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CHAPTER 14

Developing PricingStrategies and

Programs


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IN THIS CHAPTER WE WILLADDRESS

THE FOLL

OWING

QUESTION

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 competitors price

challenge?


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GILLETTE

The Gillette example reveals the power of pricing.


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UNDERSTANDING PRICING


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A Changing Pricing Environment

Buyers can:

Get instant price comparisons from thousand of vendors.

Name their price and have it met.

Get products free.

Sellers can: Monitor customer behavior and tailor offers to individuals.

Give certain customers access to special prices.

Negotiate prices in online auctions and exchanges.


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How companies Price.


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CONSUMER PSYCHOLOGY AND

PRICING

Consumers Price takers

Purchase decisions- perceive prices of consumers, current

actual price and not marketers stated prices E.g. a T-shirt

of Armani, GAP, H&M


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CONS ER SYCHOLOGY ND

RICING


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REFERENCE PRICES

A reference price is the price that people expect or deemto be reasonable for a certain type of product.


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Factors affect reference prices

Memory of past prices

Frame of reference (compared to competitive prices, pre-

sale prices, manufacturers suggested prices, channel-specific

prices, marked prices before discounts, substitute product

prices, etc.)

E.g.- EMI (equated monthly installments) followed in

automobiles or residential apartments.


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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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Consumer Perceptions vs. Reality for Cars

Overvalued Brands Undervalued Brands

Land Rover Mercury

Kia Infiniti

Volkswagen Buick Buick

Volvo Lincoin

Mercedes Chrysler


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PRICE CUES

L

eft 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


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When to Use Price Cues

Customers purchase item in frequently

Customers are new

Product designs vary over time

Prices vary seasonally

Quality or sizes vary across stores


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Tiffany and Co.

Tiffany name has connoted diamonds and luxury. Yet in 1990s,during the economic crisis, Tiffany launched a line of cheaper

silver jewelry known as Return to Tiffany which became a musthave item for teens of a certain set.

The skyrocketing heights of sale of this set of jewelry bought in adifferent image for the company. For all those who grew upthinking of Tiffany as the only place where they got the jewelry ofgirlhood, the company began hiking price. At the same point, thecompany launched higher-end collections and expandedaggresively into new markets and shopping-malls.


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SETTING THE PRICE

The firm must consider many factors in setting its pricing policy.


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STEP 1:

SELECTING THE PRICING OBJECTIVE

Survival

Maximum current profit

Maximum market share

Maximum market skimming

Product- Quality leadership

Other Objectives


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STEP 2: DETERMINING DEMAND

PRICE SENSITIVITY

ESTIMATING THE DEMAND

CURVE

PRICE ELASTICITY OF

DEMAND


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PRICE SENSITIVITY

- There are few or no substitutes or competitors

- They do not readily notice the higher price

- They are slow to change their buying habits

- They think the higher prices are justified

- Price is only a small part of the total cost of obtaining,operating, and servicing the product over its lifetime.


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ESTIMATINGTHE DEMAND CURVE

Surveys

Price experiments

Statistical analysis

PRICEELASTICITYOFDEMAND

If demand hardly changes with a small change in price, we say thedemand is inelastic.

If demand changes considerably, demand is elastic.


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Step 3: estimate cost

Type of cost & level of production:-

Fixed cost

Variable cost

Total cost

Average cost

Accumulated Production

Activity-Based Cost Accounting

Target Costing


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Fixed Cost

Fixed cost do not vary with production

level or sales revenue.


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Variable cost

Variable cost vary directly with level of production


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Average cost

Average cost is the cost per unit at the level of production it

equals total cost divided by production.


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Accumulated Production


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TARGET COSTING

Target costing involves setting a target cost (competitive

market price profit)

Target Costing is a disciplined process for determining and

achieving a full-stream cost.

Quality must be produced in order to generate the desiredprofitability


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Popular Pricing Methods


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Unit Cost + Standard Markup = Selling Price

Suppose a Gel Pen manufacturer has the following costs and salesexpectations:

Variable Cost/unit : Rs.10

Fixed Cost : Rs. 300000

Expected Sales unit : 50000

ar -up r c ng


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Manufacturers Unit Cost = Variable Cost + Fixed Cost

unit sales

= 10 + 30000050000

= 10 + 6

= Rs. 16

Now, the manufacturer wants to a 20% mark-up on sales.

Then manufacturers mark-up price is given by:

Mark-up Price = Unit Cost1- desired return on sale

= Rs. 16

1- 0.2

= Rs. 20

Hence, manufacturer will charge dealer Rs.20/unit.

The dealer will further add on his own markup.

M k ll


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Mark-ups are generally

higher on:

Seasonal Items

Specialty Items

Slower moving items

Items with high storage and handling cost

Demand-inelastic Items


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The form determines the price that would yield its target rate

of ROI.

Suppose a Toaster manufacturer has invested Rs.1 million in

the business and wants to earn a profit of 20% ROI,

specifically Rs. 200000.target return price is given by:

Target-Return Pricing= desired return x invested capital

unit sales

Target Return Pricing


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Break-even Point


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erce ve a ue r c ng

Buyers image of products performance

Channel deliverables

Warranty quality

Customer support

Softer attributes: suppliers reputation, trustworthiness and

esteem.

Perceived values is made up of several elements


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Companies must deliver the value promised by their

value proposition

Customers must perceive this value

Use of marketing mix elements such as Advertising

and sales force, to communicate and enhance perceived

value in customers mind.

Deliver more value than the competitor and

demonstrate this to prospective buyers.


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GOING RATE PRICING

In going-rate pricing, the firm bases its price largely on

competitors' prices, charging the same. more, or less than

major competitors.

It is used where costs are difficult to measure or

competitive response is uncertain.


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AUCTION-TYPE PRICING

Auction-type pricing is growing more popular

,especially with the growth of the Internet.

Example:- EBay


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E-bay began as an auction site which created a pricing

revolution by helping buyers get the best price for their items

and letting customers decide the price that they want. Now it

is also offering fixed price Buy it now option for those who

dont want to enter into auction.

E-bays acquisition of Paypal online payment service and

Skype internet voice and video communication have

synergetically expanded the companys auction capabilities as

customers can pay online through Paypal and buyers andsellers can communicate through Skype.

Acquisition of shopping.com, rent.com and Stub Hub online

ticket resale service has provided diversification to E-bay.


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STEP 6: SELECTING THE FINAL

PRICE:


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IMPACT OF OTHERMARKETING

ACTIVITIES:

The final price must take into account of two things

relative to the competition-

(1)Brands quality


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(2)Advertising


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COMPANY PRICING POLICY:

1)The company pricing policies must be consistent

2)It can establish pricing penalties under certain

circumstances.

3)The price should be reasonable to customers.

4)The price should be profitable to the company.


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GAINAND RISK SHARING PRICING:

Buyers may resist accepting a sellers proposal because

of high perceived level of risk.

The seller has the option of offering to absorb part or all

the risk if it does not deliver the full promised value.


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IMAPCT OF PRICE ON OTHER

PARTIES:

Management must also consider the reactions of other parties

like

1)How will distributor and dealers feels about it?

2)How will competitors react?

3)Will suppliers raise their prices on seeing the companys prices?

4)Will the government intervene and prevent this price from

being charged?


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ARMANI, GAP, and H&M

A pretty ordinary looking Armani black t-shirt for womenwhich doesnt look much different from the black t-shirt soldby GAP and Swedish discount clothing chain,H&M costs$275 in comparison to $14.90 $7.90 by GAP andH&Mrespectively.

Despite of being more stylishly cut and being made of 70%nylon, there are very few takers of Armani t-shirt at$275.

thus Armani doesnt make many, this further enhancing theappeal for status-seekers who like the idea of having aspecial edition t-shirts.


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