14-1

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?

14-2

Whirlpool’s Duet combo is nearly four times the price of comparable models

14-3

Consumer Psychology and Pricing

Reference Prices

Price-quality inferences

Price endings

Price cues

14-4

Examples of Price Cues

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

• Odd number discount perceptions

• Even number value perceptions

• Ending prices with 0 or 5

• “Sale” written next to price

14-5

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

14-6

Step 1: Determine your Objective

• Survival• Maximum current

profit• Maximum market

share• Maximum market

skimming• Product-quality

leadership

14-7

Price Tiers in the Ice Cream Market

14-8

Step 2: Determine Demand

Price Sensitivity

Estimating

Demand Curves

Price Elasticity

of Demand

14-9

Inelastic and Elastic Demand

14-10

Step 3: Estimate Costs

Types of Costs

Target Costing

Accumulated

ProductionActivity-Based

Cost Accounting

14-11

Cost Terms and Production

• Fixed costs• Variable costs• Total costs• Average cost• Cost at different levels

of production

14-12

Cost per Unit based on Production

14-13

Step 4: Analyze Competition

Reality check!

What are your competitors charging?

Compare features or service.

Is your price reasonable and competitive?

14-14

Step 5: Select a Pricing Method

• Markup pricing

• Target-return pricing

• Perceived-value pricing

• Value pricing

• Going-rate pricing

• Auction-type pricing

14-15

Break-Even Chart

14-16

Auction-Type Pricing?

English auctions

Dutch auctions

Sealed-bid auctions

14-17

Step 6: Select the Final Price

• Impact of other marketing activities

• Company pricing policies

• Gain-and-risk sharing pricing

• Impact of price on other parties

14-18

Common Pricing Mistakes

• Determine costs and add 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

14-19

Price-Adaptation Strategies

Geographical Pricing

Discounts/Allowances

Differentiated Pricing

Promotional Pricing

14-20

Promotional Pricing Tactics

• Loss-leader pricing

• Special-event pricing

• Cash rebates

• Low-interest financing

• Longer payment terms

• Warranties and service contracts

• Psychological discounting

14-21

Differentiated Pricing and Price Discrimination

• Customer-segment pricing

• Product-form pricing

• Image pricing

• Channel pricing

• Location pricing

• Time pricing

• Yield pricing

14-22

Example of Profit Before and After a Price Increase

14-23

Marketing Discussion

As a consumer, which pricing

method do you prefer to deal with?

Why?