Chapter 11

12/7/2023
Marketing Mix
1
11
Managing Pricing and
Sales Promotions
16/e Copyright © 2023 Pearson Education, Inc. Publishing as Prentice Hall 11-2
Understanding Price Definition of Price
• Price influences consumer perception, buying

decisions, & firm’s profitability • Price is not just a number on a tag
• Internet has changed how buyers & sellers • Price is the sum of all the values that a
interact buyer gives up to gain the benefits of
− It allows buyers to compare prices quickly & sellers to having a product
set prices more effectively
− The total amount of sacrifice a buyer gives up for
• Still many use outdated methods in pricing having a product
− Includes money, time, energy, & psychic effort
• Pricing requires understanding buyer
psychology & using a systematic approach
Copyright © 2023 Pearson Education, Inc. Publishing as Prentice Hall 11-3 Copyright © 2023 Pearson Education, Inc. Publishing as Prentice Hall 11-4
Consumer Psychology and Pricing Consumer Psychology and Pricing
• Consumers have price thresholds

• Economists think consumers are ―price
− Influences their perceptions of quality & value
takers‖ who accept the price at face value
• Marketers think consumers actively • Understanding consumer psychology is
crucial for marketers to set effective prices
process price info & interpret it based on
their past experiences, MKT msgs, etc. & • Consumers often use internal reference
take buying decisions prices
− They take price decisions based on their − Reference price is the price a consumer carries
perceived price, not the marketer's stated price in mind & compare it to an observed price while
buying a product
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Consumer Psychology and Pricing A Black T-Shirt
―A Black T-Shirt‖ example illustrates the

• Reference prices can be influenced by: consumer psychology in determining 3
− Internal factors (fair price, typical price, last price different prices for essentially the same
item
paid)
− External factors (competitor price, expected future
Armani - $275
price, usual discounted price)
• Marketers can use reference prices to

influence consumer perceptions of value
Gap - $14.90
• Consumer expectations about future prices
can affect their current buying behavior
H&M - $7.90
Consumer Psychology and Pricing Major Pricing Strategies
• In image pricing, consumers use price as • Customer value-based pricing:

an indicator of quality especially for ego- − Pricing based on how much customers perceive
sensitive products the product to be worth
− Price and quality perceptions reinforce each other • Cost-based pricing:
• When info about true quality is available, − Pricing based on the total costs of producing,
price becomes less important distributing, and selling the product, plus a desired
profit margin
• Use exclusivity & scarcity to justify
premium price & attract luxury-goods • Competition-based pricing:
customers − Pricing based on the prices and strategies of
competitors in the market
Considerations in Setting Customer

Value-based Price Value-based Vs. Cost-based Pricing
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New-Product Pricing Strategies Steps in Setting Price

• Market-penetration Pricing
6 Select Final Price
− Setting an initial low price to penetrate the market
quickly & deeply & attract a large number of
5 Select a Price Method
buyers
− The goal is to establish a strong market presence 4 Analyze Competitors
before competitors can enter
3 Estimate Costs
• Market-skimming Pricing
− Setting a high initial price to ―skim‖ revenue layers 2 Determine Demand
from the market and then lower it
− Targets early adopters & customers willing to pay 1 Pricing Objective
a premium for unique offerings
Step-1: Define the Pricing Objective Step 2: Determine Demand

• Short-term profit • Each price will lead to a different level of
− Set a price that can maximize ST profit demand (demand curve)
• Market penetration • Consider price elasticity which measures how
− Set a low price to gain market share quickly, assuming much demand changes with price
a price-sensitive market & falling costs with increased
production − Price elasticity of demand & marketer’s revenue
• Market skimming
− Charge a high price initially to "skim" revenue from
early adopters and premium customers
• Quality Leadership
− Charge a premium price to maintain quality, targeting
customers valuing quality above price
Step 2: Determine Demand Step 3: Estimate Costs

Price Ceiling
• Price elasticity of demand is low when: (Demand sets a ceiling on the price)
− the product is unique & has a few substitutes Price

− price increase goes unnoticed
− buying habit is inflexible
Fair Return
− high price is justified Price Floor
− product cost is shared (Costs set the floor)
FC
VC
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Types of costs Costs at Varying Levels of Production
Fixed Costs
(overhead) Variable Costs Total Costs
Experience Curve Effect Experience Curve Pricing
• Increased production experience leads to

lower average costs due to: • Aggressive experience-curve pricing can
harm brand image:
− improved efficiency
− It relies on weak competitors and risks
− learned shortcuts technological disruption
− reduced procurement costs − Focusing solely on manufacturing costs ignores
− smoother material flow potential MKT cost reductions
Cost per unit
− Lower MKT costs can lead to price reductions &

increased profits
Copyright © 2023 Pearson Education, Inc. Publishing as Prentice Hall

Accumulated production
11-21 Copyright © 2023 Pearson Education, Inc. Publishing as Prentice Hall 11-22
Step 4: Analyze Competitors’ Prices Step 5: Select a Pricing Method
• Consider competitor prices & features when • 3 considerations in pricing:

pricing
− Costs set a floor to the price
− Value-focused firms are winning customers with
low prices & high quality − Competitors’ prices & substitutes act as a
reference point
− They are changing consumer expectations about
price-quality trade-offs − Customers’ value perception of unique features
set the price ceiling
• Set up low-cost operations only if they
benefit existing businesses
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Step 5: Select a Pricing Method Markup (Cost Plus) Pricing
• The basic pricing method that adds a fixed

• Markup (Cost Plus) Pricing % to a product’s cost
VC per unit = $10; FC= $300,000;
• Target-Rate-of-Return Pricing
Expected unit sales 50,000;
• Economic-Value-to-Customer Pricing Desired markup on sales: 20%
Unit Cost =$10 + ($300,000/50,000)= $16
• Competitive (Going-Rate) Pricing
• Mark-up price:
• Auction Pricing
unit cost $16
= = = $20
(1 – desired return on sales) 1 – 0.2
Target-Rate-of-Return Pricing Target-Rate-of-Return Pricing

• A marketer uses a break-even chart to assess
• Pricing based on a desired profit margin, not outcomes at different sales levels
customer demand or competition
You invested $1 million & want to set a price to
earn a 20% ROI $200,000
Economic-Value-to-Customer Pricing Competitive (Going-Rate) Pricing
• Pricing considers customer perception of value • Pricing based on competitor pricing

including − Commonly seen in commodity industries
− Buyer’s image of the product performance − Smaller firms often follow market leaders & adjust
their prices
− Channel deliverables
− Appropriate when costs fluctuate, demand varies,
− Warranty quality
or competitive responses are uncertain
− Customer support
− Supplier’s reputation, trustworthiness, & esteem
• Companies must fulfill their value promise to
ensure customers recognize this value
Follow the leader
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Auction Pricing Auction Pricing

English auction (ascending bids): Seller sets the starting
price; bidding escalates until the highest price wins
• Very popular in online marketplaces where
firms sell excess inventory or used goods Dutch auction (descending bids):
One seller & many buyers: The auctioneer
• 3 major types of auctions: starts with a high price that drops until a
buyer accepts
− English auctions
One buyer & many sellers : Buyer names
− Dutch auctions the item, sellers drop prices until the buyer
− Sealed-bid auctions accepts
Sealed-bid auction: Suppliers submit one

blind bid, not below cost and not too high,
aiming for an expected profit
Step 6: Select the Final Price Price Discrimination
• Pricing methods narrow possible price range • Selling the same product at different prices,
• Companies often develop pricing structures not based on cost differences
with variations based on various factors − 1st-degree price discrimination offers individualized
pricing based on customer demand
• Dynamic pricing adjusts to changing conditions
− 2nd-degree price discrimination discounts larger
and dominates the market. purchases
− Merchants, sports teams, & online sellers use
− 3rd-degree price discrimination charges different
real-time data to adjust prices
groups different prices, regardless of cost variations
Price Discrimination Price Discrimination

• Customer-segment pricing— Customers pay
• Airlines & hotels use yield pricing with early
different prices for the same product based on
discounts, late premiums, & last-minute deals
segment
based on buying time, travel details, & customer
• Product-form pricing— Different versions of the status
same product are priced differently, not based on
cost • Constant price changes can strain customer
relationships (yet many use bundled offers and
• Channel pricing— Prices vary by delivery channel rewards to mitigate this)
used
• Some discrimination cause customer resentment
• Location pricing— Prices vary by location
• Success depends on segmentable markets,
• Time pricing— Prices vary by season, day, or hour
varying demand, & controlled reselling
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Price Discrimination Product-Mix Pricing Strategies
• Seek price combinations Product line pricing

• Conditions for price discrimination to work: that maximize total mix
Optional-feature pricing
− Segmentable market profits, accounting for
complex demand, cost
− No resale to higher-priced segments by customers Captive pricing
relationships, and
− Competitors must not undercut the firm in higher- competition across various Two-part pricing
priced segments
products
− Cost-effective By-product pricing
− Challenge is how to balance
− Customer acceptance among demand, costs, and
Product-bundling pricing
competition for each product
within the mix
Loss leader pricing
Product-Mix Pricing Strategies Price Adjustment Strategies

• Loss leader pricing: Drop the price of a well-known brand Strategy DESCRIPTION
to stimulate additional store traffic
Discount and Reward volume purchases, early
• Optional-feature pricing: Decide which features to include allowance pricing payments, or product promotion
in the base price and which to offer separately
Segmented pricing Adjust for customer, product, or location
• Captive pricing: Price the main product low and set high differences
markups on essential add-ons (e.g., razor & blades)
Psychological Adjust prices for psychological effect
• Two-part pricing: Charge a fixed fee plus a variable usage pricing
fee
Promotional pricing Temporarily reduce prices to spur SR
• By-product pricing: Price by-products based on their value sales
(e.g., sawdust)
Geographical pricing Adjust prices for customer location
• Product-bundling pricing: Offer products as a bundle at a
discounted price (including pure and mixed bundling) Dynamic and Continuously adjust for individual customer
personalized pricing needs & specific situations
• Product line pricing: Set prices across an entire product
line International pricing Adjust prices for international markets
Copyright © 2023 Pearson Education, Inc. Publishing as Prentice Hall 11-39
Promotional Pricing Methods Geographical Pricing Methods

• FOB-origin: Buyer pays freight from factory to
destination
• Loss-leader pricing* • FOB-port: Seller pays freight to port and loading cost
• Called ―zero-sum-game‖
• Special-event pricing • FOB-destination: Seller pays freight to buyer's
• Adverse effects:
unloading dock
• Cash rebates − Creates deal-prone
consumers • Uniform-delivered pricing: Seller charges same price +
• Low-interest financing freight to all customers
− Erodes brand’s value
• Longer payment terms − Not a legitimate substitute • Zone pricing: Different prices for different customer
for effective strategic zones
• Warranties & service planning
contracts • Basing-point pricing: Seller sets base price + freight
− Leads to industry price wars
from city to customer location
• Freight-absorption pricing: Seller absorbs some or all
freight costs
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Initiating and Responding to Initiating Price Cuts

Price Changes
Reasons
• Companies take aggressive pricing actions • Excess capacity
Customer interpretation
to gain market position, increase revenue, • Aiming to dominance
and boost profits •Customers may perceive a
market through cost
better deal or reduced
leadership
− Lower prices to lure competitor customers quality or faulty products
• Recession
− Raise prices to extract more value from their •Customers may guess:
current base • Strong price competition − new models coming up
− further price cut
− financial trouble
Initiating Price Increases Initiating Price Increases
Reasons Customer interpretation

– Boost profits – Suggest exclusivity or Techniques to avoid sticker shock:
– Cost inflation and greediness
– Advance notice for price increases
expected inflation
– Transparent explanations
– Over demand
– Making low-visibility price moves
– Shortage of supply
– Exclusivity and giving
Cautions – Escalator clauses in long-term projects
better quality image – Consumers dislike price
increases, so firms
should avoid looking like
price gougers
Competitor Reactions to Price Competitor Reactions to Price

Changes Changes
• Competitors most likely react when:

• Competitors may take each change as a
– few firms exist
challenge
– product is similar
• Research competitor’s:
– buyers are informed
– Current financial situation
• Competitors may react to price cut with – Recent sales
standard assumptions:
– Customer loyalty
– trying to steal market
– Corporate goals
– struggling to boost sales
– competitors imitate the action
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Competitor Reactions to Price

Responding to Price Changes
Changes
• Response to competitor price cuts depends

on several factors:
– Why did they cut prices?
– Is it a temporary or permanent change?
– What happens if the firm doesn't react?
– How might other companies respond?
Any Question?
Copyright © 2024 Pearson Education, Inc. Publishing as Prentice Hall 12-51

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12/7/2023

Understanding Price Definition of Price

• Price influences consumer perception, buying

Consumer Psychology and Pricing Consumer Psychology and Pricing

• Consumers have price thresholds

Consumer Psychology and Pricing A Black T-Shirt

―A Black T-Shirt‖ example illustrates the

• Marketers can use reference prices to

Consumer Psychology and Pricing Major Pricing Strategies

• In image pricing, consumers use price as • Customer value-based pricing:

Considerations in Setting Customer

New-Product Pricing Strategies Steps in Setting Price

Step-1: Define the Pricing Objective Step 2: Determine Demand

Step 2: Determine Demand Step 3: Estimate Costs

− the product is unique & has a few substitutes Price

Types of costs Costs at Varying Levels of Production

Experience Curve Effect Experience Curve Pricing

• Increased production experience leads to

− Lower MKT costs can lead to price reductions &

Copyright © 2023 Pearson Education, Inc. Publishing as Prentice Hall

Step 4: Analyze Competitors’ Prices Step 5: Select a Pricing Method

• Consider competitor prices & features when • 3 considerations in pricing:

Step 5: Select a Pricing Method Markup (Cost Plus) Pricing

• The basic pricing method that adds a fixed

Target-Rate-of-Return Pricing Target-Rate-of-Return Pricing

Economic-Value-to-Customer Pricing Competitive (Going-Rate) Pricing

• Pricing considers customer perception of value • Pricing based on competitor pricing

Auction Pricing Auction Pricing

Sealed-bid auction: Suppliers submit one

Step 6: Select the Final Price Price Discrimination

Price Discrimination Price Discrimination

Price Discrimination Product-Mix Pricing Strategies

• Seek price combinations Product line pricing

Product-Mix Pricing Strategies Price Adjustment Strategies

Promotional Pricing Methods Geographical Pricing Methods

Initiating and Responding to Initiating Price Cuts

Initiating Price Increases Initiating Price Increases

Reasons Customer interpretation

Competitor Reactions to Price Competitor Reactions to Price

• Competitors most likely react when:

Competitor Reactions to Price

• Response to competitor price cuts depends

Copyright © 2024 Pearson Education, Inc. Publishing as Prentice Hall 12-51

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