Changing Pricing Environment
Buyers can do:
1. Get instant price comparisons from thousands of vendors. The comparison shopper, a service-
offered by Canada Post, allows Canadian consumers to compare prices of millions of products
across hundreds of stores
2. Name there price and have it met.
3. Get products free
Sellers can do:
1. Monitor customer behaviour and tailor offers to individuals
2. Give certain customers access to special prices.
3. Negotiate prices in online auctions and exchanges or even in person
How Companies Price
For an organization, effectively designing and implementing pricing strategies require a thorough
understanding of consumer pricing psychology and a systematic approach to setting, adapting, and
Consumer Psychology and Pricing
Consumers were “price takers” and accepted prices at “face value” or as given. Markets, however,
recognize that consumers often actively process price information, interpreting it from the context of
prior purchasing experience, formal communication ( advertising, sales calls, and brochures), informal
communications ( friends, colleagues, or family members) point-of-purchase or online resources, and
Surprisingly few can accurately recall specific prices. When examining products, however, they often
employ reference prices comparing an observed price to an internal reference price they remember or
an external frame of reference such as posted “regular retail price”
When consumers evoke one or more of these frames of reference, their perceived price can vary from
the stated price.
Consumers use price as an indicator of quality. Image pricing is especially effective with-sensitive
products such as perfumes, expensive cars, and designer clothing.
Price and quality perceptions of cars interest. Higher-priced cars are perceived to possess high quality.
Higher-quality cars are likewise perceived to be higher priced than they actually are. Chapter 14
Some brands adopt exclusivity and scarcity to signify uniqueness and justify premium pricing.
Pricing cues such as sale signs and prices that end in 9 are more influential when consumers price
knowledge is poor, when they purchase the item infrequently or are new to the category, and when
product designs vary over time, prices vary seasonally, or quality or sizes vary across stores
Setting the Price
A firm must set a price for the first time, when it develops a new product, when it introduces its regular
product into a new distribution channel or geographical area, and when it enters bids of new contract
work. The firm must decide where to position its product on quality and price.
Step 1: Selecting the Price Objective
Survival: Companies pursue survival as their major objective if they are plagued with overcapacity,
intense competition, or changing consumer wants. As long as prices cover variable costs are some fixed
costs, the company stays in business.
Maximum Current Profit
Companies estimate the demand and costs associated with alternative prices and choose the price that
produces maximum current profit, cash flow, or rate of return on investment. This strategy assumes the
firm knows its demand and cost functions.
Maximum Market Share
Market penetration pricing – Companies believe that a higher sales volume with lead to lower unit costs
and higher long-run profit. They set the lowest price, assuming the market is price sensitive.
The Conditions favour adopting a market-penetration pricing strategy
1) The market is highly price sensitive and a lower prices stimulates market growth
2) Production and distribution costs fall with a accumulated production experience
3) A low price discourages actual and potential competition
Maximum Market Skimming
Market Skimming Pricing , Prices start and slowly drop over time. Market skimming makes sense under
the following conditions
1) A sufficient number of buyers have a high current demand
2) The unit costs of producing a small volume are high enough to cancel the advantage of charging
what the traffic will bear
3) The high initial price does not attract more competitor to the market
4) The high price communicates the image of a superior product Chapter 14
Product Quality Leadership
A company will aim to be the product-quality leader in the market. Brands strive to be affordable
luxuries ‘products or services characterized by high levels of perceived quality, taste and status and
with a price just high enough not to be out of consumers reach.
Non-profit and pubic organizations may have other pricing objectives. A university aims for partial
cost recovery, knowing that it must rely on private gifts and public grants to cover its remaining
Step 2: Determining Demand
The normally inverse relationship between price and demand is captured in a demand curve, the
higher the price, the lower the demand. For prestige goods, the demand curve sometimes slopes
upward. One perfume company raises its price and sold more rather than less.
The demand curve shows the market`s probably purchase quantity at alternative prices. It sums the
reactions of many individuals with different price sensitivities. The first step in estimating demand is
to understand what affects price sensitivity.
1) There are new or no substitutes or competitors
2) They do not readily notice the higher prices
3) They are slow to change their buying habits
4) They think the higher prices are justified
5) Price is only a small part of the total cost of obtaining, operating, and servicing the product over
Estimating Demand Curves
1. Surveys can explore how any units consumers would buy at different proposed prices
2. Price experiments can vary the prices of different products in a store or charge different prices
for the same product in similar territories to see how the change affects sales.
3. Statistical analysis of past prices, quantities sold, and other factors can reveal their relationships.
One large retail chain was selling a line of `good-better-best`power`.
In measuring the price-demand relationship, the market researcher must control for various factors
that will influence demand.
Price Elasticity of Demand Chapter 14
Markets need to know how responsive, or elastic, demand is to a change in price. Consider the two
demand curves . In demand curve a) a price increase from $10 to $15 lead to a relatively small
decline in demand.
The higher the elasticity, the greater the volume growth resulting from a 1 percent price reduction
Step 3: Estimating Costs
Demand sets a ceiling on the price the company can charge for its product. Costs set the floor. He
company wants to charge a price that covers its costs of producing, distributing, and selling the
product, including a fair return for its effort and risk.
Types of Costs and Levels of Production
Fixed costs: Also known as overhead, are costs that do not vary with production level or sales
Variable costs: Vary directly with the level of production.
Total Costs – Consist of the sum of the fixed and variable costs for any given level of production.
Average Cost: The cost per unit at that level of production it equals total costs divided by production
Experience curve or learning curve –The decline in the average cost with accumulated production
Experience-Curve – Pricing nevertheless carries major risk. Aggressive pricing might give the product
a cheap image. It assumes that competitors are weak followers
Costs change with production scale and experience. They can also change as a result of a
concentrated effort by designers, engineers, and purchasing agents to reduce them through Target
The firm must examine each cost element – design, engineering, manufacturing sales – and bring
down costs so that the final cost projections are in the target range
Step 4: Analyzing Competitors` Costs, Prices, and Offers
Within the range of possible prices determined by market demand and company costs, the firm
must take competitors costs, prices and possible price reactions into account
If it has a profit-maximization objective, it may react by increasing its advertising budget or
improving product quality Chapter 14
Step 5: Selecting a Pricing Method
Markup Pricing – The most elementary pricing method is adding standard markup to the products
Target-return pricing – Firm determines the price that yields its target rate of return on investment.