Gillette

Commands a
Price Premium

13. DEVELOPING PRICING

STRATEGIES AND PROGRAMS
Agenda

• Factors affecting pricing

decisions
• General Pricing approaches

• New-Product Pricing Strategies

• Product Mix Pricing Strategies

• Price-Adjustment strategies

• Initiating & Responding to

Price Changes
 Price

• The amount of money charged for a product or service, or

the sum of the values that consumers exchange for the
benefits of having or using the product or service
• The monetary medium of exchange is also called price

• Price is the only element of the MM that produces revenue;

the other elements produce costs
 Synonyms for Price

• Rent • Bribe
• Tuition • Dues
• Fee • Salary
• Fare • Commission
• Rate • Wage
• Toll • Tax
• Premium
• Honorarium
 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
 Consumer Psychology and Pricing
Understanding how consumers arrive at their perceptions of
prices is an important marketing priority

Reference Prices

Price-quality inferences

Price endings

Price cues
 Reference Prices
Consumers compare an observed price to an internal reference
price they remember or to an external frame of reference

• Possible consumer reference prices

• “Fair price”

• Last price paid

• Upper-bound price

• Competitor prices

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 Price-Quality Inferences

Many consumers use price as an indicator of quality

Image pricing is effective with ego-sensitive products such as

perfumes and expensive cars

Some brands adopt exclusivity and scarcity as a means to

signify uniqueness and justify premium pricing
 Price Cues

• Consumer perceptions of prices are also affected by alternative

pricing strategies
• “Left to right” pricing ($299 vs. $300)

• Odd number discount perceptions

• Even number value perceptions

• Ending prices with 0 or 5

• “Sale” written next to price

 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
 Steps in Setting Price

Select the price objective

Determine demand

Estimate costs

Analyze competitor price mix

Select pricing method

Select final price

Step 1: Selecting the Pricing Objective

• Survival

• Maximum current profit

• Maximum market share

• Maximum market skimming

• Product-quality leadership
 Step 2: Determining Demand

Price Sensitivity

Estimating
Demand Curves

Price Elasticity
of Demand
 Factors Leading to Less Price Sensitivity

• The product is more distinctive

• Buyers are less aware of substitutes

• Buyers cannot easily compare the quality of substitutes

• The expenditure is a smaller part of buyer’s total income

• The expenditure is small compared to the total cost of the end product

• Part of the cost is paid by another party

• The product is used with previously purchased assets

• The product is assumed to have high quality and prestige

• Buyers cannot store the product

Inelastic and Elastic Demand
Step 3: Estimating Costs

Types of Costs

Accumulated
Production

Activity-Based
Cost Accounting

Target Costing
 Types of Costs

Fixed
FixedCosts
Costs Variable
VariableCosts
Costs
(Overhead)
(Overhead)
Costs
Coststhat
thatdo
dovary
vary
Costs
Coststhat
thatdon’t
don’t directly
directlywith
withthe
the
vary
varywith
withsales
salesor
or level
levelof
ofproduction.
production.
production
productionlevels.
levels.
Raw
Rawmaterials
materials
Executive
ExecutiveSalaries
Salaries
Rent
Rent

Total
TotalCosts:
Costs:
Sum
Sumof
ofthe
theFixed
Fixedand
andVariable
VariableCosts
Costsfor
foraaGiven
Given
Level
Levelof
ofProduction
Production
Cost per unit at different levels of production

• Total costs

• Average cost

• Cost at different levels of

production
 The Experience Curve:
Cost per Unit as a Function of Accumulated Production
Step 4:Analyzing competitors’ costs, prices, and
offers

• Company’s pricing strategy may affect the nature of

competition it faces

• Companies need to learn the price and quality of each

competitor’s offer
 Step 5: Selecting a Pricing Method

• Markup pricing

• Target-return pricing

Target-return price = unit cost + (desired return X invested

capital / unit sales )
• Perceived-value pricing

• Value pricing

• Going-rate pricing

• Auction-type pricing
 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

 General Pricing Approaches

• Cost-based: Cost-plus, Target profit pricing

• Buyer-based: Value-based pricing

• Competition-based: Going rate, Sealed-bid pricing

 New-Product Pricing

• Market-skimming Pricing: Setting a high price for a new

product to skim maximum revenue layer by layer from the
segments willing to pay the high price; the company makes
fewer but more profitable sales

• Market-penetration Pricing: Setting a low price for a new

product in order to attract a large number of buyer and a large
market share
 Product Mix Pricing Strategies
• Product line pricing: Setting price steps between product line items

• Optional-product pricing: Pricing optional or accessory products sold

with the main product
• Captive-product pricing: Pricing products that must be used with the
main product
• Two-part pricing: Service firms engage in this price consisting of a
fixed fee plus a variable usage fee
• By-product pricing: Pricing low-value by-products to get rid of them

• Product bundle pricing: Pricing bundles of products sold together

Adapting the Price:
Price-Adjustment Strategies

Companies usually adjust their basic prices

to account for various customer differences
and changing situations

Some price-adjustment strategies

 Price-Adjustment Strategies
Strategy Description
Discount and allowance Reducing prices to reward customer response such
Pricing as paying early or promoting the product

Differentiated pricing Adjusting prices to allow for differences in

customers, products, or locations

Psychological pricing Adjusting prices for psychological effect

Geographical pricing Adjusting prices to account for the geographic

location of customers

Promotional pricing Temporarily reducing prices to increase short-run

sales

International pricing Adjusting prices for international markets

 Discount and Allowance Pricing

• Cash discount: Price reduction to buyers who pay their bills promptly

• Quantity discount: A price reduction to buyers who buy large volumes

• Functional discount: Price reduction offered to channel members who

perform certain function
• Seasonal discount: Price reduction to buyers who purchase merchandise
or services out of season
• Allowance: Promotional money paid by manufacturers to retailers in
return for an agreement to feature the manufacturer’s product in some
away
Differentiated Pricing
Hospitality Industry and Differentiated Pricing

• Yield pricing: Discounted but limited early purchases, higher-

priced late purchases, lowest rates on unsold inventory just
before it expires
• Price discrimination is illegal when sellers offer different
price terms to different people within the same trade group
• Price discrimination is legal if the seller can prove that its
costs are different when selling different volumes or qualities
of same products to different retailers
Promotional Pricing

• Loss-leader pricing

• Special-event pricing

• Cash rebates

• Low-interest financing

• Longer payment terms

 Initiating Price Cuts

Initiating Price Cuts

• A price-cutting strategy can
lead to other possible traps
like:
– Low-quality trap

– Fragile-market-share trap

– Shallow-pockets trap

– Price-war trap
 Initiating Price Increases
• Sensitive issue

• Factors contributing to Price increase: Cost

inflation, anticipatory pricing, over demand
• Price can be increased in the following ways:
– Delayed quotation pricing Ex: Industrial construction

– Escalator clauses. Ex: Bridge building

– Unbundling

– Reduction of discounts
 Alternative approaches to avoid
increasing prices

• Shrinking the amount of product

• Substituting less-expensive materials or ingredients

• Reducing or removing product features

• Using less-expensive packaging materials

• Reducing the number of sizes and models offered

Responding to Competitors’ Price Changes

Hold our price

Has competitor No at present level;
cut his price? continue to watch
competitor’s
No No price
Yes

Is the price Is it likely to be How much has

likely to a permanent his price been
significantly Yes Yes
hurt our sales? price cut? cut?

By less than 2% By more than 4%

Include a
cents-off coupon Drop price to
for the next competitor’s
purchase price