Part 5 : Shaping the

Market Offerings
Chapter 14 – Developing Pricing
Strategies & Programs
 Understanding Pricing
• Although non price factors have become more important in
modern marketing, price is the most important elements
determining market share and profitability
• Effectively designing and implementing pricing strategies
requires a thorough understanding of consumer pricing
psychology and a systematic approach to setting,
adapting, and changing prices
• Consumer pricing psychology  how consumers arrive at their
perceptions of price, the marketers must think of:
a. Reference price: consumers get pricing information from
internal reference price (used as habitual decision making)
or external reference price (used as limited decision
making and extended decision making)
b. Price-quality inferences: many consumers use price as an
indicator of quality whenever the information is not
available
c. Price cues: consumers tend to process prices in a “left to right”
manner rather than by rounding e.g. stereo amplifier priced
at 299 instead $300 as a price in the $200 range rather
than $300 range
 Setting the Price
• In setting pricing policy, a company follows a Six-Step
procedures :
I. Selecting the Pricing Objective through
b. Survival if a firm sets prices covering variable cost and
some fixed cost to face overcapacity, intense
competition or changing consumer wants.
c. Maximum current profit if a firm has knowledge of its
demand and cost function
d. Maximum market share if a firm believes a higher sales
volume will lead to lower unit cost and higher long
run profit. They set “the lowest price” assuming the
market is price sensitive
e. Maximum market skimming if a firm unveiling a new
technology favor setting “higher price” as to
communicate superior product but sales drop in the
next future making the price low e.g. initially higher
price for TV flat with billingual system
 Setting the Price
e. Product-Quality leadership if a firm makes the brands “affordable
luxuries”-products or services characterized by high levels of
perceived quality, taste, and status with a price e.g. Jaguar car
f. Other objectives: suitable to nonprofit and public organization to cover
the remaining cost e.g. customers pay for building
maintenance
IV. Determining Demand : price elasticity of demand

(a) Inelastic Demand (b) Elastic Demand


$15 $15
------------------------------------------------------------------------------------------
Price

$10 $10
--------------------------------------------------------------------------------------------------------------------------

50 150
100 105
Quantity Demanded per Period Quantity Demanded per Period
 Setting the Price
III.Estimating costs : a company’s costs take two forms,
fixed costs and variable costs. The models are:
b. The decline in the average cost (total costs divided by
production) with accumulated production
experience is called experience curve

$10 -----------------------------------------------------------------------
I Current price
I
B I I
A
Cost per unit

$8 I
TI I
$6 I
$4 I Experience
I curve
I
$2
I
I I I
100,000 200,000 400,000 800,000
Accumulated Production
 Setting the Price
b. Activity-Based Cost Accounting is to identify the real costs
associated with serving each customer
V. Analyzing Competitors Costs, Prices, and Offers by
considering the nearest competitor’s price so that
the firm can charge (competitors’ price as
benchmarking)
VII.Selecting a Pricing methods:
d. Markup pricing e.g. VC/unit: $10; FC: $300,000; Expected
unit sales 50,000, the unit cost = $10 + ($
300,000/50,000) = $ 16, then markup price = $16/(1-
0.2) = $20
e. Perceived-value pricing: setting premium price for
excellent services, luxurious products etc.
f. Value pricing: setting price with “everyday low pricing” at
the retail level
 Setting the Price
VI.Selecting the final price : the company must
consider additional factors such as
b. Impact of other marketing activities: the final
price must take the brand’s quality,
advertising media, channel selection and
services provided
c. The salespeople quote prices that are
reasonable to customer and profitable to
the company
d. Risk and gain sharing pricing: the company must
aware “the risk of pricing” such as
consumers will see uncompetitive price for
homogenous products or loss of customers
if it does not deliver the full promised value
for non homogenous products.
 Adapting the Price
• Companies usually do not set a single price, but rather a
pricing structure that reflects variation in:
a. Geographical pricing: the company decides how to price
its products to different customers in different
locations and countries
b. Price discounts and allowance: most companies will adjust
their list price and give discounts and allowances for
early payment, volume purchases, and off-season
buying
c. Promotional pricing: companies can use several pricing
techniques to stimulate early purchases or attract
customers attention such as loss leader pricing,
special event pricing, longer payment terms
d. Differentiated pricing or price discrimination: companies
often adjust their basic price in customer segment
pricing (adult vs child), product form pricing (1 for $10,
2 for $15), location pricing and time pricing
 Initiating & Responding to Price Changes
• Companies face situations where they need to cut or raise price
• Initiating Price Cuts: as a drive to dominate the market through lower
cost and excess plant capacity. A price-cutting strategy involves
possible traps:
a. Low quality trap
b. A low price buys market share but not market loyalty
c. Little cash receives due to price wars
• Initiating Price Increases: as a drive to face the cost inflation and the
over demand. A price-increase strategy involves different impact
on buyers:
a. Delayed quotation pricing: the company does not set a final price until
the product is finished or delivered
b. Unbundling: the company prices separately one or more elements
that were part of the offer such as delivery and installation cost
c. Reduction of discounts: the price increase makes the company to
instruct its sales force not to offer its normal cash e.g. 30%
discount but price already changes
• Market leaders attacked by lower-priced competitors can choose: to
maintain price, raise the perceived quality of their product,
reduce price, increase price and improve quality, or launch a
low-priced fighter line