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Developing Pricing Strategies and Programs
Key Concepts
Marketing Management at Gillette
Commands a 70% share of the global market for razors and blades and charges premium prices.
Pricing Re-ConsiderationsFocusing on costs and striving for the
industry’s traditional margins.
Not revising price often enough to capitalize on market changes.
Setting price independently rather than as an intrinsic element of market-positioning strategy.
Not varying price enough for different products, segments, channels, and purchase occasions.
Marketing Skills: Giving It Away?
“Freemium” strategy —giving some offering away for free while profiting from extras that are priced appropriately.
SKYPE—free Internet calling but charges for calls made to non-Internet phones.
Ryannair—fly free, pay for everything else.
Consumer Psychology and Pricing
Price-quality inferences
Reference prices
Price cues
Steps in Setting Price Policy
Select the objective
Determine demand
Estimate costs
Select the final price
Analyze competitors
Step 1: Selecting the Pricing Objective
SurvivalMaximum
current profitMaximum
market share
Product-quality leadership
Maximum market
skimming
Step 2: Determining Demand
Price sensitivity
Estimating demand curvesSurvey consumersSet different prices
in similar territoriesStatistical analysis of
past prices, quantities sold, and other factors
Price elasticity of demandInelastic—small
change in demand with small change in price.
Elastic—considerable change in demand with small change in price.
Step 3: Estimating Costs
Fixed costs
Variable costs
Total costs
Average cost
The Experience Curve
Target Costing
Establish a new product’s desired functions, the price at which it will sell, and the desired profit margin.
Step 4: Analyzing Competitors’ Costs, Prices, and Offers
Does the firm offer features not offered by competitors?
Given this point of comparison, should the price be higher, lower, or the same?
Step 5: Selecting a Pricing Method
The three Cs in selecting a price:Customers’
demand scheduleCost functionCompetitors’
prices
Price-Setting MethodsMarkup pricing
Target-return pricing
Perceived-value pricing
Value pricing
Going-rate pricing
Auction-type pricing
Break-Even Chart
Breakthrough Marketing: eBay
$7.3 billion in annual sales.It’s not all rosy worldwide, though!
Step 6: Selecting the Final Price
Factors to consider: Impact of other marketing activitiesCompany pricing policiesGain-and-risk sharing pricing Impact of price on other parties
Price Adaptation Strategies
Geographical pricing
Price discounts
and allowances
Promotional pricing
Product-mix pricing
Differentiated pricing
Geographical PricingBarter
Compensation deal
Buyback arrangement
Offset
Price Discounts and Allowances
Discounts—price reductionsCashQuantityFunctionalSeasonal
Allowance—extra payment
Promotional Pricing
Loss-leader pricing
Special-event pricing
Cash rebates
Low-interest financing
Longer payment terms
Warranties and service contracts
Psychological discounting
Differentiated Pricing
Customer-segment pricing
Product-form pricing
Image pricing
Channel pricing
Location pricing
Time pricing
Product-Mix Pricing
Product-line
Optional-feature
Captive-product
Two-part
By-product
Product-bundling
Product-Mix Pricing
Product-line
Optional-feature
Captive-product
Two-part
By-product
Product-bundling
Traps of Price-Cutting
Customers assume quality is low.
A low price buys market share but not loyalty.
Higher-priced competitors match the lower prices but have longer staying power because of deeper cash reserves.
Trigger a price war.
Increasing Prices
Delayed quotation pricing
Escalator clauses
Unbundling
Reduction of discounts
How to Respond to Low-Cost Rivals