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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 and how should a company initiate a price change?
5. How should a company respond to a competitor’s price change?
CHAPTER SUMMARY
1. Price is the only marketing element that produces revenue; the others produce
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
3. Companies usually set a pricing structure that reflects variations in geographical
4. A price decrease might be brought about by excess plant capacity, declining
6. The firm facing a competitor’s price change must try to understand the
competitor’s intent and the likely duration of the change. A market leader attacked by
C H A P T E R
16
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.
You are in charge of pricing Sonic’s first PDA. Review your SWOT Analysis and
Competition Analysis. Also, think about the markets you are targeting and the
positioning you want to achieve. Then, answer the following questions about pricing:
• What should Sonic’s primary pricing objective be? Why?
• Are PDA customers likely to be price-sensitive? Is demand elastic or inelastic?
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
Many consumers use price as an indicator or quality. As a group assignment, students
should choose a product produced by a firm. Subsequently, the students should conduct a
small research project (utilizing the material learned from Chapter 4) and either, confirm,
or deny this relationship for the chosen product. For example, do more women or men
rely on price as an indicator of quality for product X? If there is a difference, what is the
quantifiable difference in terms of marketing research data? Does this difference suggest
that marketers must or can revise, or revamp price clues to reach their target market?
Table 16.1 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?
Table 16.3 lists nine factors that the authors contend leads to less price sensitivity in
consumers. Choose a product that is available online and in stores (books or tires, for
example) and ask the students to research the various pricings choices available online.
After collecting this data, ask the students to comment on whether or not, the variety of
price points found lowers their price sensitivity?
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
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.
Take a position: Prices should reflect the value that consumers are willing to pay versus prices
should primarily just reflect the cost involved in making a product or service.
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
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
or (2) to employ slightly higher prices most of the year, but slightly lower discounted prices or
specials for certain occasions.
Student answers will differ. However, the following notation from research is worth re-
enforcing during the class discussions.
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
3. Discuss Donahoe’s vision for eBay. Is moving away from online auctions sustainable
for the company?
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 or other airlines mimic its business model?
Suggested Answer: The risks to Southwest’s strategy are in a number of areas.
DETAILED CHAPTER OUTLINE
Opening vignette: Price is the one element of the marketing mix that produces revenue;
the other elements produce costs. Price also communicates the company’s intended value
positioning of its product or brand. A well-designed and marketed product can still
command a price premium and reap big profits. But new economic realities have caused
many consumers to reevaluate what they are willing to pay for products and services, and
companies have had to carefully review their pricing strategies as a result.
Pricing decisions are complex and must take into account many factors—the company,
the customers, the competition, and the marketing environment. Holistic marketers know
their pricing decisions must also be consistent with the firm’s marketing strategy and its
target markets and brand positions.
I. Understanding Pricing
A. Price comes in many forms and performs many functions.
B. Price also has many components.
C. Pricing in a Digital World
i. Price has operated as a major determinant of buyer choice.
1. Consumers and purchasing agents who have access to price
2. Retailers put pressure on manufacturers to lower their prices.
3. The result can be a marketplace characterized by heavy
discounting and sales promotion.
environment.
iii. Buyers can:
2. Check prices at the point of purchase
4. Get products free
iv. Sellers can:
2. Give certain customers access to special prices.
v. Both buyers and sellers can negotiate prices in online auctions and
exchanges or even in person.
D. A Changing Pricing Environment is a result of the recession and the resource
constrained Millennial cohort.
i. Result = sharing economy in which consumers share bikes, cars,
clothes, couches, apartments, tools, and skills and extracting more
E. How Companies Price
i. Bosses or top management sets general pricing objectives and policies
and often approves lower management’s proposals.
ii. Many companies do not handle pricing well and fall back on
“strategies” such as: “We calculate our costs and add our industry’s
traditional margins.”
iii. Other common mistakes are not revising price often enough to
capitalize on market changes; setting price independently of the rest of
the marketing program rather than as an intrinsic element of market-
F. Consumer Psychology and Pricing
i. Consumers often actively process price information, interpreting it
from the context of prior purchasing experience, formal
ii. Purchase decisions are based on how consumers perceive prices and
iii. Understanding how consumers arrive at their perceptions of prices is
an important marketing priority.
II. Reference Prices
A. Few consumers can accurately recall specific prices
B. Consumers often employ reference prices, comparing an observed price to an
internal reference price they remember or an external frame of reference such
as a posted “regular retail price.”
i. “Fair Price” (what consumers feel the product should cost)
ii. Typical Price
iii. Last Price Paid
iv. Upper-Bound Price (reservation price or the maximum most
consumers would pay)
III. Price-Quality Inferences
A. Many consumers use price as an indicator of quality.
i. Image pricing is especially effective with ego-sensitive products such
as perfumes, expensive cars, and designer clothing.
ii. When information about true quality is available, price becomes a less
significant indicator of quality.
B. Exclusivity and scarcity can also affect quality inferences
IV. Price Endings
A. Consumers tend to process prices “left to right” rather than by rounding
B. Another explanation for the popularity of “9” endings is that they suggest a
time, prices vary seasonally, or quality or sizes vary across stores.
V. Setting the Price
A. The firm must decide where to position its product on quality and price.
B. Having a range of price points allows a firm to cover more of the market and
to give any one consumer more choices.
D. Steps in Setting a Pricing Policy: Step One—Selecting the Pricing Objective
i. Five major objectives are: survival, maximum current profit,
maximum market share, maximum market skimming, and product-
quality leadership.
ii. Companies pursue survival as their major objective if they are plagued
with overcapacity, intense competition, or changing consumer wants.
iii. Many companies try to set a price that will maximize current profits.
iv. Some companies want to maximize their market share/use market-
1. The market is highly price sensitive and a low price stimulates
market growth
3. Low price discourages actual and potential competition.
v. Companies unveiling a new technology favor setting high prices to
maximize market skimming (prices start high and slowly drop over
time).
1. Fatal if a worthy competitor decides to price low.
2. Consumers who buy early at the highest prices may be
4. The unit costs of producing a small volume are high enough to
cancel the advantage of charging what the traffic will bear
6. The high price communicates the image of a superior product.
vi. A company might aim to be the product-quality leader in the market
vii. Nonprofit and public organizations may have other pricing objectives.
E. Steps in Setting a Pricing Policy: Step Two—Determining Demand
i. Each price will lead to a different level of demand and have a different
impact on a company’s marketing objectives.
ii. The normally inverse relationship between price and demand is
captured in a demand curve: The higher the price, the lower the
demand.
iii. The first step in estimating demand is to understand what affects price
sensitivity.
1. Generally speaking, customers are less price sensitive to low-
cost items or items they buy infrequently.
2. They are also less price sensitive when (1) there are few or no
iv. A seller can successfully charge a higher price than competitors if it
can convince customers that it offers the lowest total cost of ownership
(TCO).
v. Factors that Reduce Price Sensitivity
1. Distinctive product, low awareness of substitutes, hard to
2. Product used in conjunction with assets previous bought, more
quality, prestige and exclusiveness assumed, buyers cannot
store the product.
vi. Most companies attempt to measure their demand curves using several
different methods.
2. Price experiments can vary the prices of different products in a
3. Statistical analysis of past prices, quantities sold, and other
factors can reveal their relationships.
vii. Marketers need to know how responsive, or elastic, demand is to a
change in price.
2. If demand changes considerably, it is elastic.
4. Long-run price elasticity may differ from short-run elasticity.
F. Steps in Setting a Pricing Policy: Step Three—Estimating Costs
1. Fixed costs, or overhead, are costs that do not vary with
production level or sales revenue.
2. Variable costs vary directly with the level of production.
iii. Accumulated production reduces costs; the experience curve or
learning curve improves processes
iv. Aggressive pricing might give the product a cheap image or assume
G. Steps in Setting a Pricing Policy: Step Four—Analyzing Competitors’ Costs,
Prices and Offers
i. If the competitor’s offer contains some features not offered by the
firm, the firm should subtract their value from its own price.
ii. Companies offering the powerful combination of low price and high
quality are capturing the hearts and wallets of consumers all over the
world
H. Steps in Setting a Pricing Policy: Step Five—Selecting a Pricing Method
i. Costs set a floor to the price.
ii. Competitors’ prices and the price of substitutes provide an orienting
point.
VI. Adapting the Price
A. Companies 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.
B. As a result of discounts, allowances, and promotional support, a company
D. 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.
i. In first-degree price discrimination, the seller charges a separate price
to each customer depending on the intensity of his or her demand.
ii. In second-degree price discrimination, the seller charges less to buyers
of larger volumes.
iii. In third-degree price discrimination, the seller charges different
amounts to different classes of buyers
2. Product-form pricing
4. Channel pricing
6. Time pricing
iv. Yield pricing offers discounted but limited early purchases, higher-
priced late purchases, and the lowest rates on unsold inventory just
before it expires.
v. Constant price variation can be tricky, however, where consumer
relationships are concerned.
VII. Initiating and Responding to Price Changes
A. Initiating Price Cuts
a. One is excess plant capacity: The firm needs additional business and
cannot generate it through increased sales effort, product improvement, or
B. A price-cutting strategy can lead to other possible traps:
a. Low-quality trap. Consumers assume quality is low.
b. 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.
C. Initiating Price Increases
a. A successful price increase can raise profits considerably.
b. Cost inflation and overdemand can provoke price increases.
c. Delayed quotation pricing. The company does not set a final price until the
product is finished or delivered.
D. Anticipating Competitive Responses
a. Introduction or change of any price can provoke a response from
customers, competitors, distributors, suppliers, and even government.
b. Competitors are most likely to react when the number of firms is few, the
product is homogeneous, and buyers are highly informed.
E. Responding to Competitors’ Price Changes
a. Why did the competitor change the price? To steal the market, to utilize
excess capacity, to meet changing cost conditions, or to lead an industry-
wide price change?
b. Does the competitor plan to make the price change temporary or
permanent?
c. What will happen to the company’s market share and profits if it does not
respond? Are other companies going to respond?
d. What are the competitors’ and other firms’ likely responses to each
possible reaction?
