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Chapter 14 Developing Pricing Strategies and Programs.docx

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MKT 702
Rob Wilson

MKT702 Marketing Management CHAPTER 14 Developing Pricing Strategies and Programs UNDERSTANDING PRICING A Changing Pricing Environment  Effectively designing and implementing pricing strategies requires thorough understanding of consumer pricing psychology and systematic approach to setting, adapting, and changing prices Consumer Psychology and Pricing  Customers actively process price information, interpreting it from the context of prior purchasing experience, formal communications, informal communications, point-of-purchase or online resources, and other factors  Reference prices: comparing observed price to an internal reference price remembered or an external frame of reference o Regular retail price, fair price, typical price, last price paid, upper-bound/lower-bound price, historical competitor prices, expected future price, usual discounted price  Consumers use price as an indicator of quality o Some brands adopt exclusivity and scarcity to signify uniqueness and justify premium pricing SETTING THE PRICE Step 1: Selecting the Pricing Objective  Five major objectives in pricing: 1. Survival – if plagued with overcapacity, intense competition, or changing consumer wants  Short-term objective that only covers variable costs and some fixed costs 2. Maximum current profit – estimate demand and costs associated with alternative prices and choose price that produces maximum current profit, cash flow, or rate of return on investment  May sacrifice long-term performance by ignoring effects of other marketing variables, competitors’ reactions, and legal restrains on price 3. Maximum market share – generating higher sales volume will lead to lower unit costs and higher long-term profits by setting the lowest price assuming market is price sensitive  Market-penetration pricing: pricing strategy where prices start low to drive higher sales volume from price sensitive customers and produce productivity gains 4. Maximum market skimming – unveiling new product favour setting high prices  Market-skimming pricing: pricing strategy where prices start high and are slowly lowered over time to maximize profits from less price-sensitive customers 5. Product-quality leadership – striving to be affordable luxuries characterized by high levels of perceived quality, taste, and status and with a price just high enough not to be out of consumers’ reach Step 2: Determining Demand  Inverse relationship between price and demand: the higher the price, the lower the demand  Consumers are less price sensitive when i. There are few or no substitutes or competitors ii. They do not readily notice the higher price iii. They are slow to change their buying habits iv. They think the price are justified v. Price is only a small part of total cost of obtaining, operating, and servicing the product over its lifetime  Sellers can charge higher price than competitors if it can convince customers that it offers lowest total cost of ownership (TCO)  Companies attempt to measure demand curve using different methods o Surveys – explore how many units consumers would buy at different proposed prices o Price experiments – vary prices of different products in a store and charge different prices for the same product in similar territories to see how change affects sales o Statistical analysis – use past prices quantities sold, and other factors to reveal their relationship  If demand hardly changes with small change in price, demand is inelastic; if demand changes considerably, demand is elastic Step 3: Estimating Costs  Fixed costs (overhead): costs that do not vary with production level or sales revenue  Variable costs: costs that vary directly with the level of production MKT702 Marketing Management  Total costs: sum of fixed and variable costs for any given level of production  Average costs: cost per unit at the level of production; equals total cost divided by production  Experience curve (learning curve): decline in average cost with accumulated production experience  Target costing: deducting the desired profit margin from the price at which a product will sell, given its appeal and competitors’ prices o Firm must examine each cost element – design, engineering, manufacturing, sales – and bring down costs so that the final cost projections are in target range Step 4: Analyzing Competitors’ Costs, Prices, and Offers  Firm must take competitors’ costs, prices, and possible price reactions into account o Firm should evaluate their worth to customer and add that value to their competitors’ price  Can anticipate competitor reactions by assuming competitor reacts in standard way to a price being set or changed, or that competitor treats each price difference or change as fresh challenge and reacts according to self-interest at the time Step 5: Selecting a Pricing Method  Six price-setting methods 1. Markup pricing – pricing an item by adding a standard increase to product’s cost  Markup works only if marked-up price actually brings in expected level of sales 2. Target-return pricing – determining price that would yield firm’s target rate of return on investment  This pricing strategy ignores the fact that pricing depends on price elasticity and competitors’ prices 3. Perceived-value pricing – made up of a host of input, such as buyer’s image of product performance, channel deliverables, and warranty quality, customer support, and softer attributes such as supplier’s reputation, trustworthiness, and esteem  Must deliver on value promised by value proposition, and customer must perceive this value  Key is to deliver more unique value than competitor and to demonstrate this to prospective buyers 4. Value pricing – winning loyal customers by charging a fairly low price for a high-quality offering  Everyday low pricing (EDLP): pricing policy charges a constant low price with few or no price promotions and special sales  High-low pricing: retailer charges higher prices on everyday basis buy runs frequent promotions with prices temporarily lower than EDLP level 5. Going-rate pricing – firm bases price largely on competitors’ prices 6. Auction-type pricing – three types of auctions and their separate pricing procedures  English auctions (ascending bids) – have one seller and may buyers  Dutch auctions (descending bids) – one seller and many buyers, or one buyer and many sellers  Sealed-bid auctions – let would-be suppliers submit only one bid; they cannot know what the other bids Step 6: Selecting the Final Price  In selecting price, company must consider additional factors 1. Impact of other marketing activities – must take into account brand’s quality and advertising relative to competition 2. Company pricing policies – must be consistent with company pricing policies but not establishing pricing penalties under any circumstances 3. Gain-and-risk-sharing pricing – seller has the option of offering to absorb part or all the risk if it does not deliver full promised value 4. Impact of price on other parties – Competition Bureau of Canada prohibits sellers from setting prices based on ag
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