Developing price strategies
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D.V. Madhusudan RaoDept. MBA,
School of Graduate Studies,Jigjiga University
ETHOPIA
MARKETING MANAGEMENT
Developing Pricing Strategies
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Learning ObjectivesAfter studying this chapter, you should be able to:
1. Describe the major strategies for pricing initiative and new products
2. Explain how companies find a set of prices that maximize the profits from the total product mix
3. Discuss how companies adjust their prices to take into account different types of customers and situations
4. Discuss the key issues related to initiating and responding to price changes
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Pricing Products
• New-Product Pricing Strategies• Product Mix Pricing Strategies• Price Adjustment Strategies• Price Changes
Topic Outline
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Price is the only element in the marketing mix that produces revenue; all other elements represent costs.So Cost =FACT;Price (cost+Margin) =
POLICY
What Is a Price?
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Pricing Puzzle
• Production costs• Indirect costs• Advertising costs• Distribution costs• Manufacturer’s
margin• Distributor’s margin• Seller’s margin
Product performance• Usefulness & Quality
Image / Aspirations• Brand Equity
Availability• Distribution Strategy
Service• Before/During & After
sales
Minimize Optimize Maximize
Costs + Margins = PRICE
VALUE
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Value is a ratio between what customer gets and what he gives
Value = Benefits/Costs
How to increase its Value?•Raise benefits•Reduce costs•Raise benefits and reduce costs•Raise benefits by more than the raise of costs•Lower benefits by less than the reduction of costs
VALUE
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A Secret Pie
• Impact of a 1 % price increase on profits
– Coca-Cola 6,4 %– Nestlé 17,5 %– Ford 26,0 %– Philips 28,7 %
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Synonyms for Price
• Rent• Tuition• Fee• Fare• Rate• Toll• Premium• Honorarium• Wage
• Special assessment• Bribe• Dues• Salary• Interest• Donation• Commission• Tax
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Common Pricing Mistakes• Determine costs and take traditional industry
margins• Failure to revise price to capitalize on market
changes• Setting price independently of the rest of the
marketing mix• Failure to vary price by product item, market
segment, distribution channels, and purchase occasion
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Pricing Puzzle
4 P’s• PRODUCT• PRICE• PLACE• PROMOTION
4 C’s• CUSTOMER VALUE• COST• CONVENIENCE• COMMUNICATION
Seller’s Dilemma
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Pricing Puzzle4 P’s• PRODUCT• PRICE• PLACE• PROMOTION
4 C’s• CUSTOMER VALUE• COST• CONVENIENCE• COMMUNICATION
“ Tomorrow’s winner companies will be those who offer distinct products at comparatively low
market prices ”
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• Physical Differences– Features, performance, durability, conformance,
design, etc…
• Availability Differences– Distribution channels ; Stores, mail-order, internet,
etc…
• Service Differences– Delivery, installation, training, consulting, maintenance,
etc…
• Price Differences– Price positioning (Very high / High / Medium / Low / Very
Low)
• Image Differences– Symbols, atmosphere, events, media, etc…
Key = DifferentiationThe key to drive value is to offer relevant and
distinctive product differentiation
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• Physical Differences– Levi’s Engineered Jeans (Ergonomic construction, durability,
style)
• Availability Differences– Dell Computer’s customized production, Volkswagen “e.lupo”
• Service Differences– Acıbadem Hospital – Mother Care Division, Nissan “5-year
Warranty”
• Image Differences– Audi vs Mercedes, DuPont (Innovation Leader)
Differentiation : Examples
Key = Differentiation
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• Perdue Chicken (USA)– Guaranteed tenderness (30 % market-share, 10 % premium
pricing)
• Flora Drinking Water (Turkey – Sabancı Holding)– Service, packaging, attributes, operation
• Starbuck’s Coffee (USA)– Atmosphere, standard service
Differentiating commodities…
Key = Differentiation
Everything can be differentiated !...
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Pricing Decisions
• INTERNAL FACTORS– Marketing
Objectives• Positioning• Target Group
– Marketing Mix Strategy
• 4 P’s– Costs
• Fixed & Variable– Management
Approach• Responsibility• Perspective
• EXTERNAL FACTORS– Market
• Pure Competition• Monopolistic
Competition• Oligopolistic
Competition• Pure Monopoly
– Demand• Elastic / Inelastic
– Competition• Competitors’ offers• Competitiors’ reactions
– Economy• Buying power
– Government Influence• Laws & Regulations
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Consumer Psychology and Pricing
Reference Prices
Price-quality inferences
Price endings
Price cues
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Table 14.1 Possible Consumer Reference Prices
• “Fair price”• Typical price• Last price paid• Upper-bound price
• Lower-bound price• Competitor prices• Expected future
price• Usual discounted
price
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Price–Quality Inferences: An Image pricing for ego-sensitive products. Eg: Perfumes, cars (over-valued and under-valued)When information about true quality is known, price becomes a less significant indicator of quality. When information is not available, price acts as a signal of quality.
Price endings: Price tags end with 0 and 5 or 9 are commonly seen examples.
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Price Cues
• “Left to right” pricing ($299 vs. $300)• Odd number discount perceptions• Even number value perceptions• Ending prices with 0 or 5• “Sale” written next to price
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20
Steps in Setting the Price
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Pricing Strategies
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Marketing
Objectives
SurvivalLow Prices to Cover Variable Costs
andSome Fixed Costs to Stay in
Business.Current Profit Maximization Choose the Price that Produces the
Maximum Current Profit, Etc.
Market Share LeadershipLow as Possible Prices to Become
the Market Share Leader.
Product Quality LeadershipHigh Prices to Cover Higher
Performance Quality and R & D.
Internal Factors Affecting Pricing Decisions: Marketing Objectives
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Price
Product Design
Distribution
Promotion
NonpricePositions
Internal Factors Affecting Pricing Decisions: Marketing Mix
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Market andDemand
Competitors’ Costs, Prices, and Offers
Other External FactorsEconomic Conditions
Reseller NeedsGovernment Actions
Social Concerns
External Factors Affecting Pricing Decisions
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Market Skimming
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New-Product Pricing Strategies
• Market-skimming pricing• Market-penetration pricing• Intermediate Pricing
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Market SkimmingMarket-skimming pricing is a strategy for setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price, the company make fewer (low volume) but more profitable sales.• Product quality and image must support the price• Buyers must want the product at the price• Costs of producing the product in small volume should not cancel the advantage of higher prices• Competitors should not be able to enter the market easily• Suitable for products that have short life cycles or which will face
competition at some point in the future (e.g. after a patent runs out)
• Examples include: Playstation, jewellery, digital technology, new DVDs, Bic, Biro etc
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• For example when Sony introduced the world first high definition television (HDTV) to the Japanese market , the high tech sets cost 43,000$ . These televisions were purchased only by customers who really wanted the new technology and afford to pay high prices.
Market-skimming pricing
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Penetration Pricing
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Market Penetration Contd..Market-penetration pricing sets a low initial price
in order to penetrate the market quickly and deeply to attract a large number of buyers quickly to gain market share
• Price sensitive market• Production and distribution costs must fail as
sales volume increases.• Low prices must keep competition out of the
market
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• For example ,Dell used penetration pricing to enter the personal computer market, selling high quality computer products through lower cost direct channels.
Market-penetration pricing
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Price-Quality Strategies• Philip Kotler identified 9 price-quality strategies
Premium HighValue
SuperValue
OverCharging
MidValue
GoodValue
Rip-off FalseEconomy Economy
High Quality
Low Quality
High Price Low Price
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Middle Quality
Mid Price
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Product Line PricingSetting Price Steps Between Product Line Items
i.e. $299, $399
Product Line PricingSetting Price Steps Between Product Line Items
i.e. $299, $399
Optional-Product PricingPricing Optional or Accessory Products
Sold With The Main Producti.e. Car Options
Optional-Product PricingPricing Optional or Accessory Products
Sold With The Main Producti.e. Car Options
Captive-Product PricingPricing Products That Must Be Used
With The Main Producti.e. Razor Blades, Film, Software
Captive-Product PricingPricing Products That Must Be Used
With The Main Producti.e. Razor Blades, Film, Software
By-Product PricingPricing Low-Value By-Products To Get Rid
of Themi.e. Lumber Mills, Zoos
By-Product PricingPricing Low-Value By-Products To Get Rid
of Themi.e. Lumber Mills, Zoos
Product-Bundle PricingPricing Bundles Of Products Sold Together
i.e. Season Tickets, Computer Makers
Product-Bundle PricingPricing Bundles Of Products Sold Together
i.e. Season Tickets, Computer Makers
Product Mix Pricing Strategies
ProductMix
PricingStrategies
ProductMix
PricingStrategies
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Product line pricingProduct line pricing takes into account the
cost differences between products in the line, customer evaluation of their features, and competitors’ prices
* For example channel offers 20 different collections of bags of all shapes and sizes at price that range from under $50 to more than $1,250.
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Optional Product pricing• Optional-product pricing takes into account
optional or accessory products along with the main product
• For example : a car buyer may choose to order a GPS navigation system & Bluetooth wireless communication.
• Refrigerators come with optional ice maker
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Captive-product pricing• Captive-product pricing
involves products that must be used along with the main product
• Examples of Captive products are razor blade cartridges , Gillette once you bought the razor, you are committed to buying replacement cartridges at $25 an eight pack
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Two-part pricingTwo-part pricing involves breaking the price into:
– Fixed fee– Variable usage feeFor example : Jawwal company charge a flat rate for a
basic calling plan, then charge for minutes over what the plan allows.
The service firm must decide how much to charge for the basic service and how much for the variable usage.
– Another example is when you visit a park , you pay a ticket charge + fee for food and additional feature
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By-product pricing• By-product pricing refers to products with
little or no value produced as a result of the main product. Producers will seek little or no profit other than the cost to cover storage and delivery.
• Petroleum products often results in by-products.
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Product bundle pricingProduct bundle pricing combines several
products at a reduced priceFor example : fast food restaurants
bundle a burger , fries and a soft drink at a combo price
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Step 2: Determining Demand
1.Price Sensitivity
2. Estimating Demand Curves
3. Price Elasticity of Demand
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Fig 14.2 Inelastic and Elastic Demand
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1.Price sensitivity
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Table 14.3 Factors Leading to Less Price Sensitivity
• The product is more distinctive• Buyers are less aware of substitutes• Buyers cannot easily compare the quality of substitutes• Expenditure is a smaller part of buyer’s total income• Expenditure is small compared to the total cost• Part of the cost is paid by another party• Product is used with previously purchased assets• Product is assumed to have high quality and prestige• Buyers cannot store the product
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Influence of Elasticity• Any pricing decision must be mindful of the
impact of price elasticity • The degree of price elasticity impacts on the level
of sales and hence revenue• Elasticity focuses on proportionate (percentage)
changes• PED = % Change in Quantity demanded/%
Change in Price
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Price Elasticity of Demand
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Influence of Elasticity• Price Inelastic:• % change in Q < % change in P• e.g. a 5% increase in price would be met by a fall in
sales of something less than 5% • Revenue would rise• A 7% reduction in price would lead to a rise in sales of
something less than 7%• Revenue would fall
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Influence of Elasticity contd..• Price Elastic:• % change in quantity demanded > % change in
price• e.g. A 4% rise in price would lead to sales falling by
something more than 4%• Revenue would fall• A 9% fall in price would lead to a rise in sales of
something more than 9%• Revenue would rise
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Step 3: Estimating Costs
• Types of costs• Cost Terms and Production
• Fixed costs• Variable costs• Total costs• Average cost• Cost at different levels of production
• Accumulated production• Activity-Based Cost accounting• Target costing
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Figure 14.3 Cost Per Unit at Different Levels of Production
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Figure 14.4 Estimating Cost per Unit as a Function of Accumulated Production
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Target Costing
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Step 4: Analysing Competitors’ Costs, Prices and Offers
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Step 5: Selecting a Pricing Method• Markup pricing• Target-return pricing• Perceived-value pricing• Value pricing• Going-rate pricing• Auction-type pricing
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Markup /Cost-Plus Pricing
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Markup/ Cost-Plus Pricing contd..• Calculation of the average cost (AC) plus a
mark up• AC = Total Cost/OutputEg: An Immersion Rod mfg. costs are: Variable C=$10,FC=$300,000, Expected unit sales = 50,000.A Unit Cost = VC + FC/Unit sales =10+300k/50k = $16.
IF mfr. Wants to earn a 20% markup on sales,Markup price = Unit cost/ 1-desired return on sales = $16/1-0.2 = $20 per unitHence Mfr can sell to Dealers at $ 20 and earn $4 as profit
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BEP / Target-return pricing
An expected percentage of profit on mfr’s investment (Return on Investment)
Target-return pricing = Unit Cost + Desired return x Invested Capital Unit Sales
Break-Even Volume = Fixed Cost (Price - Variable Cost)
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Figure 14.6 Break-Even Chart
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• BE= Fixed Costs/Contribution (SP-VC)• Example - Meal - SP = $20, VC = $8• Fixed costs are $2400 a day• BE=$2400/$12 = 200• Need to sell 200 meals @ $20 to break-even• VC = 40%, contribution = 60%• BE = $2400/.6 = $4000
Break-Even
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Break-even Analysis or Target Profit Pricing
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Perceived Value PricingTable 14.2 Consumer Perceptions vs. Reality for Cars
Overvalued Brands• Land Rover• Kia• Volkswagen• Volvo• Mercedes
Undervalued Brands• Mercury• Infiniti• Buick• Lincoln• Chrysler
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Some important pricing definitions
• Utility: The attribute that makes it capable of want satisfaction
• Value: The worth in terms of other products
• Price: The monetary medium of exchange.
Value Example: CaterpillarTractor is $100,000 vs. Market
$90,000$90,000 if equal 7,000 extra durable 6,000 reliability 5,000 service 2,000 warranty $110,000 in benefits - $10,000
discount!
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Value Pricing
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Value Pricing contd..
• Price set in accordance with customer perceptions about the value of the product/service
• Examples include status products/exclusive products
Companies may be able to set prices according to perceived value.
Copyright: iStock.com
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Going Rate (Price Leadership)
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Going Rate (Price Leadership)• In case of price leader, rivals have difficulty in competing
on price – too high and they lose market share, too low and the price leader would match price and force smaller rival out of market
• May follow pricing leads of rivals especially where those rivals have a clear dominance of market share
• Where competition is limited, ‘going rate’ pricing may be applicable – banks, petrol, supermarkets, electrical goods – find very similar prices in all outlets
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Auction / Tender Pricing
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Auction-Type Pricing
English auctions
Dutch auctions
Sealed-bid auctions
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Step 6: Selecting the Final Price
• Impact of other marketing activities
• Company pricing policies• Gain-and-risk sharing
pricing• Impact of price on other
parties
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Price-Adjustment/ Adaption Strategies
Price Adaptation StrategiesPrice Adaptation Strategies
Discount & AllowanceReducing Prices to Reward
Customer Responses such asPaying Early or Promoting
the Product.
Discount & AllowanceReducing Prices to Reward
Customer Responses such asPaying Early or Promoting
the Product.
SegmentedAdjusting Prices to Allow
for Differences in Customers,Products, or Locations.
SegmentedAdjusting Prices to Allow
for Differences in Customers,Products, or Locations.
Cash DiscountCash Discount
Quantity DiscountQuantity Discount
Functional DiscountFunctional Discount
Seasonal DiscountSeasonal Discount
CustomerCustomer
Product FormProduct Form
LocationLocation
TimeTime
Trade-In AllowanceTrade-In Allowance
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Price-Adjustment Strategies
• Adjusting Prices for Psychological Effect.•Price Used as a Quality Indicator.
• Temporarily Reducing Prices to Increase Short-Run Sales.• i.e. Loss Leaders, Special-Events
• Adjusting Prices to Account for the Geographic Location of Customers.• i.e. FOB-Origin, Uniform-Delivered, Zone Pricing, Basing-Point, & Freight-Absorption.
• Adjusting Prices for International Markets.• Price Depends on Costs, Consumers, Economic Conditions & Other Factors.
Psychological Pricing
Promotional Pricing
Geographical Pricing
International Pricing
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Price-Adjustment Strategies contd..
Geographical pricing is used for customers in different parts of the country or the world
• FOB pricing• Uniformed-delivery pricing• Zone pricing• Basing-point pricing• Freight-absorption pricing• Counter trade (Barter,Compensation deal, Buyback arrangement, Offset)
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Price Adjustment Strategies
• FOB (free on board) pricing means that the goods are delivered to the carrier and the title and responsibility passes to the customer
• Uniformed-delivery pricing means the company charges the same price plus freight to all customers, regardless of location
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Price Adjustment Strategies
• Zone pricing means that the company sets up two or more zones where customers within a given zone pay a single total price
• Basing-point pricing means that a seller selects a given city as a “basing point” and charges all customers the freight cost associated from that city to the customer location, regardless of the city from which the goods are actually shipped
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Price-Adjustment Strategies
• Freight-absorption pricing means the seller absorbs all or part of the actual freight charge as an incentive to attract business in competitive markets
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Price-Adjustment Strategies
Dynamic pricing is when prices are adjusted continually to meet the characteristics and needs of the individual customer and situations Ex. Alaska airlines creates unique
prices and advertisements for people as they surf the web
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Price Adjustment StrategiesInternational pricing is when prices are set in a specific
country based on country-specific factors• Economic conditions• Competitive conditions• Laws and regulations• Infrastructure• Company marketing objective
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• For example : Boeing sells its jetliners at about the same price everywhere, whether in the United states , Europe or the third world
• A pair of Levi’s selling for $30 in Canada might go for $ 63 in Tokyo and $ 88 in Paris
International pricing
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Discount and allowance pricing
Discount and allowance pricing reduces prices to reward customer responses such as paying early or promoting the product
• Discounts• Allowances
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Price-Adjustment Strategies
Price Discounts and AllowancesQuantity discount: The more you buy, the cheaper it becomes-- cumulative and non-cumulative.Trade discounts” functional”: Reductions from list for functions performed-- storage, promotion.Cash discount: A deduction granted to buyers for paying their bills within a specified period of time, (after first deducting trade and quantity discounts from the base price)
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Price Adjustment StrategiesFunctional discount: discount offered by a manufacturer to trade-channel members if they will perform certain functions.Seasonal discount: a price reduction to those who buy out of season.Allowance: an extra payment designed to gain reseller participation in special programs. a) Trade in allowances: are price reductions given for
turning in an old item when buying a new one ( Automobiles industry)
b) Promotional allowances: are payments or price reductions to reward dealer for participating in advertising and sales support program
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Promotional Pricing Tactics• Loss-leader pricing• Special-event pricing• Cash rebates• Low-interest financing• Longer payment terms• Warranties and service
contracts• Psychological discounting
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Price-Adjustment StrategiesPromotional pricing is when prices are temporarily
priced below list price or cost to increase demand• Loss leaders• Special event pricing• Cash rebates• Low-interest financing• Longer warrantees• Free maintenance
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Price-Adjustment strategies
Promotional Pricing• Loss-leader pricing: supermarkets and department stores
often drop the price on well known brands to stimulate additional store traffic
• Special-event pricing: sellers well establish special pricing in certain seasons to draw in more customers
• Cash rebates: companies offer cash rebates to encourage purchase of the manufacturers products within a specified time period
• Low-interest financing: the company can offer customers low-interest financing
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Price-Adjustment strategies
• Longer payment terms: sellers especially mortgage banks and auto companies stretch loans over longer periods and thus lower the monthly payment
• Warranties and service contracts: companies can promote sales by adding a free or low cost warranty or service contract
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Price-Adjustment Strategies
Risks of promotional pricing• Used too frequently, and copies by
competitors can create “deal-prone” customers who will wait for promotions and avoid buying at regular price
• Creates price wars
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Differentiated/segmented Pricing• Customer-segment pricing• Product-form pricing• Image pricing• Channel pricing• Location pricing• Time pricing• Yield pricing
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Price-Adjustment Strategies
Segmented pricing is used when a company sells a product at two or more prices even though the difference is not based on cost
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a) Customer segment pricing: different customers pay different prices for the same product or service . For ex. Museums charge a lower admission for students .
b) Product from pricing: different versions of the product are priced differently but not according to differences in their costs
c) Location pricing: company charges different prices for different locations
d) Time pricing : a firm varies it prices by the season , the month , the day and even the hour
Segmented pricing
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Price-Adjustment Strategies
To be effective:• Market must be segmentable• Segments must show different degrees of
demand• Watching the market cannot exceed the extra
revenue obtained from the price difference• Must be legal
Segmented Pricing
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Price-Adjustment StrategiesPsychological pricing occurs when sellers consider the
psychology of prices and not simply the economics” the price is used to say something about the product”
Reference prices are prices that buyers carry in their minds and refer to when looking at a given product– Noting current prices– Remembering past prices– Assessing the buying situations– For example : a company could display its product
next to more expensive ones in order to imply that it belongs in the same class
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Initiating and Responding to Price Changes
InitiatingPrice
Increases
CompetitorReactions
toPrice
Changes
Initiating Price Cuts
Buyer Reactions
to Price
Changes
Price Changes
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Traps in Price Cutting Strategies
• Low-quality trap• Fragile-market-share trap • Shallow-pockets trap• Price-war trap
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Should We Raise Prices?
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Methods for Increasing Prices
• Delayed quotation pricing• Escalator clauses• Unbundling• Reduction of discounts
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Price Changes
Initiating Pricing Changes
Price cuts occur due to:
• Excess capacity• Increased market share
Price increase from:
• Cost inflation• Increased demand• Lack of supply
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Price Changes contd..
Price increases
•Product is “hot” that means better made•Company is greedy
Price cuts
•New models will be available•Models are not selling well•Quality issues
Buyer Reactions to Pricing Changes
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Price Changes
Questions– Why did the competitor change the price?– Is the price cut permanent or temporary?– What is the effect on market share and profits?– Will competitors respond?
Responding to Price Changes
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Price Changes contd…
Solutions– Reduce price to match competition– Maintain price but raise the perceived value
through communications– Improve quality and increase price– Launch a lower-price “fighting” brand
Responding to Price Changes
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Brand Leader Responses to Competitive Price ChangesBrand Leader Responses to Competitive Price Changes
Hold Current Price;Continue to MonitorCompetitor’s Price.
Hold Current Price;Continue to MonitorCompetitor’s Price.
Reduce PriceReduce Price
Raise PerceivedQuality
Raise PerceivedQuality
Improve Quality& Increase PriceImprove Quality& Increase Price
Launch Low-Price“Fighting Brand”
Launch Low-Price“Fighting Brand”
Has Competitor CutPrice?
Has Competitor CutPrice?
Will Lower Price Negatively Affect Our
Market Share & Profits?
Will Lower Price Negatively Affect Our
Market Share & Profits?
Can/ Should EffectiveAction be Taken?
Can/ Should EffectiveAction be Taken?
Yes
No
No
No
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A frame work for responding to Low-Cost Rivals
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Public Policy and Pricing
Price fixing: Sellers must set prices without talking to competitors
Predatory pricing: Selling below cost with the intention of punishing a competitor or gaining higher long-term profits by putting competitors out of business , this will protect small sellers from larger ones
Pricing Within Channel Levels
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Public Policy and Pricing contd..
Robinson-Patman Act prevents unfair price discrimination by ensuring that the seller offer the same price terms to customers at a given level of trade
Pricing Across Channel Levels
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Public Policy and Pricing contd…
Robinson-Patman Act• Price discrimination is allowed:
– If the seller can prove that costs differ when selling to different retailers
– If the seller manufactures different qualities of the same product for different retailers
Pricing Across Channel Levels
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Public Policy and Pricing
Retail (or resale) price maintenance is when a manufacturer requires a dealer to charge a specific retail price for its products
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Public Policy and Pricing contd…
Deceptive pricing occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers
• Scanner fraud failure of the seller to enter current or sale prices into the computer system
• Price confusion results when firms employ pricing methods that make it difficult for consumers to understand what price they are really paying
Pricing Across Channel Levels
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Loss Leader
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Loss Leader contd..
• Goods/services deliberately sold below cost to encourage sales elsewhere
• Typical in supermarkets, e.g. at Christmas, selling bottles of gin at £3 in the hope that people will be attracted to the store and buy other things
• Purchases of other items more than covers ‘loss’ on item sold
• e.g. ‘Free’ mobile phone when taking on contract package
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Psychological Pricing
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Psychological Pricing contd..
• Used to play on consumer perceptions• Classic example - £9.99 instead of £10.99!• Links with value pricing – high value goods
priced according to what consumers THINK should be the price
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Price Discrimination
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Price Discrimination contd..• Charging a different price
for the same good/service in different markets
• Requires each market to be impenetrable
• Requires different price elasticity of demand in each market
Prices for rail travel differ for the same journey at different times of the day
Copyright: iStock.com
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Destroyer Pricing/Predatory Pricing
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Destroyer/Predatory Pricing• Deliberate price cutting or offer of ‘free
gifts/products’ to force rivals (normally smaller and weaker) out of business or prevent new entrants
• Anti-competitive and illegal if it can be proved
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Absorption/Full Cost Pricing
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Absorption/Full Cost Pricing contd..
• Full Cost Pricing – attempting to set price to cover both fixed and variable costs
• Absorption Cost Pricing – Price set to ‘absorb’ some of the fixed costs of production
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Marginal Cost Pricing
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Marginal Cost Pricing contd..
• Marginal cost – the cost of producing ONE extra or ONE fewer item of production
• MC pricing – allows flexibility • Particularly relevant in transport where fixed costs may be
relatively high• Allows variable pricing structure – e.g. on a flight from London
to New York – providing the cost of the extra passenger is covered, the price could be varied a good deal to attract customers and fill the aircraft
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Marginal Cost Pricing contd...
• Example:
Aircraft flying from Bristol to Edinburgh – Total Cost (including normal profit) = £15,000 of which £13,000 is fixed cost*
Number of seats = 160, average price = £93.75
MC of each passenger = 2000/160 = £12.50
If flight not full, better to offer passengers chance of flying at £12.50 and fill the seat than not fill it at all! *All figures are estimates only
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Contribution Pricing
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Contribution Pricing contd..
• Contribution = Selling Price – Variable (direct costs)
• Prices set to ensure coverage of variable costs and a ‘contribution’ to the fixed costs
• Similar in principle to marginal cost pricing• Break-even analysis might be useful in such
circumstances
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Target Pricing
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Target Pricing contd..• Setting price to ‘target’ a specified profit
level• Estimates of the cost and potential revenue
at different prices, and thus the break-even have to be made, to determine the mark-up
• Mark-up = Profit/Cost x 100
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Chapter Questions• How do consumers process and evaluate prices?• How should a company set prices initially for products
or services?• How should a company adapt prices to meet varying
circumstances and opportunities?• When should a company initiate a price change?• How should a company respond to a competitor’s
price challenge?
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One Final Word
“ A product is not a product unless it sells.Otherwise, it’s just a museum piece…”
Ted Levitt
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Marketing Debate
Is the right price a fair price?
Take a position:1. Prices should reflect the value that consumers are willing to pay.
or
2. Prices should primarily just reflect the costinvolved in making a product.
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Marketing Discussion
Think of all the pricing methods described in the chapter.
As a consumer, which pricing method do you personally prefer to deal with?
Why?
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Reference• Kotler, Kelly, Koshy and Jha (2009) Marketing Management: A South
Asian Perspective, 14th ed. Pearson Prentice Hall, pp.368-99