DEVELOPING PRICING STRATEGIES AND PROGRAMS

Price is all around us

You pay rent for your apartment
You pay tuition for your education
You pay a fee to your physician or dentist
Airline/railway/taxi/bus companies charge you a fare
Local utilities call their price a rate
Local bank charges you interest for the money you borrow
The price for driving your car on Jamuna Bridge is toll
The company that insures your car charges you a premium
The guest lecturer charges an honorarium
The price of an executive is salary
The price of a sales person is commission
Price of worker is wage
Income tax- the price we pay for the privilege of making money
Setting the Price
Segment
Ultimate
Luxury
Special Needs
Middle
Ease/Convenience
Me Too, But Cheaper
Price Alone

Example
Mercedes Benz
Audi, Lincoln, Lexus
Volvo(safety), Porsche (performance)
Buick, Renault,
Escort
Hyundai
Yugo

Steps in Setting Price

Select the price objective

Determine demand
Estimate costs
Analyze competitor price mix
Select pricing method
Select final price

Figure: Setting Pricing Policy

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Step 1: Selecting the Pricing Objective

Survival
Maximum current profit
Maximum market share
Maximum market skimming
Product-quality leadership

Survival
Companies pursue survival as their major objective if plagued with overcapacity, intense
competition, or changing customer wants.
To keep the plant operating and the inventories turning over. They will often cut prices.
Profits are less important than survival.
As long as prices cover variable costs and some fixed costs, the companies stay in
business.
It is a short run objective. The firm must learn how to add value.
Maximum Current Profit
Focused on maximizing current profit.
Choose the price that produces maximum current profit, cash flow, or rate of return on
investment.
Focused on current financial performance this may not be effective in the long-run.
It assumes that the firm has knowledge of its demand and cost functions; in reality, it is very
difficult to estimate.
Maximum Current Revenue
Focused on maximizing sales revenue.
It requires only estimating the demand function.
They believe that revenue maximization will lead to long-run profit maximization and market
share- growth.
Maximum Sales Growth
They believe that higher sales volume will lead to lower unit costs and higher long-run profit
They set lowest price, assuming that the market is price sensitive. This is called marketpenetration pricing.
e.g. Texas Instrument (TI)
Market-penetration pricing- Best when:
Market is highly price-sensitive, and a low price stimulates market growth,
Production and distribution costs fall within accumulated production experience, and
Low price discourages actual and potential competition
Maximum Market Skimming
Many companies favor setting high prices to skim the market. e.g. Du Pont
Conditions:
A sufficient number of buyers have a high current demand
Unit costs of producing small volumes are not high.
High initial price does not attract more competition
The price communicates the image of superior product.
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Product Quality Leadership

A company might aim to be the product quality leader in the market.
e.g. Maytag builds high quality washing machines and prices them at roughly $ 100 more.
Premium quality/premium price strategy
Step 2: Determining Demand
Price sensitivity- The demand curve shows the markets probable purchase quantity
at different prices.
Estimating demand curves Surveys
Price experiments
Statistical Analysis
Price elasticity of demand- Marketers need to know responsive, or elastic, demand
would be to a change in price.

Figure: Inelastic and Elastic Demand

Step 3: Estimating Costs
Types of Costs- Fixed, variable
Accumulated Production- Learning curve
Activity-Based Cost Accounting- Instead of standard cost accounting ABC accounting
tries to identify the real costs associated with serving each customer.
Target Costing- Cost can be changed as a result of a concentrated effort by
designers, engineers, and purchasing agents to reduce them through target costing.
Cost Terms and Production

Fixed costs
Variable costs
Total costs
Average cost
Cost at different levels of production

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Figure: Cost per Unit as a Function of Accumulated Production: The Experience

Curve
Step 4: Analyzing Competitors Costs, Prices, and Offers
The firm should first consider the nearest competitors price.
If the firms offer contains features not offered by the nearest competitor, it should evaluate
their worth to the customer and add that value to the competitors price
If the competitors offer contains some features not offered by the firm, the firm should
subtract their value from its own price.

Figure: The Three Cs Model for Price Setting

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Step 5: Selecting a Pricing Method

Markup pricing
Target-return pricing
Perceived-value pricing
Value pricing
Going-rate pricing
Sealed Bid Pricing
Auction-type pricing

Markup pricing
The most elementary pricing method is to add a standard markup to the products cost
e.g. Construction companies submit job bids by estimating the total project cost and adding
a standard markup to their costs.
Variable cost $ 10
Fixed cost
$ 300,000
Expected unit sales 50,000
Unit cost = Variable cost + (Fixed cost/Units) = $ 16
If manufacturer wants to add 20 % mark up
Markup price = Unit Cost /(1- desired return on sales)
= $ 16 /(1-0.2) = $20
Target-return pricing
The firm determines the price that would yield its target rate of return on investment (ROI).
General Motor follows this method.
Suppose manufacturer has invested $ I m in the business and wants to set a price to earn a
20% ROI, namely $200,000. quantity to be sold is 50,000
Target return price= Unit cost + (desired return X invested capital)/Unit
= $16 + (0.2X $1,000,000)/50,000 = $ 20
BEP (Volume) = Fixed cost/ (price- variable cost)
= $ 300,000/($20-$10) = 30,000 units.

Fig: Break-Even Chart for Determining Target-Return Price and Break-Even Volume
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Perceived Value Pricing

Marketers see the buyers perceptions of value, not the sellers cost, as the key to pricing.
They use non price variables in the marketing mix to build up perceived value in the buyers
minds.
It first well with product positioning thinking. A company develops a product concept for a
particular target market with a planned quality and price
More for More philosophy
e.g. Du Pont and Caterpillar are two major practitioners of perceived-value pricing
Value Pricing
Marketers charge a low price for a high-quality offering.
e.g. Pricing of Lexus.
More for less philosophy
Going Rate Pricing
Based on competitors prices with less attention paid to its own costs or demand
The firm might charge the same, more, or less than its major competitors.
The smaller firms follow the leader.
This pricing method is quite popular, Where costs are difficult to measure or competitive
response is uncertain.
Sealed Bid Pricing
Competitive- oriented pricing is common where firms bid for jobs.
The firms bases its price on expectations of how competitors will price rather than on a rigid
relation to the firms costs or demand.
The firm wants to win the contract.
Table: Effect of Different Bids on Expected Profit

Probability of Getting
Award with This Bid
(Assumed)

Companys
Bid

Companys
Profit

$ 9,500

$ 100

0.81

$ 81

10,000

600

0.36

216

10,500

1,100

0.09

99

11,000

1,600

0.01

16

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Expected
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Auction-Type Pricing
One major purpose of auctions is to dispose of excess
inventories or used goods
English auctions- Ascending bids
Dutch auctions- Descending bids. An auctioneer announces a high price for a
product and then slowly decreases the price until a bidder accepts the price.
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

Influence of the Other Marketing Elements

Brands with average relative quality but high relative advertising budgets charged premium
prices
Brands with high relative quality and high relative advertising budgets obtained the highest
prices
The positive relationship between high advertising budgets and high prices held most
strongly in the later stages of the product life cycle for market leaders
Figure: Nine Price-Quality Strategies

Initiating and Responding to Price Changes

Reactions to Price Changes
Customer Reactions
Competitor Reactions
Responding to Competitors Price Changes
Maintain price
Maintain price and add value
Reduce price
Increase price and improve quality
Launch a low-price fighter line

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NOTE- for details please see:

Marketing Management Kotler & Keller (12th Edition),
Marketing Management Philip Kotler (Millenium Edition)

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