A FRAMEWORK for MARKETING MANAGEMENT Chapter 12 Developing Pricing Strategies and Programs Kotler Keller Cunningham

© Copyright 2008 Pearson Education Canada Chapter Questions How do consumers process and evaluate prices? How should a company set initial prices for its offerings? How should a company adapt prices to meet varying circumstances and opportunities? What should a company do to initiate a price change or respond to a competitor’s price change? © Copyright 2008 Pearson Education Canada

Profile: Canadian Marketing Excellence KIA CANADA Kia Canada: Sell value, not price Launched in 1999, a subsidiary of Hyundai Use comparative pricing, its new “extra care” warranty, and an innovative brand building strategy Competes on price, but also built brand credibility using advertising and event sponsorship © Copyright 2008 Pearson Education Canada

Elements Affecting Price Company Marketing environment Marketing strategy Elements Competition Target markets Customers Brand positionings © Copyright 2008 Pearson Education Canada

© Copyright 2008 Pearson Education Canada Synonyms for Price Special assessment Bribe Dues Salary Commission Wage Tax Rent Tuition Fee Fare Rate Toll Premium Honorarium © Copyright 2008 Pearson Education Canada

Consumer Psychology and Pricing Reference prices Price-quality inferences Price cues © Copyright 2008 Pearson Education Canada

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 © Copyright 2008 Pearson Education Canada

© Copyright 2008 Pearson Education Canada Price Cues “Left to right” pricing ($299 versus $300) Odd number discount perceptions Even number value perceptions Ending prices with 0 or 5 Sale written next to price © Copyright 2008 Pearson Education Canada

© Copyright 2008 Pearson Education Canada 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 © Copyright 2008 Pearson Education Canada

Figure 12.1 Setting Price Policy Select the price objective Determine demand Estimate costs Analyze competitor price mix Select pricing method Select final price © Copyright 2008 Pearson Education Canada

1. Select the Price Objective Survival Maximum current profit Maximum market share Maximum market skimming Product-quality leadership © Copyright 2008 Pearson Education Canada

© Copyright 2008 Pearson Education Canada 2. Determine Demand Price sensitivity Estimating demand curves Price elasticity of demand © Copyright 2008 Pearson Education Canada

Table 12.1 Factors Leading to Less Price Sensitivity Product is more distinctive Substitutes are largely unknown and difficult to compare Expenditure is small portion of income Expenditure is small compared to total cost of product Cost is shared Product is differentiated Product cannot be stored © Copyright 2008 Pearson Education Canada

Demand Is Likely to Be Less Elastic When… There are few or no substitutes or competitors Price increases are not readily noticed Buyers are slow to change buying habits Buyers can justify higher prices © Copyright 2008 Pearson Education Canada

© Copyright 2008 Pearson Education Canada 3. Estimate Costs Types of costs Accumulated production Activity-based cost accounting Target costing © Copyright 2008 Pearson Education Canada

© Copyright 2008 Pearson Education Canada Types of Costs Fixed costs Variable costs Total costs Average cost Cost at different levels of production © Copyright 2008 Pearson Education Canada

© Copyright 2008 Pearson Education Canada Figure 12.2 The Experience Curve: Cost per Unit as a Function of Accumulated Production © Copyright 2008 Pearson Education Canada

4. Analyze Competitor Price Mix Does the firm offer features not offered by the closest competitor? Given this point of comparison, should the price be higher, lower, or the same? Why is the Whirlpool Duet combo priced nearly four times what some competitors charge for a comparable product? © Copyright 2008 Pearson Education Canada

© Copyright 2008 Pearson Education Canada 5. Select Pricing Method Markup pricing Target-return pricing Perceived-value pricing Value pricing Going-rate pricing Auction-type pricing © Copyright 2008 Pearson Education Canada

© Copyright 2008 Pearson Education Canada The Bay The Bay partially revised its upscale image to emphasize affordability and value (2002) Adopted the tagline “More than you came for” 2 years later, the Bay opened its first Designer Depot outlet © Copyright 2008 Pearson Education Canada

© Copyright 2008 Pearson Education Canada Auction-Type Pricing English auctions Dutch auctions Sealed-bid auctions © Copyright 2008 Pearson Education Canada

© Copyright 2008 Pearson Education Canada 6. Select Final Price Impact of other marketing activities Company pricing policies Gain-and-risk sharing pricing Impact of price on other parties © Copyright 2008 Pearson Education Canada

Price-Adaptation Strategies Geographical pricing Discounts/allowances Promotional pricing Differentiated pricing © Copyright 2008 Pearson Education Canada

Price-Adaptation Strategies Countertrade Barter Compensation deal Buyback arrangement Offset Discounts/Allowances Cash discount Quantity discount Functional discount Seasonal discount Allowance © Copyright 2008 Pearson Education Canada

Promotional Pricing Tactics Loss-leader pricing Special-event pricing Cash rebates Low-interest financing Longer payment terms Warranties and service contracts Psychological discounting © Copyright 2008 Pearson Education Canada

Differentiated Pricing and Price Discrimination Customer-segment pricing Product-form pricing Image pricing Channel pricing Location pricing Time pricing © Copyright 2008 Pearson Education Canada

© Copyright 2008 Pearson Education Canada Product-Mix Pricing Product line Two-part Optional feature By-product Captive product Product bundling © Copyright 2008 Pearson Education Canada

Increasing Prices Delayed quotation pricing Escalator clauses Unbundling Reduction of discounts © Copyright 2008 Pearson Education Canada

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 © Copyright 2008 Pearson Education Canada

Figure 12.5 Price-Reaction Program for Meeting Competitor’s Price Cut © Copyright 2008 Pearson Education Canada

For Discussion As a consumer, which pricing method do you personally feel most comfortable with? Why? © Copyright 2008 Pearson Education Canada