Developing Pricing Strategies and Programs

14-2

Synonyms for Price

• Rent• Tuition• Fee• Fare• Rate• Toll• Premium• Honorarium

• Special assessment• Bribe• Dues• Salary• Commission• Wage• Tax

14-3

Possible Consumer Reference Prices

• “Fair price”• Typical price• Last price paid• Upper-bound price

• Lower-bound price• Competitor prices• Expected future price• Usual discounted

price

14-4

Price Cues

• “Left to right” pricing ($299 versus $300)

• Odd number discount perceptions

• Even number value perceptions

• Ending prices with 0 or 5

• “Sale” written next to price

14-5

Steps in Setting Price

Select the price objective

Determine demand

Estimate costs

Analyze competitor price mix

Select pricing method

Select final price

14-6

Step 1: Selecting the Pricing Objective

• Survival (cover variable and some fixed costs)

• Maximum current profit

• Maximum market share

• Maximum market skimming

• Product-quality leadership (affordable luxuries)

14-7

Step 2: Determining Demand

Price Sensitivity

(purchase quantity at alternative prices)

Estimating

Demand Curves(Statistical, experiments, surveys)

Price Elasticity

of Demand(Response to change in price)

14-8

Inelastic and Elastic Demand

14-9

Step 3: Estimating Costs

Types of Costs(fixed, variable, total, average)

Target Costing(costs based on profit)

Accumulated

Production(experience curve)

Activity-Based

Cost Accounting(costs/customer)

14-10

Cost Terms and Production

• Fixed costs• Variable costs• Total costs• Average cost• Cost at different levels

of production

14-11

Cost per Unit as a Function of Accumulated Production

14-12

Step 5: Selecting a Pricing Method

• Markup pricing• Target-return pricing• Perceived-value

pricing (brand equity)• Value pricing

(EDLP/H-L Pricing)• Going-rate pricing

(competitive pricing)• Auction-type pricing

14-13

Break-Even Chart

14-14

Auction-Type Pricing

English auctions(ascending bids)

Dutch auctions(descending bids)

Sealed-bid auctions(submit one bid)

14-15

Step 6: Selecting the Final Price

• Impact of other marketing activities– Quality and

advertising• Company pricing

policies• Gain-and-risk sharing

pricing• Impact of price on other

parties

14-16

Price-Adaptation Strategies

Countertrade• Barter• Compensation deal• Buyback

arrangement• Offset

Discounts/ Allowances• Cash discount• Quantity discount• Functional discount• Seasonal discount• Allowance

14-17

Promotional Pricing Tactics

• Loss-leader pricing• Special-event pricing• (seasonal)• Cash rebates• Low-interest financing• Longer payment terms• Warranties and service

contracts (free or low cost)

• Psychological discounting (set artificially high price and then lowering the price)

14-18

Differentiated Pricing and Price Discrimination

• Customer-segment pricing– (students, senior citizens)

• Product-form pricing – (various package sizes)

• Image pricing – (various names)

• Channel pricing – (Cola Cola purchase in

restaurant or vending machine)• Location pricing

– (theater seat prices)• Time pricing

– (early bird specials in restaurants)

• Yield pricing – (time of airplane ticket

purchase)

14-19

Increasing Prices

Delayed quotation pricing (price based on finished/delivered)

Escalator clauses(inflation increases)

Unbundling(elements of offer)

Reduction of discounts(no cash/quantity)

14-20

Brand Leader Responses to Competitive Price Cuts

• Maintain price

• Maintain price and add value

• Reduce price

• Increase price and improve quality (introduce a new brand)

• Launch a low-price fighter line