To accompany A Framework for Marketing Management, 2nd Edition Slide 1 in Chapter 13©2003 Prentice Hall, Inc.

Chapter 13Chapter 13

Designing Pricing Designing Pricing Strategies and ProgramsStrategies and Programs

PowerPoint by Karen E. JamesPowerPoint by Karen E. JamesLouisiana State University - ShreveportLouisiana State University - Shreveport

To accompany A Framework for Marketing Management, 2nd Edition Slide 2 in Chapter 13©2003 Prentice Hall, Inc.

ObjectivesObjectives

Understand how companies price a new good or service.

Identify how prices can be adapted to meet varying circumstances.

Learn when price changes should be initiated and how soon companies should respond to competitive price changes.

To accompany A Framework for Marketing Management, 2nd Edition Slide 3 in Chapter 13©2003 Prentice Hall, Inc.

Price Has Many NamesPrice Has Many Names

Rent

Tuition

Fare

Monthly payment

Fee

Dues

Interest

Donation

To accompany A Framework for Marketing Management, 2nd Edition Slide 4 in Chapter 13©2003 Prentice Hall, Inc.

Setting the PriceSetting the Price

Pricing Procedure

Select pricing objective

Determine demand

Estimate costs

Analyze competition

Select pricing method

Select final price

Survival

Maximize current profits

Maximize market share

– Penetration strategy

Market skimming

– Skimming strategy

Product quality leaders

Partial cost recovery

To accompany A Framework for Marketing Management, 2nd Edition Slide 5 in Chapter 13©2003 Prentice Hall, Inc.

Setting the PriceSetting the Price

Pricing Procedure

Select pricing objective

Determine demand

Estimate costs

Analyze competition

Select pricing method

Select final price

Understand factors that affect price sensitivity

Estimate demand curves

Understand price elasticity of demand– Elasticity– Inelasticty

To accompany A Framework for Marketing Management, 2nd Edition Slide 6 in Chapter 13©2003 Prentice Hall, Inc.

Marketing StrategiesMarketing Strategies

Product is more distinctive

Buyers are less aware of substitutes

Buyers cannot easily compare quality of substitutes

The expenditure is a lower part of buyer’s total income

The expenditure is small compared to the total cost

Part of the cost is borne by another party

The product is used with assets previously bought

The product is assumed to have more quality, prestige, or exclusiveness

Buyers cannot store the product

Conditions Under Which Consumers are Less Price Sensitive:

To accompany A Framework for Marketing Management, 2nd Edition Slide 7 in Chapter 13©2003 Prentice Hall, Inc.

Marketing StrategiesMarketing Strategies

There are few or no substitutes

Buyers do not readily notice the higher price

Buyers are slow to change their buying habits and search for lower prices

Buyers think higher prices are justified

Conditions Under Which Demand is Less Elastic:

To accompany A Framework for Marketing Management, 2nd Edition Slide 8 in Chapter 13©2003 Prentice Hall, Inc.

Setting the PriceSetting the Price

Pricing Procedure

Select pricing objective

Determine demand

Estimate costs

Analyze competition

Select pricing method

Select final price

Types of costs and levels of production must be considered

Accumulated production leads to cost reduction via the experience curve

Differentiated marketing offers create different cost levels

To accompany A Framework for Marketing Management, 2nd Edition Slide 9 in Chapter 13©2003 Prentice Hall, Inc.

Setting the PriceSetting the Price

Key Pricing Terms:

– Fixed costs: do not vary directly with changes in level of production

– Variable costs: vary with production– Total costs: sum of fixed and variable

costs a given level of production– Average cost: cost per unit at a given

level of production

To accompany A Framework for Marketing Management, 2nd Edition Slide 10 in Chapter 13©2003 Prentice Hall, Inc.

Setting the PriceSetting the Price

Pricing Procedure

Select pricing objective

Determine demand

Estimate costs

Analyze competition

Select pricing method

Select final price

Firms must analyze the competition with respect to:

– Costs– Prices– Possible price reactions

Pricing decisions are also influenced by quality of offering relative to competition

To accompany A Framework for Marketing Management, 2nd Edition Slide 11 in Chapter 13©2003 Prentice Hall, Inc.

Setting the PriceSetting the Price

Pricing Procedure

Select pricing objective

Determine demand

Estimate costs

Analyze competition

Select pricing method

Select final price

Price-setting begins with the three “C’s”

Select method:

– Markup pricing– Target-return pricing– Perceived-value pricing– Value pricing– Going-rate pricing– Auction-type pricing– Group pricing

To accompany A Framework for Marketing Management, 2nd Edition Slide 12 in Chapter 13©2003 Prentice Hall, Inc.

Setting the PriceSetting the Price

Pricing Procedure

Select pricing objective

Determine demand

Estimate costs

Analyze competition

Select pricing method

Select final price

Requires consideration of additional factors:

– Psychological pricing– Gain-and-risk-sharing

pricing– Influence of other

marketing mix variables– Company pricing

policies– Impact of price on other

parties

To accompany A Framework for Marketing Management, 2nd Edition Slide 13 in Chapter 13©2003 Prentice Hall, Inc.

Adapting the PriceAdapting the Price

Geographical Pricing

– Barter

– Compensation deal

– Buyback arrangement

– Offset

To accompany A Framework for Marketing Management, 2nd Edition Slide 14 in Chapter 13©2003 Prentice Hall, Inc.

Adapting the PriceAdapting the Price

Cash discounts

Quantity discounts

Trade-in allowances

Functional discounts

Seasonal discounts

Promotion allowances

Price Discounts and Allowances:

To accompany A Framework for Marketing Management, 2nd Edition Slide 15 in Chapter 13©2003 Prentice Hall, Inc.

Adapting the PriceAdapting the Price

Loss-leader pricing

Special-event pricing

Cash rebates

Low-interest financing

Longer payment terms

Warranties and service contracts

Psychological discounting

Promotional Pricing Tactics:

To accompany A Framework for Marketing Management, 2nd Edition Slide 16 in Chapter 13©2003 Prentice Hall, Inc.

Adapting the PriceAdapting the Price

Customer segment pricing

Product-form pricing

Image pricing

Channel pricing

Location pricing

Time pricing

Discriminatory Pricing Tactics:

To accompany A Framework for Marketing Management, 2nd Edition Slide 17 in Chapter 13©2003 Prentice Hall, Inc.

Adapting the PriceAdapting the Price

Price discrimination works when:

– Market segments show different intensities of demand

– Consumers in lower-price segments can not resell to higher-price segments

– Competitors can not undersell the firm in higher-price segments

– Cost of segmenting and policing the market does not exceed extra revenue

To accompany A Framework for Marketing Management, 2nd Edition Slide 18 in Chapter 13©2003 Prentice Hall, Inc.

Adapting the PriceAdapting the Price

Product-line pricing

Optional-feature pricing

Captive-product pricing

Two-part pricing

By-product pricing

Product-bundle pricing

Product-Mix Pricing Tactics:

To accompany A Framework for Marketing Management, 2nd Edition Slide 19 in Chapter 13©2003 Prentice Hall, Inc.

Initiating and Responding Initiating and Responding to Price Changesto Price Changes

Strategic Options Include:

– Maintain price and perceived quality; selectively prune customers

– Raise price and perceived quality– Partially cut price and raise quality– Fully cut price, maintain perceived quality– Maintain price, reduce perceived quality– Introduce an economy model

To accompany A Framework for Marketing Management, 2nd Edition Slide 20 in Chapter 13©2003 Prentice Hall, Inc.

Initiating and Responding Initiating and Responding to Price Changesto Price Changes

Key Considerations

Initiating price cuts

Initiating price increases

Reactions to price changes

Responding to competitor’s price changes

Circumstances leading to price cuts:– Excess plant capacity– Declining market share– Attempt to dominate the

market via lower costs Price cutting traps:

– Price/quality perceptions– Low prices don’t create

market loyalty– Competition may match

or beat price cuts

To accompany A Framework for Marketing Management, 2nd Edition Slide 21 in Chapter 13©2003 Prentice Hall, Inc.

Initiating and Responding Initiating and Responding to Price Changesto Price Changes

Key Considerations

Initiating price cuts

Initiating price increases

Reactions to price changes

Responding to competitor’s price changes

Circumstances leading to price increases:– Cost inflation– Overdemand

Methods of dealing with overdemand:– Delayed quotation

pricing– Escalator clauses– Unbundling– Reduction of discounts

To accompany A Framework for Marketing Management, 2nd Edition Slide 22 in Chapter 13©2003 Prentice Hall, Inc.

Initiating and Responding Initiating and Responding to Price Changesto Price Changes

Key Considerations

Initiating price cuts

Initiating price increases

Reactions to price changes

Responding to competitor’s price changes

Firms must monitor both customer and competitor reactions

Competitor reactions are common when:

– Few firms offer the product

– The product is homogeneous

– Buyers are highly informed

To accompany A Framework for Marketing Management, 2nd Edition Slide 23 in Chapter 13©2003 Prentice Hall, Inc.

Initiating and Responding Initiating and Responding to Price Changesto Price Changes

Key Considerations

Initiating price cuts

Initiating price increases

Reactions to price changes

Responding to competitor’s price changes

The degree of product homogeneity affects how firms respond to price cuts initiated by the competition

Market leaders can respond to aggressive price cutting by smaller competitors in several ways

To accompany A Framework for Marketing Management, 2nd Edition Slide 24 in Chapter 13©2003 Prentice Hall, Inc.

Initiating and Responding Initiating and Responding to Price Changesto Price Changes

Maintain price and profit margin

Maintain price, add value

Increase price, improve quality

Launch a low-price fighter line

Market Leader Responses to Competitor Initiated Price Cuts:

Reduce price