14

Developing Pricing
Strategies and Programs

Marketing Management, 13th ed

 Chapter Questions
How do consumers process and evaluate
prices?
How should a company set prices initially for
products or services?
How should a company adapt prices to meet
varying circumstances and opportunities?
When should a company initiate a price
change?
How should a company respond to a
competitors price challenge?
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 A Changing Pricing Environment
Buyers can:
Get instant price comparison from thousands of
vendors
Name their price and have it met
Get products free
Sellers can:
Monitor customer behavior and tailor offers to
individuals
Give certain customers access to special prices
Both buyers and sellers can:
Negotiate price in online auctions and exchange

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 Consumer Psychology
and Pricing

Reference Prices

Price-quality inferences

Price endings

Price cues

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 Reference Prices: comparing an observed
price to an internal reference price.
Price-Quality Inferences: Many consumers
use price as an indicator of quality.
Price Cues: Consumer perceptions of prices are
also affected by alternative pricing strategies. Many
sellers believe that prices should end in an odd
number.

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 Steps in Setting Price
Select the price objective

Determine demand

Estimate costs

Analyze competitor price mix

Select pricing method

Select final price

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 Step 1: Selecting the Pricing Objective

Survival: over
capacity, intense
competition
Maximum current
profit
Maximum market
share
Maximum market
skimming: price
start high and
slowly drop
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overtime
 Step 2: Determining Demand

Price Sensitivity

Estimating
Demand Curves

Price Elasticity
of Demand
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 Price Sensitivity: Less price sensitive to low-
cost price, there are no or few competitors, do not
notice the higher prices, slow to change buyer
behavior, high prices are justified & price is only a
small part of the load.
Estimating Demand Curve: Survey, price
experiments and statistical analysis
Price Elasticity of Demand: Demand hardly
changes with a small change in price is inelastic. If
demand changes considerably, demand is elastic.

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 Figure 14.2 Inelastic and
Elastic Demand

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 Step 3: Estimating Costs

Types of Costs
Accumulated
Production
Activity-Based
Cost Accounting
Target Costing

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 Cost Terms and Production
Fixed costs
Variable costs
Total costs
Average cost
Cost at different
levels of
production

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 Figure 14.4 Cost per Unit as a
Function of Accumulated Production

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 Step 4: Analyzing Competitors Costs,
Prices and Offers
Consider the nearest competitors cost
Any price change
Consider the competitors reactions

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 Step 5: Selecting a Pricing Method
Markup pricing
Target-return pricing
Perceived-value
pricing
Value pricing
Going-rate pricing
Auction-type pricing

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 Markup Pricing: To add a standard markup to the products cost.
Target-Return Pricing: the firm determines the price that would
yield its target rate of ROI.
Perceived Value Pricing: Perceived value is made up of
several elements such as the product performance, the channel
deliverables, the warranty, quality, customer support, supplier
reputation and trustworthiness.
Value Pricing: Charging fairly low price for high quality offering.
Going Rate Pricing: The firm bases its price largely on
competitors prices, charging the same, more or less than major
competitors.
Auction-Type Pricing: Three major types of auctions pricing:
English auction, Dutch auction and Sealed bid auctions.

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 Figure 14.6 Break-Even Chart

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 Step 6: Selecting the Final Price

Impact of other marketing

activities: promotion,
development cost
Company pricing policies
Gain-and-risk sharing
pricing: absorb part or all
the risk.
Impact of price on other
parties: supplier, sales
force reactions

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 Price-Adaptation Strategies

Geographical Pricing

Discounts/Allowances

Promotional Pricing

Differentiated Pricing

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 Price-Adaptation Strategies

Countertrade Discounts/ Allowances

Barter Cash discount
Compensation deal Quantity discount
Buyback Functional discount
arrangement Seasonal discount
Offset Allowance

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 Promotional Pricing Tactics
Loss-leader pricing
Special-event pricing
Cash rebates
Low-interest financing
Longer payment terms
Warranties and service
contracts
Psychological
discounting

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