Chapter 10

Developing pricing Strategies and

Programs
Consumer Psychology and Pricing
• Marketers recognize that consumers often
actively process price information,
interpreting prices in terms of their knowledge
from prior purchasing experience.

• Purchase decisions are based on

consumers perceive prices and how what
consider the current actual price to they
be-not the
marketer's stated price.
• Understanding how consumers arrive at
perceptions prices is an their
of priority. important marketing

• Here we consider three key topics-reference prices,

price-quality inferences, and price endings.

• When examining products, however, consumers often

employ reference prices, comparing an observed price
to an internal reference price they remember or to an
external frame of reference such as a posted "regular
retail price."
Reference Pricing
 PRICE-QUALITY INFERNCES
• PRICE-QUALIY INFERNCES: Many
consumers use price as an indicator
pricing is especially
of quality. Image effective with
sensitive ego- products such as
perfumes,
expensive cars, and Armani T-shirts.
Consumer Perceptions vs Reality for
Cars
 Setting the Price
• Firm set a price for the first time when
develops a new
must it product.

• The firm must consider many factors in setting

its pricing policy.
• (1) selecting the pricing objective
• (2) determining demand
• (3) estimating costs
• (4) analyzing competitors' costs, prices
• (5) selecting a pricing method
• (6) selecting the final price.
 Setting the Price
• Step 1: Selecting the Pricing Objective: 'here
company first decides where it wants to
position its market offering.

• The clearer a firm's objectives, the easier it is

to set price. Five major objectives are:
survival, maximum current profit, maximum
market share, maximum market skimming,
and product-quality leadership.
 Setting the Price
• SURVIVAL: Companies pursue survival as their major
objective if they are plagued with over‘ capacity,
intense competition, or changing consumer wants. As
long as prices cover variable costs and some fixed
costs.

• Maximum Current Profit: Many companies try to set a

price that will maximize current profits, They estimate
the demand and costs associated with alternative
prices and choose . The price that produces maximum
current profit, cash flow, or rate of return on
investment.
 Setting the Price
• Maximum Market Share: Some companies want to maximize their market
share. They believe that a higher sales volume will lead to lower unit costs
and higher long-run profit, They want the lowest price, assuming the
market is price sensitive.

• The following conditions favor adopting a market-penetration pricing

strategy:

• (1) The market is highly price sensitive and a low price stimulates
market
growth.

• (2) production and distribution costs fall with accumulated production.

• (3) a low price discourages actual and potential competition.

 Market Skimming
• Maximum Marketing Skimming: Companies
unveiling a new technology favor setting high
prices to maximize market skimming. Sony is a
frequent practitioner of market-skimming
pricing, in which prices start high and slowly
drop over time.
 Conditions for market skimming
• (1) A sufficient number of buyers have a high current
demand.

• (2) the unit costs of producing a small volume are not so

high that they cancel the advantage of charging what the
traffic will bear.

• (3) the high initial price does not attract more competitors
to the market.

• (4) the high price communicates the image of a superior

product.
 Product Quality Relationship
• Product Quality Relationship: A company
might aim to be the product-quality leader in
the market. Many brands strive to be
"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.
 Step 2: Determining Demand
• Each price will lead to a different level of
demand and will therefore have a different
impact on a company's marketing objectives.
 Step 3: Estimating Costs
• Types of Costs: A company's costs take two forms, fixed and
variable.

• Fixed costs (also known as overhead) are costs that do not

vary with production level or sales revenue.

• Variable costs vary directly with the level of production. For

example, each hand calculator produced by Texas
Instruments incurs the cost of plastic, microprocessor chips,
and packaging.

• Total costs consist of the sum of the fixed and variable costs
for any given level of production.
Step 4: Analyzing Competitors' Costs,
Prices, and Offers
• Within the range of possible prices
determined by market demand and company
costs, the firm must take competitors' costs,
prices, and possible price reactions into
account.
Step 4: Analyzing Competitors' Costs,
Prices, and Offers
• How can a firm anticipate a competitor's reactions?

• company will need to research the competitor's

current financial situation, recent sales, customer
loyalty, and corporate objectives.

• The problem is complicated because the competitor

can put different interpretations on lowered prices or a
price cut: that the company is trying to steal the
market, that the company is doing poorly and trying to
boost its sales, or that the company wants the whole
industry to reduce prices to stimulate total demand.
Step 5: Selecting a Pricing Method
• We will examine six price-setting methods:
markup pricing, target-return.

• MARKUP PRICING: The most elementary

pricing method is to add a standard markup to
the product's cost. Construction companies
submit job bids by estimating the total project
cost and adding a standard markup for profit.
Step 5: Selecting a Pricing Method
• Target Return Pricing: In target-return pricing,
the firm determines the price that ,would yield its
target rate of return on investment (ROI).

• PERCEIVED-VALUE PRICING: Perceived value is

made up of several elements, such as the buyer's
image of the product performance, the Channel
deliverables, the warranty quality, customer
support, and softer attributes such as the
supplier's reputation, trustworthiness, and
esteem.
Step 5: Selecting a Pricing Method
• VALUE PRICING: Companies have adopted value
pricing: They win loyal customers by charging a
fairly low price for a high-quality offering.

• Value pricing is thus not a

setting matter of simply lower
reengineering the company's
prices; operations
it is
become a low-cost producer awithout sacrificing
matter of
quality, to attract a large number of value- to
conscious customers.
Step 5: Selecting a Pricing Method
• G0ING-RATE PRICING: In going-rate pricing, the
firm bases its price largely on competitors' prices,
charging the same, more, or less than major
competitor(s).

• AUCTION TYPE PRICING Auction-type pricing is

growing more popular, especially with the growth
of the Internet. "Breakthrough Marketing: EBay"
describes the ascent of that wildly successful
Internet company.
 Step 6: Selecting the Final Price
• In selecting that price, the company must
consider additional factors, including the impact
of other marketing activities, company pricing
policies, gain-and-risk-sharing pricing, and the
impact of price on other parties.

• IMPACT OF OTHER MARKETING ACTIVITIES: The

final price must take into account the brand's
quality and advertising relative to the
competition.
Price Discounts and Allowances
 Differentiated Pricing
• Price discrimination occurs when a company sells a product or
service at two or more prices that do not reflect a proportional
difference in costs.

• In first-degree price discrimination, the seller charges a separate

price to each customer depending on the intensity of his or her
demand.

• In second-degree price discrimination, the seller charges less

to
buyers who buy a larger volume.

• In third-degree price discrimination, the seller charges

different
amounts to different classes of buyers, as in the following cases:
 Differentiated Pricing
• Customer-segment pricing. Different customer groups pay different
prices for the same product or service. For example, museums
often charge a lower admission fee to students and senior citizens.

• Product-form pricing. Different versions of the product are priced

differently, but not proportionately to their costs. Evian prices a 48-
ounce bottle of its mineral water at $2.00. It takes the same water
and packages 1.7 ounces in a moisturizer spray for $6.00.

• Image pricing. Some companies price the same product at two

different levels based on image differences. A perfume
manufacturer can put the perfume in one bottle, give it a name and
image, and price it at $10 an ounce. It can put the same perfume in
another bottle with a different name and image and price it at $30
an ounce.
 Differentiated Pricing
• Channel pricing. Coca-Cola carries a different price
depending on whether the consumer purchases it in a fine
restaurant, a fast-food restaurant, or a vending machine.

• Location pricing. The same product is priced differently at

different locations even though the cost of offering it at
each location is the same.

• Time pricing. Prices are varied by season, day, or hour.

Responding to Competitors' Price
Changes