14

Developing Pricing
Strategies and Programs

Marketing Management, 13th ed

 Chapter Questions
• How do consumers process and evaluate
prices?
• How should a company set prices initially for
products or services?
• How should a company adapt prices to meet
varying circumstances and opportunities?
• When should a company initiate a price
change?
• How should a company respond to a
competitor’s price challenge?
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 Gillette Commands a
Price Premium

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 Synonyms for Price

• Rent • Special assessment

• Tuition • Bribe
• Fee • Dues
• Fare • Salary
• Rate • Commission
• Toll • Wage
• Premium • Tax
• Honorarium

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 Common Pricing Mistakes

• Determine costs and take traditional industry

margins
• Failure to revise price to capitalize on market
changes
• Setting price independently of the rest of the
marketing mix
• Failure to vary price by product item, market
segment, distribution channels, and
purchase occasion

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 Consumer Psychology
and Pricing

Reference Prices

Price-quality inferences

Price endings

Price cues

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 Table 14.1 Possible Consumer
Reference Prices

• “Fair price” • Lower-bound price

• Typical price • Competitor prices
• Last price paid • Expected future
• Upper-bound price price
• Usual discounted
price

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 Table 14.2 Consumer Perceptions vs.
Reality for Cars
Overvalued Brands Undervalued Brands
• Land Rover • Mercury
• Kia • Infiniti
• Volkswagen • Buick
• Volvo • Lincoln
• Mercedes • Chrysler

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 Tiffany’s
Price-Quality Relationship

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 Price Cues

• “Left to right” pricing ($299 vs. $300)

• Odd number discount perceptions
• Even number value perceptions
• Ending prices with 0 or 5
• “Sale” written next to price

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 When to Use Price Cues

• Customers purchase
item infrequently
• Customers are new
• Product designs
vary over time
• Prices vary
seasonally
• Quality or sizes vary
across stores

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 Steps in Setting Price
Select the price objective

Determine demand

Estimate costs

Analyze competitor price mix

Select pricing method

Select final price

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 Step 1: Selecting the Pricing Objective

• Survival
• Maximum current
profit
• Maximum market
share
• Maximum market
skimming
• Product-quality
leadership

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 Step 2: Determining Demand

Price Sensitivity

Estimating
Demand Curves

Price Elasticity
of Demand

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 Figure 14.2 Inelastic
and Elastic Demand

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 Table 14.3 Factors Leading to Less
Price Sensitivity
• The product is more distinctive
• Buyers are less aware of substitutes
• Buyers cannot easily compare the quality of substitutes
• The expenditure is a smaller part of buyer’s total income
• The expenditure is small compared to the total cost of
the end product
• Part of the cost is paid by another party
• The product is used with previously purchased assets
• The product is assumed to have high quality and
prestige
• Buyers cannot store the product

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 Step 3: Estimating Costs

Types of Costs
Accumulated
Production
Activity-Based
Cost Accounting
Target Costing

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 Cost Terms and Production
• Fixed costs
• Variable costs
• Total costs
• Average cost
• Cost at different
levels of
production

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 Figure 14.4 Cost per Unit as a
Function of Accumulated Production

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 9 Lives Uses Target Costing

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 Step 5: Selecting a Pricing Method
• Markup pricing
• Target-return pricing
• Perceived-value
pricing
• Value pricing
• Going-rate pricing
• Auction-type pricing

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 Figure 14.6 Break-Even Chart

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 Auction-Type Pricing

English auctions

Dutch auctions

Sealed-bid auctions

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 Step 6: Selecting the Final Price

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

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 Price-Adaptation Strategies

Geographical Pricing

Discounts/Allowances

Promotional Pricing

Differentiated Pricing

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 Price-Adaptation Strategies

Countertrade Discounts/ Allowances

• Barter • Cash discount
• Compensation deal • Quantity discount
• Buyback • Functional discount
arrangement • Seasonal discount
• Offset • Allowance

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

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 Differentiated Pricing

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

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 Table 14.6 Profits Before and After a
Price Increase

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 Increasing Prices

Delayed quotation pricing

Escalator clauses

Unbundling

Reduction of discounts

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 Brand Leader Responses to
Competitive Price Cuts

• Maintain price
• Maintain price and add value
• Reduce price
• Increase price and improve quality
• Launch a low-price fighter line

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 Marketing Debate

 Is the right price a fair price?

Take a position:
1. Prices should reflect the value that
consumers are willing to pay.
or
2. Prices should primarily just reflect the cost
involved in making a product.

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 Marketing Discussion

 Think of all the pricing methods

described in the chapter.
 As a consumer, which pricing method
do you personally prefer to deal with?
 Why?

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