14

Developing Pricing Strategies

and Programs

Marketing Management, 13th ed

 What Is a Price?
“The amount of money charged, expected,
required or given in payment of something”

Price is the only

element in the
marketing mix that
produces revenue;
all other elements
represent costs
NATURE AND IMPORTANCE OF PRICE

• The Many Names of Price - ???

• Hotel
• Doctor
• Insurance
• apartment

• What Is Price?

To the seller... To the consumer...

Price is revenue Price is what you give
and profit source up to get what you want
Factors in Setting Price
 Consumer Psychology
and Pricing

Reference Prices (Previous experience + posted)

Price-quality inferences (higher the price higher qty)

Price endings ($299 vs. $300)

Price cues (Sale signs & avoid 9 if u want image)

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 THE PRICING EQUATION FOR CONSUMERS

PRICE = LIST PRICE - INCENTIVES & ALLOWANCES + EXTRA FEES

 THE PROFIT EQUATION FOR SELLERS

Profit = Total revenue - Total cost

or
Profit = (Unit price × Quantity sold) −Total cost
 Steps in Setting Price
Select the price objective

Determine demand

Estimate costs

Analyze competitor price mix

Select pricing method

Select final price

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-8
 Step 1: Selecting the Pricing Objective

• Survival (Short run strategy specially when a company

has excess capacity or intense competition)
• Maximum current profit (Estimate demand & cost
associated and try to get maximum current profits,
cash flow or ROI) not a long term strategy
• Maximum market share (market penetration pricing) TI
• Maximum market skimming (Sony HDTV @ $43,000)
• Product-quality leadership (affordable luxuries, like
Lexus, BMW & Mercedes)

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 New-Product Pricing
Strategies
Market-penetration pricing sets a low initial
price in order to penetrate the market quickly
and deeply to attract a large number of
buyers quickly to gain market share
• Price sensitive market
• Inverse relationship of production and
distribution cost to sales growth
• Low prices must keep competition out of the
market
 New-Product Pricing
Strategies
Market-skimming pricing is a strategy with high
initial prices to “skim” revenue layers from the
market
• Product quality and image must support the price
• Buyers must want the product at the price
• Costs of producing the product in small volume
should not cancel the advantage of higher prices
• Competitors should not be able to enter the market
easily
 Step 2: Determining Demand

Price Sensitivity
(Higher the price lower the demand)

Estimating Demand Curves

(Surveys, Experiments, Statistical analysis)
Price Elasticity of Demand
(If demand hardly changes-Inelastic
If demand changes considerably-Elastic)
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 Figure 14.2 Inelastic and
Elastic Demand

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 Step 3: Estimating Costs

Types of Costs
variable, fixed, total cost
Accumulated Production
Experience curve
Activity-Based
Cost Accounting
Target Costing
Tata’s Nano @ Rs100,000
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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 & Offers
• Consider the nearest competitor price
• See their features, if plus reduce your
own price, if more should increase your
own price
• The introduction of any price or the
change of existing price can provoke a
response from customers, competitors,
distributors, suppliers and even
government
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-17
Step 5: Selecting a Pricing Method
• Markup pricing (20%)
• Target-return pricing (20% ROI)
• Perceived-value pricing (Caterpillar
tractor @ $100,000)
• Value pricing (IKEA, Target,
Southwest Airline)
• EDLP (Every day low prices Wal-Mart)
• HLP (High Low Pricing-Frequent sales)
• Going-rate pricing (Competitors
price, like steel, iron & paper)
• Auction-type pricing (English-real
estate, Dutch-one buyer many
sellers, Sealed-bid)
 Figure 14.6 Break-Even Chart

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 Step 6: Selecting the Final Price

• Impact of other marketing activities (relative price,

relative quality, relative advertising)
• Company pricing policies (Airline charge up to 50%
on cancellation, Credit card charges fee on late
payment, Banks charge on cheque bouncing)
• Gain-and-risk sharing pricing (profit & loss for
saving’s account holder)
• Impact of price on other parties (price impact on
intermediaries)

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 Price-Adaptation Strategies

Geographical Pricing (Different locations)

Discounts/Allowances

Promotional Pricing

Differentiated Pricing

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 Price-Adaptation Strategies
Countertrade Discounts/ Allowances
• Barter (product for • Cash discount (2/10, net
product) 30)
• Compensation deal • Quantity discount ($10
(70% cash 30% up to 100 & $9 for 101 +
coffee) units)
• Buyback • Functional discount
arrangement (Initial (Selling & storing)
payment in cash • Seasonal discount (Off-
rest factories goods) season discount)
• Offset (Pepsi vs. • Allowance (Trade-in &
Vodka from Russia) promotional allowance)
 Promotional Pricing Tactics
• Loss-leader pricing
• Special-event pricing
• Cash rebates
• Low-interest financing
• Longer payment terms
• Warranties and service
contracts
• Psychological discounting
(Was $399 Now $299)

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 Differentiated Pricing

• Price Discrimination- • Customer-segment pricing

Company sells a (student discounts)
product at two or • Product-form pricing (Shirts
prices that do not from Rs 800-2,000)
reflect proportional • Image pricing (Garments)
difference in costs • Channel pricing (Soft drink)
• Separate price as per • Location pricing (Stadiums)
demand • Time pricing (Busy hours
• Less to bulk buyers vs. Off hours)
• Yield pricing (Airline &
Hotel industry)
 Table 14.6 Profits Before and After a
Price Increase

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 Initiating Price Cuts

• Low quality trap (consumers assume quality is

low)
• Fragile-market share trap (a low price buys
market share but not market loyalty)
• Shallow-pocket trap (higher priced competitors
can match the lower prices and can sustain it
due to deeper pockets)
• Price-war trap (competitors respond by lowering
their prices even more, triggering a price war)
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 Increasing Prices

Delayed quotation pricing (Until

the product is finished or delivered)
Escalator clauses
(Increase due to inflation, Toyota)
Unbundling (start charging for the
things which were free like Air bags
Reduction of discounts
(stops cash or quantity discounts)
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 Alternative approaches to
Price Hike
• Shrinking the amount of the product
• Substituting expensive ingredients
• Reducing or removing product features
• Reducing or removing product services
• Using less expensive package material
• Reducing the # of sizes & models offered
• Creating new economy models

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-28

 WAYS TO SELECT BASE PRICE LEVELS

Demand oriented – focus on consumer preference

Cost oriented – focus on business’s expenses
Profit oriented – focus on profit
Competition oriented – focus on the marketplace players
 DEMAND ORIENTED APPROACHES

 Skimming Pricing – high initial price

 Penetration Pricing – low initial price

 Prestige Pricing – high price = quality and status

 Target Pricing-make product fit price market will pay

 Bundle Pricing- 2 products priced as one. helps poorer seller

 Yield Management Pricing – peak and non peak prices

 PROFIT ORIENTED APPROACHES

 Target Profit Pricing-set annual dollar volume or profit

If I need to make $5000, & I can make 5 units,
selling price is $1000.

 Target Return-on-Sales Pricing-

Want to receive 1% of sales as my profit – actors & directors

 Target Return-on-Investment Pricing –

I can make 5 % on my money in the bank. Set price so
I make 6% on my investment if I invest it in my business.
 COST ORIENTED APPROACHES

• Cost-Oriented Approaches
 Standard Markup Pricing
add the standard industry fixed % to my costs. Easy
to implement.

 Cost-Plus Pricing
add a standard dollar amount to my costs- like $5.00
for shipping and handling
 COMPETITION ORIENTED APPROACHES

 Customary Pricing
Adjust product to fit costs & maintain price
75¢ candy bar in a vending machine

 Above-, At-, or Below-Market Pricing

Use largest competitor as a benchmark to set your price.
Rolex watches (above) or Value City Furniture (below)

 Loss-Leader Pricing-
Price below cost to lure buyers in
Want buyer purchasing other things you sell at high mark ups

Lots of choices, but when to use which one?

 Breakeven Point Formula

Fixed Costs
BREAKEVEN QUANTITY 
Price/unit – Variable cost/unit

(Contribution Margin)