14 Ce Chapter 14 - Developing Pricing Strategies 1t462l

14 Developing Pricing Strategies and Programs

Marketing Management Canadian Fourteenth Edition Copyright 2013 Pearson Canada Inc.

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Chapter Questions • How do consumers process and evaluate prices? • How should a company set prices initially for products or services? • How should a company adapt prices to meet varying circumstances and opportunities? • When should a company initiate a price change? • How should a company respond to a competitor’s price challenge?

Copyright 2013 Pearson Canada Inc.

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Synonyms for Price        

Rent Tuition Fee Fare Rate Toll Honorarium


      

Special assessment Bribe Dues Salary Commission Wage Tax

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A Changing Pricing Environment

The Internet Changes the Pricing Environment – By Providing Information


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A Changing Pricing Environment • Buyers can get: – instant price comparisons from thousands of vendors, – name their price and have it met – get products free

• Sellers can: – monitor customer behavior and tailor offers to individuals – give certain customers access to special prices.

• Both buyers and sellers can negotiate prices in online auctions and exchanges or even in person.


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Common Pricing Mistakes • Determine costs and take 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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Consumer Psychology and Pricing • Reference prices • Price-quality inferences • Price endings


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Table 14.1 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

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Tiers in Pricing • A firm must decide where to position its product on quality and price. • Most markets have three to five price points or tiers.


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Steps in Setting Price • • • • • •

Select the price objective Determine demand Estimate costs Analyze competitors’ costs, prices, and offers Select pricing method Select final price


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Step 1: Selecting the Pricing Objective • • • • •

Survival Maximum current profit Maximum market share Maximum market skimming Product-quality leadership


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Step 2: Determining Demand • Price sensitivity • Estimate demand curves • Price elasticity of demand


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Figure 14.1 Inelastic and Elastic Demand


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Table 14.3 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 Expenditure is small compared to the total cost Part of the cost is paid by another party Product is used with previously purchased assets Product is assumed to have high quality and prestige Buyers cannot store the product


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Step 3: Estimating Costs • Types of costs • Accumulated production • Target costing


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Figure 14.2 Cost Per Unit at Different Levels of Production


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Cost and Production • • • • •

Fixed costs Variable costs Total costs Average cost Cost at different levels of production


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Figure 14.3 Cost per Unit as a Function of Accumulated Production


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Target Costing • Costs change with production scale and experience. • They can also change as a result of a concentrated effort by designers, engineers, and purchasing agents to reduce them through target costing.


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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 take competitors’ costs, prices, and possible price reactions into .


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Figure 14.4 The Three Cs Model for Price-Setting


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Step 5: Selecting a Pricing Method • • • • • •

Markup pricing Target-return pricing Perceived-value pricing Value pricing Going-rate pricing Auction-type pricing


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Figure 14.5 Break-Even Chart for Determining Target-Return Price and Break-Even Volume


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Dollarama


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Auction-Type Pricing English Dutch Sealed-Bid


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Step 6: Selecting the Final Price • • • •

Impact of other marketing activities Company pricing policies Gain-and-risk sharing pricing Impact of price on other parties


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Geographical Pricing • Pricing varies by location


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Price Discounts and Allowances • • • • •

Discount Quantity discount Functional discount Seasonal discount Allowance


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Promotional Pricing Tactics • • • • • • •

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


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Differentiated Pricing • • • • • •

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


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Traps in Price Cutting Strategies • • • •

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


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Table 14.6 Profits Before and After a Price Increase


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Methods for Increasing Prices • • • •

Delayed quotation pricing Escalator clauses Unbundling Reduction of discounts


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Brand Leader Responses to Low-Cost Competitors 1. Further differentiate the product or service 2. Introduce a low-cost venture 3. Reinvent as a low-cost player.


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