Chapter 12 - Developing Pricing Strategies and Programs

Summary

Price is the only element that produces revenue; the others produce costs.  In setting pricing a company follows six steps – the pricing objective, determine demand, estimate costs, analyze competitors’ costs, prices and offers, select a pricing method and select the final price.  Companies will sometimes need to lower prices to encourage sells, offer special discounts or promotional pricing to increase customer traffic, or raise prices to cover increased production costs or in response to a competitor’s price changes.

A.    Understanding Pricing

1.      The price element of the marketing mix produces revenue and all the others produce cost.  Pricing can be changed quickly, but the other elements take more time. Pricing comes in many forms and serves many functions, i.e. rent, tuition, fees, fares or tolls.

2.      Tiffany’s is a high-end jewelry icon that has long been known for high quality and high prices.  When they tried to create a line of cheaper silver jewelry, they were in danger of losing their image of high status and had to work hard to restore it.

3.      The pricing environment is changing.  The recent recession has caused people to reevaluate their spending habits and to take measures to spend less, sometimes even cutting out or severely limiting recreation and hobbies.  The Internet has also allowed consumers to compare and research products and sellers of products.  How to set price is different in companies, often depending on the size of the company.  In a small company the boss may set the price and in a large company there may be an entire department devoted to setting prices.  This can lead to big mistakes if the firm does not stay current on market changes.  Effective pricing also requires understanding the psychology of the consumer and how it affects pricing.  Purchase decisions are often based on how consumers perceive prices and what they consider the current actual price to be and not what the market says the price is.  There are three key topics for understanding how consumers arrive at their perceptions of prices: 1) reference prices – comparing a price to an internal reference price they remember from a past purchase, 2) price-quality inferences – using price as an inference of quality, 3) price endings – seeing prices as being in a lower range because of reading the numbers from left to right rather than rounding up. Some firms try to lure customers in to purchase products by giving them free items.

B.     Setting the Price

1.      A firm must set the price on a new product or when it introduces a new product to a new distribution channel or geographic area or when it enters bids on new contract work.

2.      A manufacturing company such as Texas Instruments will set the price of calculators to cover the cost of producing the instruments. This can include raw materials used and overhead.

3.      There is a six-step procedure for setting pricing: 1) selecting the pricing objective – survival, maximum current profit, maximum market share, maximum market skimming, and product-quality leadership, 2) determining demand – different levels of demand at different price levels, the inverse relationship between price and demand is captured on a demand curve, 3) estimating costs – a company wants to charge a price that will cover the cost of producing, distributing and selling the product.  4) analyzing competitors’ costs, prices and offers – the firm must take competitors’ costs, prices, and possible price reactions into account, 5) selecting a pricing method – a cost floor based on costs, competitor pricing, and customers’ assessments of unique features sets the price ceiling, 6) selecting the final price – consider factors such as the impact of other marketing activities, company pricing policies, gain-and-risk-sharing pricing, and the impact of price on other parties.

C.     Adapting the Price

1.      Rather than setting a single price for a product firms will develop a pricing structure that reflects variations in geographical demand and costs, market-segment requirements, purchase timing, order levels, delivery frequency, guarantees, service contracts and other factors.

2.      One company that carries different prices is Coca-Cola,  the price may differ depending on whether you are buying it in a restaurant, vending machine or a fast-food restaurant.

3.      There are several price adaptation strategies marketers may adopt.  In geographical pricing a company decides how to price its products to different customers in different locations and countries.  In other countries, pricing can be affected by exchange rates and payment methods.  Many firms will want to give discounts and allowances for early payment, volume purchasing and off-season buying. Some firms will offer special promotional pricing to get customers into the stores.  Promotional pricing can include loss-leader pricing, special event pricing, special customer pricing, cash rebates, low-interest financing, longer payment terms, warranties and service contracts and psychological discounting. Differentiated pricing occurs when a firm adjusts the basic price to accommodate differences in customers, products and locations.  Price discrimination occurs when a company sells a product or service at two or more prices that do not reflect a proportional difference in costs.

D.    Initiating and Responding to Price Changes

1.      Companies often need to cut or raise prices in certain situations.

2.      Car manufacturers will sometimes build up an excess inventory if cars are not selling well.  They will offer discounts or special promotional pricing to sell more cars in order to make room for a new year model or will offer discounts to get rid of the old model after a redesigned model comes on the market.

3.      Sometimes circumstances will necessitate a firm cutting its pricing.  They may have excess plant capacity or they may cut prices to dominate the market through lower costs.  Price cutting can lead to traps: 1) of consumers thinking that quality is low, 2) a low price buys market share but not market loyalty because customers will shift to lower-priced firms, 3) higher priced competitors match the lower prices but have longer staying power because of deeper cash reserves, and 4) a price war may be triggered. At times a firm may want to initiate a price increase.  This can help to raise profits but it can also help offset cost inflation.  Some companies will raise prices by more than the increased cost in anticipation of further cost inflation.  Customers prefer small, regular price increases to sudden, sharp increases and they can turn against companies they think are price gougers. When responding to a competitor’s price cut or price increase, a firm should research the product life cycle and also determine why the competitor changed its pricing and if it would be beneficial to make price changes also.