Marketing Management

Fifteenth Edition

Chapter 16
Developing
Pricing Strategies
and Programs

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Learning Objectives
16.1 How do consumers process and
evaluate prices?
16.2 How should a company set prices
initially for products or services?
16.3 How should a company adapt prices
to meet varying circumstances and
opportunities?
16.4 When and how should a company
initiate a price change?
16.5 How should a company respond to a
competitor’s price change?
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Understanding Pricing (1 of 3)
• Pricing in a digital world
‒ Get instant vendor price comparisons
‒ Check prices at the point of purchase
‒ Name your price and have it met
‒ Get products free
‒ Monitor customer behavior & tailor offers
‒ Give customers access to special prices
‒ Negotiate prices online or even in person

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Setting the Price
Table 16.2 Steps in Setting a Pricing Policy
1. Selecting the Pricing Objective
2. Determining Demand
3. Estimating Costs
4. Analyzing Competitors’ Costs, Prices, and Offers
5. Selecting a Pricing Method
6. Selecting the Final Price

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Step 1: Selecting the Pricing Objective
• Survival - pricing to get by e.g RMG decline
• Maximum current profit - may overlook long term benefit
• Maximum market share/ market penetration - focus on
higher sales volume, economies of scale, long run profit
• Product-quality leadership - affordable luxury with perceived
high quality, taste and status but within customer reach
• Maximum market skimming - pricing high and then slowly
dropping over time. can be dangerous vs competitors
• Other objectives

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Step 2: Determining Demand
• Price sensitivity
• Estimating demand curves
– Surveys, price experiments,
& statistical analysis
• Price elasticity of demand

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Figure 16.1 Inelastic And Elastic
Demand
Inelastic considered more essential, required, necessity, very few substitutes

Elastic considered luxury goods, non-essential goods, goods for which there are close substitutes.

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Step 3: Estimating Costs (1 of 3)
• Types of costs and levels of
production
– Fixed vs. variable costs
– Total costs
– Average cost

Figure 16.2 Cost per Unit at Different

Levels of Production per Period
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Step 3: Estimating Costs (3 of 3)
• Target costing
– Price less desired profit margin

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Step 4: Analyzing Competitors’ Prices
• Firm must take competitors’ costs, prices, & reactions
into account
– Value-priced competitors

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Step 5: Selecting a Pricing Method (1 of 6)
• Three major considerations in price
– Costs = price floor
– Competitors’ prices = orienting point
– Customers’ assessment of unique
features = price ceiling

Figure 16.4 The Three Cs Model

for Price Setting
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Step 5: Selecting a Pricing Method (2 of 6)
• Markup pricing
– Add a standard markup to the product’s cost

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Figure 16.5 Break-Even for
Target-Return Price

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Step 5: Selecting a Pricing Method (4 of 6)
• Perceived-value pricing
– Based on buyer’s image of product, channel
deliverables, warranty quality, customer support, and
softer attributes (e.g., reputation)

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Step 5: Selecting a Pricing Method (5 of 6)
• Value pricing
• EDLP
– High-low pricing
• Going-rate pricing

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Step 5: Selecting a Pricing Method (6 of 6)
• Auction-type pricing
– English (ascending)
– Dutch (descending)
– Sealed-bid

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Step 6: Selecting the Final Price
• Additional factors to select final price:
‒ Impact of other marketing activities
‒ Company pricing policies
‒ Gain-and-risk-sharing pricing
‒ Impact of price on other parties

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Adapting the Price (2 of 5)
• Price discounts and allowances
Table 16.4 Price Discounts and Allowances
Discount: A price reduction to buyers who pay bills promptly. A typical example is “2/10, net 30,”
which means payment is due within 30 days and the buyer can deduct 2 percent by
paying within 10 days. - helps to manage cash flow better

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

Functional Discount: Discount (also called trade discount ) offered by a manufacturer to trade-channel
Members if they perform certain functions, such as selling, storing, and record keeping.
Manufacturers must offer the same functional discounts within each channel. given by
wholesalers to retailers
Seasonal Discount: A price reduction to those who buy merchandise or services out of season. Hotels,
motels, and airlines offer seasonal discounts in slow selling periods. e.g Off peak
discount
Allowance: An extra payment designed to gain reseller participation in special programs. Trade-in
allowances are granted for turning in an old item when buying a new one.
Promotional allowances reward dealers for participating in advertising and sales
support programs.

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Adapting the Price (3 of 5)
• Loss-leader pricing • Low-interest financing
• Special event pricing • Longer payment terms
• Special customer pricing • Warranties/service
contracts
• Cash rebates
• Psychological
discounting

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Adapting the Price (4 of 5)
• Price discrimination - similar items priced
disproportionately to one another
– Customer-segment pricing - Museum admission fee
difference for adult v senior/child
– Product-form pricing - airline economy v business class
– Time pricing - off peak v on peak. Roses on VLTN day
– Image pricing - branding perception. e.g. Luxottica
eyewear Generic v Ray Ban v Tom Ford
– Location pricing - inside dhaka v outside dhaka prices
– Channel pricing - Coke at shop v cafe v fine dining.

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Adapting the Price (5 of 5)
• Price discrimination
– Yield pricing
– The airline and hospitality industries use yield management systems and
yield pricing, by which they offer discounted but limited early purchases,
higher-priced late purchases, and the lowest rates on unsold inventory just
before it expires.

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