Chapter-by-Chapter Instructional Material
Chapter 14: Developing Pricing Strategies and Programs
LEARNING OBJECTIVES
After reading this chapter, students should:
Know how consumers process and evaluate prices
Know how a company should set prices initially for products or
services
Know how a company should adapt prices to meet varying
circumstances and opportunities
Know when a company should initiate a price change
Know how a company should respond to a competitors price
change
CHAPTER SUMMARY
Despite the increased role of non-price factors in modern
marketing, price remains a critical element of the marketing mix.
Price is the only one of the 4Ps that produces revenue; the others
produce costs.
In setting pricing policy, a company follows a six-step
procedure. It selects its pricing objective. It estimates the
demand curvethe probable quantities it will sell at each possible
price. It estimates how its costs vary at different levels of
output, at different levels of accumulated production experience,
and for differentiated marketing offers. It examines competitors
costs, prices, and offers. It selects a pricing method. It selects
the final price.
Companies do not usually set a single price, but rather a
pricing structure that reflects variations in geographical demand
and costs, market-segment requirements, purchase timing, order
levels, and other factors. Several price-adaptation strategies are
available: (1) geographical pricing; (2) price discounts and
allowances; (3) promotional pricing; and (4) discriminatory
pricing.
After developing pricing strategies, firms often face situations
in which they need to change prices. A price decrease might be
brought about by excess plant capacity, declining market share, a
desire to dominate the market through lower costs, or economic
recession. A price increase might be brought about by cost
inflation or over demand. Companies must carefully manage customer
perceptions in raising prices.
Companies must anticipate competitor price changes and prepare a
contingent response. A number of possible responses are possible in
terms of maintaining or changing price or quality.
The firm facing a competitors price change must try to
understand the competitors intent and the likely duration of the
change. Strategy often depends on whether a firm is producing
homogeneous or non-homogeneous products. Market leaders attacked by
lower-priced competitors can choose to maintain price, raise the
perceived quality of their product, reduce price, increase price
and improve quality, or launch a low-priced fighter line.
OPENING THOUGHT
Students should have a good understanding of price in their role
as consumers. The instructor is encouraged to expand the students
definition of a price by using examples of different pricing
structures (cell phone plans for example), promotional pricing,
geographical pricing, and price discrimination.
An area for some misunderstanding for students new to marketing
is how the firm reviews competitors reactions to price changes.
Students will have some degree of difficulty in assuming the role
of a competitor and formulating defensive and/or offensive plans to
price changes.
Discriminatory pricing is also an area that students new to
marketing can have some difficulty understanding for the first
time. Although discriminatory pricing is not illegal, per se, the
distinctions are sometimes porous between the two.
TEACHING STRATEGY AND CLASS ORGANIZATION
PROJECTS
1. At this point in the semester-long marketing plan project,
students should be prepared to hand in their pricing strategy
decisions for their fictional product/service. In reviewing this
section, the instructor should make sure that the students have
addressed all or most of the material, concerning pricing, covered
in this chapter. 2. Consumer perceptions of prices are also
affected by alternative pricing strategies. Marriott Hotels, for
example, has different brands for differing price points. Building
upon the Marriott example, students are to scan the environment to
find examples of a company whose pricing strategy is closely tied
to its branding strategy. Caution: students may want to list just
the different price points in the same company such as Ford
automobiles. What this project is designed to accomplish, is that
students should note that the Lincoln line of cars are priced at a
premium to the Ford and Mercury divisions. Good students will also
have researched the actual percentage difference between the three
divisions. 3. Sonic PDA Marketing Plan Pricing is a critical
element in any companys marketing plan, because it directly affects
revenue and profit goals. Effective pricing strategies must
consider costs as well as customer perceptions and competitor
reactions, especially in highly competitive markets.
You are in charge of pricing Sonics first PDA. Review your SWOT
Analysis and Competition Analysis. Also, think about the markets
you are targeting and the positioning you want to achieve. Then,
answer the following questions about pricing:
What should Sonics primary pricing objective be? Why?
Are PDA customers likely to be price-sensitive? Is demand
elastic or inelastic? What are the implications of the answers for
pricing decisions?
What price adaptations such as discounts, allowances, and
promotional pricing should Sonic include in its marketing plan?
Document your pricing strategies and programs in a written
marketing plan or type them into the Marketing Mix section of
Marketing Plan Pro.
ASSIGNMENTS
Small Group Assignments1. Marketers recognize that consumers
often actively process price information, interpreting prices in
terms of their knowledge from prior purchasing experience, formal
communications, informal communications, point-of-purchase, or
online resources. Purchase decisions are based on how consumers
perceive prices and what they consider to be the current actual
pricenot the marketers stated price. In small groups, ask the
students to choose a service good, such as education, legal advice,
tax advice, or other such services, and have them map out their
perception of prices and what they consider to be the current
actual price. Finally, students should compare and contrast their
perceptions with the stated or published prices for these services.
In completing this assignment, students should explain the
differences between perception and stated prices in terms of
consumer buying behavior models from Chapter 6 of this text. 2.
Many consumers use price as an indicator or quality. As a group
assignment, students should choose a product produced by a firm.
Subsequently, the students should conduct a small research project
(utilizing the material learned from Chapter 4) and either,
confirm, or deny this relationship for the chosen product. For
example, do more women or men rely on price as an indicator of
quality for product X? If there is a difference, what is the
quantifiable difference in terms of marketing research data? Does
this difference suggest that marketers must or can revise, or
revamp price clues to reach their target market?
Individual Assignments
1. Table 14.1 lists some possible consumer reference prices.
Students should read Russell S. Winers, Behavioral Perspectives on
Pricing, and Buyers Subjective Perceptions of Price Revisited, in
Issues in Pricing: Theory and Research, ed. Timothy Devinney,
Lexington, MA: Lexington Books, 1988, pp. 3557. Students should
comment on whether or not these consumer reference prices are
applicable to todays consumers; whether this list is inclusive, or
are there new consumer reference price points that have developed
due to the use of the Internet? 2. Table 14.3 lists nine factors
that the authors contend leads to less price sensitivity in
consumers. Choosing a product that is available online and in
stores (books or tires, for example) students are to research the
various pricings available to consumers through the various
Internet shopping gateways and retailers. After collecting this
data, ask the students to comment on whether or not, the variety of
price points found, can lower price sensitivity to the item or
increase consumers price sensitivity because of the variety of
differing prices found for the same item. Think-Pair-Share
1. For many firms pricing is the domain of the financial
disciplines in the company. Using accepted accounting and financial
processes, some companies price strictly according to these models.
Assign students the assumed role of defenders of this practice and
others as innovators, challenging these models and supporting some
of the newer pricing models such as perceived and value pricing for
products. Have the students come prepared to defend their positions
using the concepts developed in this chapter. 2. Paul W. Farris and
David J. Reibstein, in their article, How Prices, Expenditures, and
Profits Are Linked, Harvard Business Review (November-December
1979); pp. 173184, found a relationship between relative price,
relative quality, and relative advertising (their findings are
summarized in the chapter). Students should read the full report,
and then be prepared to discuss the validity of this study in light
of the consumer information explosion that has occurred due to the
emergence of the Internet. Are these relationships still valid
today? If not, why or what has caused them to change? MARKETING
TODAYCLASS DISCUSSION TOPICS
Price discrimination occurs when a company sells a product or
service at two or more prices that do not reflect a proportional
difference in costs. Sellers can however, charge different amounts
to different classes of buyers in the case of customer-segment
pricing, product-form pricing, image pricing, channel pricing,
location pricing, and timing pricing. Airlines and other yield
pricing industries use these practices on a daily basis. Other
industries offer senior citizen and student discounts. Yet other
companies are guilty of first or second-degree price
discrimination.
Knowing now what you know about the concepts of pricing
decisions facing firms, is price discrimination (first, second, or
third degree) a philosophy that aids a company in brand building,
defeats the purpose of price as a clue to quality, or is price
discrimination one of the realities of the marketplace that
companies must follow to remain competitive?
Additional comments can be solicited from the students regarding
the ethics of legal price discrimination as it pertains to society
as a whole. For example, is the practice of senior citizen
discounts inherently unethical because it differentiates one
segment of society from another?
END-OF-CHAPTER SUPPORT
MARKETING DEBATEIs the Right Price a Fair Price?
Prices are often set to satisfy demand or to reflect the premium
that consumers are willing to pay for a product or service. Some
critics shudder, however, at the thought of $2 bottles of water,
$150 running shoes, and $500 concert tickets.
Take a position: Prices should reflect the value that consumers
are willing to pay versus prices should primarily just reflect the
cost involved in making a product or service.
Pro: Price, perhaps more than any other element of the marketing
mix, communicates value to the consumer. In the consumer-decision
making process, we have learned that customers are
value-maximizers. They form an expectation of value and act on it.
A buyers satisfaction is a function of the products perceived
performance and the buyers expectations. So, if the product meets
these consumers value definitions and the given price point
reflects these values, price is seen as acceptable. If the price
and the products value definition in the minds of the consumer are
not consistent, sales will decline and prices will drop until
prices reach equilibrium with the consumers definition of
value.
Con: Marketers have an obligation to the consumers to produce
products (or services) that meet consumer needs at the lowest price
possible. Fair pricing does not assign any consumer value
definition into its equation and it should not because each
consumer will have differing definitions of value according to
their prejudices. When marketers try to assign a value definition
to its product, it runs the risks of alienating current customers
and missing other potential customers. Therefore, assigning a fair
price, composed of actual costs plus fair margins, allows the
marketer to maximize their customer bases. MARKETING
DISCUSSIONThink of the various pricing methodsmarkup pricing,
target-return pricing, perceived value pricing, value pricing,
going rate pricing, and auction-type pricing. As a consumer which
method do you personally prefer to deal with. Why? If the average
price were to stay the same, which would you prefer: (1) for firms
to set one price and not deviate, or (2) to employ slightly higher
prices most of the year, but slightly lower discounted prices or
specials for certain occasions.
Student answers will differ. However, the following notation
from research is worth re-enforcing during the class
discussions.
The two different pricing strategies have been shown to affect
consumer price judgments:
Deep discounts (EDLP) can lead to lower perceived prices by
consumers over time than frequent shallow discounts (high-low) even
if the actual averages are the same.
MARKETING SPOTLIGHTeBayDiscussion Questions:
1)What are the key success factors for eBay?
a. They have allowed customers to state their perceived value of
the product and the buyers image of product performance.
b. Channel deliverables.
c. Warranty quality.
d. Customer support.
e. Supplier reputation.
f. Trustworthiness.
g. Esteem.
h. Allows customers to view the going-rate pricing of products
immediately.
i. Accounted for geographical pricing.
(i) Market-segment pricing.
(ii) Purchase timing.
(iii) Order levels.
(iv) Delivery frequencies.
(v) Guarantees.
j.Allowed companies to adjust prices to accommodate differences
in customers, products, locations and so on.
k.Allowed companies to test new pricing levels, product
specifications, and new products.
l.Who has eBay appealed to?
(i) Price buyers.
(ii) Value buyers.
(iii) Loyal buyers.
2) Where is eBay vulnerable?
a. Changes to technology.
b. Problems in/with technology.
c. Credibility of the sellers.
d. Governmental regulation.
e. Competitive reactions:
(i)Other auction-type Web sites.
(ii) Companies starting their own auction-type operations.
3) What should eBay watch out for?
a. Consumer changes in buying patterns and priorities.
b. Consumers loss of enthusiasm for the process (newness wears
off).
c. Competition.
d. Governmental controls or changes in laws (taxation).
4)What recommendations would you make to senior marketing
executives moving forward?
a. Continue to build upon the key aspects of the consumers image
of the firm.
b. Continue to build upon the trustworthiness and reputation of
the firm.
c. Monitor competition.
DETAILED CHAPTER OUTLINE
Price is the one element of the marketing mix that produces
revenue; the other elements produce costs. Prices are perhaps the
easiest element of the marketing program to adjust. Price also
communicates to the market the companys intended value positioning
of its product or brand. A well-designed and marketed product can
command a price premium.
Pricing decisions are clearly complex and difficult. Holistic
marketers must take into account many factors in making pricing
decisionthe company, customers, competition, and marketing
environment. Pricing decisions must be consistent with the firms
marketing strategy and its target markets and brand
positionings.
UNDERSTANDING PRICING
Price is not just a number on a tag or an item.
A) Throughout most of history prices were set by negotiation
between buyers and sellers.
B) Setting one price for all buyers is a relatively modern
idea.
C) Today the Internet is partially reversing the fixed pricing
trend.
D) Traditionally, price has operated as the major determinant of
buyer choice.
E) Price remains one of the most important elements determining
market share and profitability.
How Companies Price
Companies do their pricing in a variety of ways. A) In small
companies, prices are often set by the boss.
B) In large companies, pricing is handled by division and
product-line managers.
C) In large companies, top management sets general pricing
objectives, policies, and often approves the prices proposed by
lower levels of management.
D) In industries where pricing is a key factor, companies will
often establish a pricing department to set or assist others in
determining appropriate prices.
E) Many companies do not handle pricing well.
F) Others use price as a key strategic tool.
1) There are customized prices and offerings based on segment
value and costs.
G)Effectively designing and implementing pricing strategies
requires a thorough understanding of consumer pricing psychology
and a systematic approach to setting, adapting, and changing
prices.
Consumer Psychology and Pricing
Marketers recognize that consumers often actively process price
information, interpreting prices in terms of their knowledge from
prior purchasing experiences, formal communications, and
point-of-purchase or online resources.
A) Purchase decisions are based on how consumers perceive
prices.
B) What they consider the current actual pricenot the marketers
stated price.
C) Consumers may have a lower price threshold below which prices
may signal inferior or unacceptable quality.
D) Upper price threshold above which prices are prohibitive and
seen as not worth the money
Reference Prices
When examining products, consumers often employ reference
prices. A) In considering an observed price, consumers often
compare it to an internal reference price (pricing from
memory).
B) An external frame of reference (posted regular retail
price).
C) All types of reference prices are possible.
Table 14.1 illustrates possible consumer reference pricing.D)
Sellers often attempt to manipulate reference prices.
E) Reference-price thinking is also encouraged by stating a high
manufacturers suggested price or:
1) By indicating that the product was priced much higher
originally.
2) By pointing to a competitors high price.
F) Clever marketers try to frame the price to signal the best
value possible.
G) When consumers evoke one or more of these frames of
reference, their perceived price can vary from the stated
price.
Price Cues
A) Consumer perceptions of prices are also affected by
alternative pricing strategies.
B) Many sellers believe that prices should end in an odd
number.
C) Research has shown that consumers tend to process prices in a
left-to-right manner rather than by rounding.
D) Sale signs next to prices have been shown to spur demand, but
only if not overused.
SETTING THE PRICE
A firm must set a price for the first time when it develops a
new product, when it introduces its regular product into a new
distribution channel or geographic area, and when it enters bids on
new contract work.
A) The firm must decide where to position its product on quality
and price.
B) Most marketers have 35 price points or tiers.
C) Consumers often rank brands according to price tiers in a
category.
Figure 14.1 Price Tiers in the Ice Cream MarketD) Within any
tier, there is a range of acceptable prices, called price
brands.
E) The price brand provides managers with some indication of the
flexibility and breadth they can adopt in pricing their brands
within a particular price tier.
F) The firm has to consider many factors in setting its pricing
policy.
G) There is a six-step procedure:
1) Selecting the pricing objective.
2) Determining demand.
3) Estimating costs.
4) Analyzing competitors costs, prices, and offers.
5) Selecting a pricing method.
6) Selecting the final price.
Step 1: Selecting the Pricing Objective
The company first decides where it wants to position its market
offering. The clearer a firms objectives, the easier it is to set
price.
A)A company can pursue any of five major objectives through
pricing:
1) Survival.
2) Maximum current profit.
3) Maximum market share.
4) Maximum market skimming.
5) Product-quality leadership.
Survival
Companies pursue survival as their major objective when they are
plagued with overcapacity, intense competition, or changing
consumer wants.
A) Survival is a short-run objective.
Maximum Current Profit
Many companies try to set a price that will maximize current
profits. They estimate the demand and costs associated with
alternative prices and choose the price that produces maximum
current profit, cash flow, or rate of return on investment. A) This
strategy assumes that the firm has knowledge of its demand and cost
functions.
B) In emphasizing current performance the company may sacrifice
long-run performance by ignoring the effects of:
1) Other marketing-mix variables.
2) Competitors reactions.
3) Legal restraints on price.
Maximum Market Share
Some companies want to maximize their market share. They believe
that a higher sales volume will lead to lower unit costs and higher
long-run profit.
A) This practice is called market-penetration pricing.
B) The following conditions favor setting a low price:
1) The market is highly price-sensitive, and a low price
stimulates market growth.
2) Production and distribution costs fall with accumulated
production experience.
3) A low price discourages actual and potential
competition..
Maximum Market Skimming
Companies unveiling a new technology favor setting high prices
to maximize market skimming.
A)This is also called market-skimming pricing, where prices
start high and are slowly lowered over time.
B) Market skimming makes sense under the following
conditions:
1) A sufficient number of buyers have a high current demand.
2) The unit costs of producing a small volume are not so high
that they cancel the advantage of charging what the traffic will
bear.
3) The high initial price does not attract more competitors to
the market.
4) The high price communicates the image of a superior
product.
Product-Quality Leadership
A company might aim to be the product quality leader in the
market.
A) Many brands strive to be affordable luxuriesproducts or
services characterized by high levels of perceived quality, taste,
and status with a price just high enough not to be out of consumers
reach.
Other Objectives
Nonprofit and public organizations may have other pricing
objectives. Whatever the specific objective, businesses that use
price as a strategic tool will profit more than those who simply
let costs or the market determine their pricing. Step 2:
Determining Demand
Each price will lead to a different level of demand and
therefore have a different impact on a companys marketing
objectives.
A) The relation between alternative prices and the resulting
current demand is captured in a demand curve.
Figure 14.2 Inelastic and elastic demandB) In the normal case,
demand and price are inversely related; the higher the price, the
lower the demand.
C) In the case of prestige goods, the demand curve sometimes
slopes upward.
Review Key Definitions here: market penetration pricing and
market skimming pricingPrice Sensitivity
The demand curve shows the markets probable purchase quantity at
alternative prices. The first step in estimating demand is to
understand what affects price sensitivity.
A) Generally speaking, customers are most price-sensitive to
products that cost a lot or are bought frequently.
B) Customers are less price-sensitive to low-cost items or items
they buy infrequently.
C) They are also less price-sensitive when price is only a small
part of the total cost of obtaining, operating, and servicing the
product over its lifetime (total cost of ownershipTCO).
D) Companies prefer customers who are less price-sensitive.
Table 14.3 lists some characteristics that are associated with
decreased price sensitivity. Estimating Demand Curves
Most companies attempt to measure their demand curves using
several different methods.
A) Statistical analysis of past prices, quantities sold, and
other factors can reveal their relationships.
B) Price experiments.
C) Surveys.
D) In measuring the price-demand relationship, the market
researcher must control various factors that will influence
demand.
1) The competitors response will make a difference.
2) Changes to other marketing-mix factors.
Price Elasticity of Demand
Marketers need to know how responsive or elastic, demand would
be to a change in price.
A) If demand hardly changes with a small change in price, we say
the demand is inelastic.B) If demand changes considerably, demand
is elastic. C) Demand is likely to be less elastic under the
following conditions:
1) There are few or no substitutes or competitors.
2) Buyers do not readily notice a higher price.
3) Buyers are slow to change their buying habits.
4) Buyers think the higher prices are justified.
D)If demand is elastic, sellers will consider lowering the
price.
1) A lower price will produce more total revenue as long as the
costs of producing and selling more units do not increase
disproportionately
E)It is a mistake not to consider the price elasticity of
customers and their needs in developing marketing programs.
F)Price elasticity depends on the magnitude and direction of the
contemplated price change.
1) It may be negligible with a small price change.
2) Substantial with a large price change.
3) It may differ for a price cut versus a price increase.
4) There may be a price indifference band within which price
changes have little or no effect.
G)Long-run price elasticity may differ from short-run
elasticity.
Review Key Definitions here: inelastic demand, elastic demand,
price indifference bandStep 3: Estimating Costs
Demand sets a ceiling on the price the company can charge for
its product. Costs set the floor. Types of Costs and Levels of
Production
A companys costs take two forms, fixed and variable.
A) Fixed costs (also known as overhead) are costs that do not
vary with production or sales revenue.
B) Variable costs vary directly with the level of
production.
C) Total costs consist of the sum of the fixed and variable
costs for any given level of production.
D) Average cost is the cost per unit at that level of
production
E) Management wants to charge a price that will at least cover
the total production costs at a given level of production.
F) To price intelligently, management needs to know how its
costs vary with different levels of production.
Accumulated Production
The decline in the average cost with accumulated production
experience is called the experience curve or learning curve. Figure
14.4 Cost/unit: The Experience CurveA)Experience-curve pricing
carries major risks.
1) Aggressive pricing might give the product a cheap image.
2) The strategy assumes that competitors are weak followers.
B)Most experience-curve pricing has focused on manufacturing
costs, but all costs, including marketing costs, can be improved
on.
Activity-Based Cost Accounting
Today companies try to adapt their offers and terms to different
buyers.
A) To estimate the real profitability of dealing with different
retailers, the manufacturer needs to use activity-based accounting
(ABC).B) ABC accounting tries to identify the real costs associated
with serving each customer.
C) The key to effectively employing ABC is to define and judge
activities properly.
Target Costing
Costs change with production scale and experience. They can also
change as a result of a concentrated effort to reduce them through
target costing.
A) The objective is to bring the final cost projections into the
target cost range.
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 into account.
A) The firm should first consider the nearest competitors
price.
Step 5: Selecting a Pricing Method
Given the 3Csthe customers demand schedule, the cost function,
and competitors prices, the company is now ready to select a
price.
Figure 14.5 The Three Cs model for price settingA) Costs set the
floor to the price.B) Competitors prices and the price of
substitutes provide an orienting point.C) Customers assessment of
unique features establish the price ceiling. D) There are six
price-setting methods:1) Markup pricing.2) Target-return pricing.3)
Perceived-value pricing.4) Value pricing.5) Going-rate pricing.6)
Auction-type pricing.Markup Pricing
A)The most elementary pricing method is to add a standard markup
to the products cost
B)Does the use of standard markups make logical sense?
1)Generally, no. Any pricing method that ignores current demand,
perceived value, and competition is not likely to lead to the
optimal price.
C)Markup pricing remains popular.
1) Sellers can determine costs much more easily than they can
estimate demand.
2) By tying the price to cost, sellers simplify the pricing
task.
3) Where all firms in the industry use this pricing method,
prices tend to be similar.
4) Many people feel that cost-plus pricing is fairer to both
buyers and sellers.
Target-Return Pricing
A) In target-return pricing, the firm determines the price that
would yield its target rate of return on investments (ROI).
Figure 14.6 Break Even chart Break even volume B) Target-return
pricing tends to ignore price elasticity and competitors
prices.
Perceived Value Pricing
A) An increasing number of companies base their price on the
customers perceived value. They must deliver the value promised by
their value proposition, and the customer must perceive this
value.
B) Perceived value is made up of several characteristics:
1) Buyers image of the product performance.
2) Channel deliverables.
3) The warranty quality.
4) Customer support.
5) Softer attributes such as:
a. Suppliers reputation.
b. Trustworthiness.
c. Esteem.
6)Furthermore, each potential customer places different weights
on these different elements, with the result that some will be:
a. Price buyers.b. Value buyers.c. Loyal buyers.C)Companies need
different strategies for each of these three groups.
D)The key to perceived-value pricing is to deliver more value
than the competitor and to demonstrate this to prospective
buyers.
E)The company can try to determine the value of its offering in
several ways:
1) Managerial judgments within the company.
2) Value of similar products.
3) Focus groups.
4) Surveys.
5) Experimentation.
6) Analysis of historical data.
7) Conjoint analysis.
Value Pricing
A) In recent years, several companies have adopted value
pricing: they win loyal customers by charging a fairly low price
for a high-quality offering.
B) Value pricing is not a matter of simply setting lower
prices.
C) It is a matter of reengineering the companys operations to
become a low-cost producer without sacrificing quality.
D) Lowering pricings significantly helps to attract a large
number of value-conscious customers.
E) An important type of value pricing is everyday low pricing
(EDLP) that takes place at the retail level.
F) A retailer who holds to an EDLP pricing policy charges a
constant low price with little or no price promotions and special
sales.
G) In high-low pricing, the retailer charges higher prices on an
everyday basis but then runs frequent promotions in which prices
are temporarily lowered below the EDLP level.
H) The two different pricing strategies have been shown to
affect consumer price judgments
1) Deep discounts (EDLP) can lead to lower perceived prices by
consumers over time than frequent shallow discounts (high-low) even
if the actual averages are the same.
I)Some retailers have even based their entire marketing strategy
around what could be called extreme everyday low pricing.
Going-Rate Pricing
A) In going-rate pricing, the firm bases its price largely on
competitors prices.
1)The firm might charge the same, more, or less than major
competitor (s).
B) Going-rate pricing is quite popular where costs are difficult
to measure or competitive response is uncertain.
Auction-type pricing
A) Auction-type pricing is growing more popular, especially with
the growth of the Internet.
B) There are three types of auction-type pricing:
1) English auctions (ascending bids).
2) Dutch auctions (descending bids).
3) Sealed-bid auctions.
Review Key Definitions here: markup pricing, target-return
pricing, perceived value pricing, value pricing, going-rate
pricing, and auction-type pricingStep 6: Selecting the Final Price
Pricing methods narrow the range from which the company must select
its final price. In selecting the price, the company must consider
additional factors, including the impact of other marketing
activities, company pricing policies, gain-and-risk sharing
pricing, and the impact of price on other parties. Impact of Other
Marketing Activities
A) The final price must take into account the brands quality and
advertising relative to the competition.
B) Farris and Reibsteins findings suggest that price is not as
important as quality and other benefits in the market offering.
Company Pricing Policies
A) The price must be consistent with company pricing
policies.
B) Many companies set up a pricing department to develop
policies and establish or approve pricing decisions.
1) The aim is to ensure that salespeople quote prices that are
reasonable to customers.
2) Profitable to the company.
Gain-and-Risk Sharing Pricing
A) Buyers may resist accepting a sellers proposal because of a
high-perceived level of risk.
B) The seller has the option of offering to absorb part or all
of the risk if he does not deliver the full promised value.
Impact of Price on Other Parties
A)Management must also consider the reactions of other parties
to the contemplated price:
1) How will distributors and dealers feel about it?
2) Will the sales force be willing to sell at that price?
3) How will competitors react?
4) Will suppliers raise their prices when they see the companys
price?
5) Will the government intervene and prevent this price from
being charged?
B)Marketers need to know the laws regulating pricing in the
United States.
ADAPTING THE PRICE
A)Companies usually do not set a single price, but rather a
pricing structure that reflects variations in:
1) Geographical demand and costs.
2) Market-segment requirements.
3) Purchase timing.
4) Order levels.
5) Delivery frequency.
6) Guarantees.
7) Service contracts.
8) Other factors.
B)As a result of discounts, allowances, and promotional support,
a company rarely realizes the same profit from each unit of a
product it sells.
Geographical Pricing (Cash, Countertrade, Barter)
A)Geographical pricing involves the company in deciding how to
price its products to different customers in different locations
and countries.
1) Should the company charge higher prices to distant customers
to cover the higher shipping costs or a lower price to win
additional business?
2) How should exchange rates and the strength of different
currencies be accounted for?
3) Another issue is how to get paid.
a. Many buyers want to offer other items in payment, a practice
known as countertrade.B)Countertrade may account for 15 to 25
percent of world trade and takes several forms:
1) Barter.
2) Compensation deal.
3) Buyback arrangement.
4) Offset. Price Discounts and Allowances
A)Most companies will adjust list prices and give discounts and
allowances for early payment, volume purchases, and off-season
buying.
Table 14.4 shows price discounts and allowances.B) Discount
pricing has become the modus operandi of a surprising number of
companies offering both products and services.
C) Some product categories tend to self-destruct by always being
on sale.
D) Discounting can be a useful tool if the company can gain
concessions in return.
E) Sales management needs to monitor the proportion of customers
who are receiving discounts.
F) Higher levels of management should conduct a net price
analysis to arrive at the real price of their offering.
Promotional Pricing
A)Companies can use several pricing techniques to stimulate
early purchase:
1) Loss-leader pricing.
2) Special-event pricing.
3) Cash rebates.
4) Low-interest financing.
5) Longer payment terms.
6) Warranties and service contracts.
7) Psychological discounting.
B)Promotional-pricing strategies are often a zero-sum game.
Differentiated Pricing
A) Companies often adjust their basic price to accommodate
differences in customers, products, locations, and so on.
B) Price discrimination occurs when a company sells a product or
service at two or more prices that do not reflect a proportional
difference in costs.
1) In first-degree price discrimination, the seller charges a
separate price to each customer depending on the intensity of his
or her demand.
2) In second-degree price discrimination, the seller charges
less to buyers who buy a larger volume.
3) In third-degree price discrimination, the seller charges
different amounts to different classes of buyers:
a. Customer-segment pricing.
b. Product-form pricing.
c. Image pricing.
d. Channel pricing.
e. Location pricing.
f. Time pricing.
C) Yield pricing, and yield management systems are used to offer
discounts based upon some criteria.
D) Some forms of price discrimination are illegal.
E) Price discrimination is legal if the seller can prove that
its costs are different when selling different volumes or different
quantities of the same product to retailers.
F) Predatory pricingselling below cost with the intent of
destroying competition - is unlawful.
G) For price discrimination to work, certain conditions must
exist:
1) The market must be segmentable and the segments must show
different intensities of demands.
2) Members in the lower-price segment must not be able to resell
the product to the higher-price segment.
3) Competitors must not be able to undersell the firm in the
higher-price segment.
4) The cost of segmenting and policing the market must not
exceed the extra revenue derived from price discrimination.
5) The practice must not breed customer resentment and ill
will.
6)The particular form of price discrimination must not be
illegal.
Review Key Definition here: price discriminationINITIATING AND
RESPONDING TO PRICE CHANGES
Companies often face situations when they may need to cut or
raise prices. Initiating Price CutsA)Several circumstances might
lead a firm to cut prices:
1) Excess plant capacity.
2) Companies may initiate a price cut in a drive to dominate the
market through lower costs.
a. Either the company starts with lower costs or initiates price
cuts in hope of gaining market share and lower costs.
b. A price-cutting strategy involves possible traps:
(i) Low-quality trap.
(ii) Fragile-market-share trap.
(iii) Shallow-pockets trap.
Initiating Price Increases
A)A successful price increase can raise profits
considerably.
Table 14.5 Profits before and after price increasesB)A major
circumstance provoking price increases is cost inflation. 1)Rising
costs unmatched by productivity gains squeeze profit margins and
lead companies to regular rounds of price increases.
C)Companies often raise their prices by more than the cost
increase in anticipation of further inflation or governmental price
controls, in a practice called anticipatory pricing.
D)Another factor leading to price increase is over-demand.
1)The price can be increased in the following ways:
a. Delayed quotation pricing.
b. Escalator clauses.
c. Unbundling.
d. Reduction of discounts.
E)A company needs to decide whether to raise its price sharply
on a one-time basis or to raise it by small amounts several
times.
1)Consumers, generally, prefer small price increases on a
regular basis to sudden, sharp increases.
F)In passing on price increases to consumers, the company must
avoid looking like a price gouger. Customer memories are long, and
they can turn against companies they perceive as price gougers.
G)Several techniques help consumers avoid sticker shock and a
hostile reaction when prices rise:
1) Sense of fairness must surround any price increase.
2) Customers must be given advance notice so that they can do
forward buying or shop around.
3) Sharp price increases need to be explained in understandable
terms.
4) Making low-visibility price moves first is also a good
technique:
a. Eliminating discounts.
b. Increasing minimum order sizes.
c. Curtailing production of low-margin products.
Reactions to Price Changes Any price change can provoke a
response from customers, competitors, distributors, suppliers, and
even government. Customer Reactions A)Customers often question the
motivation behind price changes.
B)A price cut can be interpreted in different ways:
1) The item is about to be replaced by a new model.
2) The item is faulty and is not selling well.
3) The firm is in financial trouble.
4) The price will come down even further.
5) The quality has been reduced.
C)A price increase may carry some positive meanings to
customers:
1) The item is hot.
2) The item represents an unusually good value.
Competitor Reactions
A)Competitors are most likely to react when:
1) The number of firms are few.
2) The product is homogeneous.
3) Buyers are highly informed.
B)How can a firm anticipate a competitors reactions?
1) One way is to assume that the competitor reacts in a set way
to price changes.
2) The other is to assume that the competitor treats each price
change as a fresh challenge and reacts according to self-interests
at that time.
Responding to Competitors Price Changes
How should a firm respond to a price cut initiated by a
competitor?
A)In markets characterized by high product homogeneity, the firm
should search for ways to enhance its augmented product.
B)If not it will have to meet the price reduction.
C)In non-homogeneous product markets, the firm has more
latitude. It needs to consider the following:
1) Why did the competitor change the price?
2) Does the competitor plan to make the price change temporary
or permanent?
3) What will happen to the companys market share and profits if
it does not respond?
4) Are other companies going to respond?
5) What are the competitors and other firms responses likely to
be to each possible reaction?
D)Market leaders frequently face aggressive price cutting by
smaller firms trying to build market share.
E)The brand leader can respond in several ways:
1) Maintain price.
2) Maintain price and add value.
3) Reduce price.
4) Increase price and improve quality.
5) Launch a low-price fighter line.
F)The best response varies with the situation.
G)The company has to consider the products:
1) Stage in the life cycle.
2) Its importance in the companys portfolio.
3) The competitors intentions and resources.
4) The markets price and quality sensitivity.
5) The behavior costs of with volume.
6) The companys alternative opportunities.
H)An extended analysis of alternatives may not be feasible when
the attack occurs.
I)It would make better sense to anticipate possible competitors
price changes and to prepare contingent responses.
Figure 14.7 shows a price-reaction program to be used if a
competitor cuts prices.C H A P T E R
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