Chapter 13

1. Chapter 13 Designing Pricing Strategies and Programs PowerPoint by Karen E. James Louisiana State University - Shreveport To accompany A Framework for Marketing Management, 2nd Edition

2. Objectives • Understand how companies price a new good or service. • Identify how prices can be adapted to meet varying circumstances. • Learn when price changes should be initiated and how soon companies should respond to competitive price changes. To accompany A Framework for Marketing Management, 2nd Edition

3. Rent Tuition Fare Monthly payment Fee Dues Interest Donation Price Has Many Names To accompany A Framework for Marketing Management, 2nd Edition

4. Pricing Procedure Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price Survival Maximize current profits Maximize market share Penetration strategy Market skimming Skimming strategy Product quality leaders Partial cost recovery Setting the Price To accompany A Framework for Marketing Management, 2nd Edition

5. Pricing Procedure Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price Understand factors that affect price sensitivity Estimate demand curves Understand price elasticity of demand Elasticity Inelasticty Setting the Price To accompany A Framework for Marketing Management, 2nd Edition

6. Product is more distinctive Buyers are less aware of substitutes Buyers cannot easily compare quality of substitutes The expenditure is a lower part of buyer’s total income The expenditure is small compared to the total cost Part of the cost is borne by another party The product is used with assets previously bought The product is assumed to have more quality, prestige, or exclusiveness Buyers cannot store the product Marketing Strategies Conditions Under Which Consumers are Less Price Sensitive: To accompany A Framework for Marketing Management, 2nd Edition

7. There are few or no substitutes Buyers do not readily notice the higher price Buyers are slow to change their buying habits and search for lower prices Buyers think higher prices are justified Marketing Strategies Conditions Under Which Demand is Less Elastic: To accompany A Framework for Marketing Management, 2nd Edition

8. Pricing Procedure Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price Types of costs and levels of production must be considered Accumulated production leads to cost reduction via the experience curve Differentiated marketing offers create different cost levels Setting the Price To accompany A Framework for Marketing Management, 2nd Edition

9. Setting the Price • Key Pricing Terms: • Fixed costs: do not vary directly with changes in level of production • Variable costs: vary with production • Total costs: sum of fixed and variable costs a given level of production • Average cost: cost per unit at a given level of production To accompany A Framework for Marketing Management, 2nd Edition

10. Pricing Procedure Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price Firms must analyze the competition with respect to: Costs Prices Possible price reactions Pricing decisions are also influenced by quality of offering relative to competition Setting the Price To accompany A Framework for Marketing Management, 2nd Edition

11. Pricing Procedure Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price Price-setting begins with the three “C’s” Select method: Markup pricing Target-return pricing Perceived-value pricing Value pricing Going-rate pricing Auction-type pricing Group pricing Setting the Price To accompany A Framework for Marketing Management, 2nd Edition

12. Pricing Procedure Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price Requires consideration of additional factors: Psychological pricing Gain-and-risk-sharing pricing Influence of other marketing mix variables Company pricing policies Impact of price on other parties Setting the Price To accompany A Framework for Marketing Management, 2nd Edition

13. Adapting the Price • Geographical Pricing • Barter • Compensation deal • Buyback arrangement • Offset To accompany A Framework for Marketing Management, 2nd Edition

14. Cash discounts Quantity discounts Trade-in allowances Functional discounts Seasonal discounts Promotion allowances Adapting the Price Price Discounts and Allowances: To accompany A Framework for Marketing Management, 2nd Edition

15. Loss-leader pricing Special-event pricing Cash rebates Low-interest financing Longer payment terms Warranties and service contracts Psychological discounting Adapting the Price Promotional Pricing Tactics: To accompany A Framework for Marketing Management, 2nd Edition

16. Customer segment pricing Product-form pricing Image pricing Channel pricing Location pricing Time pricing Adapting the Price Discriminatory Pricing Tactics: To accompany A Framework for Marketing Management, 2nd Edition

17. Adapting the Price • Price discrimination works when: • Market segments show different intensities of demand • Consumers in lower-price segments can not resell to higher-price segments • Competitors can not undersell the firm in higher-price segments • Cost of segmenting and policing the market does not exceed extra revenue To accompany A Framework for Marketing Management, 2nd Edition

18. Product-line pricing Optional-feature pricing Captive-product pricing Two-part pricing By-product pricing Product-bundle pricing Adapting the Price Product-Mix Pricing Tactics: To accompany A Framework for Marketing Management, 2nd Edition

19. Initiating and Responding to Price Changes • Strategic Options Include: • Maintain price and perceived quality; selectively prune customers • Raise price and perceived quality • Partially cut price and raise quality • Fully cut price, maintain perceived quality • Maintain price, reduce perceived quality • Introduce an economy model To accompany A Framework for Marketing Management, 2nd Edition

20. Key Considerations Initiating price cuts Initiating price increases Reactions to price changes Responding to competitor’s price changes Circumstances leading to price cuts: Excess plant capacity Declining market share Attempt to dominate the market via lower costs Price cutting traps: Price/quality perceptions Low prices don’t create market loyalty Competition may match or beat price cuts Initiating and Responding to Price Changes To accompany A Framework for Marketing Management, 2nd Edition

21. Key Considerations Initiating price cuts Initiating price increases Reactions to price changes Responding to competitor’s price changes Circumstances leading to price increases: Cost inflation Overdemand Methods of dealing with overdemand: Delayed quotation pricing Escalator clauses Unbundling Reduction of discounts Initiating and Responding to Price Changes To accompany A Framework for Marketing Management, 2nd Edition

22. Key Considerations Initiating price cuts Initiating price increases Reactions to price changes Responding to competitor’s price changes Firms must monitor both customer and competitor reactions Competitor reactions are common when: Few firms offer the product The product is homogeneous Buyers are highly informed Initiating and Responding to Price Changes To accompany A Framework for Marketing Management, 2nd Edition

23. Key Considerations Initiating price cuts Initiating price increases Reactions to price changes Responding to competitor’s price changes The degree of product homogeneity affects how firms respond to price cuts initiated by the competition Market leaders can respond to aggressive price cutting by smaller competitors in several ways Initiating and Responding to Price Changes To accompany A Framework for Marketing Management, 2nd Edition

24. Maintain price and profit margin Maintain price, add value Increase price, improve quality Launch a low-price fighter line Initiating and Responding to Price Changes Market Leader Responses to Competitor Initiated Price Cuts: • Reduce price To accompany A Framework for Marketing Management, 2nd Edition