Developing Pricing Strategies and Programs
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DEVELOPING PRICING STRATEGIES AND PROGRAMS
Ms.Kiran Sharma
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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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GILLETTE COMMANDS A PRICE PREMIUM
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SYNONYMS FOR PRICE
Rent Tuition Fee Fare Rate Toll Premium Honorarium
Bribe Dues Salary Commission Wage 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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CHANGING PRICING ENVIRONMENT
For Buyers Get instant price comparisons from thousands of
vendors – (www.mySimon.com) Name their price and have it met –
(www.priceline.com) Get products free
For Sellers Monitor customer behavior and tailor offer to
individuals Give certain customers access to special prices
Both Buyers and Sellers may Negotiate prices in Online auctions and exchanges
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CONSUMER PSYCHOLOGY AND PRICING
Reference Prices
Price-quality inferences
Price cues
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POSSIBLE CONSUMER REFERENCE PRICES
“Fair price” Last price paid Upper-bound price Lower-bound price
Competitor prices Expected future price Usual discounted
price
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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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TIFFANY’S PRICE-QUALITY RELATIONSHIP
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PRICE CUES
“Left to right” pricing (Rs.2999 vs. Rs.3000)
Odd number discount perceptions
Ending prices with 0 or 5“Sale” written next to price
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WHEN TO USE PRICE CUES
Customers purchase item infrequently
Customers are new Product designs
vary over time Prices vary
seasonally Quality or sizes vary
across stores
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STEPS IN SETTING PRICE
Select the price objective
Determine demand
Estimate costs
Analyze competitor price mix
Select pricing method
Select final price
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STEP 1: SELECTING THE PRICING OBJECTIVE
• Survival (overcapacity, intense competition, changing consumer wants)
• Maximum current profit (can estimate the demand and cost associated with alternative prices)
• Maximum market share (market skimming)
• Maximum market skimming
• Product-quality leadership
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STEP 2: DETERMINING DEMAND
Price Sensitivity
Estimating Demand Curves
Price Elasticity of Demand
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FACTORS LEADING TO LESS PRICE SENSITIVITY The product is more distinctive, low cost items, or
items they buy infrequently. There are no or few substitutes or competitors Buyers cannot easily compare the quality of
substitutes Buyers are slow to change their buying habits. Buyer do not readily notice the higher price Part of the cost is paid by another party The product is used with previously purchased
assets The product is assumed to have high quality and
prestige, hence feel higher price is justified. Buyers cannot store the product
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ESTIMATING DEMAND CURVES
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PRICE ELASTICITY OF DEMANDINELASTIC AND ELASTIC DEMAND
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STEP 3: ESTIMATING COSTS
Types of Costs
Target Costing
Accumulated Production
Activity-Based Cost Accounting
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COST TERMS AND PRODUCTION
Fixed costs (rent, salaries) Variable costs (Raw material,
microprocessor chips, packaging material)
Total costs Average cost Cost at different levels of
production
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COST PER UNIT AS A FUNCTION OF ACCUMULATED PRODUCTION
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TARGET COSTING - TATA MOTORS DEVELOPED ‘NANO’ ITS SMALL CAR WITH A TARGET PRICE
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STEP 4: ANALYZING COMPETITORS COSTS, PRICES AND OFFERS
Analyze competitor in terms of financial situation, recent sales, customer loyalty, product efficacy.
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STEP 5: SELECTING A PRICING METHOD
Markup pricing Target-return pricing Perceived-value pricing ( Buyer’s image,
warranty, product performance, supplier reputation, trust)
Value pricing (Higher volumes at lower prices)
Going-rate pricing (competitor prices) Auction-type pricing
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BREAK-EVEN CHART
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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• Impact of price on other parties
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PRICE-ADAPTATION STRATEGIES
Geographical Pricing
Discounts/Allowances
Differentiated Pricing
Promotional Pricing
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PRICE-ADAPTATION STRATEGIES
Countertrade Barter Compensation deal Buyback
arrangement Offset
Discounts/ Allowances Cash discount Quantity discount Functional discount Seasonal discount
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11-30
GEOGRAPHICAL PRICING - BARTER The least complex and oldest form of
bilateral, non-monetary counter-trade A direct exchange of goods or services
between two parties
Country X
Exporter/Importer
Exporter/ Importer
Country Y
Goods/Services
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SWITCH TRADING
11
-31
Exporter Exporter
Switch trader
Country X Country Y
Country Z
Goods/ services A
Goods/ Services B
Payment or Goods/Services C
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COUNTER PURCHASE1
1-3
2
Exporter
Country X
Exporter
Exporter
Country Y
Country Y
Goods/Services
Goods/Services
Payment( Hard Currency)
Payment( Hard Currency
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BUY BACK (COMPENSATION)1
1-3
3
Exporter(capital goods or technology or Licenser)
ImporterOrLicensee
Country X Country YCapital goods or technology
Payment
Output from Capital goods/ technology
Payment
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PROMOTIONAL PRICING TACTICS Loss-leader pricing
(drop prices on well known brand)
Special-event pricing Cash rebates Low-interest financing Longer payment terms Warranties and service
contracts Psychological
discounting (was Rs 599 Now Rs 549)
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DIFFERENTIATED PRICING
Customer-segment pricing
Product-form pricing
Image pricing Channel pricing Location pricing Time pricing
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PRICING FOR RURAL MARKETS
• A large proportion have a low and seasonal income
• Several approaches adopted by retailers and companies to address this
• Rural retailers often extend credit• Retailers also “break the bulk” and sell in
loose form, in small quantities• Companies use a similar strategy by
introducing “low-unit packing” or LUP• Companies also develop low-priced products
with a target price for rural markets• Companies might offer refill packs or
recyclable and reusable packs
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INITIATING PRICE INCREASES
Delayed quotation pricing
Escalator clauses
Unbundling
Reduction of discounts
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BRAND LEADER RESPONSES TO COMPETITIVE PRICE CUTS
Maintain price Maintain price and add value Reduce price Increase price and improve quality Launch a low-price fighter line