to determine the total sales.

Selecting the Pricing Method (Cont.)Selecting the Pricing Method (Cont.) Perceived-value Pricing:Perceived-value Pricing:

Buyers’ perception of value rather than sellers’ cost. Buyers’ perception of value rather than sellers’ cost. Price-quality decision for the target market.Price-quality decision for the target market.

Value pricing:Value pricing: Very low price for high quality products:.Very low price for high quality products:.

Everyday low pricing(EDLP).Everyday low pricing(EDLP). High/low pricing.High/low pricing.

Going-rate pricing:Going-rate pricing: Company pays less attention to its cost.Company pays less attention to its cost.

Sealed-bid pricing:Sealed-bid pricing: Based upon expected profit.Based upon expected profit.

Selecting the Final PriceSelecting the Final Price

Psychological Pricing:Psychological Pricing: Odd pricingOdd pricing Reference price.Reference price.

Influence of other marketing mix elements: Influence of other marketing mix elements: Average quality/high advertising lead to high priceAverage quality/high advertising lead to high price High quality/high advertising lead to high priceHigh quality/high advertising lead to high price Relationship between price and advertising are seen Relationship between price and advertising are seen

strongly at later stages of PLC, or for low-cost strongly at later stages of PLC, or for low-cost producers. producers.

Selecting the Final Price (Cont.)Selecting the Final Price (Cont.)

Pricing policies:Pricing policies: To be consistent with company pricing policy.To be consistent with company pricing policy.

Impact of price on other parties:Impact of price on other parties: Distributors/ dealers’ reaction.Distributors/ dealers’ reaction. Competitors’ reaction.Competitors’ reaction. Government policies on prices-price fixing, Government policies on prices-price fixing,

price discrimination, and predatory pricing are price discrimination, and predatory pricing are illegal.illegal.

Adopting the PriceAdopting the Price

Geographical pricing:Geographical pricing: Pricing policy may based upon geographical Pricing policy may based upon geographical

demand/cost, market segments, orders and service:demand/cost, market segments, orders and service: Countertrade arrangements.Countertrade arrangements.

• Barter:Barter:– No money involvedNo money involved

• Compensation deal:Compensation deal:– Some cash payment and some productsSome cash payment and some products

• Buyback arrangement:Buyback arrangement:– Sells plant and equipment, and agree to buy the production.Sells plant and equipment, and agree to buy the production.

• Offset:Offset:– Receive cash and purchase goods Receive cash and purchase goods

Price Discounts and AllowancesPrice Discounts and Allowances

Cash discounts.Cash discounts. Quantity discounts.Quantity discounts. Functional discounts:Functional discounts:

Trade discounts to channel members for storage, etc.Trade discounts to channel members for storage, etc.

Seasonal discounts.Seasonal discounts. Allowances:Allowances:

Trade-in allowances.Trade-in allowances. Promotional allowances.Promotional allowances.

Promotional PricingPromotional Pricing

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

Setting a high price, and discounting to a lower price. Setting a high price, and discounting to a lower price.

Discriminatory PricingDiscriminatory Pricing

Customer segment pricing:Customer segment pricing: Senior citizens pay less.Senior citizens pay less.

Product-form pricing:Product-form pricing: Higher price for larger size boxes.Higher price for larger size boxes.

Image Pricing:Image Pricing: Creates image differentiation.Creates image differentiation.

Location pricing:Location pricing: Theaters charge varies prices for different locations.Theaters charge varies prices for different locations.

Time pricing:Time pricing: Seasonal or week-end specials.Seasonal or week-end specials. Yield pricing.Yield pricing.

Discriminatory Pricing (Cont.)Discriminatory Pricing (Cont.)

Conditions for discriminatory pricing:Conditions for discriminatory pricing: Market must be segmentable and shows different intensities of Market must be segmentable and shows different intensities of

demand.demand. Members of lower price segments must not be able to re-sell in the Members of lower price segments must not be able to re-sell in the

higher price segment.higher price segment. Competitors must not be able to undersell the firm in the higher-Competitors must not be able to undersell the firm in the higher-

price segmentprice segment Cost of segmenting must not exceed the revenue derived from Cost of segmenting must not exceed the revenue derived from

discriminationdiscrimination The practice must not create customer resentmentThe practice must not create customer resentment The practice must not be illegal.The practice must not be illegal.

Typical practice-Typical practice-yield management: yield management: airlines deregulation allowed them airlines deregulation allowed them to charge different fare depending on time of purchase seating class or to charge different fare depending on time of purchase seating class or time of flight.time of flight.

Product Mix PricingProduct Mix Pricing

Product-line pricing:Product-line pricing: Price steps for different models.Price steps for different models.

Optional-features pricing:Optional-features pricing: auto manufacturers add optional air condition.auto manufacturers add optional air condition.

Captive-product pricing:Captive-product pricing: Razors and Cameras.Razors and Cameras.

Two-part pricing:Two-part pricing: Telephone companies.Telephone companies.

Byproduct pricing:Byproduct pricing: Petroleum products.Petroleum products.

Product-bundling pricing:Product-bundling pricing: Option package in auto industry.Option package in auto industry.

Initiating and Responding to Price ChangesInitiating and Responding to Price Changes Initiating Price cuts: Initiating Price cuts:

Excess capacity.Excess capacity. Lower market share.Lower market share. Lower cost(cost leader). Lower cost(cost leader).

Risk involved: Risk involved: • Low-quality image.Low-quality image.• Lower product loyalty.Lower product loyalty.• Leaders treat with higher cash reserves..Leaders treat with higher cash reserves..

Initiating Price increases: Initiating Price increases: Inflation.Inflation. Anticipatory pricing:Anticipatory pricing:

Response to government control.Response to government control. Increased demand.Increased demand.

Initiating and Responding to Price Changes (cont.)Initiating and Responding to Price Changes (cont.) Reactions to Price Changes:Reactions to Price Changes:

Customers’ reaction:Customers’ reaction: Customers may question the reason behind the price Customers may question the reason behind the price

increasesincreases Competitors’ reaction:Competitors’ reaction:

Anticipation of competitors’ response is necessary.Anticipation of competitors’ response is necessary. Competitors’ response:Competitors’ response:

Homogenous productsHomogenous products Non-homogenous products. Non-homogenous products.

Initiating and Responding to Price Changes (cont.)Initiating and Responding to Price Changes (cont.) Leader’s Strategic Options:Leader’s Strategic Options:

Maintain Price.Maintain Price. Maintain price and add value.Maintain price and add value. Reduce price.Reduce price. Increase price and improve quality.Increase price and improve quality. Lunch a low price fighter.Lunch a low price fighter.