MNH, MKT 601, CH014
MKT: 601
Chapter14: Developing Pricing Strategies and Programs
Understanding Pricing
A Changing Pricing Environment
Buyers can
Sellers can
 Get instant price comparisons
 Monitor customer behavior and tailor offers
 Name their price and have it met
 Give certain customers access to special prices
 Get products free
Buyers and sellers can: Negotiate prices in online auctions and exchanges.
How Companies Price
Consumer Psychology and Pricing
o Reference Prices
Possible Consumer Reference Price
 "Fair Price"
 Typical Price
 Last Price Paid
 Upper-Bound Price (most consumers would pay)
 Lower-Bound Price
 Competitor Prices
 Expected Future Price  Usual Discounted Price
o Price Quality Inferences
o Price Ending
Setting the price
Step 1: Selecting the Pricing Objectives
Survival: Short run, but in long run value has to add
Maximum Current profit: Emphasizing current performance
Maximum market share: Price sensitive market/Experience Curve and AC
Maximum market skimming: More buyers/ Small amount production cost is less
/Price as image
Product quality leadership: BMW/ Starbucks coffee
Other objectives: Cost recovery
Step 2: Determining Demand
o Price sensitivity: Inelastic or Elastic
o Estimating demand curves by: Surveys/Price experiments/Statistical analysis
o 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 the buyer's total income.
 The expenditure is small compared to the total cost of the end product.
 Part of the cost is borne by another party.
 The product is used in conjunction with assets previously bought.
 The product is assumed to have more quality, prestige, or exclusiveness.
 Buyers cannot store the product.
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MNH, MKT 601, CH014
o Price Elasticity of demand
Step 3: Estimating costs
o Types of cost and levels of production: FC/VC/TC/AC/ABC (for each customer)
o Accumulated production: Experience or learning curve
o Target costing: Design, Engineering, Manufacturing, Sales cost to Target cost
Step 4: Analyzing Competitors' Costs, Prices, and Offers
Step 5: Selecting a Pricing Method
Unit cost= VC (for one unit) + FC /unit sales
o Mark up price=Unit cost/1 - desired return on sales
o Target-return price=Unit cost + (desired return X invested capital/unit sales)
Break even volume=FC/Price-VC (for one unit)
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MNH, MKT 601, CH014
o Perceived value pricing
Depends on
 Image
 Channel deliverable
 Customer support
 Suppliers reputation
o Value pricing
EDLP (good promotion with more frequency)
High low (first high then promote low price)
o Going rate pricing: Like competitors
o Auction type pricing
English auctions (AB)
Dutch auctions (DB)
 Warranty quality
 Research
Sealed-bid auctions
Step 6: Selecting the final price
o Impact of Other Marketing Activities
 Brands with average relative quality but high relative advertising budgets were able
to charge premium prices. Consumers apparently were willing to pay higher prices for
known products than for unknown products.
 Brands with high relative quality and high relative advertising obtained the highest
prices. Conversely, brands with low quality and low advertising charged the lowest
prices.
 The positive relationship between high prices and high advertising held most
strongly in the later stages of the product life cycle for market leaders.
o Company Pricing Policies
o Gain-And-Risk-Sharing Pricing
Buyers may resist accepting a seller's proposal because of a high perceived level of risk.
The seller has the option of offering to absorb part or all of the risk if it does not deliver
the full promised value.
Impact of Price on Other Parties
 How will distributors and dealers feel about it?
 If they do not make enough profit, they may not choose to bring the product to
market. Will the sales force be willing to sell at that price?
 How will competitors react?
 Will suppliers raise their prices when they see the company's price? Will the
government intervene and prevent this price from being charged?
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MNH, MKT 601, CH014
Adapting the Price
Geographical Pricing (Cash, Countertrade, Barter)
 Barter: In 1993, Eminence S.A., one of France's major clothing makers, launched a
five-year deal to barter $25 million worth of U.S.-produced underwear and sportswear
to customers in Eastern Europe, in exchange for a variety of goods and services,
including global transportation and advertising space in eastern European magazines.
 Compensation deal: The seller receives some percentage of the payment in cash and
the rest in products. A British aircraft manufacturer sold planes to Brazil for 70
percent cash and the rest in coffee.
 Buyback arrangement. The seller sells a plant, equipment, or technology to another
country and agrees to accept as partial payment products manufactured with the
supplied equipment. A U.S. chemical company built a plant for an Indian company and
accepted partial payment in cash and the remainder in chemicals manufactured at the
plant.
 Offset: The seller receives full payment in cash but agrees to spend a substantial
amount of the money in that country within a stated time period. PepsiCo sells its cola
syrup to Russia for rubles and agrees to buy Russian vodka at a certain rate for sale in
the United States.
Price Discounts and Allowances
A price reduction to buyers who pay bills promptly. 2/10, net 30
Discount
Quantity discount A price reduction to those who buy large volumes.
Functional dis.
Discount (also called trade discount) offered by a manufacturer to
trade-channel members
Seasonal discount Hotels, motels, and airlines offer seasonal discounts
Allowances
Trade-in allowances are granted for turning in an old item when
buying a new one. Promotional allowances reward dealers for
participating in advertising and sales support programs.
Promotional pricing
 Loss-leader pricing: Supermarkets and department stores often drop the price on
well-known brands to stimulate additional store traffic.
 Special-event pricing: December, there are back-to-school sales.
 Cash rebates: Auto companies and other consumer-goods companies offer cash
rebates to encourage purchase of the manufacturers' products within a specified time
period.
 Low-interest financing: Installment
 Longer payment terms
 Warranties and service contracts: Companies can promote sales by adding a free or
low-cost warranty or service contract.
 Psychological discounting: "Was $359, now $299."
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MNH, MKT 601, CH014
Differentiated pricing
 Customer-segment pricing
 Product-form pricing
 Image pricing
 Channel pricing
 Location pricing
 Time pricing
Initiating and Responding to Price Changes
Initiating Price Cuts
A price-cutting strategy involves possible traps:
 Low-quality trap: Consumers will assume that the quality is low.
 Fragile-market-share trap: A low price buys market share but not market loyalty.
The same customers will shift to any lower-priced firm that comes along.
 Shallow-pockets trap: The higher-priced competitors may cut their prices and may
have longer staying power because of deeper cash reserves.
 Price war trap: Just a war with competitors
Initiating Price Increases
 Delayed quotation pricing: does not set a final price until the product is finished or
delivered.
 Escalator clauses: requires the customer to pay today's price and all or part of any
inflation increase that takes place before delivery.
 Unbundling: maintains its price but removes or prices separately one or more
elements that were part of the former offer, such as free delivery or installation.
 Reduction of discounts: instructs its sales force not to offer its normal cash and
quantity discounts.
Options for marketers
 Shrinking the amount of product
 Substituting ingredient
 Removing product features
 Removing product related service
 Less expensive packaging materials
 Reducing the number of sizes and models
 Creating new economy brand
Responding to Competitors' Price Changes
o Maintain price and add value
o Reduce price
o Increase price and improve quality
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