Developing

Pricing Strategies
and Programs
Developing Pricing Strategies and Programs
4P’s components of Product variety
marketing mix
Quality
Design
PRODUCT
Features
Brand name
Packaging
Size
Services
Warranty
Returns Slide 3 of 33
4P’s components
of marketing mix
PRICE List price
Discount
Allowances
Payment
period
Credit terms

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4P’s components
of marketing mix
Channels
PLACE Coverage
Assortment
Location
Inventory
Transport

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4P’s components
of marketing mix
Sales
PROMOTION promotion
Advertising
Sales force
Public
relations
Direct
marketing
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PROMOTION
Advertising
MIX
Sales
promotion
Personal
selling
Public
relations or
Publicity
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Expanded marketing mix
People
Process
Physical evidence
Front Office Back Office
Expanded marketing mix
Mega Marketing
Power
Public relations
Front Office Back Office
Discussion Questions
1. How do consumers process and evaluate prices?
2. How should a company set prices initially for
products or services?
3. How should a company adapt prices to meet
varying circumstances and opportunities?
4. When should a company initiate a price change?
5. How should a company respond to a competito
r’s price change?

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Marketing Mix

Revenue
Cost Producer

Cost Place Promotion Cost

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Price is the only one of the 4 P’s that produces
revenue, all over elements produce costs. Price
is also the easiest element of the marketing
mix to adjust, and communicates the intended
value of the offering.

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Pricing

$31.50 $33.50

Bargainin
g Slide 13 of 33
Holistic marketers take into account the
company, their customers, the competition,
and the marketing environment in determine
prices. Pricing decisions must be consistent
with the firm’s marketing strategy and its
target market and brand positioning's.

Pricing takes many forms and performs many

functions. Rent, tuition, fares, fees, rates, tolls,
retainers, wages, and commissions are all the
price people pay for some good or service.

Price also has many components. Prices can be

altered through rebates and incentives, and
payment can be made with more than cash,
such as through the use of frequent flyer
miles.

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 Changing Price Environment
Buyers

I’ll pay $235.00

Instant Price Comparisons

Get Products Free

Name Your Own Price

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Instant price comparisons: mySimon.com.
PriceSCAN.com, Intelligent shopping agents
(“bots”).
Name your own price: Priceline.com.
Free products: Open Source, the free software
movement.

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 Changing Price Environment
Sellers $29.99 $19.99 $24.99

Selective Pricing

Negotiate Prices
Monitor Customers
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 How Companies Price
Product-line Managers
(w/guidance)

Small Business Owner

Pricing Department
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Effectively designing and implementing pricing
strategies requires a thorough understanding
of consumer pricing psychology and a
systematic approach to setting, adapting, and
changing prices.

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Consumer Psychology and Pricing
Price-Quality Inferences

Reference Prices

$1. 99
Price Cues

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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.
Reference prices: consumers compare an observed price to an internal
reference price they remember or an external frame of reference such as a
posted “regular retail price.”
Price-quality inferences: consumers use price as an indicator of quality.
Image pricing is especially effective with ego-sensitive products such as
perfumes, expensive cars, and designer clothing.
Price endings: Many sellers believe prices should end in an odd number.
Customers see an item priced at $299 as being in the $200 rather than the
$300 range; they tend to process prices “left-to-right” rather than by
rounding. Another explanation for the popularity of “9” endings is that they
suggest a discount or bargain. Prices that end with 0 and 5 are also popular
and are thought to be easier for consumers to process and retrieve from
memory.

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A Black T-Shirt

Armani - $275

Gap - $14.90

H&M - $7.90
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 Setting the Price

6 Select Final Price

5 Price Method
4 Competitor Analysis
3 Estimate Costs
2 Determine Demand
1 Pricing Objective

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Selecting the Pricing Objective
Survival
Maximum Current Profit
Maximum Market Share
Maximum Market Skimming
Product-Quality Leadership
Other Objectives

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Survival is a short-run objective for firms to deal with overcapacity, intense competition, or
changing consumer wants.
Maximize current profits emphasis current performance . But firms may sacrifice long-run
performance by ignoring the effects of other marketing variables, competitors’ reactions,
and legal restraints on price.
Maximum market share utilizes a market-penetration pricing strategy, in which a higher
sales volume will lead to lower unit costs and higher long-run profit.
Maximum market skimming utilizes a market-skimming pricing strategy, in which prices
start high and slowly drip over time. This strategy can be fatal if competitors price low.
A firm striving to be a product-quality leader offers brands that are “affordable luxuries” –
products or services characterized by high levels of perceived quality, taste, and status with
a price just high enough not to be out of consumers’ reach.
Other objectives: Nonprofit and public organizations may have other pricing objectives.

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 Determining Demand

Price sensitivity
Estimating demand curves
Price Elasticity of Demand

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The demand curve sums the reactions of many individuals with different price sensitivities.
Customers are less price sensitive to low-cost items or items they buy infrequently. They are
also less price sensitive when (1) there are few or no substitutes or competitors; (2) they do
not readily notice the higher price; (3) they are slow to change their buying habits; (4) they
think the higher prices are justified; and (5) price is only a small part of the total cost of
obtaining, operating, and servicing the product over its lifetime.

Firms estimate demand curves using: surveys, price experiments, and statistical analysis.
Marketers need to know how responsive, or elastic, demand is to a change in price. Research
findings show that (1) The average price elasticity across all products, markets, and time
periods studied was –2.62. (2) Price elasticity magnitudes were higher for durable goods
than for other goods, and higher for products in the introduction/growth stages of the
product life cycle than in the mature/decline stages. (3) Inflation led to substantially higher
price elasticities, especially in the short run. (4) Promotional price elasticities were higher
than actual price elasticities in the short run (although the reverse was true in the long run).
(5) Price elasticities were higher at the individual item or SKU level than at the overall brand
level.

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Inelastic and Elastic Demand

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 Estimating Costs
Demand Price Ceiling

Price

Price Floor
Profit

Costs

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Demand sets the price ceiling while costs set
the floor. Costs include production,
distribution, and selling expenses, plus a fair
return (profit) to cover effort and risk. The
company wants to charge a price that covers
its cost of producing, distributing, and selling
the product, including a fair return for its effort
and risk. Yet when companies price products
to cover their full costs, profitability isn’t
always the net result.

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 Estimating Costs
Types of costs

Fixed Costs
Variable Costs Total Costs
(overhead)

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Costs at Varying Levels of Production

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 Estimating Costs
Accumulated Production

Experience Curve
(Learning Curve)

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 Estimating Costs
Target Costing

Market research Design engineers

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The Experience Curve

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Analyzing Competitors’ Offers

Price

Costs Reaction

“A”
“ B”

Worth to Customer
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Selecting a Pricing Method

Pricing Methods
• Markup
• Target-return
• Perceived-Value
• Value
• Going-rate
• Auction-type
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 High Price
(No possible
demand at this price)

Ceiling price
Three Cs Customers’ assessment
of unique product
Model for features

Price Setting Competitors’ prices

and prices of
substitutes
Costs
Floor Price

Low Price
(No possible
profit at this price)
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 Markup Pricing

Variable cost per toaster $10

Fixed costs $300,000
Expected unit sales 50,000

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Target-Return Pricing

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Target-Return Pricing

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Perceived-Value Pricing
Customer’s perceived-value

• Performance $$$
• Warranty $
• Customer support $
• Reputation $$

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 Value Pricing
EDLP
THOUSANDS OF

LOW PRICES
Level of
Quality EVERY DAY
throughout the store

P1 C1 P2 C2
High
Pricing
Low
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 Going-Rate Pricing

Commodities

Follow the Leader

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Auction Pricing
English auction
(ascending bids)

Dutch auction
(descending bids)

Sealed-bid auction
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Selecting the Final Price
Impact on others

Brand
Quality

Pricing Policies

Gain-and-risk-sharing
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 Adapting the Price
Geographic Pricing

Price Discounts
and Allowances

Differentiated Pricing

Promotional Pricing
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Dealing with Price Changes
Raising Prices

Cutting Prices

Competitor Moves
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Thank You!

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Mptivational:
http://www.youtube.com/watch?v=hzBCI13rJmA

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