CHAPTER 14 - DEVELOPING PRICING STRATEGIES AND PROGRAMS

Marketing Mix

• Product

• Price

• Place

• Promotion

the only one of the 4ps that produce revenue

Price

traditionally a major determinant of buyer choice.

Price

Ways the buyers can discriminate between sellers

• get instant price comparisons from thousands of vendors.

• name their price and get it

• get products for free

the buyer can discriminate the seller by comparing the prices offered by multiple stores.

Get instant price comparisons from thousands of vendors

the buyer can discriminate the seller by stating the price they want and meeting sellers who can meet the price willingly.

Name their price and have it met

the buyer can discriminate the seller by acquiring the initial product for free.

Get products free

ways sellers can discriminate against the buyers

• monitor customer behavior and tailor offers to individuals

• give certain customers access to special prices

way buyer and seller can discriminate against each other

negotiate prices in online auctions and exchanges or in person

how small companies price

the boss sets the prices

how large companies price

through pricing departments, top management, or finance departments.

based on how consumers perceive prices and what they consider the current actual price to be.

purchase decisions

consumers compare an observed price to an internal reference price they remember or an external frame of reference e.g., SRP

Reference price

consumers use price as an indicator of quality

price-quality inferences

When information about the ____ is unavailable, price acts as a signal of quality.

quality

many sellers believe prices should end in an odd number.

price endings

steps in setting the price

• selecting price objective

• determine demand

• estimate costs

• competitor analysis

• price method

• selecting the final price

the company first decides where it wants to position its market offering.

Setting pricing objectives

Five Major Pricing Objectives

• survival

• Maximum current profit

• maximum market share

• maximum market skimming

• product-quality leadership

short-run pricing objective for firms to deal with overcapacity, intense competition, and changing customer wants.

Survival

pricing objective where they estimate the demand and costs associated with alternative prices and choose the price that produces [redacted], cash flow, or rate of return on investment.

Maximum current profit

pricing objective wherein they set the lowest price, assuming that the market is price sensitive.

maximum market share

another term for maximum market share

market-penetration pricing

conditions that favor adopting maximum market share

• market is highly price sensitive

• production and distribution costs fall with acuumulated production experience.

• low price discourages competition

pricing objective wherein they price high then slowly drop over time

maximum market skimming

pricing objective wherein they offer brands that are affordable luxuries.

product-quality leadership

pricing objective wherein they provide quality product at a cost lower than expected.

Partial cost recovery

each price will lead to a different level of demand and have a different impact on a company’s marketing objectives.

Determine demand

a measurement of how much the price of goods and services affects customers' willingness to buy them.

Price sensitivity

customers are less sensitive to ____ items or items they buy ___.

low-cost; infrequently.

the purchase price of an asset plus the costs of operation.

total cost of ownership (TCO)

different methods to measure demand curves

• surveys

• price experiments

• statistical analysis

can explore how many units consumers would buy at different proposed prices.

surveys

can vary the prices of different products in a store or charge different prices for the same product in similar territories to see how the change affects sales.

price experiments

can reveal the relationship of past prices, quantities sold, and other factors.

statistical analysis

data over time

longitudinal data

data from different locations at the same time.

cross-sectional

demand changes considerably

elastic demand

demand hardly changes

inelastic demand

the higher the price,______.

the lower the demand

a range of prices within which price changes have little or no impact on customers’ willingness to make a purchase.

price indifference band

the company wants to charge a price that covers its cost of producing, distributing, and selling the product.

estimate costs

sets the price ceiling

demand

sets the price floor

costs

1. Demand

2. Price Ceiling

3. Price Floor

4. Price

5. Profit

6. Costs

types of cost

• fixed costs

• variable costs

• total costs

• average costs

overhead

fixed costs

costs that do not vary with production levels or sales revenue

fixed costs

rent is an example of what cost?

fixed costs

vary directly with the level of production.

variable costs

raw materials is an example of what cost?

variable costs

fixed costs + variable costs

total costs

Total costs formula

Fixed costs + variable costs

cost per unit at that level of production

average costs

total costs / production

average costs

average costs formula

total costs / production

the gain a company experiences in producing a product over a period of time

accumulated production

the decline in the average costs with accumulated production experience

experience curve/learning curve

the pricing of a product at a lower than average-cost level on the basis that costs will decrease as production experience increases.

experience curve pricing

examining each cost element and bringing down costs so the final costs projection are in the target range.

target costing

analyzing competitors’ costs, prices, and potential price reactions

Competitor Analysis

three major considerations in price setting

• costs

• competitors

• customers

their prices provide an orienting point

competitors

their assessment of unique features establishes the price ceiling.

customers

1. High price

2. ceiling price

3. customers’ assessment

4. orienting point

5. competitors’ prices

6. costs

7. price floor

8. low price

Price Setting methods

• markup pricing

• target-return pricing

• perceived-value pricing

• value pricing

• going-rate pricing

• auction-type pricing

does not take into account the current demand, perceived value, or competition.

markup pricing

the most elementary pricing method

markup pricing

formula of unit cost

Unit cost = (variable cost) + [(fixed cost) / (unit sales)]

formula of markup pricing

(unit cost) / (1 - desired return on sales)

the firm determines the price that yields its target rate of return on investment.

target-return pricing

pricing method often used by public utilities.

target-return pricing

formula of target-return price

[unit cost] + [(desired return x invested capital) / unit sales ]

the amount of your production that you will need to produce and sell to cover total costs of production.

break-even volume

formula of break-even volume

fixed cost / (price - variable cost)

customer’s perceived value is determined by the buyer’s image of the ____.

• product performance

• channel deliverables

• warranty quality

• customer support

• supplier’s reputation

companies must deliver the value promised by their value proposition, and the customer must perceive this value.

Perceived-value pricing

a matter of reengineering the company’s operations to become a low-cost producer without sacrificing quality to attract a large number of value-conscious customers.

value pricing

an important type of value pricing where they charge constant low price with little or no price promotions and special sales.

Everyday Low Pricing

charges higher prices on an everyday basis but runs frequent promotions with prices temporarily lower than the EDLP level.

high-low pricing

the firm bases its price largely on comeptitor’s prices.

Going-rate pricing

pricing through auctions and bids

auction-type pricing

a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder.

auction

an offer to pay a particular amount of money for something that is being sold.

bid

three major types of auctions

• English auctions

• dutch auctions

• sealed-bid auctions

ascending bids; highest bidder gets the item

English auctions

1 seller : many buyers

english auctions

descending bids; buyer announces something they want to buy, then potential sellers compete to offer the lowest price.

dutch auctions

one buyer : many sellers

dutch auctions

lets would-be suppliers submit only one bid and they cannot know the other bids.

sealed-bid auctions

the company must consider additional factors like the impact of other marketing activities, company pricing policies, gain-and-risk sharing pricing, and the impact of price on other parties.

Select final price

the final price must take into account the brand’s quality and advertising relative to the competition.

impact of Other marketing activities

the price must be consistent with company pricing policies.

company pricing policies

buyers may resist accpeting a seller’s proposal because of a high-perceived level of risk.

gain-and-risk-sharing pricing

how will distributors and dealers feel about the contemplated price?

Impact of price on other parties

Price-Adaptation Strategies

• geographical pricing

• price discounts and allowances

• promotional pricing

• differential pricing

the company decides how to price its products to different customers in different locations and countries.

geographical pricing

offering other items in payment

countertrade

different forms of countertrade

• barter

• compensation deal

• buyback arrangement

• offset

buyer and seller directly exchange goods; no money; no third party involved.

barter