Developing Pricing Strategies And Programs.ppt Ch 13 2p2f6s

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?

Synonyms for Price Tuition

Special assessment Bribe

Fee

Dues

Fare

Salary

Rate

Commission

Toll

Wage



Tax

Rent

Honorarium

Changing price environment Get instant price comparisons Name their price and have it met. Get products free.

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

Reference Prices Price-quality inferences Price endings

Possible Consumer Reference Prices “Fair price” Typical price

Lower-bound price Competitor prices

Last price paid Upper-bound price

Expected future

price Usual discounted price

Price Cues “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

When to Use Price Cues Customers

purchase item infrequently Customers are new Product designs vary over time Prices vary seasonally Quality or sizes vary across stores Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

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Select the price objective Determine demand Estimate costs Analyze competitor price mix Select pricing method Select final price

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 Estimating Demand Curves Price Elasticity of Demand 14-12

Price sensitivity  Reactions of the customer to the increase or decrease in

prices  The customers are less price sensitive1. There are few or n substitutes or competitors 2. They do not readily notice the higher price 3. They are slow to change their buying habits 4. Hey think the higher price are justified 5. Price is only a small part of the total cost of obtaining, operating and servicing the product

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 The expenditure is a smaller part of buyer’s total

income The expenditure is small compared to the total cost of the end product Part of the cost is paid by another party The product is used with previously purchased assets The product is assumed to have high quality and prestige Buyers cannot store the product 14

Inelastic and Elastic Demand

Estimating demand curves  Surveys:- Can explore how many units consumers would buy

at different proposed prices.  Price experiments :- vary the prices of different products in a store or charge different prices for the same product in similar territories to see how the change effects sales.  Statistical analysis:- of past prices, quantities sold, and other factors can reveal their relationships.

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

Cost and Production Fixed costs Variable costs Total costs Average cost Cost at

different levels of production

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Cost per Unit as a Function of Accumulated Production

Step 4: Analyzing competitor’s  The firm should first consider the nearest competitors price costs,prices,and offers  If the firm offer contains features not offered by the

competitors, it shd evaluate their worth and add to the price of the product and vice versa  The introduction of any price or the change of any existing

price can provoker a response from customers,competitors,distributors,suppliers and even govt.

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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Step 5: Selecting a Pricing Method  Markup pricing- to add a standard mark up to the product's cost  Target return pricing- the firm determines the price that would

yield its target rate of ROI  Perceived value pricing- perceived value is made up of several elements such as buyers image of the product performance, channel deliverables, the warranty,quality, and other softer attributes such as suppliers reputation, trustworthiness and esteem.  Value pricing- value pricing is a pricing wherein charging a fairly low price for a high quality offering. it is not a matter of simply setting low price but re-engineering the company’s operations to become a low cost producer sacrificing quality, to attract a larger number.  Going rate pricing-the firms bases its price on competitors pricing, change it more or less.  Auction type pricing- modern web sites

Auction-Type Pricing English auctions Dutch auctions Sealed-bid auctions

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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Adapting the price  Companies do not seta single price but rater develop a pricing

structure that reflects variations in  geographical demand and costs,  mkt segment requirements,  purchasing timing,  order levels,  delivery frequency,  Guarantees  Service contracts

Geographical Pricing Discounts/Allowances Promotional Pricing Differentiated Pricing

Price-Adaptation Discounts/ Strategies Countertrade Allowances Barter Compensation deal Buyback

arrangement Offset

Cash discount Quantity discount Functional discount Seasonal discount Allowance

Promotional Pricing Tactics Loss-leader pricing Special-event pricing Cash rebates Low-interest

financing Longer payment Warranties and service contracts Psychological discounting 14-28

Differentiated Pricing Customer-segment

pricing Product-form pricing Image pricing Channel pricing Location pricing Time pricing Yield pricing Predatory pricing 14-29

Initiating and responding to price changes Several circumstances lead a firm to cut prices 1.Excess capacity of the plant 2.Firm needs additional business and cannot

generate it through increased sales effort 3.Product improvement Initiating price cuts  Low quality trap  Fragile market share trap  Shallow pocket trap  Price war trap

Initiating and responding to price changes Circumstances leading to price increase. Cost inflation Rising costs unmatched by productivity gains

squeeze profit margins and lead to companies to regular rounds of price increases. Companies raise their prices in anticipation of further inflation or govt. price controls. Overdemand’

Delayed quotation pricing Escalator clauses Unbundling Reduction of discounts

Alternative approaches that will allow them avoid increasing Shrinking the to amount of product instead of raising the prices. prices Substituting less expensive materials or

ingredients Reducing or removing product features Reducing or removing product services Using less expensive packaging materials or larger package sizes Reducing the number of sizes and models offered Creating new economy brands.’

Brand Leader Responses to Competitive Price Cuts Maintain price Maintain price and add value Reduce price Increase price and improve quality Launch a low-price fighter line

 Is the right price a fair price? Take a position: 1. Prices should reflect the value that consumers are willing to pay. or

2. Prices should primarily just reflect the cost involved in making a product.

 Think of all the pricing methods described in the chapter.  As a consumer, which pricing method do you personally prefer to deal with?  Why?