F) To price intelligently, management needs to know how its costs vary with different
levels of production.
Accumulated Production
The decline in the average cost with accumulated production experience is called the
experience curve or learning curve.
A) Experience–curve pricing carries major risks.
1) Aggressive pricing might give the product a cheap image.
including marketing costs, can be improved on.
Target Costing
Costs change with production scale and experience. They can also change as a result of a
concentrated effort to reduce them through target costing.
A) The objective is to bring the final cost projections into the target cost range.
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.
A) The firm should first consider the nearest competitor’s price.
B) The introduction of any price or the change of any existing price can provoke a
Step 5: Selecting a Pricing Method
Given the customers’ demand schedule, the cost function, and competitors’ prices, the
company is now ready to select a price.
A) Costs set the floor to the price.
Markup Pricing
A) The most elementary pricing method is to add a standard markup to the product’s cost.
B) Does the use of standard markups make logical sense?
1) Generally, no. Any pricing method that ignores current demand, perceived value,
and competition is not likely to lead to the optimal price.
Target-Return Pricing
A) In target-return pricing, the firm determines the price that would yield its target
rate of return on investments (ROI).
B) Target-return pricing tends to ignore price elasticity and competitors’ prices.
Perceived-Value Pricing
An increasing number of companies base their price on the customer’s perceived value. They
A) Perceived value is made up of several characteristics:
1) Buyer’s image of the product performance
2) Channel deliverables
The key to perceived-value pricing is to deliver more value than the competitor and to
demonstrate this to prospective buyers.
Value Pricing
In recent years, several companies have adopted value pricing: they win loyal customers by
charging a fairly low price for a high-quality offering.
A) Value pricing is not a matter of simply setting lower prices.
1) Deep discounts (EDLP) can lead to lower perceived prices by consumers over
time than frequent shallow discounts (high-low) even if the actual averages are the
same.
I) Some retailers have even based their entire marketing strategy around what could be
called extreme everyday low pricing.
Going-Rate Pricing
In going–rate pricing, the firm bases its price largely on competitor’s prices.
A) The firm might charge the same, more, or less than major competitor(s).
Auction-type pricing
A) Auction-type pricing is growing more popular, especially with the growth of the
Internet.
B) There are three types of auction-type pricing:
1) English auctions (ascending bids)
Step 6: Selecting the Final Price
Pricing methods narrow the range from which the company must select its final price. In
Impact of Other Marketing Activities
The final price must take into account the brand’s quality and advertising relative to the
competition.
Marketing Insight: Stealth price increase
Companies trying to figure out how to increase revenue without really increasing prices
are increasingly charging additional fees for what had once been free features/services.
Company Pricing Policies
The price must be consistent with company pricing policies.
A) Many companies set up a pricing department to develop policies and establish or
approve pricing decisions.
Gain–and-Risk Sharing Pricing
Buyers may resist accepting a seller’s proposal because of a high–perceived level of risk.
A) The seller has the option of offering to absorb part or all of the risk if he does not
deliver the full promised value.
Impact of Price on Other Parties
Management must also consider the reactions of other parties to the contemplated price:
A) How will distributors and dealers feel about it?
ADAPTING THE PRICE
Companies usually do not set a single price but rather develop a pricing structure that reflects
variations in geographical demand and costs, market-segment requirements, purchase timing,
order levels, delivery frequency, guarantees, service contracts, and other factors.
Geographical Pricing (Cash, Countertrade, Barter)
A) In geographical pricing, the company decides how to price its products to different
customers in different locations and countries.
C) Barter. The buyer and seller directly exchange goods, with no money and no third
party involved.
D) Compensation deal. The seller receives some percentage of the payment in cash and
the rest in products. A British aircraft manufacturer sold planes to Brazil for 70% cash
and the rest in coffee.
Price Discounts and Allowances
Most companies will adjust their list price and give discounts and allowances for early
payment, volume purchases, and off-season buying (see Table 14.5). Companies must do this
carefully or find their profits much lower than planned.
A) Discount pricing has become the modus operandi of a surprising number of
companies offering both products and services.
Promotional Pricing
Companies can use several pricing techniques to stimulate early purchase:
A) Loss-leader pricing
B) Special-event pricing
Differentiated Pricing
Companies often adjust their basic price to accommodate differences in customers, products,
locations, and so on.
A) 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) In first-degree price discrimination, the seller charges a separate price to each
customer depending on the intensity of his or her demand.
B) Yield pricing, and yield management systems are used to offer discounts based upon
some criteria.
C) The phenomenon of offering different pricing schedules to different consumers is
exploding.
D) Research shows that constant price variations work best in situations where there is no
bond between buyer and seller.
E) The tactic most companies favor, however, is to use variable prices as a reward rather
than a penalty.
INITIATING AND RESPONDING TO PRICE CHANGES
Companies often face situations when they may need to cut or raise prices.
Initiating Price Cuts
Several circumstances might lead a firm to cut prices:
A) Excess plant capacity
B) Companies may initiate a price cut in a drive to dominate the market through lower
costs.
Initiating Price Increases
A successful price increase can raise profits considerably.
A) A major circumstance provoking price increases is cost inflation.
1) Rising costs unmatched by productivity gains squeeze profit margins and lead
companies to regular rounds of price increases.
B) Companies often raise their prices by more than the cost increase in anticipation of
further inflation or governmental price controls, in a practice called anticipatory
pricing.
C) Another factor leading to price increase is over-demand.
1) The price can be increased in the following ways:
a. Delayed quotation pricing
F) Several techniques help consumers avoid sticker shock and a hostile reaction when
prices rise:
1. Sense of fairness must surround any price increase.
2. Customers must be given advance notice so that they can do forward buying or
shop around.
Given strong consumer resistance, marketers go to great lengths to find alternate
approaches that avoid increasing prices when they otherwise would have done so. Here
are a few popular ones.
1. Shrinking the amount of product instead of raising the price. (Hershey Foods
maintained its candy bar price but trimmed its size. Nestlé maintained its size but
raised the price.)
2. Substituting less-expensive materials or ingredients. (Many candy bar companies
substituted synthetic chocolate for real chocolate to fight cocoa price increases.)
Responding to Competitor’s Price Changes
How should a firm respond to a price cut initiated by a competitor? The best response
varies with the situation.
A) One way is to assume that the competitor reacts in a set way to price changes.
1) If not it will have to meet the price reduction.
D) In non–homogeneous product markets, the firm has more latitude. It needs to consider
the following:
1. Why did the competitor change the price?
2. Does the competitor plan to make the price change temporary or permanent?
E) Market leaders frequently face aggressive price cutting by smaller firms trying to build
market share.
F) The brand leader can respond in several ways:
1. Maintain price
2. Maintain price and add value
G) The company has to consider the product’s:
1. Stage in the life cycle
2. Importance in the company’s portfolio
H) An extended analysis of alternatives may not be feasible when the attack occurs.
I) It would make better sense to anticipate possible competitors’ price changes and to
prepare contingent responses.
Marketing Memo: How to fight low-cost rivals
The first approach to competing against cut-price players is to differentiate the product or
