developing price strategies

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D.V. Madhusudan Rao Dept. MBA, School of Graduate Studies, Jigjiga University ETHOPIA MARKETING MANAGEMENT Developing Pricing Strategies 18-2-2013 10.00 PM 1

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Page 1: Developing price strategies

D.V. Madhusudan RaoDept. MBA,

School of Graduate Studies,Jigjiga University

ETHOPIA

MARKETING MANAGEMENT

Developing Pricing Strategies

18-2-2013 10.00 PM 1

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Learning ObjectivesAfter studying this chapter, you should be able to:

1. Describe the major strategies for pricing initiative and new products

2. Explain how companies find a set of prices that maximize the profits from the total product mix

3. Discuss how companies adjust their prices to take into account different types of customers and situations

4. Discuss the key issues related to initiating and responding to price changes

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Pricing Products

• New-Product Pricing Strategies• Product Mix Pricing Strategies• Price Adjustment Strategies• Price Changes

Topic Outline

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Price is the only element in the marketing mix that produces revenue; all other elements represent costs.So Cost =FACT;Price (cost+Margin) =

POLICY

What Is a Price?

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Pricing Puzzle

• Production costs• Indirect costs• Advertising costs• Distribution costs• Manufacturer’s

margin• Distributor’s margin• Seller’s margin

Product performance• Usefulness & Quality

Image / Aspirations• Brand Equity

Availability• Distribution Strategy

Service• Before/During & After

sales

Minimize Optimize Maximize

Costs + Margins = PRICE

VALUE

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Value is a ratio between what customer gets and what he gives

Value = Benefits/Costs

How to increase its Value?•Raise benefits•Reduce costs•Raise benefits and reduce costs•Raise benefits by more than the raise of costs•Lower benefits by less than the reduction of costs

VALUE

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A Secret Pie

• Impact of a 1 % price increase on profits

– Coca-Cola 6,4 %– Nestlé 17,5 %– Ford 26,0 %– Philips 28,7 %

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Synonyms for Price

• Rent• Tuition• Fee• Fare• Rate• Toll• Premium• Honorarium• Wage

• Special assessment• Bribe• Dues• Salary• Interest• Donation• Commission• Tax

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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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Pricing Puzzle

4 P’s• PRODUCT• PRICE• PLACE• PROMOTION

4 C’s• CUSTOMER VALUE• COST• CONVENIENCE• COMMUNICATION

Seller’s Dilemma

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Pricing Puzzle4 P’s• PRODUCT• PRICE• PLACE• PROMOTION

4 C’s• CUSTOMER VALUE• COST• CONVENIENCE• COMMUNICATION

“ Tomorrow’s winner companies will be those who offer distinct products at comparatively low

market prices ”

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• Physical Differences– Features, performance, durability, conformance,

design, etc…

• Availability Differences– Distribution channels ; Stores, mail-order, internet,

etc…

• Service Differences– Delivery, installation, training, consulting, maintenance,

etc…

• Price Differences– Price positioning (Very high / High / Medium / Low / Very

Low)

• Image Differences– Symbols, atmosphere, events, media, etc…

Key = DifferentiationThe key to drive value is to offer relevant and

distinctive product differentiation

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• Physical Differences– Levi’s Engineered Jeans (Ergonomic construction, durability,

style)

• Availability Differences– Dell Computer’s customized production, Volkswagen “e.lupo”

• Service Differences– Acıbadem Hospital – Mother Care Division, Nissan “5-year

Warranty”

• Image Differences– Audi vs Mercedes, DuPont (Innovation Leader)

Differentiation : Examples

Key = Differentiation

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• Perdue Chicken (USA)– Guaranteed tenderness (30 % market-share, 10 % premium

pricing)

• Flora Drinking Water (Turkey – Sabancı Holding)– Service, packaging, attributes, operation

• Starbuck’s Coffee (USA)– Atmosphere, standard service

Differentiating commodities…

Key = Differentiation

Everything can be differentiated !...

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Pricing Decisions

• INTERNAL FACTORS– Marketing

Objectives• Positioning• Target Group

– Marketing Mix Strategy

• 4 P’s– Costs

• Fixed & Variable– Management

Approach• Responsibility• Perspective

• EXTERNAL FACTORS– Market

• Pure Competition• Monopolistic

Competition• Oligopolistic

Competition• Pure Monopoly

– Demand• Elastic / Inelastic

– Competition• Competitors’ offers• Competitiors’ reactions

– Economy• Buying power

– Government Influence• Laws & Regulations

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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”• Typical price• Last price paid• Upper-bound price

• Lower-bound price• Competitor prices• Expected future

price• Usual discounted

price

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Price–Quality Inferences: An Image pricing for ego-sensitive products. Eg: Perfumes, cars (over-valued and under-valued)When information about true quality is known, price becomes a less significant indicator of quality. When information is not available, price acts as a signal of quality.

Price endings: Price tags end with 0 and 5 or 9 are commonly seen examples.

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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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20

Steps in Setting the Price

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Pricing Strategies

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Marketing

Objectives

SurvivalLow Prices to Cover Variable Costs

andSome Fixed Costs to Stay in

Business.Current Profit Maximization Choose the Price that Produces the

Maximum Current Profit, Etc.

Market Share LeadershipLow as Possible Prices to Become

the Market Share Leader.

Product Quality LeadershipHigh Prices to Cover Higher

Performance Quality and R & D.

Internal Factors Affecting Pricing Decisions: Marketing Objectives

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Price

Product Design

Distribution

Promotion

NonpricePositions

Internal Factors Affecting Pricing Decisions: Marketing Mix

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Market andDemand

Competitors’ Costs, Prices, and Offers

Other External FactorsEconomic Conditions

Reseller NeedsGovernment Actions

Social Concerns

External Factors Affecting Pricing Decisions

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Market Skimming

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New-Product Pricing Strategies

• Market-skimming pricing• Market-penetration pricing• Intermediate Pricing

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Market SkimmingMarket-skimming pricing is a strategy for setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price, the company make fewer (low volume) but more profitable sales.• Product quality and image must support the price• Buyers must want the product at the price• Costs of producing the product in small volume should not cancel the advantage of higher prices• Competitors should not be able to enter the market easily• Suitable for products that have short life cycles or which will face

competition at some point in the future (e.g. after a patent runs out)

• Examples include: Playstation, jewellery, digital technology, new DVDs, Bic, Biro etc

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• For example when Sony introduced the world first high definition television (HDTV) to the Japanese market , the high tech sets cost 43,000$ . These televisions were purchased only by customers who really wanted the new technology and afford to pay high prices.

Market-skimming pricing

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Penetration Pricing

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Market Penetration Contd..Market-penetration pricing sets a low initial price

in order to penetrate the market quickly and deeply to attract a large number of buyers quickly to gain market share

• Price sensitive market• Production and distribution costs must fail as

sales volume increases.• Low prices must keep competition out of the

market

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• For example ,Dell used penetration pricing to enter the personal computer market, selling high quality computer products through lower cost direct channels.

Market-penetration pricing

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Price-Quality Strategies• Philip Kotler identified 9 price-quality strategies

Premium HighValue

SuperValue

OverCharging

MidValue

GoodValue

Rip-off FalseEconomy Economy

High Quality

Low Quality

High Price Low Price

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Middle Quality

Mid Price

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Product Line PricingSetting Price Steps Between Product Line Items

i.e. $299, $399

Product Line PricingSetting Price Steps Between Product Line Items

i.e. $299, $399

Optional-Product PricingPricing Optional or Accessory Products

Sold With The Main Producti.e. Car Options

Optional-Product PricingPricing Optional or Accessory Products

Sold With The Main Producti.e. Car Options

Captive-Product PricingPricing Products That Must Be Used

With The Main Producti.e. Razor Blades, Film, Software

Captive-Product PricingPricing Products That Must Be Used

With The Main Producti.e. Razor Blades, Film, Software

By-Product PricingPricing Low-Value By-Products To Get Rid

of Themi.e. Lumber Mills, Zoos

By-Product PricingPricing Low-Value By-Products To Get Rid

of Themi.e. Lumber Mills, Zoos

Product-Bundle PricingPricing Bundles Of Products Sold Together

i.e. Season Tickets, Computer Makers

Product-Bundle PricingPricing Bundles Of Products Sold Together

i.e. Season Tickets, Computer Makers

Product Mix Pricing Strategies

ProductMix

PricingStrategies

ProductMix

PricingStrategies

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Product line pricingProduct line pricing takes into account the

cost differences between products in the line, customer evaluation of their features, and competitors’ prices

* For example channel offers 20 different collections of bags of all shapes and sizes at price that range from under $50 to more than $1,250.

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Optional Product pricing• Optional-product pricing takes into account

optional or accessory products along with the main product

• For example : a car buyer may choose to order a GPS navigation system & Bluetooth wireless communication.

• Refrigerators come with optional ice maker

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Captive-product pricing• Captive-product pricing

involves products that must be used along with the main product

• Examples of Captive products are razor blade cartridges , Gillette once you bought the razor, you are committed to buying replacement cartridges at $25 an eight pack

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Two-part pricingTwo-part pricing involves breaking the price into:

– Fixed fee– Variable usage feeFor example : Jawwal company charge a flat rate for a

basic calling plan, then charge for minutes over what the plan allows.

The service firm must decide how much to charge for the basic service and how much for the variable usage.

– Another example is when you visit a park , you pay a ticket charge + fee for food and additional feature

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By-product pricing• By-product pricing refers to products with

little or no value produced as a result of the main product. Producers will seek little or no profit other than the cost to cover storage and delivery.

• Petroleum products often results in by-products.

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Product bundle pricingProduct bundle pricing combines several

products at a reduced priceFor example : fast food restaurants

bundle a burger , fries and a soft drink at a combo price

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Step 2: Determining Demand

1.Price Sensitivity

2. Estimating Demand Curves

3. Price Elasticity of Demand

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Fig 14.2 Inelastic and Elastic Demand

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1.Price sensitivity

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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• Expenditure is a smaller part of buyer’s total income• Expenditure is small compared to the total cost• Part of the cost is paid by another party• Product is used with previously purchased assets• Product is assumed to have high quality and prestige• Buyers cannot store the product

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Influence of Elasticity• Any pricing decision must be mindful of the

impact of price elasticity • The degree of price elasticity impacts on the level

of sales and hence revenue• Elasticity focuses on proportionate (percentage)

changes• PED = % Change in Quantity demanded/%

Change in Price

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Price Elasticity of Demand

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Influence of Elasticity• Price Inelastic:• % change in Q < % change in P• e.g. a 5% increase in price would be met by a fall in

sales of something less than 5% • Revenue would rise• A 7% reduction in price would lead to a rise in sales of

something less than 7%• Revenue would fall

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Influence of Elasticity contd..• Price Elastic:• % change in quantity demanded > % change in

price• e.g. A 4% rise in price would lead to sales falling by

something more than 4%• Revenue would fall• A 9% fall in price would lead to a rise in sales of

something more than 9%• Revenue would rise

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Step 3: Estimating Costs

• Types of costs• Cost Terms and Production

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

• Accumulated production• Activity-Based Cost accounting• Target costing

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Figure 14.3 Cost Per Unit at Different Levels of Production

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Figure 14.4 Estimating Cost per Unit as a Function of Accumulated Production

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Target Costing

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Step 4: Analysing Competitors’ Costs, Prices and Offers

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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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Markup /Cost-Plus Pricing

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Markup/ Cost-Plus Pricing contd..• Calculation of the average cost (AC) plus a

mark up• AC = Total Cost/OutputEg: An Immersion Rod mfg. costs are: Variable C=$10,FC=$300,000, Expected unit sales = 50,000.A Unit Cost = VC + FC/Unit sales =10+300k/50k = $16.

IF mfr. Wants to earn a 20% markup on sales,Markup price = Unit cost/ 1-desired return on sales = $16/1-0.2 = $20 per unitHence Mfr can sell to Dealers at $ 20 and earn $4 as profit

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BEP / Target-return pricing

An expected percentage of profit on mfr’s investment (Return on Investment)

Target-return pricing = Unit Cost + Desired return x Invested Capital Unit Sales

Break-Even Volume = Fixed Cost (Price - Variable Cost)

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Figure 14.6 Break-Even Chart

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• BE= Fixed Costs/Contribution (SP-VC)• Example - Meal - SP = $20, VC = $8• Fixed costs are $2400 a day• BE=$2400/$12 = 200• Need to sell 200 meals @ $20 to break-even• VC = 40%, contribution = 60%• BE = $2400/.6 = $4000

Break-Even

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Break-even Analysis or Target Profit Pricing

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Perceived Value PricingTable 14.2 Consumer Perceptions vs. Reality for Cars

Overvalued Brands• Land Rover• Kia• Volkswagen• Volvo• Mercedes

Undervalued Brands• Mercury• Infiniti• Buick• Lincoln• Chrysler

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Some important pricing definitions

• Utility: The attribute that makes it capable of want satisfaction

• Value: The worth in terms of other products

• Price: The monetary medium of exchange.

Value Example: CaterpillarTractor is $100,000 vs. Market

$90,000$90,000 if equal 7,000 extra durable 6,000 reliability 5,000 service 2,000 warranty $110,000 in benefits - $10,000

discount!

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Value Pricing

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Value Pricing contd..

• Price set in accordance with customer perceptions about the value of the product/service

• Examples include status products/exclusive products

Companies may be able to set prices according to perceived value.

Copyright: iStock.com

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Going Rate (Price Leadership)

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Going Rate (Price Leadership)• In case of price leader, rivals have difficulty in competing

on price – too high and they lose market share, too low and the price leader would match price and force smaller rival out of market

• May follow pricing leads of rivals especially where those rivals have a clear dominance of market share

• Where competition is limited, ‘going rate’ pricing may be applicable – banks, petrol, supermarkets, electrical goods – find very similar prices in all outlets

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Auction / Tender Pricing

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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-Adjustment/ Adaption Strategies

Price Adaptation StrategiesPrice Adaptation Strategies

Discount & AllowanceReducing Prices to Reward

Customer Responses such asPaying Early or Promoting

the Product.

Discount & AllowanceReducing Prices to Reward

Customer Responses such asPaying Early or Promoting

the Product.

SegmentedAdjusting Prices to Allow

for Differences in Customers,Products, or Locations.

SegmentedAdjusting Prices to Allow

for Differences in Customers,Products, or Locations.

Cash DiscountCash Discount

Quantity DiscountQuantity Discount

Functional DiscountFunctional Discount

Seasonal DiscountSeasonal Discount

CustomerCustomer

Product FormProduct Form

LocationLocation

TimeTime

Trade-In AllowanceTrade-In Allowance

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Price-Adjustment Strategies

• Adjusting Prices for Psychological Effect.•Price Used as a Quality Indicator.

• Temporarily Reducing Prices to Increase Short-Run Sales.• i.e. Loss Leaders, Special-Events

• Adjusting Prices to Account for the Geographic Location of Customers.• i.e. FOB-Origin, Uniform-Delivered, Zone Pricing, Basing-Point, & Freight-Absorption.

• Adjusting Prices for International Markets.• Price Depends on Costs, Consumers, Economic Conditions & Other Factors.

Psychological Pricing

Promotional Pricing

Geographical Pricing

International Pricing

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Price-Adjustment Strategies contd..

Geographical pricing is used for customers in different parts of the country or the world

• FOB pricing• Uniformed-delivery pricing• Zone pricing• Basing-point pricing• Freight-absorption pricing• Counter trade (Barter,Compensation deal, Buyback arrangement, Offset)

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Price Adjustment Strategies

• FOB (free on board) pricing means that the goods are delivered to the carrier and the title and responsibility passes to the customer

• Uniformed-delivery pricing means the company charges the same price plus freight to all customers, regardless of location

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Price Adjustment Strategies

• Zone pricing means that the company sets up two or more zones where customers within a given zone pay a single total price

• Basing-point pricing means that a seller selects a given city as a “basing point” and charges all customers the freight cost associated from that city to the customer location, regardless of the city from which the goods are actually shipped

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Price-Adjustment Strategies

• Freight-absorption pricing means the seller absorbs all or part of the actual freight charge as an incentive to attract business in competitive markets

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Price-Adjustment Strategies

Dynamic pricing is when prices are adjusted continually to meet the characteristics and needs of the individual customer and situations Ex. Alaska airlines creates unique

prices and advertisements for people as they surf the web

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Price Adjustment StrategiesInternational pricing is when prices are set in a specific

country based on country-specific factors• Economic conditions• Competitive conditions• Laws and regulations• Infrastructure• Company marketing objective

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• For example : Boeing sells its jetliners at about the same price everywhere, whether in the United states , Europe or the third world

• A pair of Levi’s selling for $30 in Canada might go for $ 63 in Tokyo and $ 88 in Paris

International pricing

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Discount and allowance pricing

Discount and allowance pricing reduces prices to reward customer responses such as paying early or promoting the product

• Discounts• Allowances

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Price-Adjustment Strategies

Price Discounts and AllowancesQuantity discount: The more you buy, the cheaper it becomes-- cumulative and non-cumulative.Trade discounts” functional”: Reductions from list for functions performed-- storage, promotion.Cash discount: A deduction granted to buyers for paying their bills within a specified period of time, (after first deducting trade and quantity discounts from the base price)

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Price Adjustment StrategiesFunctional discount: discount offered by a manufacturer to trade-channel members if they will perform certain functions.Seasonal discount: a price reduction to those who buy out of season.Allowance: an extra payment designed to gain reseller participation in special programs. a) Trade in allowances: are price reductions given for

turning in an old item when buying a new one ( Automobiles industry)

b) Promotional allowances: are payments or price reductions to reward dealer for participating in advertising and sales support program

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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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Price-Adjustment StrategiesPromotional pricing is when prices are temporarily

priced below list price or cost to increase demand• Loss leaders• Special event pricing• Cash rebates• Low-interest financing• Longer warrantees• Free maintenance

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Price-Adjustment strategies

Promotional Pricing• Loss-leader pricing: supermarkets and department stores

often drop the price on well known brands to stimulate additional store traffic

• Special-event pricing: sellers well establish special pricing in certain seasons to draw in more customers

• Cash rebates: companies offer cash rebates to encourage purchase of the manufacturers products within a specified time period

• Low-interest financing: the company can offer customers low-interest financing

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Price-Adjustment strategies

• Longer payment terms: sellers especially mortgage banks and auto companies stretch loans over longer periods and thus lower the monthly payment

• Warranties and service contracts: companies can promote sales by adding a free or low cost warranty or service contract

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Price-Adjustment Strategies

Risks of promotional pricing• Used too frequently, and copies by

competitors can create “deal-prone” customers who will wait for promotions and avoid buying at regular price

• Creates price wars

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Differentiated/segmented Pricing• Customer-segment pricing• Product-form pricing• Image pricing• Channel pricing• Location pricing• Time pricing• Yield pricing

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Price-Adjustment Strategies

Segmented pricing is used when a company sells a product at two or more prices even though the difference is not based on cost

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a) Customer segment pricing: different customers pay different prices for the same product or service . For ex. Museums charge a lower admission for students .

b) Product from pricing: different versions of the product are priced differently but not according to differences in their costs

c) Location pricing: company charges different prices for different locations

d) Time pricing : a firm varies it prices by the season , the month , the day and even the hour

Segmented pricing

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Price-Adjustment Strategies

To be effective:• Market must be segmentable• Segments must show different degrees of

demand• Watching the market cannot exceed the extra

revenue obtained from the price difference• Must be legal

Segmented Pricing

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Price-Adjustment StrategiesPsychological pricing occurs when sellers consider the

psychology of prices and not simply the economics” the price is used to say something about the product”

Reference prices are prices that buyers carry in their minds and refer to when looking at a given product– Noting current prices– Remembering past prices– Assessing the buying situations– For example : a company could display its product

next to more expensive ones in order to imply that it belongs in the same class

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Initiating and Responding to Price Changes

InitiatingPrice

Increases

CompetitorReactions

toPrice

Changes

Initiating Price Cuts

Buyer Reactions

to Price

Changes

Price Changes

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Traps in Price Cutting Strategies

• Low-quality trap• Fragile-market-share trap • Shallow-pockets trap• Price-war trap

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Should We Raise Prices?

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Methods for Increasing Prices

• Delayed quotation pricing• Escalator clauses• Unbundling• Reduction of discounts

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Price Changes

Initiating Pricing Changes

Price cuts occur due to:

• Excess capacity• Increased market share

Price increase from:

• Cost inflation• Increased demand• Lack of supply

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Price Changes contd..

Price increases

•Product is “hot” that means better made•Company is greedy

Price cuts

•New models will be available•Models are not selling well•Quality issues

Buyer Reactions to Pricing Changes

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Price Changes

Questions– Why did the competitor change the price?– Is the price cut permanent or temporary?– What is the effect on market share and profits?– Will competitors respond?

Responding to Price Changes

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Price Changes contd…

Solutions– Reduce price to match competition– Maintain price but raise the perceived value

through communications– Improve quality and increase price– Launch a lower-price “fighting” brand

Responding to Price Changes

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Brand Leader Responses to Competitive Price ChangesBrand Leader Responses to Competitive Price Changes

Hold Current Price;Continue to MonitorCompetitor’s Price.

Hold Current Price;Continue to MonitorCompetitor’s Price.

Reduce PriceReduce Price

Raise PerceivedQuality

Raise PerceivedQuality

Improve Quality& Increase PriceImprove Quality& Increase Price

Launch Low-Price“Fighting Brand”

Launch Low-Price“Fighting Brand”

Has Competitor CutPrice?

Has Competitor CutPrice?

Will Lower Price Negatively Affect Our

Market Share & Profits?

Will Lower Price Negatively Affect Our

Market Share & Profits?

Can/ Should EffectiveAction be Taken?

Can/ Should EffectiveAction be Taken?

Yes

No

No

No

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A frame work for responding to Low-Cost Rivals

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Public Policy and Pricing

Price fixing: Sellers must set prices without talking to competitors

Predatory pricing: Selling below cost with the intention of punishing a competitor or gaining higher long-term profits by putting competitors out of business , this will protect small sellers from larger ones

Pricing Within Channel Levels

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Public Policy and Pricing contd..

Robinson-Patman Act prevents unfair price discrimination by ensuring that the seller offer the same price terms to customers at a given level of trade

Pricing Across Channel Levels

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Public Policy and Pricing contd…

Robinson-Patman Act• Price discrimination is allowed:

– If the seller can prove that costs differ when selling to different retailers

– If the seller manufactures different qualities of the same product for different retailers

Pricing Across Channel Levels

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Public Policy and Pricing

Retail (or resale) price maintenance is when a manufacturer requires a dealer to charge a specific retail price for its products

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Public Policy and Pricing contd…

Deceptive pricing occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers

• Scanner fraud failure of the seller to enter current or sale prices into the computer system

• Price confusion results when firms employ pricing methods that make it difficult for consumers to understand what price they are really paying

Pricing Across Channel Levels

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Loss Leader

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Loss Leader contd..

• Goods/services deliberately sold below cost to encourage sales elsewhere

• Typical in supermarkets, e.g. at Christmas, selling bottles of gin at £3 in the hope that people will be attracted to the store and buy other things

• Purchases of other items more than covers ‘loss’ on item sold

• e.g. ‘Free’ mobile phone when taking on contract package

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Psychological Pricing

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Psychological Pricing contd..

• Used to play on consumer perceptions• Classic example - £9.99 instead of £10.99!• Links with value pricing – high value goods

priced according to what consumers THINK should be the price

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Price Discrimination

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Price Discrimination contd..• Charging a different price

for the same good/service in different markets

• Requires each market to be impenetrable

• Requires different price elasticity of demand in each market

Prices for rail travel differ for the same journey at different times of the day

Copyright: iStock.com

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Destroyer Pricing/Predatory Pricing

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Destroyer/Predatory Pricing• Deliberate price cutting or offer of ‘free

gifts/products’ to force rivals (normally smaller and weaker) out of business or prevent new entrants

• Anti-competitive and illegal if it can be proved

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Absorption/Full Cost Pricing

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Absorption/Full Cost Pricing contd..

• Full Cost Pricing – attempting to set price to cover both fixed and variable costs

• Absorption Cost Pricing – Price set to ‘absorb’ some of the fixed costs of production

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Marginal Cost Pricing

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Marginal Cost Pricing contd..

• Marginal cost – the cost of producing ONE extra or ONE fewer item of production

• MC pricing – allows flexibility • Particularly relevant in transport where fixed costs may be

relatively high• Allows variable pricing structure – e.g. on a flight from London

to New York – providing the cost of the extra passenger is covered, the price could be varied a good deal to attract customers and fill the aircraft

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Marginal Cost Pricing contd...

• Example:

Aircraft flying from Bristol to Edinburgh – Total Cost (including normal profit) = £15,000 of which £13,000 is fixed cost*

Number of seats = 160, average price = £93.75

MC of each passenger = 2000/160 = £12.50

If flight not full, better to offer passengers chance of flying at £12.50 and fill the seat than not fill it at all! *All figures are estimates only

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Contribution Pricing

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Contribution Pricing contd..

• Contribution = Selling Price – Variable (direct costs)

• Prices set to ensure coverage of variable costs and a ‘contribution’ to the fixed costs

• Similar in principle to marginal cost pricing• Break-even analysis might be useful in such

circumstances

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Target Pricing

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Target Pricing contd..• Setting price to ‘target’ a specified profit

level• Estimates of the cost and potential revenue

at different prices, and thus the break-even have to be made, to determine the mark-up

• Mark-up = Profit/Cost x 100

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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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One Final Word

“ A product is not a product unless it sells.Otherwise, it’s just a museum piece…”

Ted Levitt

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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 costinvolved 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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Reference• Kotler, Kelly, Koshy and Jha (2009) Marketing Management: A South

Asian Perspective, 14th ed. Pearson Prentice Hall, pp.368-99