chapter 10 (developing pricing strategies and programs)

7/31/2019 Chapter 10 (Developing Pricing Strategies and Programs)

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Chapter 10

Developing pricing Strategies and

Programs



Consumer Psychology and Pricing

• Marketers recognize that consumers oftenactively process price information,interpreting prices in terms of their knowledge

from prior purchasing experience.

• Purchase decisions are based on how

consumers perceive prices and what theyconsider the current actual price to be-not themarketer's stated price.



• Understanding how consumers arrive at theirperceptions of prices is an important marketingpriority.

• Here we consider three key topics-reference prices,price-quality inferences, and price endings.

• When examining products, however, consumers often

employ reference prices, comparing an observed priceto an internal reference price they remember or to anexternal frame of reference such as a posted "regularretail price."



Reference Pricing



PRICE-QUALITY INFERNCES

• PRICE-QUALIY INFERNCES: Many consumers

use price as an indicator of quality. Image

pricing is especially effective with ego-

sensitive products such as perfumes,expensive cars, and Armani T-shirts.



Consumer Perceptions vs Reality for

Cars



Setting the Price

• Firm must set a price for the first time when itdevelops a new product.

• The firm must consider many factors in setting its

pricing policy.• (1) selecting the pricing objective

• (2) determining demand

• (3) estimating costs

• (4) analyzing competitors' costs, prices• (5) selecting a pricing method

• (6) selecting the final price.



Setting the Price

• Step 1: Selecting the Pricing Objective: 'herecompany first decides where it wants toposition its market offering.

• The clearer a firm's objectives, the easier it isto set price. Five major objectives are:

survival, maximum current profit, maximummarket share, maximum market skimming,and product-quality leadership.



Setting the Price

• SURVIVAL: Companies pursue survival as their majorobjective if they are plagued with over‘ capacity,intense competition, or changing consumer wants. Aslong as prices cover variable costs and some fixed

costs.

• Maximum Current Profit: Many companies try to set aprice that will maximize current profits, They estimatethe demand and costs associated with alternativeprices and choose . The price that produces maximumcurrent profit, cash flow, or rate of return oninvestment.



Market Skimming

• Maximum Marketing Skimming: Companies

unveiling a new technology favor setting high

prices to maximize market skimming. Sony is a

frequent practitioner of market-skimmingpricing, in which prices start high and slowly

drop over time.



Conditions for market skimming

• (1) A sufficient number of buyers have a high currentdemand.

• (2) the unit costs of producing a small volume are not so

high that they cancel the advantage of charging what thetraffic will bear.

• (3) the high initial price does not attract more competitorsto the market.

• (4) the high price communicates the image of a superiorproduct.



Step 2: Determining Demand

• Each price will lead to a different level of

demand and will therefore have a different

impact on a company's marketing objectives.



Step 3: Estimating Costs

• Types of Costs: A company's costs take two forms, fixed andvariable.

• Fixed costs (also known as overhead) are costs that do not

vary with production level or sales revenue.

• Variable costs vary directly with the level of production. Forexample, each hand calculator produced by TexasInstruments incurs the cost of plastic, microprocessor chips,

and packaging.

• Total costs consist of the sum of the fixed and variable costsfor any given level of production.



Step 4: Analyzing Competitors' Costs,

Prices, and Offers

• Within the range of possible prices

determined by market demand and company

costs, the firm must take competitors' costs,

prices, and possible price reactions intoaccount.



Step 4: Analyzing Competitors' Costs,

Prices, and Offers

• How can a firm anticipate a competitor's reactions?

• company will need to research the competitor'scurrent financial situation, recent sales, customer

loyalty, and corporate objectives.

• The problem is complicated because the competitorcan put different interpretations on lowered prices or a

price cut: that the company is trying to steal themarket, that the company is doing poorly and trying toboost its sales, or that the company wants the wholeindustry to reduce prices to stimulate total demand.



Step 5: Selecting a Pricing Method

• We will examine six price-setting methods:

markup pricing, target-return.

• MARKUP PRICING: The most elementary

pricing method is to add a standard markup to

the product's cost. Construction companies

submit job bids by estimating the total project

cost and adding a standard markup for profit.




• Target Return Pricing: In target-return pricing,the firm determines the price that ,would yield itstarget rate of return on investment (ROI).

• PERCEIVED-VALUE PRICING: Perceived value ismade up of several elements, such as the buyer'simage of the product performance, the Channeldeliverables, the warranty quality, customer

support, and softer attributes such as thesupplier's reputation, trustworthiness, andesteem.




• VALUE PRICING: Companies have adopted valuepricing: They win loyal customers by charging afairly low price for a high-quality offering.

• Value pricing is thus not a matter of simplysetting lower prices; it is a matter of reengineering the company's operations to

become a low-cost producer without sacrificingquality, to attract a large number of value-conscious customers.




• G0ING-RATE PRICING: In going-rate pricing, thefirm bases its price largely on competitors' prices,charging the same, more, or less than major

competitor(s).

• AUCTION TYPE PRICING Auction-type pricing isgrowing more popular, especially with the growth

of the Internet. "Breakthrough Marketing: EBay"describes the ascent of that wildly successfulInternet company.



Step 6: Selecting the Final Price

• In selecting that price, the company mustconsider additional factors, including the impactof other marketing activities, company pricing

policies, gain-and-risk-sharing pricing, and theimpact of price on other parties.

• IMPACT OF OTHER MARKETING ACTIVITIES: The

final price must take into account the brand'squality and advertising relative to thecompetition.



Price Discounts and Allowances



Differentiated Pricing

• Price discrimination occurs when a company sells a product orservice at two or more prices that do not reflect a proportionaldifference in costs.

• In first-degree price discrimination, the seller charges a separate

price to each customer depending on the intensity of his or herdemand.

• In second-degree price discrimination, the seller charges less tobuyers who buy a larger volume.

• In third-degree price discrimination, the seller charges differentamounts to different classes of buyers, as in the following cases:




• Customer-segment pricing. Different customer groups pay differentprices for the same product or service. For example, museumsoften charge a lower admission fee to students and senior citizens.

• Product-form pricing. Different versions of the product are priced

differently, but not proportionately to their costs. Evian prices a 48-ounce bottle of its mineral water at $2.00. It takes the same waterand packages 1.7 ounces in a moisturizer spray for $6.00.

• Image pricing. Some companies price the same product at twodifferent levels based on image differences. A perfumemanufacturer can put the perfume in one bottle, give it a name andimage, and price it at $10 an ounce. It can put the same perfume inanother bottle with a different name and image and price it at $30an ounce.




• Channel pricing. Coca-Cola carries a different pricedepending on whether the consumer purchases it in a finerestaurant, a fast-food restaurant, or a vending machine.

• Location pricing. The same product is priced differently atdifferent locations even though the cost of offering it ateach location is the same.

• Time pricing. Prices are varied by season, day, or hour.



Responding to Competitors' Price

Changes

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