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Developing Pricing Strategies _ Programs - 14


									                    Marketing Management
         By Philip, Kevin Lane Keller, Abraham Koshy, Mithileshwar Jha

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                                   SUMMARY by

                 Chapter           14
     Developing Pricing Strategies
     and Programs
                           Traditionally, price has been the major determinant of a buyers’ choice. And this is still the
                           case with large segments of markets across the world. Although non-price factors have
                           recently risen in importance, pricing remains an important factor in determining sales and
                           profitability. Also, price is the only component in the marketing mix that provides revenue and
Pricing                    not costs.

                           Buyers can :
Many firms are                 •   Get instant price comparisons from thousands of vendors: Websites like
nowadays following        offer data about products like prices and reviews from hundreds of
the low-price trend                merchants.
and have seen success          •   Name their prices: The consumer can state his desired price for a product and find the
                                   seller willing to meet this price on sites like Also, volume-aggregating
in converting the
                                   sites collate orders from many customers and press the supplier for a deeper discount.
acquired customers to          •   Get products free: The open source software movement has eroded margins for
more expensive                     almost any major software player. Also, the recent emergence of low-cost airlines
products by                        providing tickets only for the amount of taxes levied on a ticket is an example how
combining unique                   firms have been successful with free offerings.

product formulations
and engaging               Sellers can :
marketing campaigns.           •   Monitor customer behaviour and customize offers: Firms use software to analyse
                                   pricing requests with pricing factors such as past sales data, discounts, etc. to reduce
                                   processing time of these requests greatly.
                               •   Offer certain customers special prices: Certain customers are offered lower prices by
                                   firms in order to capture a certain market segment on ensure the loyalty of existing
                                   customers further.

                                                             Setting the price
                           Firms set a price when they introduce a new product, or venture into a new market with an
                           existing product. This is usually achieved by following a six-step process as follows
                      Chapter 14 - Developing Pricing Strategies and Programs
Consumer                          Step 1: Selecting the Pricing Objective – The firm first decides where it wants to position
                                  its market offering. The five major pricing objectives are
psychology and                     •   Survival: Companies pursue survival if they are plagued with over-capacity, intense
                                       competition, or changing consumer wants.
pricing:                           •   Maximum current profit: Many firms try to set a price that maximises their current
                                       profits and delivers a high return on investment.
• Reference prices:                •   Maximum market share: Here, firms believe that a higher sales volume will lead to
  Consumers often employ               lower unit costs and higher long-run profits and thereby maximise their market
  reference prices,                    share.
  comparing an observed            •   Maximum market skimming: Companies offering new technologies often set high
  price to an internal                 prices initially in order to gain high profits from various segments of the market
                                       early on.
  reference price or a posted
                                   •   Product-Quality Leadership: Many firms aspire to be the product-quality leader in
  ‘regular retail price’.
                                       the market.
  Sellers manipulate this by
  product positioning,            Step 2: Determining Demand – Each price leads to a different level of demand and
  suggesting that the actual      therefore has a different impact on a company’s marketing objectives. The factors
  price of the product is         entailing this are
                                   •   Price Sensitivity: The relation between price and demand, i.e. the demand curve can
  much higher or by
                                       be analysed to determine the market’s probable purchase quantity at various prices.
  pointing to a competitor’s
                                       This helps a firm to maximise its profits.
  high price.                      •   Estimating Demand Curves: Most companies use the following methods to estimate
• Price-Quality inferences:   demand curves: Market Surveys, Price Experiments, Statistical Analysis, etc.
  Many consumers use price • Price Elasticity: Marketers need to know how responsive, or elastic, the demand
  as an indicator of quality. would be, to a change in price. If the price elasticity is high, increasing prices would
                              lead to a great reduction in demand, while decreasing prices would lead to increase
  High-price cars are
                              in demand. Hence, marketers prefer inelastic markets where price changes do not
  perceived to be of higher
                              elicit great shifts in demand.
  quality and vice versa.
• Price cues: Consumer            Step 3: Estimating Costs – While demand sets a ceiling on the range of price a firm can
  perceptions of prices are       charge for its product, costs determine the floor.
  also affected by the             •   Types of Costs and Levels of Production: Costs are classified as Fixed costs and
                                       Variable costs. Fixed costs include salaries, electricity bills, etc. which do not depend
  manner in which prices are
                                       upon quantity produced. Variable costs include processing costs, packaging costs,
  displayed. Many sellers
                                       shipping costs, etc. which depend upon quantity produced. Hence, companies must
  believe setting a price of           decide on a level of production which will more or less guarantee no losses on the
  Rs.2999 puts a product               cost of production.
  into the 2000 range              •   Accumulated Production: As firms gain experience in production of a good, the
  instead of the 3000 range            costs involved begin to decline. This is due to various factors such as workers finding
                                       shortcuts, smoother flow of materials, etc. This decline in cost with production
  as perceived by the
                                       experience is called experience curve.
  consumer. Putting ‘Sale’
                                   •   Target Costing: Other than production scale and experience, costs also change a
  signs near the price                 result of concentrated efforts by designers, engineers, purchase agents etc. They
  display have also been               examine each cost component and try to find ways to reduce the costs involved in
  known to be effective.               each of these.
                          Chapter 14 - Developing Pricing Strategies and Programs
                            Step 4: Analyzing Competitors – The introduction of any change in price, cost, offers given by
Initiating and                any seller can elicit a response in the market.
                              A firm must analyse the value offered by a competitor to a customer in terms of prices, add-
responding to                 ons, post-sale services, etc. and thereby modify its own price in order to be competitive in the
price changes:
                              Step 5: Selecting Pricing Methods – There are six major pricing methods:
•      Initiating price
                               •   Mark-up Pricing: The most elementary pricing method is to add a standard mark-up to
cuts: Companies                    the producer’s cost.
sometimes initiate             •   Target-return Pricing: In target-return pricing, the firm determines the price that would
price cuts in order to             yield its target return on investment.
                               •   Perceived-value Pricing: Perceived-value pricing is made up of several factors like the
dominate the market
                                   buyer’s image of the product, the channel deliverables, warranty quality, customer
through lower prices.              support, supplier’s reputation, etc.
•      Initiating price        •   Value Pricing: Here, high quality products are assigned a fairly low price. The basic aim
                                   here is to attract a value-conscious customer base by reengineering the company to
increases: Companies
                                   become a low-cost producer without sacrificing quality.
initiate price increase
                               •   Going-rate Pricing: Here, firms base their prices largely on competitors’ prices, charging
to increase their profits          nearly the same as major competitors in the market do.
by taking into account         •   Auction-type Pricing: There are three types in this pricing method –
the feasibility of the                 English Auctions (Ascending bids): Here, the seller puts up an item and the bidders raise
                                       the price until the top price is reached.
price rise. A major
                                       Dutch Auctions (Descending bids): Here, the seller announces a high price and then goes
factor leading to these                on lowering the price until a bidder accepts it. Or, a buyer announces his desire for a
price increases is over                product and sellers compete to offer him the lowest price.
demand, where the                      Sealed-bid Auctions: Here, potential suppliers submit their bids without knowledge of
company cannot                         other bids made and the best bid is selected.

supply all its customers
                              Step 6: Selecting the Final Price – After the pricing methods have narrowed the range of the
and hence raises its          price, the company selects the final price by taking into account factors as listed below:
prices.                        •   Impact of other marketing activities: The final price must take into account the brand’s
                                   quality and advertising relative to the competition.
•      Responding to
                               •   Company Pricing Policies: The final price must be compliant with the company’s pricing
competitors’ price                 policies.
changes: Firms respond • Gain-and-Risk-sharing Pricing: Buyers may resist accepting a supplier’s proposal because
to price cuts/raises by  of a high perceived level of risk. Hence, the seller has the option of offering to absorb part
competitors by                     or all of the risk if the promised value is not delivered.
                               •   Impact of price on other parties: The final price’s effect on other parties such as
considering various
                                   distributors, dealers, competitors, government should also be taken into account by the
factors like the                   management.
product’s stage in the
life cycle, its                                                   Adapting the Price
importance in the                  •     Geographical Pricing
                                   •     Price Discounts and Allowances
company portfolio, etc.
                                   •     Promotional Pricing
                                   •     Differentiated Pricing

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