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 industrys
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.

Ryannairfly free, pay for

everything else.

SKYPEfree Internet calling

but charges for calls made to non-Internet phones.

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

Survival Maximum current profit Maximum market share

Maximum market skimming

Product-quality leadership

Step 2: Determining Demand

Price sensitivity

Price elasticity of
demand
Inelasticsmall
change in demand with small change in price. Elastic considerable change in demand with small change in price.

Estimating demand curves Survey consumers Set different prices in similar territories Statistical analysis of past prices, quantities sold, and other factors

Step 3: Estimating Costs

Fixed costs Variable costs Total costs Average cost

The Experience Curve

Target Costing
Establish a new products 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. Its 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

Promotional pricing

Differentiated pricing

Product-mix pricing

Geographical Pricing
Barter

Compensation deal Buyback arrangement

Offset

Price Discounts and Allowances

Discountsprice reductions

Cash Quantity Functional Seasonal

Allowanceextra payment

Promotional Pricing
Loss-leader
pricing

Longer payment
terms

Special-event
pricing

Warranties and
service contracts

Cash rebates Low-interest

financing

Psychological
discounting

Differentiated Pricing
Customer-segment pricing
Product-form pricing Image pricing Channel pricing Location pricing Time pricing

Product-Mix Pricing
Product-line
Optional-feature

Two-part
By-product

Captive-product

Product-bundling

Product-Mix Pricing
Product-line
Optional-feature

Two-part
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