MBA 315 Marketing Management

By

H M C G Bandara
 Developing pricing strategies and Programs
Topic Outline

1 Understanding pricing

2 Changing pricing environment

3 How companies price

4 Consumer psychology and pricing

5 Setting the price

6 Adapting the price

7 Initiating and responding to price changes

Understanding pricing
• What Is a Price?
Price is the amount of money charged for a product or service. It
is the sum of all the values that consumers give up in order to gain the
benefits of having or using a product or service.

Price is the only element in the marketing mix that produces revenue;
all other elements represent costs
Price also communicate the company’s intended
value positioning of its product or brand

Price decisions are complex and must take into

account many factors
The • Last Price Paid
company, • Fair price
customers, • Lower-bound
competition, • Typical Price
marketing environment • Competitor’s Price
• Usual Discounted Price
• Expected Future Price
Difference forms of “Price”
• Rent, tuition, fares, fees, rates, wages, and commissions
 PRICING IN A DIGITAL WORLD
• Traditionally, price has operated as a major determinant of buyer choice

Consumers Put pressure Retailers Put pressure Manufactures

Lower the price Lower the price

Marketplace is characterized by heavy discounting and sales promotion

Internet has been changing the way buyers
and sellers interact
Buyers can :
• Get instant price comparisons from thousands of vendors.
• Check prices at the point of purchase
• Name their price and have it met
• Get Products free

Sellers can:
• Monitor customer behavior and tailor offers to individuals
• Give certain customers access to special prices
 CHANGING PRICING ENVIRONMENT
• Pricing practices have changed significantly;

Severe recession in 2008-2009, a slow recovery,

Rapid technological advances,
New millenial generation brings new attitudes and values to consumption

Born the concept of “New sharing economy”

someone can be both a consumer and a producer
Trust and good reputation are crucial in any exchange ,but
imperative in a sharing economy
Pillars of a sharing economy
• Bartering

• Renting
 HOW COMPANIES PRICE
• Small companies - the boss
• Large companies - division and product line managers
• When pricing is a key competitive factor - often establish a pricing department

• Pricing performance improves when pricing authority is spread horizontally

accross the sales, marketing, finance units
Common mistakes in Pricing

• “We determine our costs and take our industry’s traditional margins.”

• 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-positioning strategy

• Not varying price enough for different product items, market segments,
distribution channels, and purchase occasions
Consumer psychology and pricing

• Any organization, effectively designing and implementing pricing

strategies requires a thorough understanding of consumer pricing
psychology and a systematic approach to setting, adapting, and
changing prices.
• Many economist traditionally assumed that consumers were “price
takers” who accepted prices at face value or as a given.

• Marketers, recognize that consumers often actively process price

information interpreting it from the context of prior purchasing
experience.
• Purchase decision are based on how consumers perceive prices and
what they consider the current actual price to be-not on the
marketer’s stated price

• Consumer attitudes about pricing took a dramatic shift

• Eg: shunned conspicuous consumption and medical tourism in 2010
Consumer Psychology and Pricing
• Understanding how consumers arrive at their perceptions of prices is
an important marketing priority.

• Three key topics Consumer Psychology and Pricing—

• reference prices,
The price that people expect or deem to be reasonable for a certain type of product
• price–quality inferences,
Consumers use prices as an indicator of quality.
Image pricing is especially effective with ego-sensitive products such as perfumes,
expensive cars, and designer clothing.
• price endings
Many sellers believe prices should end in an odd number. Eg Rs 299.90
If a company wants a high-price image, it should probably avoid the odd-ending tactic
SETTING THE PRICE

• A firm must set a price for the first time when it develops a new
product, when it introduces its regular product into a new
distribution channel or geographical area.

• The firm must decide where to position its product on quality and
price.
SETTING THE PRICE
• Price points or tiers

• Marriott Vacation Club—Vacation Villas

(highest price)
• Renaissance (medium-high price),
• Courtyard (medium price),
• TownePlace Suites (medium-low price),
• Fairfield Inn (low price).
• The firm must many factors considering in setting price policy

1. Selecting the Pricing Objective

2. Determining Demand
3. Estimating Costs
4. Analyzing Competitors’ Costs, Prices, and Offers
5. Selecting a Pricing Method
6. Selecting the Final Price
 Step 1: Selecting the Pricing Objective
• The company first decides where it wants to position its market offering. The clearer a
firm’s objectives, the easier it is to set price.

• Five major objectives are;

1. SURVIVAL - As long as prices cover variable costs and some fixed costs, the company stays in
business.
• Companies pursue survival as their major objective if they are plagued with
overcapacity,
intense competition, or
changing consumer wants.
Survival is a short-run objective;
in the long run, the firm must learn how to add value or face extinction.
MAXIMUM CURRENT PROFIT - Many companies estimate the demand and costs

associated with alternative prices and choose the price that produces
maximum current profit, cash flow, or rate of return on investment.

• This strategy assumes the firm knows its demand and cost functions;
• But in reality,
these are difficult to estimate.

company may sacrifice long-run performance by ignoring the effects of

other marketing variables, competitors’ reactions, and legal restraints on
price.
MAXIMUM MARKET SHARE –
Some companies believe a higher sales volume will lead to
lower unit costs and higher long-run profit.
• They assumes
• The market is price sensitive and a low price stimulates market growth

• Production and distribution costs fall with accumulated production

experience; and

• A low price discourages actual and potential competition

MAXIMUM MARKET SKIMMING - prices start high and slowly
drop over time

• The company can “skim” the maximum amount of revenue from the

various segments of the market.

• This strategy can be fatal, however, if a worthy competitor decides

to price low. Eg. Sony Vs Dutch electronics manufacturer

• Consumers who buy early at the highest prices may be dissatisfied

• Market skimming makes sense under the following conditions:

(1) A sufficient number of buyers have a high current demand;

(2) the unit costs of producing a small volume are high enough to

cancel the advantage of charging what the traffic will bear;

(3) the high initial price does not attract more competitors to the market;

(4) the high price communicates the image of a superior product

PRODUCT-QUALITY LEADERSHIP- A company might aim to
be the product-quality leader in the market.

• Brands strive to be “affordable luxuries”—products or services

characterized by high levels of perceived quality, taste, and status with a
price just high enough not to be out of consumers’ reach.

• Brands positioned themselves as quality leaders in their categories,

combining quality, luxury, and premium prices with an intensely loyal
customer base.
Eg; Starbucks, BMW
OTHER OBJECTIVES - Nonprofit and public organizations may have
other pricing objectives.

• A university aims for partial cost recovery

• Full cost recovery
• social service agency set a service price geared to client income
Step 2: Determining Demand
• The normally inverse relationship between price and demand is
captured in a demand curve. The higher the price, the lower the
demand.
• Demand can be determined by examining
• price sensitivity
• Estimating Demand Curves
• Price Elasticity of Demand

The first step in estimating demand is to understand what affects price

sensitivity. They are also less price sensitive when :
• There are few or no substitutes or competitors
• They do not readily notice the higher price
• They are slow to change their buying habits
• They think the higher price are justified
• Price is only a small part of the total cost of obtaining, operating, and
servicing the product over its lifetime
• Estimating Demand Curves
Companies attempt to measure their demand curves using
several different methods :

• (1). Survey, can explore how many units consumers would buy at
different proposed prices.
• (2). Price Experiments, can vary the prices of different products in a
store or of the same product in similar territories to see how the
change affect sales.
• (3). Statistic Analysis of past prices, quantities sold, and other factors
can reveal their relationships.
Price Elasticity of Demand
Marketers need to know how responsive, or elastic, demand is to a
change in price
STEP 3. Estimating Costs

• Types of costs and levels of production

• Company’s cost divided into two forms, fixed and variable :

• Fixed costs, also known as overhead, are costs that do not vary with
production level or sales revenue (rent, heat, interest, salaries, and so
on).
• Variable costs vary directly with the level of production. Variable
costs varies with the number of units produced.
Step 4: Analyzing Competitors’ Costs, Prices,
and Offers
• If competitor’s offer contain some feature not offered by the firm, the
firm should subtract their value from its own price.

• Competitors are most likely to react when the number of firms is few,
the product is homogeneous, and buyers are highly informed.

• The problem is complicated because the competitor can put different

interpretations on price cut:
• that the company is trying to steal the market, trying to boost its sales, or that it wants
the whole industry to reduce prices to stimulate total demand.
Step 5: Selecting a Pricing Method
• The Three Cs Model for pricing setting

Costs
Orienting Costs
HIGH Ceiling Customers’ Orienting
point
LOW
LOW
Ceiling Customers’ point PRICE
PRICE price assessment Floor PRICE
price Competitors
assessment price (no possible
(no possible of unique prices & (no possible
demand at
demand at of unique
product prices of
Competitors
this price)at
demand
this price) substitutes
prices &
product
features this price)
prices of
features
substitutes
MARKUP PRICING
• The most elementary pricing method is to add a standard markup to
the product’s cost
• Markup price = unit cost
(1 - desired return on sales)

• Unit cost = variable cost + fixed cost

unit sales
TARGET-RETURN PRICING
Public utilities, which need to make a fair return on investment, often
use this method.

• Target-return price = unit cost + desired return * invested capital

unit sales
Break-even volume
• Break-even volume = fixed cost

(price - variable cost)

PERCEIVED-VALUE PRICING
An increasing number of companies now base their price on the customer’s
perceived value.

• Perceived value is made up of a host of inputs, such as the buyer’s image of

the product performance, the channel deliverables, the warranty quality,
customer support, and softer attributes such as the supplier’s reputation,
trustworthiness, and esteem. Eg P&S
• Companies must deliver the value promised by their value proposition, and
the customer must perceive this value.

• Firms use the other marketing program elements, such as advertising, sales
force, and the Internet, to communicate and enhance perceived value in
buyers’ minds
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.

• Value pricing is thus not a matter of simply setting lower prices; it is a

matter of reengineering the company’s operations to become a low-
cost producer without sacrificing quality, to attract a large number of
value conscious customers.

• An important type of value pricing is everyday low pricing (EDLP). A

retailer that holds to an EDLP pricing policy charges a constant low
price with little or no price promotions and special sales.
GOING-RATE PRICING

• In going-rate pricing, the firm bases its price largely on competitors’

• prices.

• In oligopolistic industries that sell a commodity normally charge the same

price.

• Smaller firms “follow the leader”

• Going-rate pricing is quite popular where costs are difficult to measure or

competitive response is uncertain
AUCTION-TYPE PRICING
• There are the three major types of auctions pricing procedures

• English auctions (ascending bids) - have one seller and many buyers. The
seller puts up an item and bidders raise the offer price until the top price is
reached. The highest bidder gets the item.

• Dutch auctions (descending bids) - feature one seller and many buyers, or
one buyer and many sellers. In the first kind, an auctioneer announces a
high price for a product and then slowly decreases the price until a bidder
accepts

• Sealed-bid auctions - suppliers submit only one bid; they cannot know the
other bids.
Step 6: Selecting the Final Price
• In selecting that price, the company must consider additional factors,
including;
•
• IMPACT OF OTHER MARKETING ACTIVITIES The final price must take into
account the brand’s quality and advertising relative to the competition.
• Eg Brands with high relative quality and high relative advertising obtained the highest
prices.

• COMPANY PRICING POLICIES - The price must be consistent with company

pricing policies.
• Banks charge fees for ATM withdrawals
• GAIN-AND-RISK-SHARING PRICING - Buyers may resist accepting a
seller’s proposal because of a high perceived level of risk.
• The seller has the option of offering to absorb part or all the risk if it
does not deliver the full promised value. Eg Health /Medical Plans

• IMPACT OF PRICE ON OTHER PARTIES -

• How will distributors and dealers feel about the contemplated price?
• If they don’t make enough profit, they may choose not to bring the product to market.

• Will suppliers raise their prices when they see the company’s price?
• Will the government intervene and prevent this price from being charged?
• Will the sales force be willing to sell at that price?
• How will competitors react?
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.
• Price Adaptation Strategies
• Geographical Pricing –
• the company decides how to price its products to different customers
in different locations and countries.
Price Adaptation Strategies
• Price Discounts and Allowances

Discount: price reduction to buyers who pay bills promptly

Eg deduct 2 percent by paying the bill within 10 days.
Quantity Discount A price reduction to those who buy large volumes
Functional Discount (also called trade discount) offered by a manufacturer to
Discount trade channel
members if they will perform certain functions, such as selling,
storing, and record keeping
Seasonal Discount A price reduction to those who buy merchandise or services out of
season.
Hotels, and airlines offer seasonal discounts in slow selling periods.
Allowance An extra payment designed to gain reseller participation in special
programs.
Price Adaptation Strategies
• Promotional Pricing - Companies can use several pricing techniques to
stimulate early purchase

• Loss-leader pricing. Supermarkets and department stores often drop

the price on well known brands to stimulate additional store traffic.
• Special event pricing. Sellers will establish special prices in certain
seasons to draw in more customers. Every December, there are back-
to-school sales
• Special customer pricing. Sellers will offer special prices exclusively to
certain customers. Eg Loyalty card holders
• Psychological discounting. This strategy sets an artificially high price
and then offers the product at substantial savings
Price Adaptation Strategies
• Differentiated Pricing- Companies often adjust their basic price to
accommodate differences in customers, products, locations, and so on.

• 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

• first-degree price discrimination, the seller charges a separate price to each

customer depending on the intensity of his or her demand.
• In second-degree price discrimination, the seller charges less to buyers of
larger volumes.
• In third-degree price discrimination, the seller charges different amounts to
different classes of buyers
Initiating and Responding to Price Changes
Companies often need to cut or raise prices
• Several circumstances might lead a firm to cut prices.
• excess plant capacity
• drive to dominate the market through lower costs.
• ]hope of gaining market share and lower costs.

• A price-cutting strategy can lead to other possible traps:

• Low-quality trap. Consumers assume quality is low.
•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.
• Shallow-pockets trap. Higher-priced competitors match the lower prices but
have longer staying power because of deeper cash reserves.
• Price-war trap. Competitors respond by lowering their prices even more,
triggering a price war
• Initiating Price Increases
• A successful price increase can raise profits considerably.
• Eg; If the company’s profit margin is 3 percent of sales, a 1 percent price
increase will increase profits by 33 percent if sales volume is unaffected.

• Major circumstance provoking price increases

• cost inflation - Rising costs unmatched by productivity gains
• anticipatory pricing - anticipation of further inflation or government price
controls
• overdemand
Responding to Competitors’ Price Changes
• In general, the best response varies with the situation.

• The company must consider;

• the product’s stage in the life cycle,
• its importance in the company’s portfolio,
• the competitor’s intentions and resources, t
• the market’s price and quality sensitivity,
• the behavior of costs with volume,
Responding to Competitors’ Price Changes
• When, markets characterized by high product homogeneity.

firm can search for ways to enhance its augmented product. If it cannot find any, it may need to meet the price
reduction.

• In nonhomogeneous product markets,

It needs to consider the following issues:
(1) 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?
(2) Does the competitor plan to make the price change temporary or permanent?
(3) What will happen to the company’s market share and profits if it does not
respond? Are other companies going to respond?
(4) What are the competitors’ and other firms’ responses likely to be to each
possible reaction?
Thank you