Chapter QuestionsHow 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?

Synonyms for Price

RentTuitionFeeFareRateTollPremiumHonorarium

Special assessmentBribeDuesSalaryCommissionWageTax

Changing price environmentGet instant price comparisonsName their price and have it met.Get products free.

Common Pricing MistakesDetermine costs and take traditional

industry marginsFailure to revise price to capitalize on

market changesSetting price independently of the rest of

the marketing mixFailure to vary price by product item,

market segment, distribution channels, and purchase occasion

Reference Prices

Price-quality inferences

Price endings

Possible Consumer Reference Prices

“Fair price”Typical priceLast price paidUpper-bound price

Lower-bound priceCompetitor pricesExpected future

priceUsual discounted

price

Price Cues“Left to right” pricing ($299 vs. $300)Odd number discount perceptionsEven number value perceptionsEnding prices with 0 or 5“Sale” written next to price

Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall 14-9

When to Use Price CuesCustomers

purchase item infrequently

Customers are newProduct designs

vary over timePrices vary

seasonallyQuality or sizes

vary across stores

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

SurvivalMaximum

current profitMaximum

market shareMaximum

market skimming

Product-quality leadership

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Step 2: Determining Demand

Price Sensitivity

Estimating Demand Curves

Price Elasticity of Demand

Price sensitivityReactions of the customer to the increase or decrease in

pricesThe customers are less price sensitive-1. There are few or n substitutes or competitors2. They do not readily notice the higher price3. They are slow to change their buying habits4. Hey think the higher price are justified5. Price is only a small part of the total cost of obtaining,

operating and servicing the product

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Factors Leading to Less Price Sensitivity

The product is more distinctiveBuyers are less aware of substitutesBuyers cannot easily compare the quality of

substitutesThe expenditure is a smaller part of buyer’s total

incomeThe expenditure is small compared to the total cost of

the end productPart of the cost is paid by another partyThe product is used with previously purchased assetsThe product is assumed to have high quality and

prestigeBuyers cannot store the product

Inelastic and Elastic Demand

Estimating demand curvesSurveys:- Can explore how many units consumers would buy

at different proposed prices.Price experiments :- vary the prices of different products in

a store or charge different prices for the same product in similar territories to see how the change effects sales.

Statistical analysis:- of past prices, quantities sold, and other factors can reveal their relationships.

Step 3: Estimating Costs

Types of Costs

Target Costing

Accumulated Production

Activity-Based Cost Accounting

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Cost Terms and ProductionFixed costsVariable costsTotal costsAverage costCost at

different levels of production

Cost per Unit as a Function of Accumulated Production

Step 4: Analyzing competitor’s costs,prices,and offersThe firm should first consider the nearest competitors price If the firm offer contains features not offered by the

competitors, it shd evaluate their worth and add to the price of the product and vice versa

The introduction of any price or the change of any existing price can provoker a response from customers,competitors,distributors,suppliers and even govt.

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Step 5: Selecting a Pricing Method

Markup pricingTarget-return

pricingPerceived-value

pricingValue pricingGoing-rate pricingAuction-type

pricing

Step 5: Selecting a Pricing Method

Markup pricing- to add a standard mark up to the product's costTarget 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 buyers image of the product performance, channel deliverables, the warranty,quality,support and other softer attributes such as suppliers reputation, trustworthiness and esteem.

Value pricing- value pricing is a pricing wherein charging a fairly low price for a high quality offering. it is not a matter of simply setting low price but re-engineering the company’s operations to become a low cost producer sacrificing quality, to attract a larger number.

Going rate pricing-the firms bases its price on competitors pricing, change it more or less.

Auction type pricing- modern web sites

Auction-Type Pricing

English auctions

Dutch auctions

Sealed-bid auctions

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Step 6: Selecting the Final PriceImpact of other

marketing activitiesCompany pricing

policiesGain-and-risk

sharing pricingImpact of price on

other parties

Adapting the priceCompanies do not seta single price but rater develop a

pricing structure that reflects variations in geographical demand and costs,mkt segment requirements,purchasing timing,order levels,delivery frequency,GuaranteesService contracts

Geographical Pricing

Discounts/Allowances

Differentiated Pricing

Promotional Pricing

Price-Adaptation Strategies

CountertradeBarterCompensation dealBuyback

arrangementOffset

Discounts/ Allowances

Cash discountQuantity discountFunctional discountSeasonal discountAllowance

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Promotional Pricing TacticsLoss-leader pricingSpecial-event pricingCash rebatesLow-interest

financingLonger payment

termsWarranties and

service contractsPsychological

discounting

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Differentiated PricingCustomer-segment

pricingProduct-form

pricingImage pricingChannel pricingLocation pricingTime pricingYield pricingPredatory pricing

Initiating and responding to price changesSeveral circumstances lead a firm to cut prices1.Excess capacity of the plant2.Firm needs additional business and cannot

generate it through increased sales effort3.Product improvement

Initiating price cutsLow quality trapFragile market share trapShallow pocket trapPrice war trap

Initiating and responding to price changesCircumstances leading to price increase.Cost inflationRising costs unmatched by productivity gains

squeeze profit margins and lead to companies to regular rounds of price increases.

Companies raise their prices in anticipation of further inflation or govt. price controls.

Overdemand’

Delayed quotation pricing

Escalator clauses

Unbundling

Reduction of discounts

Alternative approaches that will allow them to avoid increasing pricesShrinking the amount of product instead of

raising the prices.Substituting less expensive materials or

ingredientsReducing or removing product featuresReducing or removing product servicesUsing less expensive packaging materials or

larger package sizesReducing the number of sizes and models

offeredCreating new economy brands.’

Brand Leader Responses to Competitive Price Cuts

Maintain priceMaintain price and add valueReduce priceIncrease price and improve qualityLaunch a low-price fighter line

Is the right price a fair price?

Take a position:1. Prices should reflect the value that consumers are willing to pay.

or

2. Prices should primarily just reflect the costinvolved in making a product.

Think of all the pricing methods described in the chapter.

As a consumer, which pricing method do you personally prefer to deal with?

Why?