MARKETING MANAGEMENT

PART 4 DESIGNING VALUE

Chapter 11: Managing Pricing and Sales Promotion

Subject Expert : Dr. Masri bin Abdul Lasi

Module Lecturer : Dr. Masri bin Abdul Lasi

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Learning Outcome
After studying this chapter you should be able to
Describe the role that pricing plays in marketing management.
Identify the key psychological factors that influence how
consumers perceive prices.
Explain the factors that a manager must consider when setting
prices.
Discuss how to respond to competitive price cuts.
Explain how to design and manage incentives

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Understanding Pricing
• Negotiations between buyers and sellers
• One price for all buyers
• Internet pricing

• Traditionally, price has operated as a major determinant of buyer

choice. Consumers and purchasing agents who have access to price
information and price discounters put pressure on retailers to lower
their prices.

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Consumer Psychology and Pricing
• Reference prices
• Image pricing
• Price cues

Purchase decisions are based on how consumers perceive

prices and what they consider the current actual price to
be—not on the marketer’s stated price.

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Setting the Price
• Six main steps:
• Defining the pricing objective
• Determining demand
• Estimating costs
• Analyzing competitors’ costs, prices, and offers
• Selecting a pricing method
• Setting the final 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
geographical area, and when it enters bids on new contract work.

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Defining the Pricing Objective
• Common pricing objectives:
• Short-term profit
• Market penetration
• Market skimming
• Quality leadership

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Determining Demand
• Price elasticity of demand
• The degree to which a change in price leads to a change in quantity sold
• Each price will lead to a different level of demand and have a different
impact on a company’s marketing objectives.
• The normally inverse relationship between price and demand is
captured in a demand curve: The higher the price, the lower the
demand. For prestige goods, the demand curve sometimes slopes
upward.
• Some consumers take the higher price to signify a better product.
However, if the price is too high, demand may fall.

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Figure 11.1 Inelastic And Elastic Demand

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Estimating Costs
• Fixed costs
• Costs that do not vary with production level or sales revenue
• Variable costs
• Vary directly with the level of production
• Total costs
• The sum of the fixed and variable costs
• Experience curve effects
• Experience curve
• Experience curve pricing

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Analyzing Competitors’ Prices
• Firm must take competitors’ costs, prices, and reactions into account
• Value-priced competitors
• If the firm’s offer contains features not offered by the nearest
competitor, it should evaluate its worth to the customer and add
that value to the competitor’s price.
• If the competitor’s offer contains some features not offered by
the firm, the firm should subtract its value from its own price.
Now the firm can decide whether it can charge more, the same,
or less than the competitor.

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Selecting a Pricing Method
• Three major considerations in price
• Costs
• Set a price floor
• Competitors’ prices
• Provide an orienting point
• Customers’ assessment of unique features
• Establish a price ceiling

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Selecting a Pricing Method
• Three major considerations in price
• Costs
• Set a price floor
• Competitors’ prices
• Provide an orienting point
• Customers’ assessment of unique features
• Establish a price ceiling
• Given the customers’ demand schedule, the cost function, and
competitors’ prices, the company is now ready to select a price.
Companies select a pricing method that includes one or more of these
three considerations.

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 Selecting a Pricing Method
• Markup pricing
• Add a standard markup to the product’s cost
unit cost
Markup price =
(1 - desired return on sales )
• Target-return pricing
• Price that yields its target rate of return on investment

desired return ´ invested capital

Target-return price = unit cost +
unit sales

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Selecting a Pricing Method
• Three major considerations in price
• Costs
• Set a price floor
• Competitors’ prices
• Provide an orienting point
• Customers’ assessment of unique features
• Establish a price ceiling
• Given the customers’ demand schedule, the cost function, and
competitors’ prices, the company is now ready to select a price.
Companies select a pricing method that includes one or more of these
three considerations.

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Figure 11.2 Break-Even Chart for Determining
Target-Return Price and Break-Even Volume

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Selecting a Pricing Method
• Economic value-to-customer pricing
• Based on buyer’s image of product, channel
deliverables, warranty quality, customer
support, and softer attributes
• An increasing number of companies now base
their price on the customer’s perceived value.
Companies must deliver the value promised
by their value proposition, and the customer
must perceive this value. Auction pricing
English (ascending)
• Competitive pricing Dutch (descending)
• The firm bases its price largely on competitors’ Sealed-bid
prices

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Setting the Final Price
• 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
• First degree
• Second degree
• Third degree
• Third degree price discrimination:
• Customer segment pricing
• Product form pricing
• Channel pricing
• Location pricing
• Time pricing
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Product Mix Pricing
• Loss-leader pricing
• Optional feature pricing
• Captive pricing
• Two-part pricing
• By-product pricing
• Product bundling pricing

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Initiating and Responding to Price Changes
• Initiating price cuts
• Excess plant capacity
• Domination of market
• Initiating price increases
• Cost inflation
• Rising costs unmatched by productivity gains squeeze profit margins and lead companies
to regular rounds of price increases
• Anticipatory pricing

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Responding to Price Changes
• Anticipating competitive responses
• Responding to competitors’ price changes
• The 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.

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Managing Incentives
• Incentives
• Sales promotion tools, mostly short-term, designed to
stimulate quicker or greater purchase of particular products
or services by consumers or the trade
• Incentives are sales promotion tools, mostly short-
term, designed to stimulate quicker or greater
purchase of particular products or services by
consumers or the trade

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Incentives as a Marketing Device
• Sales promotions
• Can produce a high sales response in the short run but little permanent gain over
the longer term
• Can prompt consumers to engage in stockpiling
• Can devalue the company’s offering in buyers’ minds
• Sales promotion expenditure increased as a percentage of budget
expenditure for a number of years, with the fastest-growing area being
digital coupons and discounts, redeemed via smartphone or
downloaded to a consumer’s printer.

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Major Incentive Decisions
• Selecting Consumer Incentives
Price reductions
• Selecting trade incentives
Coupons • Allowances • Selecting sales force
Cash refunds • Free goods incentives
Price packs • Price-off • Aim to encourage the sales
• Payment discount force to support a new
Premiums product or model,
Frequency programs boosting prospecting and
stimulating off-season
Seasonal discounts sales
Financing
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 Discussion Questions
• Fast food restaurants usually offer a variety of “meal deals” comprising a
sandwich, a side dish, and a drink.
• Which pricing objective are companies pursuing with this type of product pricing?
• How do consumers view “meal deals” as compared to individually priced menu
items?
• Uber riders have become accustomed to surge pricing, knowing that
following a concert or sporting event they may pay two or three times as
much as usual for a ride.
• How has technology changed pricing strategy?
• Compare and contrast surge pricing on Uber with peak pricing on airlines. Could
airlines use an Uber pricing model?

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