DEVELOPING PRICING STRATEGIES AND PROGRAMSMontenegro, Riza Ann Lee G.

MD12-0010

Outline

1. Understanding Pricing2. Setting the Price3. Adapting the Price4. Initiating and Responding to Price

Changes

Introduction

Price is the one element of marketing mix that produces revenue (others produce costs)

Pricing decisions are clearly complex and difficult Must be consistent with the firm’s

marketing strategy and its target markets and brand positionings

Outline

1. Understanding Pricing2. Setting the Price3. Adapting the Price4. Initiating and Responding to Price

Changes

Understanding Pricing

Comes in many forms, performs many functions Rent, tuition, fares, fees, rates, tolls,

retainers, wages, commissions Has many components Price has operated as a major

determinant of buyers choice

Concept 1: A Changing Pricing Environment

21st century Access to credit cards, debit cards

allowed firms to offer more expensive products and services

Great Recession Shift from luxury to basics needs Less spending, smart buying Shift to more economic and practical

purchases Technological environment

Concept 1: A Changing Pricing Environment

Technological environment (Internet) Buyers can get instant price comparisons from

thousands of vendors Name their price and have it met Get products free Give certain customers access to special prices Negotiate prices in online auctions and

Intelligent shopping with the help of the internet Example (Kotler)

mySimon.com, PriceSCAN.com – Compare prices of multiple bookstores

Example (local) Olx.com.ph (formerly sulit.com), Zalora, Lazada

Example (medical) Forums about where to find the cheapest medical equipment

(e.g. bambang), or an affordable doctor, or cheap hospitals

Concept 2: Consumer Psychology and Pricing

Consumers actively process price information Prior purchasing experience, formal

communications, informal communications, point-of-purchase or online resources, etc.

Purchase decisions – consumer’s perception of the price vs. what they consider the current actual price to be

Concept 2: Consumer Psychology and Pricing

Example (Kotler) A Black T-Shirt, Gap ($14.90) vs. Armani ($275)

Example (local) Nescafe small coffee bottle (Php 50.00) is considered

expensive but Starbucks coffee (Php 150.00) is considered normal because customers are paying for the “brand” the ambience, etc.

Example (medical) Doctor X charges a higher PF to his patients in TMC

than his patients in other private less known hospitals because he knows patients who go to TMC . Despite offering the same services, and having the same set of skills, his PF varies

Concept 2: Consumer Psychology and Pricing

Understanding how consumers arrive at their perceptions of prices is an important marketing priority Reference Prices Price-Quality Inferences Price Endings

Concept 3: Reference Prices

“Fair Price” Typical Price Last Price Paid Upper-Bound Price Lower Bound Price Historical Competitor Prices Expected Future Price Usual Discounted Price

Concept 3: Reference Prices

Examples Kotler: Dept stores will display women’s

apparel in separate departments differentiated by price; dresses in more expensive department are assumed to be of better quality

Local: Suggested retail price “Ariel Php 7.50”

Medical: An Welch Allyn diagnostic set in a medical equipment store is worth 20k. A consumer with a knowledge of competitor prices (reference price) will prefer to buy it in Bambang for 14.5k

Concept 4: Price-Quality Inference Price as an indicator of quality Image pricing is effective with ego-sensitive

products Examples

Kotler: Higher-priced cars are perceived to possess high quality. Higher-quality cars are likewise perceived to be higher priced than they actually are

Local: Products bought from divisoria are perceived to be of low quality and would not sell at a high price.

Medical: Doctors who charge higher PF are assumed to be very good doctors and would offer better services. “They must be THAT good to charge that high of a PF”

Outline

1. Understanding Pricing2. Setting the Price3. Adapting the Price4. Initiating and Responding to Price

Changes

Setting the Price

Step 1: Selecting the Pricing Objective Survival, max current profit, max market

share, product-quality leadership, other objectives

Step 2: Determining Demand Step 3: Estimating Costs Step 4: Analyzing Competitors’ Costs,

Prices, and Offers Step 5: Selecting a Pricing Method Step 6: Selecting the Final Price

Step 1: Setting the Price Objective Survival Maximum Current Profit Maximum Market Share Maximum Market Skimming Product Quality Leadership Other objectives (e.g. partial cost

recovery)

Step 2: Determining DemandConcept 5: Price Sensitivity

Price Sensitivity – reactions of consumers to price changes Normally inverse relationship Elastic vs. Inelastic Demand

If demand is elastic, sellers will consider lowering the price Lower price will produce more total revenue Long-run price elasticity vs. Short-run elasticity

Step 2: Determining DemandConcept 5: Price Sensitivity

Price sensitivity Customers are less price-sensitive:

Distinct product No/few/unknown substitutes Cannot easily compare quality of substitutes Expenditure is small part of total income Expenditure is small compared to the total cost of the

end product Part of the cost is borne by another party Product is used in conjunction with assets previously

bought Product is assumed to have more qualilty, prestige, or

exclusiveness Buyers cannot store the product

Step 2: Determining DemandConcept 5: Price Sensitivity

Price Sensitivity – Examples Kotler: Internet increases price sensitivity. Car

buyers use the internet to gather information and borrow the negotiating clout of an online buying service

Local: Consumers are less sensitive to price increases in SM supermarkets, than in stores such as H&M, Zara, etc . Consumers are less sensitive to price increases of basic needs (inelastic demand) than luxury items (elastic demand)

Medical: Consumers are less sensitive to rates of the emergency room (need, no substitutes) than doctors’ professional fees (many alternatives)

Step 3: Estimating Costs

Types of Costs and Levels of Production Demand: sets a ceiling price; Costs: set the floor

price Costs

fixed costs + variable costs = total cost Average cost per unit

To price intelligently, management needs to know how its costs vary with different levels of production

To estimate the real profitability of selling to different types of retailers or customers, manufacturer needs to use activity-based cost accounting instead of standard cost accounting

Step 3: Estimating Costs

Accumulated Production Experience curve or Learning Curve

Decline in average cost with accumulated production experience

Methods improve, workers learn shortcuts, materials flow more smoothly, procurement costs fall

Experience-curve pricing is risky Target Costing

Step 4, Concept 6: Analyzing Competitors’ Costs, Prices and Offers

Introduction or change of any price can provoke a response from customers, competitors, distributors, suppliers, and even government

Competitors are most likely to react when the number of firms is few, the product is homogeneous, and buyers are highly informed

Examples Kotler: Green Works – affordable price, biodegradable

ingredients, packaged in recyclable materials, not tested on animals

Local: Sun Cellular – unlimited calls and texts – drove Globe and Smart to lower prices to unlimited calls and texts as well

Medical – Laboratory clinics offering services at lower prices will drive the other clinics in the area to match their packages as well as their prices

Step 5: Selecting a Pricing Method Costs set a floor Competitor’s prices, price of subs

provide an orienting point Customer’s perception of quality

establishes price ceiling Price-setting methods: Mark-up Pricing,

Target-return pricing, perceived-value pricing, value pricing, going-rate pricing, and auction type pricing

Price-setting methods

Mark-up pricing – adding a standard mark up to the product’s cost

Target-return pricing – firm determines the price that yields its target rate of ROI

Perceived-value pricing – pricing based on buyer’s image of the product performance, the channel deliverables, the warranty quality, customer support; supplier’s reputation, trustworthiness and esteem.

Value pricing – firms win loyal customers by charging fairly low price for a high-quality offering

Price-setting methodsConcept 7: Value Pricing

Value pricing Examples Kotler: IKEA, Target Local: Globe subscribers offered unlimited data

for a reasonable price plus an iPhone for a lower price as well. Despite increasing complaints about service, consumers stay with Globe because of loyalty and their reasonable offers

Medical: Patients will go to the doctors whose PF are fairly acceptable, as long as they feel like they can trust the doctor and that they can be made to feel at ease

Price-setting methodsConcept 8: Going-rate pricing

Going rate pricing – the firm bases its price largely on competitors’ prices Example (Kotler): Gasoline companies Example (local): Most service fees such as

manicure pedicure, haircut, etc. Example (medical): PF of doctors

Auction type

Step 6: Selecting the Final Price Considerations

Impact of other marketing activities Company pricing policies Gain-and-risk-sharing pricing Impact of price on other parties

Step 6: Selecting the Final Price Impact of other marketing activities

Average quality, high relative advertising budgets – could charge premium prices

High relative quality, high relative advertising – highest prices

Low quality and low advertising – lowest prices

Outline

1. Understanding Pricing2. Setting the Price3. Adapting the Price4. Initiating and Responding to Price

Changes

Adapting the Price

Geographical pricing Price discounts and allowances Promotional pricing Differentiated pricing

Adapting the PriceConcept 9: Geographic Pricing

Geographic Pricing – company decides how to price its products to different customers in different locations and countries Barter – exchange of goods Compensation deal – payment partly in cash, the rest in goods

Example (kotler) – British aircraft manufacturer, 70% cash, the rest in coffee

Example (local) – Globe iPhone forever: Give your old iPhone + some cashout = new iphone

Example (medical) – med reps sending you to conferences out of the country+ pocket money in exchange for you prescribing their drug (UNETHICAL BUT IT HAPPENS!)

Buyback agreement – an equipment, plant or technology in exchange for the products it will produce

Offset – full payment in cash, but that cash should be spent in that country within a stated time period

Adapting the Price

Price Discounts and Allowances Early payment Volume purchases Off-season buying

Promotional Pricing Loss-leader pricing Special event pricing Special customer pricing Cash rebates Low-interest financing Longer payment terms Warranties and service contracts Psychological discounting

Adapting the Price

Differentiated Pricing First-degree price discrimination Second-degree price discrimination Third-degree price discrimination

Customer-segment pricing Product-form pricing Image pricing Channel pricing Location pricing Time pricing

Adapting the PriceConcept 10: Location Pricing

Location pricing Example (Kotler): Theater varies its seat

prices according to audience preferences for different locations

Example (local): Parking fee in SM Marikina is less expensive (Php 30) than parking fee in SM Aura (Php 50)

Example (medical): Pfof Doctor X in TMC is different from PF of Doctor X in TMC satellites

Outline

1. Understanding Pricing2. Setting the Price3. Adapting the Price4. Initiating and Responding to Price

Changes

Initiating and Responding to Price Changes

Initiating Price Cuts Traps

Low-quality trap Fragile-market-share trap Shallow-pockets trap Price-war trap

Initiating Price Increases due to Cost inflation Anticipatory pricing Overdemand

Responding to Competitors’ Price Changes

Outline

1. Understanding Pricing2. Setting the Price3. Adapting the Price4. Initiating and Responding to Price

Changes

DEVELOPING PRICING STRATEGIES AND PROGRAMSMontenegro, Riza Ann Lee G.

MD12-0010