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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Understanding Pricing (2 of 3)
• A changing pricing
environment
– Sharing economy
– Bartering
– Renting
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Understanding Pricing (3 of 3)
• How companies price
– Small companies: boss
– Large companies: division/product line managers
• How companies should price
– Understanding of consumer pricing psychology
– a systematic approach to setting, adapting, and
changing prices
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Consumer Psychology and Pricing
• Reference prices
• Price-quality inferences
• Price endings
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Reference Prices
Table 16.1 Possible Consumer Reference Prices
• “Fair Price” (what consumers feel the product should cost)
• Typical Price
• Last Price Paid
• Upper-Bound Price (reservation price or the maximum most consumers
would pay)
• Lower-Bound Price (lower threshold price or the minimum most
consumers would pay)
• Historical Competitor Prices
• Expected Future Price
• Usual Discounted Price
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Setting the Price
Table 16.2 Steps in Setting a Pricing Policy
- Selecting the Pricing Objective
- Determining Demand
- Estimating Costs
- Analyzing Competitors’ Costs, Prices, and Offers
- Selecting a Pricing Method
- Selecting the Final Price
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Step 1: Selecting the Pricing Objective
• Survival
• Maximum current profit
• Other objectives
• Maximum market share
• Product-quality leadership
• Maximum market skimming
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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
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Price Sensitivity
Table 16.3 Factors That Reduce 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 the buyer’s total income.
• The expenditure is small compared to the total cost of the end product.
• Part of the cost is borne by another party.
• The product is used in conjunction with assets previously bought.
• The product is assumed to have more quality, prestige, or exclusiveness.
• Buyers cannot store the product.
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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 (2 of 3)
• Accumulated production
– Experience/learning curve
Figure 16.3 Cost per Unit as a Function of Accumulated Production: The
Experience Curve
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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
Markup price unit cost
1 desired return on sales
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Step 5: Selecting a Pricing Method (3 of 6)
• Target-return pricing
– Price that yields its target rate of return on investment
desired Target-return price unit cost return invested capital
unit sales
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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 (1 of 5)
• Geographical pricing
– Barter
– Compensation deal
– Buyback arrangement
– Offset
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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.
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.
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.
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.
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
• Special event pricing
• Special customer pricing
• Cash rebates
• Low-interest financing
• Longer payment terms
• Warranties/service
contracts
• Psychological
discounting
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Adapting the Price (4 of 5)
• Price discrimination
– Customer-segment pricing
– Product-form pricing
– Time pricing
– Image pricing
– Location pricing
– Channel pricing
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Adapting the Price (5 of 5)
• Price discrimination
– Yield pricing
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Initiating and Responding to Price
Changes (1 of 2)
• Initiating price cuts
– Excess plant capacity
– Domination of market
• Price-cutting traps
– Price concessions
– Low-quality
– Fragile market share
– Shallow pockets
– Price war
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Initiating and Responding to Price
Changes (2 of 2)
• Initiating price increases
‒ Delayed quotation pricing
‒ Escalator clauses
‒ Unbundling
‒ Reduction of discounts
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Initiating Price Increases
Table 16.5 Profits before and after a Price Increase
Blank Before After Blank
Price $10 $10.10 (a 1% price increase)
Units sold 100 100 Blank
Revenue $1,000 $1,010 Blank
Costs −970 −970 Blank
Profit $30 $40 (a 33 ⅓% profit increase)
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Initiating and Responding to Price
Changes
• Anticipating competitive responses
• Responding to competitors’ price changes
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