Chapter 12 – Developing Pricing Strategies and Programs
I Chapter Overview/Objectives/Outline
A. Overview
Price has become one of the more important marketing variables. Despite the increased role of
non-price factors in the modern marketing process, price is a critical marketing element,
especially in markets characterized by monopolistic competition or oligopoly. Competition and
more sophisticated buyers have forced many retailers to lower prices and in turn place pressure
on manufacturers. Further, there has been increasing buyer awareness of costs and pricing, and
growing competition within the channels, which in turn provides the consumer with even more
awareness of the pricing process.
In setting the price of a product, the company should follow a six-step procedure. First, the
company carefully establishes its marketing objective(s), such as survival, maximum current
profit, maximum current revenue, maximum sales growth, maximum market skimming or
product-quality leadership. Second, the company determines the demand schedule, which
shows the probable quantity purchased per period at alternative price levels. The more inelastic
the demand, the higher the company can set its price. Third, the company estimates how its
costs vary at different output levels, production levels, different marketing strategies, differing
marketing offers, and target costing based on market research. Fourth, the company examines
competitors’’ prices as a basis for positioning its own price. Fifth, the company selects one of
and government.
Companies will adapt the price to varying conditions in the marketplace. Geographical
pricing is one marketplace adjustment based on a company decision related to pricing distant
customers. Price discounts and allowances are a second area for adjustment where the
company establishes cash discounts, quantity discounts, functional discounts, seasonal
products in a product line, as well as differential pricing for optional features, captive products,
byproducts, and product bundles.
When a firm considers initiating a price change, it must carefully consider customer and
competitor reactions. Customer reactions are influenced by the meaning customers see in the
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The firm encountering a competitor-initiated price change must attempt to understand the
competitor’s intent and the likely duration of the change. If swiftness of reaction is desirable,
the firm should preplan its reactions to different possible competitor price actions.
To summarize, pricing involves the customer demand schedule, the cost function, and
Cost-Based Pricing Decisions
Marginal analysis and break-even analysis are the two primary methods in cost-based pricing
decisions.
Demand-Based Pricing Decisions –
Among the variables here the type of demand for the product (prestige, price-oriented, etc.),
Competition-based pricing decisions –
To set prices effectively, an organization must be aware of the prices charged by competitors.
Among the major questions here are: Will all competitors raise their prices by
the same percentage? Will competitors react to cost increases more slowly to try
to increase their market share? Will some competitors try to absorb much of the
cost increases to induce brand switching?
B. Learning Objectives
C. Chapter Outline
I. Introduction – Developing the point that price and pricing are increasingly important in
the marketing mix and process. The issue that it communicates much about the firm’s
intended value positioning. There are many emerging issues related to price-cutting,
channel pricing, international pricing and pricing improved products. Opening vignette
crisis.
II. Understanding Pricing
A. A Changing pricing environment –
1. The Internet has provided buyers with the power to discriminate between
acquire products for free.
2. Sellers also leverage the Internet to discriminate on pricing as buyers are
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behavior and use it as part of their pricing strategy. Sellers also utilize
auctions and exchanges.
3. The recent recession has generated a renewed environment as
products.
4. Another challenge is how to compete with free products. Refer to the
insert “Marketing Skills: Giving it away” in this chapter.
B. How companies price
1. Size of organization influences who sets the price (i.e., owner sets in
executive management direction
2. Industry dynamics influence structure of pricing department
3. Effective pricing requires a thorough understanding of consumer pricing
psychology.
C. Consumer psychology and pricing – consumer purchase decisions are based on
how they perceive price and what they consider to be the current actual price
1. Reference prices – compare price to an:
a) Internal reference price (pricing information from memory)
b) External reference (e.g., a posted “regular retail price”)
2. Price-quality references
car)
c) Alternative information about quality may reduce significance of
price as a quality indicator
3. Price endings
a) “9s” i.e., consumers tend to view process left-to-right rather than
the odd-ending tactic
III. Setting the Price – Firms set price for the first time when developing new products,
A. Step 1: Selecting the Pricing Objective
1. Survival – short term strategy to overcome overcapacity, intense
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2. Maximize Current Profit, cash flow or return on investment
3. Maximum Market Share (market-penetration pricing) – Assuming high
dramatic increase in volume.
4. Market Skimming – appeals to high-end market segments, early adopter
strategy when:
a) A sufficient number of buyers have a high current demand
d) High price communicates the image of a superior product
5. Product-Quality Leadership – premium quality connotes premium price
6. Other Pricing Objectives usually adopted by non-profit and public
organizations – cost recovery (partial or full) and social pricing
B. Step 2: Determining Demand – each price leads to a different level of demand
and has a different impact on a company’s marketing objectives
1. Price Sensitivity – Table 12.1 lists some characteristics associated with
decreased price sensitivity
a) Customers are less sensitive to low-cost items or items purchased
infrequently
b) Seller can charge a higher price than competitors if customers
are convinced it offers a lower total cost of ownership (TCO)
c) Internet has potential to increase price sensitivity but must also
target non-price-sensitive consumers as well as to not leave
“money on the table”
2. Estimating Demand Curves – several different methods of measurements
a) Conduct surveys – information somewhat subjective
b) Experiment by changing prices for same product without
alienating consumers or violating regulatory requirements
c) Statistically analyze past prices, quantities sold and other factors
to gain understanding of price/demand relationships
3. Price elasticity of demand (refer to table 12.1 for example of factors
leading to Price sensitivity)
a) Determination of the affect of a change in price on overall
demand
b) If demand changes considerably with a change in price, it is
elastic. If demand does not change significantly or in parallel
with the price, it is inelastic
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suppliers.
C. Step 3: Estimating Costs
1. Types of Costs and Levels of Production – fixed, variable, total, and
average costs
a) To price intelligently, companies need to know its costs with
different levels of production
2. Accumulated Production –
a) Average cost falls with accumulated production experience also
referred to as experience curve or learning curve
b) Experience-curve pricing can be risky because aggressive pricing
might create a cheap image
current technology obsolete
3. Target costing – determine price that must be charged according to
market research
D. Step 4: Analyzing Competitors’ Costs, Prices, and Offers (evaluate from
customer perspective, compare, value and reaction)
sales. Figure 12.3 contains a break-even chart.
3. Perceived value pricing – based on buyer perceptions. Many firms are
now adopting this approach. Table 12.2 shows key considerations in
developing value-based pricing.
confidence in everyday shelf prices.
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b) High-low pricing – Charge higher prices on an everyday basis
but run frequent promotions with prices temporarily lower than
the EDLP level.
leader”)
6. Auction-type pricing growing in more popularity. Must qualify supplier
pool before using price/cost as major decision variable in B2B
situations.
a) English auction – ascending bids with one seller and many buyers
b) Dutch auctions (descending bids) – two types
uses this method frequently to secure goods and services.
F. Step 6: Selecting the Final Price
The influence of other marketing activities – brand’s quality and
advertising relative to the competition (know brands with high quality
full promised value
4. Impact of price on other parties – distributors, sales force, competitors,
suppliers, government, etc.
IV. Adapting the Price
cash
4. Buyback arrangement – sell plant or equipment and receive goods
manufactured with same for partial payment
5. Offset – receive full cash payment but agree to spend much of the cash in
respective geographic area within a specified amount of time
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1. Loss-leader pricing – to stimulate traffic
2. Special event pricing – to draw customers
3. Special customer pricing – special prices to different customer groups,
e.g. brand community
4. Cash rebates – to encourage purchase within a specified time period
5. Low-interest financing – to facilitate purchase
7. Warranties and service contracts – added value
8. Psychological discounting – set an artificially high initial price
D. Differentiated pricing – adjust base price to accommodate differences in
customers, products, locations etc. 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
1. First-degree price discrimination – seller charges a separate price to each
customer depending upon the intensity of his/her demand.
2. Second-degree price discrimination – seller charges less to buyers of
larger volumes
3. Third-degree price discrimination – seller charges different amounts to
different classes of buyers. Examples are :
a) Customer-segment pricing – different prices for different groups
b) Product-form pricing – different versions priced differently
c) Image pricing – same product at two different levels
d) Channel pricing (location pricing) – same product priced
differently at different locations
e) Location pricing – same product is priced differently at different
locations even though the cost of serving the different locations
is the same
f) Time pricing – same product priced differently at different day,
time or season (Yield pricing is an offer of a lower price on
unsold inventory before it expires.)
4. Price discrimination works when:
a) Market is segmental and segments show different intensities of
demand
the higher-price segment
c) Rivals cannot undersell the firm in the higher-price segment
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d) Cost of segmenting and policing the market does not exceed the
extra revenue derived from price discrimination
e) Practice does not breed customer resentment
f) Form of discrimination is not illegal
E. Product-mix pricing
1. Product-line pricing – price steps
V. Initiating and Responding to Price Changes
A. Initiating Price Cuts
1. Excess capacity
2. Drive to dominate the market through lower costs.
3. Price –cutting can lead to possible traps:
a) Customers assume quality is low
sometimes referred to as “transaction buyers”.
c) Higher-priced competitors may match the lower prices but have
longer staying power because of deeper cash reserves
d) A price war may be triggered
B. Initiating Price Increases – reasons may include:
by productivity gains
2. Anticipatory pricing – raise price in anticipation of higher costs or
inflation
3. Over-demand – when a company cannot supply all of its customers it
may use one of these pricing techniques:
times.
b) Escalator clauses – company requires customer to pay today’s
price and all or any part of inflation increase that takes place
before delivery
c) Unbundling – company maintains its price but removes or prices
d) Reduction of discounts
C. Responding to Competitors’ Price Changes
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1. Must take into consideration the following:
a) Product’s life cycle stage
b) Product’s position in the portfolio
c) Competitor’s intentions and resources
d) Market’s price and quality sensitivity
e) Behavior of costs with volume
f) Alternative opportunities
change
VI. Executive Summary
II. Lecture
“Measuring the Impact of Price—How Important is the Pricing
Variable”
concept based on their general knowledge of the companies and products involved in the
lecture/discussion.
Teaching Objectives
To stimulate students to think about the critical issues, pro and con, for a firm when it
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