CHAPTER 14

Developing Pricing
Strategies and
Programs


 IN THIS CHAPTER WE WILL
ADDRESS THE FOLLOWING
QUESTION

 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 competitor’s price

challenge?
 GILLETTE

The Gillette example reveals the power of pricing.

UNDERSTANDING PRICING
 A Changing Pricing Environment

Buyers can:
 Get instant price comparisons from thousand 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.

 Negotiate prices in online auctions and exchanges.

How companies Price.
 CONSUMER PSYCHOLOGY AND
PRICING

• Consumers – Price takers

• Purchase decisions- perceive prices of consumers, current

actual price and not marketer’s stated prices E.g. a T-shirt
of Armani, GAP, H&M
CONSUMER PSYCHOLOGY AND
PRICING
 REFERENCE PRICES

 A “reference price” is the price that people expect or

deem to be reasonable for a certain type of product.
 Factors affect reference prices

•  Memory of past prices

•   Frame of reference (compared to competitive prices, pre-sale

prices, manufacturer’s suggested prices, channel-specific
prices, marked prices before discounts, substitute product
prices, etc.) 

E.g.- EMI (equated monthly installments) followed in

automobiles or residential apartments.
 Possible Consumer Reference Prices

• Fair price

• Typical price

• Last price paid

• Upper-bound price

• Lower-bound price

• Competitor prices

• Expected future price

• Usual discounted price

 PRICE-QUALITY INFERENCES

 Price as indicator of quality

 Image pricing & ego sensitive products E.g.- Perfumes

 Price & quality perceptions of cars interacts.

 Exclusive & Scarcity

E.g.- watches, jewelry, perfume.

Consumer Perceptions vs. Reality for Cars

Overvalued Brands Undervalued Brands

Land Rover Mercury

Kia Infiniti

Volkswagen Buick Buick

Volvo Lincoin

Mercedes Chrysler
 PRICE CUES

 Left to right pricing ($299 versus $300)

 Odd number discount perceptions

 Even number value perceptions

 Ending prices with 0 or 5

 Sale written next to price

 When to Use Price Cues

 Customers purchase item in frequently

 Customers are new

 Product designs vary over time

 Prices vary seasonally

 Quality or sizes vary across stores

 Tiffany and Co.

Tiffany name has connoted diamonds and luxury. Yet in 1990’s,

during the economic crisis, Tiffany launched a line of cheaper silver
jewelry known as ‘Return to Tiffany’ which became a must have
item for teens of a certain set.

The skyrocketing heights of sale of this set of jewelry bought in a

different image for the company. For all those who grew up thinking
of Tiffany as the only place where they got the jewelry of girlhood,
the company began hiking price. At the same point, the company
launched higher-end collections and expanded aggresively into new
markets and shopping-malls.
 SETTING THE PRICE

The firm must consider many factors in setting its pricing policy.
 STEP 1:
SELECTING THE PRICING OBJECTIVE


Survival

Maximum current profit

Maximum market share

Maximum market skimming

Product- Quality leadership

Other Objectives
STEP 2: DETERMINING DEMAND


PRICE SENSITIVITY

ESTIMATING THE DEMAND
CURVE

PRICE ELASTICITY OF
DEMAND

PRICE SENSITIVITY
- There are few or no substitutes or competitors
- They do not readily notice the higher price
- They are slow to change their buying habits
- They think the higher prices are justified
- Price is only a small part of the total cost of
obtaining, operating, and servicing the product over
its lifetime.
ESTIMATING THE DEMAND CURVE

Surveys

Price experiments

Statistical analysis

PRICE ELASTICITY OF DEMAND


If demand hardly changes with a small change in price, we say the
demand is inelastic.

If demand changes considerably, demand is elastic.
 Step 3: estimate cost

Type of cost & level of production:-

 Fixed cost

 Variable cost

 Total cost

 Average cost

 Accumulated Production

 Activity-Based Cost Accounting

 Target Costing
 Fixed Cost

 Fixed cost do not vary with production

 level or sales revenue.

 Variable cost

Variable cost vary directly with level of production

 Total cost & Average cost

 Total cost Consist of sum of the fixed & variable cost for any
given level of production.

 Average cost is the cost per unit at the level of production it

equals total cost divided by production.
 Average cost

 Average cost is the cost per unit at the level of production it

equals total cost divided by production.
Accumulated Production
 TARGET COSTING

 Target costing involves setting a target cost (competitive

market price – profit)

 “Target Costing is a disciplined process for determining and

achieving a full-stream cost.

 Quality must be produced in order to generate the desired

profitability
Step :4 Analyzing Competitors’ Cost,
Prices, and Offers

-Identify nearest price competitor

-Take competitors' features & price into account

-Make decision to charge more, the same or less than

competitors

-Monitor competitor reaction to your price strategy

Step 5 : Selecting a Pricing Method

High price
______________
(No possible demand at this price)

Ceiling Price
Customers’ assessment of unique product
features

Orienting Point

Competitors’ prices and Prices of Substitutes

Costs

Floor price

Low Price
_____________
(No possible profit at this price)
Popular Pricing Methods
 Mark-up Pricing

 Unit Cost + Standard Markup = Selling Price

 Suppose a Gel Pen manufacturer has the following costs and sales
expectations:

 Variable Cost/unit : Rs.10

 Fixed Cost : Rs. 300000

 Expected Sales unit : 50000

Manufacturer’s Unit Cost = Variable Cost + Fixed Cost
unit sales

= 10 + 300000
50000
= 10 + 6
= Rs. 16
Now, the manufacturer wants to a 20% mark-up on sales.
Then manufacturer’s mark-up price is given by:

Mark-up Price = Unit Cost

1- desired return on sale

= Rs. 16
1- 0.2

= Rs. 20

Hence, manufacturer will charge dealer Rs.20/unit.

The dealer will further add on his own markup.
 Mark-ups are generally
higher on:

 Seasonal Items

 Specialty Items

 Slower moving items

 Items with high storage and handling cost

 Demand-inelastic Items
 Advantages of Mark-up Pricing

 Seller can determine cost more easily than they can

estimate demand.
 When all firms on the industry use this pricing method,
price tends to be similar and hence price-competition is
minimized.
 People feel that cost-plus pricing is fairer to both buyers
and sellers. Sellers do not take advantage of buyers when
latter’s demand become acute, and seller earn a fair ROI.
 Target Return Pricing

The form determines the price that would yield its target rate of
ROI.

Suppose a Toaster manufacturer has invested Rs.1 million in the

business and wants to earn a profit of 20% ROI, specifically Rs.
200000.target return price is given by:

Target-Return Pricing= desired return x invested capital

unit sales
The manufacturer will realize this ROI provided is costs and estimated sales turn out
to be accurate. But what if sales do not reach 50000 units?

The manufacturer can prepare a break-even chart to learn what would happen at other
sales level.

The total revenue and total cost curves cross each other at 30000 units. Thus is the Break-
even volume. It can be verified by the following formula:

Break-even volume = fixed cost = Rs. 300000 = Rs. 30000

price- variable cost Rs.20 – Rs. 10
Break-even Point
 Perceived Value Pricing

Perceived values is made up of several elements

 Buyer’s image of product’s performance

 Channel deliverables

 Warranty quality

 Customer support

 Softer attributes: supplier’s reputation, trustworthiness and

esteem.
 Companies must deliver the value promised by their value
proposition
 Customers must perceive this value

 Use of marketing mix elements such as Advertising and

sales force, to communicate and enhance perceived value
in customers’ mind.
 Deliver more value than the competitor and demonstrate
this to prospective buyers.
 GOING RATE PRICING

 In going-rate pricing, the firm bases its price largely on

competitors' prices, charging the same. more, or less than
major competitor’s.
 It is used where costs are difficult to measure or
competitive response is uncertain.
 AUCTION-TYPE PRICING

 Auction-type pricing is growing more popular

,especially with the growth of the Internet.
 Example:- EBay
 E-bay began as an auction site which created a pricing revolution
by helping buyers get the best price for their items and letting
customers decide the price that they want. Now it is also offering
fixed price ”Buy it now” option for those who don’t want to enter
into auction.
 E-bay’s acquisition of Paypal online payment service and Skype
internet voice and video communication have synergetically
expanded the company’s auction capabilities as customers can
pay online through Paypal and buyers and sellers can
communicate through Skype.
 Acquisition of shopping.com, rent.com and Stub Hub online
ticket resale service has provided diversification to E-bay.
STEP 6: SELECTING THE FINAL
PRICE:
 IMPACT OF OTHER MARKETING
ACTIVITIES:

 The final price must take into account of two things

relative to the competition-

(1)Brand’s quality
(2)Advertising
 COMPANY PRICING POLICY:

1)The company pricing policies must be consistent

2)It can establish pricing penalties under certain

circumstances.

3)The price should be reasonable to customers.

4)The price should be profitable to the company.

GAIN AND RISK SHARING PRICING:

• Buyers may resist accepting a seller’s proposal because

of high perceived level of risk.
• The seller has the option of offering to absorb part or all
the risk if it does not deliver the full promised value.
 IMAPCT OF PRICE ON OTHER
PARTIES:

Management must also consider the reactions of other parties

like

1)How will distributor and dealers feels about it?

2)How will competitors react?

3)Will suppliers raise their prices on seeing the company’s prices?

4)Will the government intervene and prevent this price from

being charged?
 ARMANI, GAP, and H&M

A pretty ordinary looking Armani black t-shirt for women

which doesn’t look much different from the black t-shirt sold
by GAP and Swedish discount clothing chain, H&M costs
$275 in comparison to $14.90 $7.90 by GAP and H&M
respectively.
Despite of being more stylishly cut and being made of 70%
nylon, there are very few takers of Armani t-shirt at$275. thus
Armani doesn’t make many, this further enhancing the appeal
for status-seekers who like the idea of having a special edition
t-shirts.