Chapter

16
Developing
Pricing Strategies
and Programs

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Learning Objectives
1. How do consumers process and evaluate
prices?
2. How should a company set prices initially for
products or services?
3. How should a company adapt prices to meet
varying circumstances and opportunities?
4. When and how should a company initiate a
price change?
5. How should a company respond to a
competitor’s price change?

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 Understanding Pricing

• Pricing decisions are complex and must take into

account many factors—the company, the customers,
the competition, and the marketing environment.
Marketers know their pricing decisions must also be
regular with the firm’s marketing strategy and its
target market.

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 Understanding Pricing

Price is the amount of money charged for a

product or service. It is the total of all the
values that consumers give up in order to
gain the benefits of having or using a product
or service.

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 Understanding Pricing
• Understanding Pricing

Price is not just a number. It comes in many forms and

performs many functions. Rent, tuition, wages, fees,
rates, and commissions are all the price you pay for
some good or service. Price also has many
components. If you buy a new car, the sticker price
may be adjusted by discounts and dealer incentives.
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 Understanding Pricing
• Pricing in a digital world
 Get immediate sellers price comparisons
 Check prices at the point of purchase
 Set your price and make it meet the
customer's expectations
 Monitor customer behavior & provide offers
 Give customers access to special prices
 Negotiate prices online or even in personally
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 Understanding Pricing
• A changing pricing
environment

– Sharing economy

– Exchange

– Renting

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 Understanding Pricing
• How companies price
– Small companies: boss
– Large companies: Department /product line
managers
• How companies should price
– Understanding of consumer pricing
psychology
– a systematic approach to setting, adapting,
and changing prices
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 Understanding Pricing
• Understanding how consumers arrive at their
perceptions of prices is an important marketing
priority. Here we consider three key topics—

1. Reference prices.

2. Price–quality conclusion.

3. Price endings.

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Consumer Psychology and
Pricing

Reference prices

Price-quality inferences

Price endings

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 Reference prices
• Possible Consumer Reference Prices

“Fair Price” (what consumers feel the product should cost)

• Typical or regular Price

• Last Price Paid

• price or the maximum most consumers would pay)

• Lower-price or the minimum most consumers would pay)

• Competitor Prices

• Expected Future Price

• Usual Discounted Price

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 Price-quality conclusion

• Price-Quality conclusion Many consumers use price

as an indicator of quality. Image pricing is especially
effective with ego-sensitive products such as
perfumes, expensive cars, and designer clothing. A
$100 bottle of perfume might contain $10 worth of
scent, but gift givers pay $100 to communicate their
high regard for the receiver.

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 Price Endings
• Price endings Many sellers believe prices should end in
an odd or singular number. Customers perceive an item
priced at $299 to be in the $200 rather than the $300
range, Price encoding in this fashion is important
Another explanation for the popularity of “9” endings is
that they suggest a discount or bargain, so if a company
wants a high-price image, it should probably avoid the
odd-ending

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 Price Endings

• One study showed that demand actually

increased by 30% when the price of a dress
raise from $34 to $39 but was unchanged
when it raise from $34 to $44.
• Prices that end with 0 are also popular.

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 SETTING THE PRICE
• A firm must set a price for the first time when it develops
a new product, when it introduces its regular product
into a new distribution channel or geographical area, and
when it enters bids on new contract work. The firm must
decide where to position its product on quality and price.

• Most markets have three to five price points or

tiers((highest price), (high price), (high-medium price),
(medium-low price), and (low price).

• Having a range of price points allows a firm to cover

more of the market and to give any one consumer more
choices.
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 STEPS IN SETTING A PRICING
POLICY
• The firm must consider many factors in
setting its pricing policy. The six steps
in the process are:
1. Selecting the Pricing Objective
2. Determining Demand
3. Estimating Costs
4. Analyzing Competitors’ Costs, Prices,
and Offers 5. Selecting a Pricing Method
6. Selecting the Final Price
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Step 1: Selecting the Pricing
Objective

Maximum
Survival
current profit

Other Maximum
objectives market share

Product-quality
leadership

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•Survival Companies pursue survival as their major objective if
they are plagued with overcapacity, intense competition, or
changing consumer wants. As long as prices cover variable
costs and some fixed costs, the company stays in business.

•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.

•Maximum Market Share Some companies want to maximize

their market share. They believe a higher sales volume will lead
to lower unit costs and higher long-run profit, so they set the
lowest price, assuming the market is price sensitive.

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• Maximum Market Skimming Companies
unveiling a new technology favor setting high
prices to maximize market skimming. Sony has
been a frequent practitioner of market-skimming
pricing, in which prices start high and slowly drop
over time.

• Product-Quality Leadership 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.
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 Step 2: Determining
Demand
• Each price will lead to a different level of
demand and have a different impact on a
company’s marketing objectives. The higher
price, the lower demand.

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 Step 2:
Determining Demand
• Price sensitivity

• Surveys, price experience, &

statistical analysis
• Price flexibility of demand.

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 Price sensitivity
• Price sensitivity The demand curve shows the
market’s expected purchase quantity at alternative
prices, So, the reactions of many individuals with
different price sensitivities. The first step in
evaluating demand is to understand what affects price
sensitivity.

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•
Price sensitivity
Generally, customers whom they are less price sensitive to
low-cost items or items they buy infrequently. They are also
less price sensitive when (1) there are few or no substitutes
or competitors; (2) they do not easily notice the higher
price; (3) they are slow to change their buying habits; (4)
they think the higher prices are justified; and (5) price is
only a small part of the total cost of obtaining, operating,
and servicing the product over its lifetime.

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Factors that reduce price sensitivity
• The product is more special.
• Buyers are less aware of substitutes.
• Buyers cannot easily compare the quality of substitutes.
• The expenses is a little part of the buyer’s total income.
• The expenses is small compared to the total cost of the
end product.
• Part of the cost is hold out by another party.
•The product is assumed to have more quality, prestige, or
exclusiveness.

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 Price sensitivity

• Of course, companies prefer customers who

are less price-sensitive.

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 ESTIMATING DEMAND CURVES
Surveys, price experience, &
statistical analysis
• Most companies attempt to measure their demand curve using
several different methods.

• Surveys: can explore how many units consumers would buy at

different proposed prices. even if consumers might understate
their purchase intentions at higher prices to discourage the
company from pricing high, they also tend to actually
exaggerate their willingness to pay for new products or

services.
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 Surveys, price experience,
& statistical analysis
• Price experience can vary the prices of different
products in a store or of the same product in
similar area to see how the change affects sales.
Online, an e-commerce site could test the
impact of a price to compare the purchase
response.

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 Surveys, price experience,
& statistical analysis

• Statistical analysis of past prices, quantities

sold, and other factors can discover their
relationships. (from different locations at the
same time).

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 Step 3: Evaluating Costs
• Target costing
– Target costing: Costs change with
production measure and
experience. They can also change
as a result of a heavy effort by
designers, engineers, and
purchasing agents to reduce them
through target costing.
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 Step 3: Evaluating Costs
• Market research establishes a new product’s
desired functions and the price at which it will
sell, given its appeal and competitors’ prices.
This price less desired profit margin leaves the
target cost the marketer must achieve.

• The firm must examine each cost element—

design, engineering, manufacturing, sales—and
bring down costs so the final cost projections
are in the target range. Cost cutting cannot go
so deep as to compromise the brand promise
and value delivered.
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 Step 4: Analyzing
Competitors’ Prices
• Firm must take competitors’ costs,
prices, & reactions into account

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 Analyzing Competitors’
Prices
• The Company should first consider the nearest competitor’s
price. If the firm’s offer features not offered by the nearest
competitor, their worth to the customer should be evaluated,
and add that value to the competitor’s price, If the
competitor’s offer some features not offered by the firm,
their worth to the customer should be evaluated and remove
from the firm’s price. Now the firm can decide whether it can
charge more, the same, or less than the competitor. But
competitors can change their prices in reaction to the price
set by the firm.

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 Step 5: Selecting a Pricing
• Markup pricing Method
EDLP, going-rate pricing, and
• target-return Pricing auction-type pricing.
• Perceived-value pricing
– Based on buyer’s image of product, channel
deliverables, warranty quality, customer
support, and softer attributes (e.g., reputation)

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 Step 5: Selecting a Pricing
Method
• Perceived-value pricing.An increasing number of
companies now base their price on the customer’s
perceived value.
• Perceived value is made up of a host of inputs, 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.
• Companies must deliver the value promised by their value
proposition, and the customer must perceive this value.
• Firms use the other marketing program elements, such as
advertising, sales force, and the Internet, to communicate
and enhance perceived value in buyers’ minds

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 Step 5: Selecting a Pricing
Method
• Value pricing

Companies win loyal customers by charging a fairly low price for

a high quality offering. Value pricing is not a matter of simply
setting lower prices; it is a matter of reengineering the
company’s operations to become a low-cost producer without
sacrificing quality; and lowering prices significantly to attract
a large number of value-interested customer.

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 Step 6: Selecting the Final
Price
Impact of other marketing activities
•The final price must take into consideration the brand’s
quality and advertising.
•Company pricing policies: The aim is to ensure that
salespeople set a prices that are reasonable to customers
and profitable to the company.

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 STEALTH PRICE INCREASES

• Airlines generate billions of

dollars in baggage fees as a
source of extra income. or
Some company earn a lots
from the cheap price product
but with very expensive parts
which also short run remain.

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 Adapting the Price
• Price discounts and allowances

1. Discount: A price reduction to buyers who

pay bills immediately. A regular example is
which means payment is due within 30 days
and the buyer can deduct 2 percent by paying
within 10 days.
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 Adapting the Price
• Price discounts and allowances

2. Quantity Discount: A price reduction to those who

buy large volumes. Quantity discounts must be offered
equally to all customers

3. Seasonal Discount: A price reduction to those who buy

goods or services out of season. Hotels, and airlines
offer seasonal discounts in slow selling periods.

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 Adapting the Price
• Yield pricing

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 Planning and Responding to
Price Changes
• start price cuts
– Factory Overcapacity
– Market domination
• Price-cutting
– Low-quality
– weak market share
– Price war

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 Planning and Responding to
Price Changes
• Several circumstances might lead a firm to cut
prices. One is excess plant capacity: The firm
needs additional business and cannot generate
it through increased sales effort, product
improvement, or other measures.
• Companies sometimes initiate price cuts in a
drive to dominate the market through lower
costs. Either the company starts with lower
costs than its competitors, or it initiates price
cuts in the hope of gaining market share and
lower costs.
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Cutting prices to keep customers or beat competitors often
encourages customers to demand price concessions, however,
and trains salespeople to offer them. A price-cutting strategy can
lead to other possible traps:
• Low-quality trap. Consumers assume quality is low.
• Fragile-market-share trap. A low price buys market
share but not market loyalty. The same customers
will shift to any lower-priced firm that comes along.
• Shallow-pockets trap. Higher-priced competitors
match the lower prices but have longer staying
power because of deeper cash reserves.
• Price-war trap. Competitors respond by lowering
their prices even more, triggering a price war.

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 Planning and Responding to
Price Changes
• Consumers had a aggressive
reaction when they heard
reports that Coca-Cola was
considering introducing smart
vending machines which
would adjust prices according

to the temperature outside.

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Copyright © 2016 Pearson Education Ltd. 16-45