CHAPTER 15
DESIGNING PRICING
STRATEGIES AND PROGRAMS
Important Topics of This Chapter
Setting Pricing policy
 Price-quality relationships
 Adapting the Price
 Initiating & Responding to Price Changes

Setting Pricing Policy
1. Selecting the pricing
objective
2. Determining demand
3. Estimating costs
4. Analyzing competitors’
costs, prices, and offers
5. Selecting a pricing
method
6. Selecting final price
Setting the Price

Pricing Objectives:
 Survival:

Short-run, low price policy.
 Maximum

High price policy.
 Maximum

current revenue:
High price policy.
 Maximum

current profit:
sales growth:
Low price policy when:
• Market is highly price sensitive
• Production and distribution costs are low
• Low price discourages the competitors.
Setting the Price (Cont.)

Maximum market skimming:
 High
•
•
•
•

price policy when:
There are sufficient number of buyers.
The unit cost of producing is not high.
High price does not attract competitors.
The product is superior.
Product-quality leadership:
 High
price policy.
Price - Quality Strategies
Price
Product Quality
High
Med
Low
High
Medium
Low
Premium
Value
High
Value
Super
Value
Overcharging
Medium
Value
Good-Value
Rip-Off
False
Economy
Economy
Determining the Demand

Relationships between price and demand
 Factors
Effecting Price sensitivity:
Unique-value
 substitute-awareness
 Difficult comparison
 Total-expenditures
 End-benefit
 Shared-cost
 Sunk-investment
 Price- quality
 Inventory effect

Determining Demand (Cont.)
 Estimating
demand curve:
Statistical analysis (time-series data)
 Conducting experiments
 Total sales at different price

 Price

elasticity:
Inelastic demand:
•
•
•
•
•

There are no substitutes.
Buyer would like to pay higher price.
Buyers are slow in searching for lower price.
Price-quality is right.
Buyers will continue purchasing if price increase is insignificant
and risk is high if they switch.
Elastic demand:
• Price should be low.
Estimating Cost

Types of costs:
 Fixed

cost, variable cost and total cost.
Accumulated Production:
 Experience

curve approach.
Differentiated Marketing Offers:
 Cost
behaviors as a function of differentiated marketing
offer (different delivery systems)

Target costing:
 Research

to decide the best price.
Analyzing Competitors’ Costs, Price, and Offers:
 Cost
advantage and disadvantage.
Selecting a Pricing Method

Markup pricing:
 The
most elementary pricing strategy.
Markup=unit cost/1-desired return on sales

Advantages:
• simplifies the pricing task
• Prices will be similar if everyone use it
• It is fair to buyers and sellers

Target-return:
 It
based upon target rate of return on investment(ROI):
T-R=unit cost+desired return X invested capital/unit
sales
B-E point help to determine the total sales.
Selecting the Pricing Method
(Cont.)

Perceived-value Pricing:
 Buyers’ perception
of value rather than sellers’ cost.
 Price-quality decision for the target market.

Value pricing:
 Very
low price for high quality products:.
Everyday low pricing(EDLP).
 High/low pricing.


Going-rate pricing:
 Company

pays less attention to its cost.
Sealed-bid pricing:
 Based
upon expected profit.
Selecting the Final Price

Psychological Pricing:
 Odd
pricing
 Reference price.

Influence of other marketing mix elements:
 Average
quality/high advertising lead to high price
 High quality/high advertising lead to high price
 Relationship between price and advertising are seen
strongly at later stages of PLC, or for low-cost
producers.
Selecting the Final Price (Cont.)

Pricing policies:
 To

be consistent with company pricing policy.
Impact of price on other parties:
 Distributors/
dealers’ reaction.
 Competitors’ reaction.
 Government policies on prices-price fixing,
price discrimination, and predatory pricing are
illegal.
Adopting the Price

Geographical pricing:
 Pricing
policy may based upon geographical
demand/cost, market segments, orders and service:

Countertrade arrangements.
• Barter:
– No money involved
• Compensation deal:
– Some cash payment and some products
• Buyback arrangement:
– Sells plant and equipment, and agree to buy the production.
• Offset:
– Receive cash and purchase goods
Price Discounts and Allowances



Cash discounts.
Quantity discounts.
Functional discounts:
 Trade


discounts to channel members for storage, etc.
Seasonal discounts.
Allowances:
 Trade-in
allowances.
 Promotional allowances.
Promotional Pricing







Loss-leader pricing.
Special-event pricing.
Cash rebates.
Low-interest financing.
Longer payment terms.
Warranties and service contracts .
Psychological discounting:
 Setting
a high price, and discounting to a lower price.
Discriminatory Pricing

Customer segment pricing:
 Senior

citizens pay less.
Product-form pricing:
 Higher

Image Pricing:
 Creates

price for larger size boxes.
image differentiation.
Location pricing:
 Theaters

charge varies prices for different locations.
Time pricing:
 Seasonal
or week-end specials.
 Yield pricing.
Discriminatory Pricing (Cont.)

Conditions for discriminatory pricing:






Market must be segmentable and shows different intensities of
demand.
Members of lower price segments must not be able to re-sell in the
higher price segment.
Competitors must not be able to undersell the firm in the higherprice segment
Cost of segmenting must not exceed the revenue derived from
discrimination
The practice must not create customer resentment
The practice must not be illegal.

Typical practice-yield management: airlines deregulation allowed
them to charge different fare depending on time of purchase seating
class or time of flight.
Product Mix Pricing

Product-line pricing:


Optional-features pricing:


Telephone companies.
Byproduct pricing:


Razors and Cameras.
Two-part pricing:


auto manufacturers add optional air condition.
Captive-product pricing:


Price steps for different models.
Petroleum products.
Product-bundling pricing:

Option package in auto industry.
Initiating and Responding to
Price Changes

Initiating Price cuts:
 Excess
capacity.
 Lower market share.
 Lower cost(cost leader).

Risk involved:
• Low-quality image.
• Lower product loyalty.
• Leaders treat with higher cash reserves..

Initiating Price increases:
 Inflation.
 Anticipatory

pricing:
Response to government control.
 Increased
demand.
Initiating and Responding to
Price Changes (cont.)

Reactions to Price Changes:
 Customers’ reaction:
 Customers
may question the reason behind the price
increases
 Competitors’ reaction:
 Anticipation
of competitors’ response is necessary.
 Competitors’ response:
 Homogenous
products
 Non-homogenous products.
Initiating and Responding to
Price Changes (cont.)

Leader’s Strategic Options:
 Maintain
Price.
 Maintain price and add value.
 Reduce price.
 Increase price and improve quality.
 Lunch a low price fighter.