14 Pricing Kotler MM 13e Chapter 14-2009

Developing Pricing Strategies and Programs

Marketing Management, 13th ed

14

Presented byBlair V. Johnson

Johns Hopkins University

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?


Price

• The money charged for a product or service.

• Everything that a customer has to give up in order to acquire a product or service.

• We must distinguish between cost to the supplier of producing/providing the product and the price paid by the buyer to acquire the product.

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Synonyms for Price

• Rent• Tuition• Fee• Fare• Rate• Toll• Premium• Honorarium

• Special assessment• Bribe• Dues• Salary• Commission• Wage• Tax


Consumer Psychology and Pricing

Reference Prices

Price-quality inferences

Price endings

Price cues

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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

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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

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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

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Four Views of Price

• The Economist’s view – price is set by the forces of supply and demand.

• The Accountant’s view – price should cover costs so that profit may be shown.

• The Customer’s view – price has to represent good value.

• The Marketer’s view – Pricing is an opportunity to gain competitive advantage

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Factors Influencing Pricing Decisions

• Costs of production• Competitors prices• Customer’s

perception of value• The firm’s objectives• Customer demand• Price elasticity of

demand• Target market

• Marketing Mix• Stages in the

product life cycle• Expectations of

distributors• State of competition

in the market• Likely reaction of

customers


Sales and Product Life Cycle

Examples of Products in PLC StagesIntroduction Growth Maturity Decline

Fourth generation mobile phones

Netbooks Personal Computers

Typewriters

E-conferencing

Email Faxes Handwritten letters

All-in-one racing skin-suits

Breathable synthetic fabrics

Cotton Shirts Shell Shirts

iris-based personal identity cards

Smart cards Credit Cards Checks


Adopter Categorization

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Market Structures

Economists identify four types of market structures:

• Perfect Competition• Many firms each selling homogeneous products with customers choosing

to buy on price alone• Each firm is a price taker and forced to charge the ruling market price• Perfectively competitive firms are price takers – they set their prices in

line with the competitive landscape

• Monopoly• A single supplier with the power to fix price • Monopolists are price makers

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Market Structures (continued)

Between those two extremes there are two other market structures:

• Monopolistic Competition• Many competing firms each selling a branded product with customers choosing to buy on price

alone• Many competing producers sell products that are differentiated from one another (i.e.. the products

are substitutes, but are not exactly alike). Many markets are monopolistically competitive, common examples include the markets for restaurants, cereal, clothing, shoes and service industries in large cities. ach firm is a price taker and forced to charge the ruling market price

• No business has total control over the market price

• Oligopoly• Competition between a small number of large firms • Natural tendency to act together in an illegal price-fixing cartel• Largest player in the market acts as the price leader; rivals follow


Steps in Setting Price

Select the price objective

Determine demand

Estimate costs

Analyze competitor price mix

Select pricing method

Select final price

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Pricing Objectives

Financial Return• Maximize profits • Achieve a target level

of profits• Achieve a target level

of return• Maximize sales

revenue• Enhance cash flow

Market Oriented• To maintain/improve

market share• Meet/stymie

competition• To increase sales• Prepare customers for

transition to next generation of products

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Nine Price-Quality Strategies

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Price Should Align with Value


Step 1: Selecting the Pricing Objective

• Survival• Maximum current

profit• Maximum market

share• Maximum market

skimming• Product-quality

leadership

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Skimming

• Setting a high price to maximize profit per unit

• The product is sold to successive layers to the market

• The top segment is skimmed off first with a high price

Objective: • Maximize profit per unit to achieve quick recovery of

developmental and other cost (e.g., distribution)


Step 2: Determining Demand

Price Sensitivity

Estimating

Demand Curves

Price Elasticity

of Demand


Figure 14.2 Inelastic andElastic Demand


Step 3: Estimating Costs

Types of Costs

Target Costing

Accumulated

ProductionActivity-Based

Cost Accounting


Cost Terms and Production

• Fixed costs• Variable costs• Total costs• Average cost• Cost at different

levels of production


Figure 14.4 Cost per Unit as a Function of Accumulated Production


Figure 14.6 Break-Even Chart


Step 5: Selecting a Pricing Method

• Markup pricing• Target-return pricing• Perceived-value

pricing• Value pricing• Going-rate pricing• Auction-type pricing

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Example of Mark-up Pricing

• % mark-up on direct costs (directly traced to producing specific goods

or services; e.g., cost of meat in a hamburger)

• Calculate direct costs and then add an amount to cover indirect costs (Some labor costs, for example, can

be indirect, as in the case of maintenance personnel and firm management)

This method is widely used in retailIllustration• Nordstrom's buys Hickey Freeman Men's Suits for $300• Mark-up of 200% on buying price• Selling price: $300 + $750 (250% mark-up) = $1050


Step 6: Selecting the Final Price

• Impact of other marketing activities

• Company pricing policies

• Gain-and-risk sharing pricing

• Impact of price on other parties


Price-Adaptation Strategies

Geographical Pricing

Discounts/Allowances

Differentiated Pricing

Promotional Pricing


Price-Adaptation Strategies

Countertrade• Barter• Compensation deal• Buyback

arrangement• Offset

Discounts/ Allowances• Cash discount• Quantity discount• Functional discount• Seasonal discount• Allowance

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Price Discounts and Allowances

Cash Discount:Cash Discount: A price reduction to buyers who pay bills A price reduction to buyers who pay bills promptly. A typical example is “2/10, net promptly. A typical example is “2/10, net 30,” which means that payment is due 30,” which means that payment is due within 30 days and that the buyer can within 30 days and that the buyer can deduct 2 percent by paying the bill within 10 deduct 2 percent by paying the bill within 10 days.days.

Quantity Discount:Quantity Discount: A price reduction to those who buy large A price reduction to those who buy large volumes. A typical example is “$10 per unit volumes. A typical example is “$10 per unit for less than 100 units; $9 per unit for 100 or for less than 100 units; $9 per unit for 100 or more units.” Quantity discounts must be more units.” Quantity discounts must be offered equally to all customers and must offered equally to all customers and must not exceed the cost savings to the seller. not exceed the cost savings to the seller. They can be offered on each order placed or They can be offered on each order placed or on the number of units ordered over a given on the number of units ordered over a given period.period.


Promotional Pricing Tactics

• Loss-leader pricing• Special-event pricing• Cash rebates• Low-interest financing• Longer payment terms• Warranties and service

contracts• Psychological

discounting


Differentiated Pricing

• Customer-segment pricing

• Product-form pricing• Image pricing• Channel pricing• Location pricing• Time pricing• Yield pricing

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Initiating and Responding to Price Changes

• Initiating Price Cuts• Drive to dominate the market

through lower costs• Low quality trap• Fragile-market-share trap• Shallow-pockets trap

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Table 16.3: Marketing-Mix Alternatives

Strategic OptionsStrategic Options ReasoningReasoning ConsequencesConsequences

1. Maintain price and 1. Maintain price and perceived quality. perceived quality. Engage in selective Engage in selective customer pruning.customer pruning.

Firm has higher Firm has higher customer loyalty. It is customer loyalty. It is willing to lose poorer willing to lose poorer customers to customers to competitors.competitors.

Smaller market share. Smaller market share. Lowered profitability.Lowered profitability.

2. Raise price and 2. Raise price and perceived quality.perceived quality.

3. Maintain price and 3. Maintain price and raise perceived raise perceived quality.quality.

Raise price to cover Raise price to cover rising costs. Improve rising costs. Improve quality to justify higher quality to justify higher prices.prices.

It is cheaper to It is cheaper to maintain price and maintain price and raise perceived quality.raise perceived quality.

Smaller market share. Smaller market share. Maintained Maintained profitability.profitability.

Smaller market share. Smaller market share. Short-term decline in Short-term decline in profitability. Long-term profitability. Long-term increase in increase in profitability.profitability.

See text for complete table


Table 14.6 Profits Before and After a Price Increase


Increasing Prices

Delayed quotation pricing

Escalator clauses

Unbundling

Reduction of discounts

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Initiating and Responding to Price Changes

Possible responses to higher costs or overhead without raising prices include:

• Shrinking the amount of product instead of raising the price

• Substituting less expensive materials or ingredients

• Reducing or removing product features

• Removing or reducing product services, such as installation or free delivery

• Using less expensive packaging material or larger package sizes

• Reducing the number of sizes and models offered

• Creating new economy brands

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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

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Common Pricing Mistakes

• Determine costs and take traditional industry margins

• Failure to revise price to capitalize on market changes

• Setting price independently of the rest of the marketing mix

• Failure to vary price by product item, market segment, distribution channels, and purchase occasion

14 Pricing Kotler MM 13e Chapter 14-2009

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