DESIGNING PRICING STRATEGIES AND PROGRAMS CHAPTER 15 DESIGNING PRICING STRATEGIES AND PROGRAMS

Important Topics of This Chapter Setting Pricing policy Price-quality relationships Adapting the Price Initiating & Responding to Price Changes

Setting Pricing 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 final price

Setting the Price Pricing Objectives: Survival: Short-run, low price policy. Maximum current profit: High price policy. Maximum current revenue: Maximum sales growth: Low price policy when: Market is highly price sensitive Production and distribution costs are low Low price discourages the competitors.

Setting the Price (Cont.) Maximum market skimming: High price policy when: There are sufficient number of buyers. The unit cost of producing is not high. High price does not attract competitors. The product is superior. Product-quality leadership: High price policy.

Price - Quality Strategies High Medium Low High Low Product Quality Med Premium Value Medium Economy High Value Super Good-Value Overcharging Rip-Off False Economy

Determining the Demand Relationships between price and demand Factors Effecting Price sensitivity: Unique-value substitute-awareness Difficult comparison Total-expenditures End-benefit Shared-cost Sunk-investment Price- quality Inventory effect

Determining Demand (Cont.) Estimating demand curve: Statistical analysis (time-series data) Conducting experiments Total sales at different price Price elasticity: Inelastic demand: There are no substitutes. Buyer would like to pay higher price. Buyers are slow in searching for lower price. Price-quality is right. Buyers will continue purchasing if price increase is insignificant and risk is high if they switch. Elastic demand: Price should be low.

Estimating Cost Types of costs: Accumulated Production: Fixed cost, variable cost and total cost. Accumulated Production: Experience curve approach. Differentiated Marketing Offers: Cost behaviors as a function of differentiated marketing offer (different delivery systems) Target costing: Research to decide the best price. Analyzing Competitors’ Costs, Price, and Offers: Cost advantage and disadvantage.

Selecting a Pricing Method Markup pricing: The most elementary pricing strategy. Markup=unit cost/1-desired return on sales Advantages: simplifies the pricing task Prices will be similar if everyone use it It is fair to buyers and sellers Target-return: It based upon target rate of return on investment(ROI): T-R=unit cost+desired return X invested capital/unit sales B-E point help to determine the total sales.

Selecting the Pricing Method (Cont.) Perceived-value Pricing: Buyers’ perception of value rather than sellers’ cost. Price-quality decision for the target market. Value pricing: Very low price for high quality products:. Everyday low pricing(EDLP). High/low pricing. Going-rate pricing: Company pays less attention to its cost. Sealed-bid pricing: Based upon expected profit.

Selecting the Final Price Psychological Pricing: Odd pricing Reference price. Influence of other marketing mix elements: Average quality/high advertising lead to high price High quality/high advertising lead to high price Relationship between price and advertising are seen strongly at later stages of PLC, or for low-cost producers.

Selecting the Final Price (Cont.) Pricing policies: To be consistent with company pricing policy. Impact of price on other parties: Distributors/ dealers’ reaction. Competitors’ reaction. Government policies on prices-price fixing, price discrimination, and predatory pricing are illegal.

Adopting the Price Geographical pricing: Pricing policy may based upon geographical demand/cost, market segments, orders and service: Countertrade arrangements. Barter: No money involved Compensation deal: Some cash payment and some products Buyback arrangement: Sells plant and equipment, and agree to buy the production. Offset: Receive cash and purchase goods

Price Discounts and Allowances Cash discounts. Quantity discounts. Functional discounts: Trade discounts to channel members for storage, etc. Seasonal discounts. Allowances: Trade-in allowances. Promotional allowances.

Promotional Pricing Loss-leader pricing. Special-event pricing. Cash rebates. Low-interest financing. Longer payment terms. Warranties and service contracts . Psychological discounting: Setting a high price, and discounting to a lower price.

Discriminatory Pricing Customer segment pricing: Senior citizens pay less. Product-form pricing: Higher price for larger size boxes. Image Pricing: Creates image differentiation. Location pricing: Theaters charge varies prices for different locations. Time pricing: Seasonal or week-end specials. Yield pricing.

Discriminatory Pricing (Cont.) Conditions for discriminatory pricing: Market must be segmentable and shows different intensities of demand. Members of lower price segments must not be able to re-sell in the higher price segment. Competitors must not be able to undersell the firm in the higher-price segment Cost of segmenting must not exceed the revenue derived from discrimination The practice must not create customer resentment The practice must not be illegal. Typical practice-yield management: airlines deregulation allowed them to charge different fare depending on time of purchase seating class or time of flight.

Product Mix Pricing Product-line pricing: Optional-features pricing: Price steps for different models. Optional-features pricing: auto manufacturers add optional air condition. Captive-product pricing: Razors and Cameras. Two-part pricing: Telephone companies. Byproduct pricing: Petroleum products. Product-bundling pricing: Option package in auto industry.

Initiating and Responding to Price Changes Initiating Price cuts: Excess capacity. Lower market share. Lower cost(cost leader). Risk involved: Low-quality image. Lower product loyalty. Leaders treat with higher cash reserves.. Initiating Price increases: Inflation. Anticipatory pricing: Response to government control. Increased demand.

Initiating and Responding to Price Changes (cont.) Reactions to Price Changes: Customers’ reaction: Customers may question the reason behind the price increases Competitors’ reaction: Anticipation of competitors’ response is necessary. Competitors’ response: Homogenous products Non-homogenous products.

Initiating and Responding to Price Changes (cont.) Leader’s Strategic Options: Maintain Price. Maintain price and add value. Reduce price. Increase price and improve quality. Lunch a low price fighter.