Chapter 12 - Developing Pricing Strategies And Programs 6o4420

12 Developing Pricing Strategies and Programs

Chapter Questions ƒ

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How do consumers process and evaluate prices? How should a company set prices initially for its offerings? How should a company adapt prices to meet varying circumstances and opportunities? How should a company initiate a price change and respond to a competitor’s price change?

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Various Forms of a Price ƒ ƒ ƒ ƒ ƒ ƒ ƒ

Rent Tuition Fee Fare Interest Toll

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Honorarium Special assessment Salary Commission Wage Tax Bribe

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The Internet Changes the Pricing Environment – By Providing Information

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Common Pricing Mistakes ƒ

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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 12-5

Consumer Psychology and Pricing ƒ ƒ

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Reference prices Price-quality inferences Price endings and cues

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Possible Consumer Reference Prices ƒ ƒ ƒ ƒ

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

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

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Price Cues ƒ

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“Left to right” pricing ($299 vs. $300) Odd number discount perceptions Even number value perceptions Ending prices with 0 or 5 “Sale” written next to price 12-8

When to Use Price Cues ƒ ƒ ƒ ƒ ƒ

Customers purchase item infrequently Customers are new Product designs vary over time Prices vary seasonally Quality or sizes vary across stores

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Tiers in Pricing

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Steps in Setting Price Select the price objective Determine demand Estimate costs Analyze competitor price mix Select pricing method Select final price 12-11

Step 1: Selecting the Pricing Objective ƒ ƒ

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Survival Maximum current profit Maximum market share Maximum market skimming Product-quality leadership Other 12-12

Step 2: Determining Demand Price Sensitivity Estimating Demand Curves Price Elasticity of Demand 12-13

Factors Leading to Less Price Sensitivity ƒ ƒ ƒ

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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 12-14

Inelastic and Elastic Demand

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Step 3: Estimating Costs Types of Costs Activity-Based Cost ing Accumulated Production Target Costing 12-16

Cost and Production ƒ ƒ ƒ ƒ ƒ

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

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Cost Per Unit at Different Levels of Production

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Cost per Unit as a Function of Accumulated Production

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Target Costing

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

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Step 5: Selecting a Pricing Method ƒ ƒ ƒ

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

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Determining Target-Return Price and Break-Even Volume

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Dollar Store Pricing

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Auction-Type Pricing

English Dutch Sealed-Bid

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Step 6: Selecting the Final Price ƒ

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

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Price-Adaptation Strategies Geographical Pricing Discounts/Allowances Promotional Pricing Differentiated Pricing

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Geographical Pricing ƒ

Pricing varies by location

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Price Discounts and Allowances ƒ ƒ ƒ ƒ ƒ

Discount Quantity discount Functional discount Seasonal discount Allowances

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Promotional Pricing Tactics ƒ ƒ ƒ ƒ ƒ ƒ ƒ

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 ƒ ƒ ƒ ƒ ƒ ƒ ƒ

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

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Should We Raise Prices? Profits Before and After a Price Increase

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Traps in Price Cutting Strategies ƒ ƒ ƒ ƒ

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

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Methods for Increasing Prices ƒ ƒ ƒ ƒ

Delayed quotation pricing Escalator clauses Unbundling Reduction of discounts

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Responses to Competitors’ Price Changes ƒ ƒ ƒ ƒ ƒ

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

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