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Pricing Strategy MKT 460 (Strategic Marketing) Taufique Hossain

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Consumer Psychology and Pricing Reference Prices: Comparing an observed price to an internal reference price they remember or to an external frame of reference such as posted regular retailed price Price-quality inferences: Consumers use price as an indicator of quality. Price Cues: Consumers perception of prices are also affected by alternative pricing strategies.

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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 Maximum current profit Market penetration pricing Maximum market share 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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Price sensitivity Customers are less price sensitive when: There are few or no substitute or competitors They do not readily notice the higher price They are slow to change their buying habits They think that the higher prices are justified Price is only a small part of the total cost of obtaining, operating and servicing the product over its lifetime.

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Inelastic and Elastic Demand

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Estimating demand curves Surveys Price experiments Statistical analysis Experience/past performance analysis

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Estimating demand curves 1-7 th March15 th -21 st March22 nd 28 th March No of subscribers 10,000 9,800 9,700 Rate 0.80 0.85 Mins Used 100 90 88 Revenue 800,000 749,700 725,560 ARPU 80 77 75 Migration 150 200 Churn 50 100 Churn % 0.50%1.00%

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Step 3: Estimating Costs Types of Costs Target Costing Accumulated Production

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Cost Terms and Production Fixed costs Variable costs 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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Step 5: Selecting a Pricing Method Markup pricing Target-return pricing Perceived-value pricing Value pricing Going-rate pricing Auction-type pricing Product line pricing

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Break-Even Chart

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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-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 Allowance

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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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Differentiated Pricing Customer-segment pricing Product-form pricing Image pricing Channel pricing Location pricing Time pricing Yield pricing

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Initiating and responding to price changes Initiating price cuts Low quality trap Fragile market share trap Shallow pocket trap Price war trap Initiating price increase Delayed quotation pricing Escalating clauses Unbundling Reduction of discounts

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Reactions to competitive price cuts

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