Lecture 6Lecture Notes in

Marketing

Prof. Mundy GonzalezRCBC CampusJuly 26, 2006

Developing Price StrategiesDeveloping Price Strategies and Programsand Programs

Prof. Mundy GonzalezDe La Salle UniversityProfessional Schools, Inc

Sell value, Sell value, not price.not price.

Kotler on Kotler on MarketingMarketing

PremiumPremiumStrategyStrategy

High ValueHigh ValueStrategyStrategy

Super ValueSuper ValueStrategyStrategy

OverchargingOvercharging Medium ValueMedium Value Good ValueGood Value

Rip-offRip-off False False economyeconomy

EconomyEconomy

High Medium Low_______________PRICE________________

High

Medium

LowProd

uct Q

ualit

yPRICE vs. QUALITY RELATION

Low

Medium

High

Low Medium HighValue Received

Pric

e Pa

idPRICE SHOULD ALIGN WITH VALUE

Price = Value

MissedOpportunities

UnharvestedValue

Setting Pricing Policy

1. Set price objctives

2. Determine demand3. Estimate costs

4. Analyze competition - costs, price, offers, etc.

5. Select pricing method

6. Select final price

Setting the Setting the PricePrice

Step 1: Select the pricing objectiveStep 1: Select the pricing objective SurvivalSurvival Maximize current profitsMaximize current profits Maximize market shareMaximize market share

Market-penetration pricingMarket-penetration pricing Best when:Best when:

Market is highly price-sensitive, and a low price stimulates Market is highly price-sensitive, and a low price stimulates market growth,market growth,

Production and distribution costs fall within accumulated Production and distribution costs fall within accumulated production experience, andproduction experience, and

Low price discourages actual and potential competitionLow price discourages actual and potential competition

Setting the Price

Step 2: Determining DemandPrice sensitivityTotal Cost of Ownership

P 150

P 100

100 105 50 150

Pric

e

Quantity demanded per period Quantity demanded per period

Inelastic demand Elastic demand

Setting the Setting the PricePrice

Tom Nagle offers this list of factors associated Tom Nagle offers this list of factors associated with lower price sensitivitywith lower price sensitivity

The product is more distinctiveThe product is more distinctive Buyers are less aware of substitutesBuyers are less aware of substitutes Buyers cannot easily compare the quality of substitutesBuyers cannot easily compare the quality of substitutes The expenditure is a smaller part of the buyer’s total incomeThe expenditure is a smaller part of the buyer’s total income The expenditure is small compared to the total cost of the end productThe expenditure is small compared to the total cost of the end product Part of the cost is borne by another partyPart of the cost is borne by another party The product is used in conjunction with assets previously boughtThe product is used in conjunction with assets previously bought The product is assumed to have more quality, prestige, or exclusivenessThe product is assumed to have more quality, prestige, or exclusiveness Buyers cannot store the productBuyers cannot store the product

Cost per Unit at Cost per Unit at Different Levels of Different Levels of

Production per Production per PeriodPeriod

Setting the Price Estimating Demand CurvesEstimating Demand Curves Price Elasticity of DemandPrice Elasticity of Demand

InelasticInelastic ElasticElastic Price indifference bandPrice indifference band

Setting the Setting the PricePrice

Step 3: Estimating CostStep 3: Estimating Cost Types of Cost and Levels of ProductionTypes of Cost and Levels of Production

Fixed costs (overhead)Fixed costs (overhead) Variable costVariable cost Total costTotal cost Average costAverage cost

Accumulated ProductionAccumulated Production Experience curve (Learning curve)Experience curve (Learning curve)

Cost per Unit as a Function of Accumulated Production: The Experience Curve

Experience Curve

Currentprice

10

6

4

2

8

400200

Accumulated production

Cos

t per

uni

t

The Three Cs The Three Cs Model for Price Model for Price SettingSetting

Setting the Price Differentiated Marketing OffersDifferentiated Marketing Offers

Activity-based cost (ABC) accountingActivity-based cost (ABC) accounting Target costingTarget costing

Step 4: Analyzing Competitors’ Cost, Prices, and Step 4: Analyzing Competitors’ Cost, Prices, and OffersOffers

Setting the Setting the PricePrice

Step 5: Selecting a Pricing MethodStep 5: Selecting a Pricing Method Markup PricingMarkup Pricing

Unit Cost = Unit Cost = variable cost + (fixed cost/unit sales)variable cost + (fixed cost/unit sales)

Markup price Markup price Markup price= Markup price=

unit cost/ (1 – desired return on sales) unit cost/ (1 – desired return on sales)

Target-Return PricingTarget-Return PricingTarget-return price = Target-return price = unit cost + (desired return X investment capital)/unit unit cost + (desired return X investment capital)/unit

salessales

Break-even volumeBreak-even volumeBreak-even volume = fixed cost / (price – variable cost)Break-even volume = fixed cost / (price – variable cost) Perceived-Value PricingPerceived-Value Pricing

Perceived valuePerceived value Price buyersPrice buyers Value buyersValue buyers Loyal buyersLoyal buyers Value-in-use priceValue-in-use price

Setting the Price

Break-Even Chart for Determining Target-Return Price and Break-Even Volume

FixedCost

TotalCost

TotalRevenue

Desiredprofit

Sales volume in units

Rev

enue bep

Setting the Setting the PricePrice

Value PricingValue Pricing Everyday low pricing (EDLP)Everyday low pricing (EDLP) High-low pricingHigh-low pricing

Going-Rate PricingGoing-Rate Pricing

Auction-Type PricingAuction-Type Pricing English auctions (ascending bids)English auctions (ascending bids) Dutch auctions (descending bids)Dutch auctions (descending bids) Sealed-bid auctionsSealed-bid auctions

Group PricingGroup Pricing

Effect of Different Bids on Effect of Different Bids on Expected Profit Expected Profit

Company’sCompany’sBidBid

Company’sCompany’sProfitProfit

Probability of Probability of GettingGetting

Award with This Award with This BidBid

(Assumed)(Assumed)ExpectedExpected

ProfitProfit

$ 9,500$ 9,500 $ 100$ 100 0.81 0.81

$ 81$ 81

10,00010,000 600600 0.360.36 216216

10,50010,500 1,1001,100 0.090.09 9999

11,00011,000 1,6001,600 0.010.01 1616

Setting the Setting the PricePrice Step 6: Selecting the Final PriceStep 6: Selecting the Final Price

Psychological PricingPsychological Pricing Reference priceReference price

Gain-and-Risk-Sharing PricingGain-and-Risk-Sharing Pricing

Influence of the Other Marketing ElementsInfluence of the Other Marketing Elements Brands with average relative quality but high relative Brands with average relative quality but high relative

advertising budgets charged premium pricesadvertising budgets charged premium prices Brands with high relative quality and high relative Brands with high relative quality and high relative

advertising budgets obtained the highest pricesadvertising budgets obtained the highest prices The positive relationship between high advertising The positive relationship between high advertising

budgets and high prices held most strongly in the later budgets and high prices held most strongly in the later stages of the product life cycle for market leadersstages of the product life cycle for market leaders

Setting the Setting the PricePrice

Company Pricing PoliciesCompany Pricing Policies

Impact of Price on Other PartiesImpact of Price on Other Parties

Adapting the Adapting the PricePrice

Geographical Pricing (Cash, Countertrade, Barter)Geographical Pricing (Cash, Countertrade, Barter) CountertradeCountertrade BarterBarter Compensation dealCompensation deal Buyback arrangementBuyback arrangement OffsetOffset

Price Discounts and AllowancesPrice Discounts and Allowances

Price Discounts and Price Discounts and AllowancesAllowances

Cash Discount:Cash Discount: A price reduction to buyers who pay bills A price reduction to buyers who pay bills promptly. A typical example is “2/10, net 30,” promptly. A typical example is “2/10, net 30,” which means that payment is due within 30 which means that payment is due within 30 days and that the buyer can deduct 2 percent days and that the buyer can deduct 2 percent by paying the bill within 10 days.by paying the bill within 10 days.

Quantity Discount:Quantity Discount: A price reduction to those who buy large A price reduction to those who buy large volumes. A typical example is “$10 per unit for volumes. A typical example is “$10 per unit for less than 100 units; $9 per unit for 100 or more less than 100 units; $9 per unit for 100 or more units.” Quantity discounts must be offered units.” Quantity discounts must be offered equally to all customers and must not exceed equally to all customers and must not exceed the cost savings to the seller. They can be the cost savings to the seller. They can be offered on each order placed or on the number offered on each order placed or on the number of units ordered over a given period.of units ordered over a given period.

See text for complete table

Adapting the PriceAdapting the Price Promotional PricingPromotional Pricing

Loss-leader pricingLoss-leader pricing Special-event pricingSpecial-event pricing Cash rebatesCash rebates Low-interest financingLow-interest financing Longer payment termsLonger payment terms Warranties and service contractsWarranties and service contracts Psychological discountingPsychological discounting

Adapting the Adapting the PricePrice

Discriminatory PricingDiscriminatory Pricing Customer segment pricingCustomer segment pricing Product-form pricingProduct-form pricing Image pricingImage pricing Channel pricingChannel pricing Location pricingLocation pricing Time pricingTime pricing Yield pricingYield pricing

Adapting the Adapting the PricePrice

Product-mix pricingProduct-mix pricing Product-Line PricingProduct-Line Pricing Optional-Feature PricingOptional-Feature Pricing Captive-Product PricingCaptive-Product Pricing

Captive productsCaptive products Two-Part PricingTwo-Part Pricing By-Product PricingBy-Product Pricing Product-Bundling PricingProduct-Bundling Pricing

Pure bundlingPure bundling Mixed bundlingMixed bundling

Initiating and Responding to Initiating and Responding to Price ChangesPrice Changes

Initiating Price CutsInitiating Price Cuts Drive to dominate the market Drive to dominate the market

through lower coststhrough lower costs Low quality trapLow quality trap Fragile-market-share trapFragile-market-share trap Shallow-pockets trapShallow-pockets trap

Marketing-Mix Marketing-Mix AlternativesAlternatives

Strategic OptionsStrategic Options ReasoningReasoning ConsequencesConsequences

1. Maintain price and 1. Maintain price and perceived quality. perceived quality. Engage in selective Engage in selective customer pruning.customer pruning.

Firm has higher Firm has higher customer loyalty. It is customer loyalty. It is willing to lose poorer willing to lose poorer customers to customers to competitors.competitors.

Smaller market share. Smaller market share. Lowered profitability.Lowered profitability.

2. Raise price and 2. Raise price and perceived quality.perceived quality.

3. Maintain price and 3. Maintain price and raise perceived raise perceived quality.quality.

Raise price to cover Raise price to cover rising costs. Improve rising costs. Improve quality to justify higher quality to justify higher prices.prices.It is cheaper to maintain It is cheaper to maintain price and raise price and raise perceived quality.perceived quality.

Smaller market share. Smaller market share. Maintained profitability.Maintained profitability.

Smaller market share. Smaller market share. Short-term decline in Short-term decline in profitability. Long-term profitability. Long-term increase in profitability.increase in profitability.

See text for complete table

Profits Before and After a Profits Before and After a Price IncreasePrice IncreaseBeforeBefore AfterAfter

PricePrice $ 10$ 10 $10.10$10.10 (a 1 percent price increase)(a 1 percent price increase)

Units soldUnits sold 100100 100100

RevenueRevenue $1000$1000 $1010$1010

CostsCosts -970-970 -970-970

ProfitProfit $ 30$ 30 $ 40$ 40 (a 33 1/3 percent profit increase)(a 33 1/3 percent profit increase)

Initiating and Responding to Price Changes

Initiating and Responding to Initiating and Responding to Price ChangesPrice Changes

Initiating Price IncreasesInitiating Price Increases Cost inflationCost inflation Anticipatory pricingAnticipatory pricing OverdemandOverdemand Delayed quotation pricingDelayed quotation pricing Escalator clausesEscalator clauses UnbundlingUnbundling Reduction of discountsReduction of discounts

Initiating and Responding to Initiating and Responding to Price ChangesPrice Changes

Possible responses to higher costs or overhead without raising Possible responses to higher costs or overhead without raising prices include:prices include:

Shrinking the amount of product instead of raising the priceShrinking the amount of product instead of raising the price Substituting less expensive materials or ingredientsSubstituting less expensive materials or ingredients Reducing or removing product featuresReducing or removing product features Removing or reducing product services, such as installation Removing or reducing product services, such as installation

or free deliveryor free delivery Using less expensive packaging material or larger package Using less expensive packaging material or larger package

sizessizes Reducing the number of sizes and models offeredReducing the number of sizes and models offered Creating new economy brandsCreating new economy brands

Initiating and Responding to Initiating and Responding to Price ChangesPrice Changes

Reactions to Price ChangesReactions to Price Changes Customer ReactionsCustomer Reactions Competitor ReactionsCompetitor Reactions

Responding to Competitors’ Price ChangesResponding to Competitors’ Price Changes Maintain priceMaintain price Maintain price and add valueMaintain price and add value Reduce priceReduce price Increase price and improve qualityIncrease price and improve quality Launch a low-price fighter lineLaunch a low-price fighter line

Price-Reaction Program for Price-Reaction Program for Meeting a Competitor’s Price CutMeeting a Competitor’s Price Cut

PricePrice

PromotionPromotion

HighHigh

HighHigh

Rapid-skimmingstrategy

LowLowRapid-

penetrationstrategy

LowLow

Slow-skimmingstrategy

Slow-penetration

strategy

Market Penetration StrategiesMarket Penetration Strategies