Marketing Management

By Philip, Kevin Lane Keller, Abraham Koshy, Mithileshwar Jha

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SUMMARY by

Chapter

14

Developing Pricing Strategies and Programs

Traditionally, price has been the major determinant of a buyers choice. And this is still the case with large segments of markets across the world. Although non-price factors have recently risen in importance, pricing remains an important factor in determining sales and

Pricing Environment:
Many firms are nowadays following the low-price trend and have seen success in converting the acquired customers to more expensive products by combining unique product formulations and engaging marketing campaigns.

profitability. Also, price is the only component in the marketing mix that provides revenue and not costs.

Buyers can :
Get instant price comparisons from thousands of vendors: Websites like pricescan.com offer data about products like prices and reviews from hundreds of merchants. Name their prices: The consumer can state his desired price for a product and find the seller willing to meet this price on sites like priceline.com. Also, volume-aggregating sites collate orders from many customers and press the supplier for a deeper discount. Get products free: The open source software movement has eroded margins for almost any major software player. Also, the recent emergence of low-cost airlines providing tickets only for the amount of taxes levied on a ticket is an example how firms have been successful with free offerings.

Sellers can :
Monitor customer behaviour and customize offers: Firms use software to analyse pricing requests with pricing factors such as past sales data, discounts, etc. to reduce processing time of these requests greatly. Offer certain customers special prices: Certain customers are offered lower prices by firms in order to capture a certain market segment on ensure the loyalty of existing customers further.

Setting the price

Firms set a price when they introduce a new product, or venture into a new market with an existing product. This is usually achieved by following a six-step process as follows

Chapter 14 - Developing Pricing Strategies and Programs

Consumer psychology and pricing:

Reference prices: Consumers often employ reference prices, comparing an observed price to an internal reference price or a posted regular retail price. Sellers manipulate this by product positioning, suggesting that the actual price of the product is much higher or by pointing to a competitors high price.

Step 1: Selecting the Pricing Objective The firm first decides where it wants to position its market offering. The five major pricing objectives are Survival: Companies pursue survival if they are plagued with over-capacity, intense competition, or changing consumer wants. Maximum current profit: Many firms try to set a price that maximises their current profits and delivers a high return on investment. Maximum market share: Here, firms believe that a higher sales volume will lead to lower unit costs and higher long-run profits and thereby maximise their market share. Maximum market skimming: Companies offering new technologies often set high prices initially in order to gain high profits from various segments of the market early on. Product-Quality Leadership: Many firms aspire to be the product-quality leader in the market. Step 2: Determining Demand Each price leads to a different level of demand and therefore has a different impact on a companys marketing objectives. The factors entailing this are Price Sensitivity: The relation between price and demand, i.e. the demand curve can be analysed to determine the markets probable purchase quantity at various prices. This helps a firm to maximise its profits. Estimating Demand Curves: Most companies use the following methods to estimate

Price-Quality inferences: demand curves: Market Surveys, Price Experiments, Statistical Analysis, etc. Many consumers use price Price Elasticity: Marketers need to know how responsive, or elastic, the demand would be, to a change in price. If the price elasticity is high, increasing prices would as an indicator of quality. lead to a great reduction in demand, while decreasing prices would lead to increase High-price cars are in demand. Hence, marketers prefer inelastic markets where price changes do not perceived to be of higher elicit great shifts in demand. quality and vice versa. Price cues: Consumer perceptions of prices are also affected by the manner in which prices are displayed. Many sellers believe setting a price of Rs.2999 puts a product into the 2000 range instead of the 3000 range as perceived by the consumer. Putting Sale signs near the price display have also been known to be effective.
Step 3: Estimating Costs While demand sets a ceiling on the range of price a firm can charge for its product, costs determine the floor. Types of Costs and Levels of Production: Costs are classified as Fixed costs and Variable costs. Fixed costs include salaries, electricity bills, etc. which do not depend upon quantity produced. Variable costs include processing costs, packaging costs, shipping costs, etc. which depend upon quantity produced. Hence, companies must decide on a level of production which will more or less guarantee no losses on the cost of production. Accumulated Production: As firms gain experience in production of a good, the costs involved begin to decline. This is due to various factors such as workers finding shortcuts, smoother flow of materials, etc. This decline in cost with production experience is called experience curve. Target Costing: Other than production scale and experience, costs also change a result of concentrated efforts by designers, engineers, purchase agents etc. They examine each cost component and try to find ways to reduce the costs involved in each of these.

Initiating and

Chapter 14 - Developing Pricing Strategies and Programs Step 4: Analyzing Competitors The introduction of any change in price, cost, offers given by Trends
any seller can elicit a response in the market. A firm must analyse the value offered by a competitor to a customer in terms of prices, addons, post-sale services, etc. and thereby modify its own price in order to be competitive in the market. Step 5: Selecting Pricing Methods There are six major pricing methods: Mark-up Pricing: The most elementary pricing method is to add a standard mark-up to the producers cost. Target-return Pricing: In target-return pricing, the firm determines the price that would yield its target return on investment. Perceived-value Pricing: Perceived-value pricing is made up of several factors like the buyers image of the product, the channel deliverables, warranty quality, customer support, suppliers reputation, etc. Value Pricing: Here, high quality products are assigned a fairly low price. The basic aim here is to attract a value-conscious customer base by reengineering the company to become a low-cost producer without sacrificing quality. Going-rate Pricing: Here, firms base their prices largely on competitors prices, charging nearly the same as major competitors in the market do. Auction-type Pricing: There are three types in this pricing method English Auctions (Ascending bids): Here, the seller puts up an item and the bidders raise the price until the top price is reached. Dutch Auctions (Descending bids): Here, the seller announces a high price and then goes on lowering the price until a bidder accepts it. Or, a buyer announces his desire for a product and sellers compete to offer him the lowest price. Sealed-bid Auctions: Here, potential suppliers submit their bids without knowledge of other bids made and the best bid is selected. Step 6: Selecting the Final Price After the pricing methods have narrowed the range of the price, the company selects the final price by taking into account factors as listed below: Impact of other marketing activities: The final price must take into account the brands quality and advertising relative to the competition. Company Pricing Policies: The final price must be compliant with the companys pricing policies.

responding to price changes:

Initiating price cuts: Companies sometimes initiate price cuts in order to dominate the market through lower prices. Initiating price

increases: Companies initiate price increase to increase their profits by taking into account the feasibility of the price rise. A major factor leading to these price increases is over demand, where the company cannot supply all its customers and hence raises its prices. Responding to

competitors price

changes: Firms respond Gain-and-Risk-sharing Pricing: Buyers may resist accepting a suppliers proposal because of a high perceived level of risk. Hence, the seller has the option of offering to absorb part to price cuts/raises by competitors by considering various factors like the products stage in the life cycle, its importance in the company portfolio, etc.
or all of the risk if the promised value is not delivered. Impact of price on other parties: The final prices effect on other parties such as distributors, dealers, competitors, government should also be taken into account by the management.

Adapting the Price

Geographical Pricing Price Discounts and Allowances Promotional Pricing Differentiated Pricing