Developing Pricing
Strategies and Programs
Key Concepts
Marketing Management at Gillette
Commands a
70% share of the
global market for
razors and
blades and
charges
premium prices.
Pricing Re-Considerations
 Focusing on costs and striving for the industry’s
traditional margins.
 Not revising price often enough to capitalize on
market changes.
 Setting price independently rather than as an
intrinsic element of market-positioning strategy.
 Not varying price enough for different products,
segments, channels, and purchase occasions.
Marketing Skills: Giving It
Away?
 “Freemium” strategy —
giving some offering away for
free while profiting from
extras that are priced
appropriately.
 SKYPE—free Internet calling
but charges for calls made to
non-Internet phones.
 Ryannair—fly free, pay for
everything else.
Consumer Psychology and Pricing
Reference prices
Price-quality
inferences
Price cues
Steps in Setting Price Policy
Select the objective
Determine demand
Estimate costs
Analyze competitors
Select the final price
Step 1: Selecting the Pricing
Objective
Maximum
current profit
Survival
Maximum
market
skimming
Maximum
market share
Product-quality
leadership
Step 2: Determining Demand
 Price sensitivity
 Estimating demand curves
 Survey consumers
 Set different prices in
similar territories
 Statistical analysis of
past prices, quantities
sold, and other factors
 Price elasticity of
demand
 Inelastic—small
change in demand
with small change
in price.
 Elastic—
considerable
change in demand
with small change
in price.
Step 3: Estimating Costs
Fixed costs
Variable costs
Total costs
Average cost
The Experience Curve
Target Costing
Establish a new product’s
desired functions, the price at
which it will sell, and the desired
profit margin.
Step 4: Analyzing Competitors’
Costs, Prices, and Offers
 Does the firm offer features not offered by competitors?
 Given this point of comparison, should the price be
higher, lower, or the same?
Step 5: Selecting a Pricing Method
 The three Cs in
selecting a price:
 Customers’ demand
schedule
 Cost function
 Competitors’ prices
Price-Setting Methods
 Markup pricing
 Target-return pricing
 Perceived-value pricing
 Value pricing
 Going-rate pricing
 Auction-type pricing
Break-Even Chart
Breakthrough Marketing: eBay
$7.3 billion in
annual sales.
It’s not all rosy
worldwide,
though!
Step 6: Selecting the Final
Price
 Factors to consider:




Impact of other marketing activities
Company pricing policies
Gain-and-risk sharing pricing
Impact of price on other parties
Price Adaptation Strategies
Geographical
pricing
Price discounts
and
allowances
Differentiated
pricing
Promotional
pricing
Product-mix
pricing
Geographical Pricing
Barter
Compensation deal
Buyback arrangement
Offset
Price Discounts and
Allowances
 Discounts—price reductions




Cash
Quantity
Functional
Seasonal
 Allowance—extra payment
Promotional Pricing
 Loss-leader
pricing
 Special-event
pricing
 Cash rebates
 Low-interest
financing
 Longer payment
terms
 Warranties and
service contracts
 Psychological
discounting
Differentiated Pricing
 Customer-segment pricing
 Product-form pricing
 Image pricing
 Channel pricing
 Location pricing
 Time pricing
Product-Mix Pricing
 Product-line
 Two-part
 Optional-feature
 By-product
 Captive-product
 Product-bundling
Product-Mix Pricing
 Product-line
 Two-part
 Optional-feature
 By-product
 Captive-product
 Product-bundling
Traps of Price-Cutting
 Customers assume quality is low.
 A low price buys market share but not
loyalty.
 Higher-priced competitors match the lower
prices but have longer staying power
because of deeper cash reserves.
 Trigger a price war.
Increasing Prices
Delayed quotation
pricing
Escalator clauses
Unbundling
Reduction of discounts
How to Respond to Low-Cost Rivals