LEARNING OBJECTIVES
In this chapter, we will address the following questions:
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 should a company initiate a price change?
5. How should a company respond to a competitor’s price change?
CHAPTER SUMMARY
1) Despite the increased role of nonprice factors in modern marketing, price remains a
2) In setting pricing policy, a company follows a six-step procedure. It selects its pricing
objective. It estimates the demand curve, the probable quantities it will sell at each
3) Companies do not usually set a single price, but rather a pricing structure that reflects
4) Firms often need to change prices. A price decrease might be brought about by excess
5) Companies must anticipate competitor price changes and prepare a contingent
6) The firm facing a competitor’s price change must try to understand the competitor’s
C H A P T E R
14
DEVELOPING PRICING
STRATEGIES AND
PROGRAMS
OPENING THOUGHT
Students should have a good understanding of “price” in their role as consumers. The
instructor is encouraged to expand the student’s definition of “a price” by using examples
of different pricing structures (cell phone plans for example), promotional pricing,
geographical pricing, and price discrimination.
TEACHING STRATEGY AND CLASS ORGANIZATION
PROJECTS
1. At this point in the semester-long marketing plan project, students should be prepared
2. Consumer perceptions of prices are also affected by alternative pricing strategies.
Marriott Hotels, for example, has different brands for differing price points. Building
upon the Marriott example, students are to scan the environment to find examples of a
3. Sonic PDA Marketing Plan: Pricing is a critical element in any company’s marketing
plan, because it directly affects revenue and profit goals. Effective pricing strategies
must consider costs as well as customer perceptions and competitor reactions,
especially in highly competitive markets.
ASSIGNMENTS
Marketers recognize that consumers often actively process price information, interpreting
prices in terms of their knowledge from prior purchasing experience, formal
communications, informal communications, point-of-purchase, or online resources.
Purchase decisions are based on how consumers perceive prices and what they consider
to be the current actual price—not the marketer’s stated price. In small groups, ask the
Katherine Heires in Business Week 2.0, October 2006, wrote “Why it Pays to Give Away
the Store.” Either in small groups or individually, have the students read Ms. Heires
article and comment on the validity/invalidity of these nine suggestions as being
applicable to key service companies.
Table 14.1 lists some possible consumer reference prices and students should comment
on whether or not these consumer reference prices are applicable today. Is this list
inclusive or are there new reference points caused by the increased use of such Web sites
like eBay or Craigslist?
For many firms pricing is the domain of the financial disciplines in the company. Using
accepted accounting and financial processes, some companies’ price strictly according to
these models. Assign students the assumed role of “defenders” of this practice and others
as “innovators,” challenging these models and supporting some of the newer pricing
models such as “perceived” and “value” pricing for products. Have the students come
prepared to defend their positions using the concepts developed in this chapter.
still valid today? If not, why or what has caused them to change?
END-OF-CHAPTER SUPPORT
MARKETING DEBATE—Is the Right Price a Fair Price?
Prices are often set to satisfy demand or to reflect the premium that consumers are willing to
pay for a product or service. Some critics shudder, however, at the thought of $2 bottles of
water, $150 running shoes, and $500 concert tickets.
equilibrium with the consumers’ definition of value.
Con: Marketers have an obligation to the consumers to produce products (or services) that
meet consumer needs at the lowest price possible. Fair pricing does not assign any consumer
“value” definition into its equation and it should not because each consumer will have
differing definitions of “value” according to their prejudices. When marketers try to “assign” a
“value definition” to its product, it runs the risks of alienating current customers and missing
other potential customers. Therefore, assigning a “fair” price, composed of actual costs plus
fair margins, allows the marketer to maximize its customer bases.
MARKETING DISCUSSION
Think of the pricing methods described in this chapter—markup pricing, target-return pricing,
perceived value pricing, value pricing, going rate pricing, and auction-type pricing. As a
consumer which method do you personally prefer to deal with. Why? If the average price
were to stay the same, which would you prefer: (1) for firms to set one price and not deviate,
Marketing Excellence: EBAY
1) Why has eBay succeeded as an online auction marketplace while so many
others have failed?
Suggested Answer: eBay’s success truly created a pricing revolution by allowing buyers
to determine what they would pay for an item; the result pleases both sides because
2) Evaluate eBay’s fee structure. Is it optimal or could it be improved? Why?
How?
Suggested Answer: eBay’s pricing structure was developed to attract high-volume sellers
and deter those who list only a few low-priced items. With eBay’s expansion into a wide
3) What’s next for eBay? How does it continue to grow when it needs both buyers
and sellers? Where will this growth come from?
Suggested Answer: Students answers will vary. Some might suggest that eBay will
Marketing Excellence: SOUTHWEST AIRLINES
1) Southwest has mastered the low-price model and has the financial results to
prove it. Why don’t the other airlines copy Southwest’s model?
Suggested Answer: Southwest’s business model is based on streamlining its operations,
and is an integrated part of the corporate philosophy and structure of the company. Other
2) What risks does Southwest face? Can it continue to thrive as a low cost airline
when tough economic times hit?
Suggested Answer: The risks to Southwest’s strategy are in a number of areas.
DETAILED CHAPTER OUTLINE
Price is the one element of the marketing mix that produces revenue; the other elements
produce costs. Prices are perhaps the easiest element of the marketing program to adjust;
product features, channels, and even promotion take more time. Price also communicates to
the market the company’s intended value positioning of its product or brand. A well-designed
UNDERSTANDING PRICING
Price is not just a number on a tag or an item. Price comes in many forms and performs
many functions.
A) Throughout most of history prices were set by negotiation between buyers and sellers.
A Changing Pricing Environment
Pricing practices have changed significantly.
Downward price pressure from a changing economic environment coincided with some
longer-term trends in the technological environment. For some years now, the Internet
has been changing how buyers and sellers interact. Here are some ways:
1. Get instant price comparisons from thousands of vendors.
2. Name their price and have it met.
Marketing Insight: Giving it all away
Giving away products free via sampling has been a successful marketing tactic for years;
today with the advent of the Internet software, product and service companies are
following suit. Ryanair is an example.
How Companies Price
Companies do their pricing in a variety of ways.
A) In small companies, prices are often set by the boss.
Consumer Psychology and Pricing
Marketers recognize that consumers often actively process price information, interpreting
prices in terms of their knowledge from prior purchasing experiences, formal
communications, and point-of-purchase or online resources.
A) Purchase decisions are based on how consumers perceive prices.
B) What they consider the current actual price—not the marketer’s stated price.
Reference Prices
When examining products, consumers often employ reference prices.
A) In considering an observed price, consumers often compare it to an internal reference
price (pricing from memory).
B) An external frame of reference (posted “regular retail price”).
C) All types of reference prices are possible.
a. “fair price”
b. Typical price
D) When consumers evoke one or more of these frames of reference, their perceived
price can vary from the stated price.
1) These “unpleasant surprises”—when perceived price is lower than the stated
Price-Quality Inferences
A) Many consumers use price as an indicator of quality.
B) Some companies adopt exclusivity and scarcity to justify premium prices.
Price Endings
A) Many sellers believe that prices should end in an odd number.
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 geographic area, and
when it enters bids on new contract work.
A) The firm must decide where to position its product on quality and price.
Step 1: Selecting the Pricing Objective
The company first decides where it wants to position its market offering. The clearer a
firm’s objectives, the easier it is to set price. The five major objectives are: survival,
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 that a higher sales
Product-Quality Leadership
A company might aim to be the product-quality leader in the market.
A) 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 consumer’s reach.
Other Objectives
Nonprofit and public organizations may have other pricing objectives. Whatever the
Step 2: Determining Demand
Each price will lead to a different level of demand and therefore have a different impact
on a company’s marketing objectives.
A) The normally inverse relationship between price and demand is captured in a
demand curve.
Price Sensitivity
The demand curve shows the market’s probable purchase quantity at alternative prices.
The first step in estimating demand is to understand what affects price sensitivity.
A) Generally speaking, customers are most price-sensitive to products that cost a lot or
are bought frequently.
Estimating Demand Curves
Most companies attempt to measure their demand curves using several different methods.
A) Surveys can explore how many units consumers would buy at different proposed
prices.
Price Elasticity of Demand
Marketers need to know how responsive or elastic, demand would be to a change in
price.
A) The higher the elasticity, the greater the volume growth resulting from a 1% price
reduction. If demand is elastic, sellers will consider lowering the price.
Step 3: Estimating Costs
Demand sets a ceiling on the price the company can charge for its product. Costs set the
floor.
Types of Costs and Levels of Production
A company’s costs take two forms, fixed and variable.
A) Fixed costs (also known as overhead) are costs that do not vary with production or
sales revenue.