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.

Environment:
Buyers can :
Many firms are
nowadays following
the low-price trend
and have seen success
in converting the
acquired customers to
more expensive
products by
combining unique
• Get instant price comparisons from thousands of vendors: Websites like
pricescan.com offer data about products like prices and reviews from hundreds of
merchants.
• 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 priceline.com. Also, volume-aggregating
sites collate orders from many customers and press the supplier for a deeper discount.
• Get products free: The open source software movement has eroded margins for
almost any major software player. Also, the recent emergence of low-cost airlines
providing tickets only for the amount of taxes levied on a ticket is an example how
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
responding to
price changes:
• Initiating price
cuts: Companies
sometimes initiate
price cuts in order to
dominate the market
through lower prices.
• Initiating price
increases: Companies
initiate price increase
to increase their profits
by taking into account
the feasibility of the
price rise. A major
factor leading to these
price increases is over
demand, where the
company cannot
supply all its customers
and hence raises its
prices.
• Responding to
competitors’ price
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
considering various
factors like the
product’s stage in the
life cycle, its
importance in the
company portfolio, etc.
Trends
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-
ons, post-sale services, etc. and thereby modify its own price in order to be competitive in the
market.
Step 5: Selecting Pricing Methods – There are six major pricing methods:
• Mark-up Pricing: The most elementary pricing method is to add a standard mark-up to
the producer’s cost.
• Target-return Pricing: In target-return pricing, the firm determines the price that would
yield its target return on investment.
• Perceived-value Pricing: Perceived-value pricing is made up of several factors like the
buyer’s image of the product, the channel deliverables, warranty quality, customer
support, supplier’s reputation, etc.
• 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
become a low-cost producer without sacrificing quality.
• Going-rate Pricing: Here, firms base their prices largely on competitors’ prices, charging
nearly the same as major competitors in the market do.
• Auction-type Pricing: There are three types in this pricing method –
English Auctions (Ascending bids): Here, the seller puts up an item and the bidders raise
the price until the top price is reached.
Dutch Auctions (Descending bids): Here, the seller announces a high price and then goes
on lowering the price until a bidder accepts it. Or, a buyer announces his desire for a
product and sellers compete to offer him the lowest price.
Sealed-bid Auctions: Here, potential suppliers submit their bids without knowledge of
other bids made and the best bid is selected.
Step 6: Selecting the Final Price – After the pricing methods have narrowed the range of the
price, the company selects the final price by taking into account factors as listed below:
• Impact of other marketing activities: The final price must take into account the brand’s
quality and advertising relative to the competition.
• Company Pricing Policies: The final price must be compliant with the company’s pricing
policies.
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
distributors, dealers, competitors, government should also be taken into account by the
management.
Adapting the Price
• Geographical Pricing
• Price Discounts and Allowances
• Promotional Pricing
• Differentiated Pricing