1. Developing Pricing Strategies and Programs Marketing Management, 13 th ed 14

2. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-2 Chapter Questions How do consumers process and evaluate prices? How should a company set prices initially for products or services? How should a company adapt prices to meet varying circumstances and opportunities? When should a company initiate a price change? How should a company respond to a competitor’s price challenge?

3. 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. What Is a Price?

4. Price is the only element in the marketing mix that produces revenue; all other elements represent costs What Is a Price?

5. Internet Discrimination (Buyer) Get instant price comparison from thousands of vendors (mySimon.com can compare more than two dozen book stores offered on line) Name their price and have it met (Priceline.com the customer states the price he wants to pay for Airline ticket, hotel or rental car) Get products free (free software movement which started with Linux. The biggest challenge for Microsoft, Oracle & IBM to compete against free software's) Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-5

6. Internet Discrimination (Seller) Monitor customer behavior and tailor offers to individuals (GE lighting 55,000 pricing requests per year, has web programs that evaluate 300 factors that go into pricing quote, such as past sales & discounts & does it in 6 hours instead of 30 days) Give certain customers access to special prices (CDNOW, an online vendor of music, e-mails certain buyers a special website address with lower prices) Negotiate Prices in online auctions & exchanges (want to sell 100s of excess & slightly worn widgets? Post a sale on eBay) Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-6

7. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-7 Consumer Psychology and Pricing Reference Prices (Previous experience + posted) Price-quality inferences (higher the price higher qty) Price endings ($299 vs. $300) Price cues (Sale signs & avoid 9 if u want image)

8. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-8 Steps in Setting Price Select the price objective Determine demand Estimate costs Analyze competitor price mix Select pricing method Select final price

9. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-9 Step 1: Selecting the Pricing Objective Survival (Short run strategy specially when a company has excess capacity or intense competition) Maximum current profit (Estimate demand & cost associated and try to get maximum current profits, cash flow or ROI) not a long term strategy Maximum market share (market penetration pricing) TI Maximum market skimming (Sony HDTV @ $43,000) Product-quality leadership (affordable luxuries, like Lexus, BMW & Mercedes)

10. New-Product Pricing Strategies Market-penetration pricing sets a low initial price in order to penetrate the market quickly and deeply to attract a large number of buyers quickly to gain market share Price sensitive market Inverse relationship of production and distribution cost to sales growth Low prices must keep competition out of the market

11. New-Product Pricing Strategies Market-skimming pricing is a strategy with high initial prices to “skim” revenue layers from the market Product quality and image must support the price Buyers must want the product at the price Costs of producing the product in small volume should not cancel the advantage of higher prices Competitors should not be able to enter the market easily

12. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-12 Step 2: Determining Demand Price Sensitivity (Higher the price lower the demand) Estimating Demand Curves (Surveys, Experiments, Statistical analysis) Price Elasticity of Demand (If demand hardly changes-Inelastic If demand changes considerably-Elastic)

13. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-13 Figure 14.2 Inelastic and Elastic Demand

14. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-14 Step 3: Estimating Costs Types of Costs variable, fixed, total cost Target Costing Tata’s Nano @ Rs100,000 Accumulated Production Experience curve Activity-Based Cost Accounting

15. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-15 Cost Terms and Production Fixed costs Variable costs Total costs Average cost Cost at different levels of production

16. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-16 Figure 14.4 Cost per Unit as a Function of Accumulated Production

17. Step 4: Analyzing Competitors Costs, Prices & Offers Consider the nearest competitor price See their features, if plus reduce your own price, if more should increase your own price The introduction of any price or the change of existing price can provoke a response from customers, competitors, distributors, suppliers and even government Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-17

18. Step 5: Selecting a Pricing Method Markup pricing (20%) Target-return pricing (20% ROI) Perceived-value pricing (Caterpillar tractor @ $100,000) Value pricing (IKEA, Target, Southwest Airline) EDLP (Every day low prices Wal-Mart) HLP (High Low Pricing-Frequent sales) Going-rate pricing (Competitors price, like steel, iron & paper) Auction-type pricing (English-real estate, Dutch-one buyer many sellers, Sealed-bid)

19. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-19 Figure 14.6 Break-Even Chart

20. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-20 Step 6: Selecting the Final Price Impact of other marketing activities (relative price, relative quality, relative advertising) Company pricing policies (Airline charge up to 50% on cancellation, Credit card charges fee on late payment, Banks charge on cheque bouncing) Gain-and-risk sharing pricing (profit & loss for saving’s account holder) Impact of price on other parties (price impact on intermediaries)

21. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-21 Price-Adaptation Strategies Geographical Pricing (Different locations) Discounts/Allowances Differentiated Pricing Promotional Pricing

22. Price-Adaptation Strategies Countertrade Barter (product for product) Compensation deal (70% cash 30% coffee) Buyback arrangement (Initial payment in cash rest factories goods) Offset (Pepsi vs. Vodka from Russia) Discounts/ Allowances Cash discount (2/10, net 30) Quantity discount ($10 up to 100 & $9 for 101 + units) Functional discount (Selling & storing) Seasonal discount (Off- season discount) Allowance (Trade-in & promotional allowance)

23. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-23 Promotional Pricing Tactics Loss-leader pricing Special-event pricing Cash rebates Low-interest financing Longer payment terms Warranties and service contracts Psychological discounting (Was $399 Now $299)

24. Differentiated Pricing Customer-segment pricing (student discounts) Product-form pricing (Shirts from Rs 800-2,000) Image pricing (Garments) Channel pricing (Soft drink) Location pricing (Stadiums) Time pricing (Busy hours vs. Off hours) Yield pricing (Airline & Hotel industry) Price Discrimination- Company sells a product at two or prices that do not reflect proportional difference in costs Separate price as per demand Less to bulk buyers

25. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-25 Table 14.6 Profits Before and After a Price Increase

26. Initiating Price Cuts Low quality trap (consumers assume quality is low) Fragile-market share trap (a low price buys market share but not market loyalty) Shallow-pocket trap (higher priced competitors can match the lower prices and can sustain it due to deeper pockets) Price-war trap (competitors respond by lowering their prices even more, triggering a price war) Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-26

27. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-27 Increasing Prices Delayed quotation pricing (Until the product is finished or delivered) Escalator clauses (Increase due to inflation, Toyota) Unbundling (start charging for the things which were free like Air bags Reduction of discounts (stops cash or quantity discounts)

28. Alternative approaches to Price Hike Shrinking the amount of the product Substituting expensive ingredients Reducing or removing product features Reducing or removing product services Using less expensive package material Reducing the # of sizes & models offered Creating new economy models Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14-28