Chapter 13
Designing Pricing
Strategies and Programs
PowerPoint by Karen E. James
Louisiana State University - Shreveport
©2003 Prentice Hall, Inc.
To accompany A Framework for Marketing Management, 2nd Edition
Slide 0 in Chapter 13
Objectives
 Understand how companies price a
new good or service.
 Identify how prices can be adapted to
meet varying circumstances.
 Learn when price changes should be
initiated and how soon companies
should respond to competitive price
changes.
©2003 Prentice Hall, Inc.
To accompany A Framework for Marketing Management, 2nd Edition
Slide 1 in Chapter 13
Price Has Many Names
 Rent
 Fee
 Tuition
 Dues
 Fare
 Interest
 Monthly
payment
 Donation
©2003 Prentice Hall, Inc.
To accompany A Framework for Marketing Management, 2nd Edition
Slide 2 in Chapter 13
Setting the Price
Pricing Procedure
 Survival
 Select pricing objective
 Maximize current
profits
 Determine demand
 Maximize market share
 Estimate costs
 Analyze competition
– Penetration strategy
 Market skimming
– Skimming strategy
 Select pricing method
 Product quality leaders
 Select final price
 Partial cost recovery
©2003 Prentice Hall, Inc.
To accompany A Framework for Marketing Management, 2nd Edition
Slide 3 in Chapter 13
Setting the Price
Pricing Procedure
 Select pricing objective
 Determine demand
 Estimate costs
 Analyze competition
 Select pricing method
 Select final price
©2003 Prentice Hall, Inc.
 Understand factors
that affect price
sensitivity
 Estimate demand
curves
 Understand price
elasticity of demand
– Elasticity
– Inelasticty
To accompany A Framework for Marketing Management, 2nd Edition
Slide 4 in Chapter 13
Marketing Strategies
Conditions Under Which Consumers are
Less Price Sensitive:
 Product is more distinctive
 Buyers are less aware of
substitutes
 Buyers cannot easily compare
quality of substitutes
 The expenditure is a lower part
of buyer’s total income
 The expenditure is small
compared to the total cost
©2003 Prentice Hall, Inc.
 Part of the cost is borne by
another party
 The product is used with
assets previously bought
 The product is assumed to
have more quality, prestige,
or exclusiveness
 Buyers cannot store the
product
To accompany A Framework for Marketing Management, 2nd Edition
Slide 5 in Chapter 13
Marketing Strategies
Conditions Under Which Demand
is Less Elastic:
 There are few or
no substitutes
 Buyers do not
readily notice the
higher price
©2003 Prentice Hall, Inc.
 Buyers are slow to
change their buying
habits and search
for lower prices
 Buyers think higher
prices are justified
To accompany A Framework for Marketing Management, 2nd Edition
Slide 6 in Chapter 13
Setting the Price
Pricing Procedure
 Select pricing objective
 Determine demand
 Estimate costs
 Analyze competition
 Select pricing method
 Select final price
©2003 Prentice Hall, Inc.
 Types of costs and
levels of production
must be considered
 Accumulated
production leads to
cost reduction via the
experience curve
 Differentiated
marketing offers create
different cost levels
To accompany A Framework for Marketing Management, 2nd Edition
Slide 7 in Chapter 13
Setting the Price
 Key Pricing Terms:
– Fixed costs: do not vary directly with
changes in level of production
– Variable costs: vary with production
– Total costs: sum of fixed and variable
costs a given level of production
– Average cost: cost per unit at a given
level of production
©2003 Prentice Hall, Inc.
To accompany A Framework for Marketing Management, 2nd Edition
Slide 8 in Chapter 13
Setting the Price
Pricing Procedure
 Select pricing objective
 Determine demand
 Estimate costs
 Analyze competition
 Select pricing method
 Select final price
©2003 Prentice Hall, Inc.
 Firms must analyze the
competition with
respect to:
– Costs
– Prices
– Possible price reactions
 Pricing decisions are
also influenced by
quality of offering
relative to competition
To accompany A Framework for Marketing Management, 2nd Edition
Slide 9 in Chapter 13
Setting the Price
Pricing Procedure
 Select pricing objective
 Determine demand
 Estimate costs
 Analyze competition
 Select pricing method
 Select final price
©2003 Prentice Hall, Inc.
 Price-setting begins
with the three “C’s”
 Select method:
–
–
–
–
–
–
–
Markup pricing
Target-return pricing
Perceived-value pricing
Value pricing
Going-rate pricing
Auction-type pricing
Group pricing
To accompany A Framework for Marketing Management, 2nd Edition
Slide 10 in Chapter 13
Setting the Price
Pricing Procedure
 Select pricing objective
 Determine demand
 Estimate costs
 Analyze competition
 Select pricing method
 Select final price
©2003 Prentice Hall, Inc.
 Requires consideration
of additional factors:
– Psychological pricing
– Gain-and-risk-sharing
pricing
– Influence of other
marketing mix variables
– Company pricing
policies
– Impact of price on other
parties
To accompany A Framework for Marketing Management, 2nd Edition
Slide 11 in Chapter 13
Adapting the Price
 Geographical Pricing
– Barter
– Compensation deal
– Buyback arrangement
– Offset
©2003 Prentice Hall, Inc.
To accompany A Framework for Marketing Management, 2nd Edition
Slide 12 in Chapter 13
Adapting the Price
Price Discounts and Allowances:
 Cash
discounts
 Functional
discounts
 Quantity
discounts
 Seasonal
discounts
 Trade-in
allowances
 Promotion
allowances
©2003 Prentice Hall, Inc.
To accompany A Framework for Marketing Management, 2nd Edition
Slide 13 in Chapter 13
Adapting the Price
Promotional Pricing Tactics:
 Loss-leader
pricing
 Longer payment
terms
 Special-event
pricing
 Warranties and
service contracts
 Cash rebates
 Low-interest
financing
©2003 Prentice Hall, Inc.
 Psychological
discounting
To accompany A Framework for Marketing Management, 2nd Edition
Slide 14 in Chapter 13
Adapting the Price
Discriminatory Pricing Tactics:
 Customer
 Channel
segment pricing
pricing
 Product-form
pricing
 Location
pricing
 Image pricing
 Time pricing
©2003 Prentice Hall, Inc.
To accompany A Framework for Marketing Management, 2nd Edition
Slide 15 in Chapter 13
Adapting the Price
 Price discrimination works when:
– Market segments show different
intensities of demand
– Consumers in lower-price segments can
not resell to higher-price segments
– Competitors can not undersell the firm
in higher-price segments
– Cost of segmenting and policing the
market does not exceed extra revenue
©2003 Prentice Hall, Inc.
To accompany A Framework for Marketing Management, 2nd Edition
Slide 16 in Chapter 13
Adapting the Price
Product-Mix Pricing Tactics:
 Product-line
pricing
 Two-part
pricing
 Optional-feature  By-product
pricing
pricing
 Captive-product  Product-bundle
pricing
pricing
©2003 Prentice Hall, Inc.
To accompany A Framework for Marketing Management, 2nd Edition
Slide 17 in Chapter 13
Initiating and Responding
to Price Changes
 Strategic Options Include:
– Maintain price and perceived quality;
selectively prune customers
– Raise price and perceived quality
– Partially cut price and raise quality
– Fully cut price, maintain perceived quality
– Maintain price, reduce perceived quality
– Introduce an economy model
©2003 Prentice Hall, Inc.
To accompany A Framework for Marketing Management, 2nd Edition
Slide 18 in Chapter 13
Initiating and Responding
to Price Changes
Key Considerations
 Initiating price cuts
 Initiating price
increases
 Reactions to price
changes
 Responding to
competitor’s price
changes
©2003 Prentice Hall, Inc.
 Circumstances leading
to price cuts:
– Excess plant capacity
– Declining market share
– Attempt to dominate the
market via lower costs
 Price cutting traps:
– Price/quality perceptions
– Low prices don’t create
market loyalty
– Competition may match
or beat price cuts
To accompany A Framework for Marketing Management, 2nd Edition
Slide 19 in Chapter 13
Initiating and Responding
to Price Changes
Key Considerations
 Initiating price cuts
 Initiating price
increases
 Reactions to price
changes
 Responding to
competitor’s price
changes
©2003 Prentice Hall, Inc.
 Circumstances leading
to price increases:
– Cost inflation
– Overdemand
 Methods of dealing
with overdemand:
– Delayed quotation
pricing
– Escalator clauses
– Unbundling
– Reduction of discounts
To accompany A Framework for Marketing Management, 2nd Edition
Slide 20 in Chapter 13
Initiating and Responding
to Price Changes
 Initiating price cuts
 Firms must monitor
both customer and
competitor reactions
 Initiating price
increases
 Competitor reactions
are common when:
Key Considerations
 Reactions to price
changes
 Responding to
competitor’s price
changes
©2003 Prentice Hall, Inc.
– Few firms offer the
product
– The product is
homogeneous
– Buyers are highly
informed
To accompany A Framework for Marketing Management, 2nd Edition
Slide 21 in Chapter 13
Initiating and Responding
to Price Changes
Key Considerations
 Initiating price cuts
 Initiating price
increases
 Reactions to price
changes
 Responding to
competitor’s price
changes
©2003 Prentice Hall, Inc.
 The degree of product
homogeneity affects
how firms respond to
price cuts initiated by
the competition
 Market leaders can
respond to aggressive
price cutting by smaller
competitors in several
ways
To accompany A Framework for Marketing Management, 2nd Edition
Slide 22 in Chapter 13
Initiating and Responding
to Price Changes
Market Leader Responses to
Competitor Initiated Price Cuts:
 Maintain price
and profit margin
 Increase price,
improve quality
 Maintain price,
add value
 Launch a lowprice fighter line
 Reduce price
©2003 Prentice Hall, Inc.
To accompany A Framework for Marketing Management, 2nd Edition
Slide 23 in Chapter 13