Chapter 16

Developing Pricing Strategies

and Programs

Khin Kant Kaw

MBA (MEUE), B.A (EPP),
PCTHE (Oxford Brookes University)
Dip in Accounting (LCCI)
UNDERSTANDING PRICING
 Pricing in a Digital World

Buyers Can:
• Get instant price comparisons from thousands of vendors.
• Check prices at the point of purchase. Customers can use
smartphones to make price comparisons in stores before
deciding whether to purchase, pressure the retailer to
match or better the price, or buy elsewhere.
• Name their price and have it met.
• Get products free.
 Pricing in a Digital World

Sellers can:
• Monitor customer behavior and tailor offers to individuals.
• Give certain customers access to special prices.
• Ruelala is a members-only Web site that sells upscale women’s
fashion, accessories, and footwear through limited-time sales,
usually two-day events.
• Other business marketers are already using extranets
• Both buyers and sellers can:
• Negotiate prices in online auctions and exchanges or even in
person. Want
 Changing
Pricing Environment

• Bartering: exchanging goods (e.g. www.swap .com,

ThredUP, Zimride)
• Renting: (RentTheRunway, AirBnb)
 How to compromise Price

• Top management sets general pricing objectives and policies and often
approves lower management’s proposals.
• Where pricing is a key competitive factor (aerospace, railroads, oil
companies), companies often establish a pricing department to set or
assist others in setting appropriate prices. This department reports to the
marketing department, finance department, or top management.
• Others who influence pricing include sales managers, production
managers, finance managers, and accountants.
• 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.”
CONSUMER PSYCHOLOGY
AND PRICING
 Consumer Reference Prices

• Fair Price” (what consumers feel the product should cost)

• Typical Price
• Last Price Paid
• Upper-Bound Price (reservation price or the maximum most
consumers would pay)
• Lower-Bound Price (lower threshold price or the minimum most
consumers would pay)
• Historical Competitor Prices
• Expected Future Price
• Usual Discounted Price
 Price-Quality Inferences

• Customers use price as indicator of quality

• High-price cars are perceived as high quality.
• Luxury goods such as watches, jewelry, perfume and
other products emphasize exclusivity in their
communication messages and strategies.
 Price Endings

• Many sellers believe prices should end in an odd number. Customers

perceive an item priced at $299 to be in the $200 rather than the $300
range; they tend to process prices “left to right” rather than by rounding.
• If price is end with 9 people may feel discounting. (One study showed
that demand actually increased one-third when the price of a dress rose
from $34 to $39 but was unchanged when it rose from $34 to $44.)
• Prices that end with 0 and 5 are also popular and are thought to be
easier for consumers to process and retrieve from memory.
• Pricing cues such as sale signs and prices that end in 9 are more
influential when consumers’ price knowledge is poor, when
SETTING THE PRICE
 Steps for Setting Price

• Step 1: Selecting the Pricing Objective

• Step 2: Determining Demand
• Step 3: Estimating Costs
• Step 4: Analyzing Competitors’ Costs, Prices, and Offers
• Step 5: Selecting a Pricing Method
• Step 6: Selecting the Final Price
 Step 1: Pricing Objectives

Five major objectives are:

• Survival,
• Maximum current profit,
• Maximum market share,
• Maximum market skimming, and
• Product-quality leadership.
 Step 2: Determining Demand

• Price Sensitivity
• Estimating Demand Curves (surveys, price experiments,
statistical analysis)
• Price Elasticity of Demand
 Factors that reduce
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 the buyer’s total income.
• Part of the cost is borne by another party.
• Product is used in conjunction with assets previously bought.
• Product is assumed to have more quality, prestige, or
exclusiveness.
• Buyers cannot store the product.
 Step 3: Estimating Costs

• Variable Costs: vary directly with level of production

• Fixed Costs: do not vary with production level or sales
revenue
• Total Costs
 Step 4: Analyzing Competitors’ costs,
prices and offers

• Within the range of possible prices identified by market

demand and company costs, the firm must take com
• petitors’ costs, prices, and possible reactions into
account.
• Companies offering powerful combination of low price
and high quality are capturing the hearts and wallets of
consumers all over the world
 Step 5:
Selecting a Pricing Method

• Mark up pricing (Production based pricing)

• Target return pricing (Production based Pricing)
• Perceived value pricing (Consumer Value-based pricing
• Everyday Low Pricing (EDLP)
• Going Rate Pricing (Competition-based pricing)
• Auction type rate pricing
 Mark up pricing

• Variable cost per unit $10

• Fixed costs $300,000
• Expected unit sales 50,000
• Unit cost = variable cost + Fixed Cost/Unit Sales
= $10 + (300000/50000) = 16
• Markup price = unit cost / (1-desired return on sales)
= 16/ (1-0.2)
 Target Return Pricing

• Also known as BEP pricing (Break Even Point)

= unit cost + Desired return x Invested capital
Unit Sales
= $16 + .20 x $1000000
50000
= $20
 EDLP and High-low Pricing

• Everyday Low Pricing (EDLP) charges a constant low

price with little or no promotion
• High Low Pricing: retailer charges higher prices on an
everyday basis but runs frequent promotions with
prices temporarily lower than the EDLP level
 Going-rate Pricing

• Based on competitors’ prices

• Small firms have to take the market price
• For Example, Gas, Oil - mainor firms can set price
 Aution-type Pricing

• English auctions (ascending bids)

– one seller and many buyers (ebay and Amazon)

• Dutch auctions (descending bids)

– One seller and many buyers or one buyer and many
seller

• Sealed-bid auctions
 Step 6: Selecting Fianl Price

Company may consider several factors such as:

• Impact of other marketing activities
• Company’s pricing policy
• Gain-and-risk-sharing Pricing
• Impact of price on other parties
ADAPTING THE PRICE
 Adapting the Price

Price-adaptation strategies:
• Geographical pricing,
• Price discounts and allowances,
• Promotional pricing, and
• Differentiated pricing.
 Price Discount and Allowances

• Discount
• Quantity Discount
• Functional Discount
• Seasonal Discount
• Allowances (trade in allowances, promotional
allowances)
 Promotional Pricing

• Loss Leader pricing

• Special event pricing
• Special customer pricing
• Cash rebates
• Low-interest financing
• Longer payment terms
• Warranties and service contracts
• Psychological discounting
 Differentiated Pricing

• Customer-segment pricing. Different customer groups pay different

prices for the same product or service.
– E.g., Museums charge lower admission fee to students and senior
citizens.
• Product-form pricing. (EDP, EDT, Spray)
• Image pricing.
• Channel pricing.
– Coca-Cola carries a different price depending on whether the consumer
purchases it from a fine restaurant, a fast-food restaurant, or a vending
machine.
• Location pricing. The same product is priced differently at different
locations even though the cost of offering it at each location is the same.
– Theater seat prices varies according to different locations.
• Time pricing. Prices vary by season, day or hour. (Early bird price)
INITIATING AND RESPONDING TO
PRICE CHANGES
 Initiating Price Cuts

• Cost leader try to dominate market with price

• Cutting price may lead to some negative consequences:
– 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 Increase

• Companies often raise their prices by more than the

cost increase, in anticipation of further inflation or
government price controls, in a practice called
anticipatory pricing
• Sometimes they decided to increase if they are facing
with over demand.
THANK YOU FOR YOUR TIME!