Developing Pricing Strategies and Programs

1. Developing Pricing Strategies and Programs Chapter 14 Kotler & Keller 13th Ed. Prepared for: IBM Program – UC

2. Marketing Process

3. Objectives • Understanding Pricing • Setting the Price • Adapting the Price • Initiating and Responding to Price Changes

4. Understanding Pricing • Common Pricing Mistakes • Determine costs and take traditional industry margin • Failure to revise price to capitalize on market changes • Setting price independently of the rest of the marketing mix • Failure to vary price by product item, market segment, distribution channels, and purchase occasion

5. Consumer Psychological Pricing [1] • Reference Price • Fair Price (what the product should cost) • Typical Price • Last Price Paid • Upper-bound Price (reservation price or what consumers would pay) • Lower-bound Prices (lower threshold price or the least consumers would pay) • Competitor Price • Expected Future Price • Usual Discounted Price

6. Consumer Psychological Pricing [2] • Price Ending • Price end at odd number/left to Right Pricing (Rp39.999 vs Rp40.000) • Ending price of 0 or 5; easier to process and retrieve from memory • “SALE” written next to price • “Sale” and price end at “9” less effective when employed frequently 

7. Setting the Price • Selecting the Price Objective • Determining Demand • Estimating Costs • Analyzing Competitor’s Costs, Prices and Offers • Selecting a Pricing Method • Selecting the Final Price

8. 1. Selecting the Price Objective • Survival • Maximize Current Profit • Maximize Market Share / Market Penetration Pricing • Market is highly price-sensitive; and a low price stimulate market growth • Production and Distribution costs fall within accumulated production experience, and • Low price discourages actual and potential competition • Maximize Market Skimming • Product Quality Leadership

9. Price Sensitivity 2. Determining Demand[1] Demand Inelastic Demand Elastic Rp15.000. Price. Rp10.000. 100 125. 75 175. Quantity Demand

10. 2. Determining Demand[2] • Factor leading to price sensitivity • The product is more distinctive • Buyers are less aware about product substitutes • Buyers can’t easily compare the quality of substitutes • The expenditure is small compared to the total cost of the end product • Part of the cost is borne by other party • The product is used in conjunction with assets previously bought • The product is assume to have more quality, prestige, or exclusiveness • Buyers can’t store the product

11. 3. Estimating Cost[1] • Types of Cost & Level of Production TC = FC + (VC x Qty) AV = TC / Qty • Accumulated Production Current Price $10 Cost per Unit $8 Experienced Curve $6 $4 $2 2000 4000. 6000 Accumulated Production

12. 3. Estimating Cost[2] • Differentiated Marketing Offers • Activity-Based Cost (ABC) Accounting • Target Costing

13. 4. Analyzing Competitors’ Costs, Prices and Offers Within the range of possible prices determined by market demand and company costs, the firm must take competitors’ costs, prices and possible price reaction into account

14. 5. Selecting a Pricing Method High Price ------------------------------------------------ (no possible demand at this price) Ceiling Price Customers’ assessment of unique product features Orienting Point Competitors’ prices and prices of substitutions Costs Floor Price Low Price ------------------------------------------------ (No possible profit at this price) 3 major consideration in price setting

15. 5. Selecting a Pricing Method[1] • Markup Pricing • UC = VC + (FC/Qty unit sales) • Markup Price = UC/(1-desired return on sales) • Target-Return Pricing • Target-Return Price = UC + (desired return % x investment capital) / unit sale • Break-even Volume = FC/(P–VC)

16. 5. Selecting a Pricing Method[2] • Perceived-Value Pricing • Price based on customer’s perceived value • Made up of: • Buyer’s imageof product performance • Channel deliverables • The warranty quality • Customer support • Softer attributes (e.g. supplier’s reputation, trustworthiness, esteem) • Deliver more value than competitors • Demonstrate the value to prospective buyers

17. 5. Selecting a Pricing Method[3] • Value Pricing • Every Day Value Pricing (EDVP): charges a constant low price with little / no price promotions & special sales • High-low Pricing: charges higher price on an every day basis but then runs frequent promotions in which prices are temporarily lowered below the EDLP level • Going-Rate Pricing Price charged based largely on competitors’ price

18. 5. Selecting a Pricing Method[4] • Auction-Type Pricing • English Auctions (ascending bids): low to high price; one seller - many buyers • Dutch Auctions (descending bids): high to low price; one seller – many buyers or many sellers – one buyer • Sealed-bid Auctions: suppliers submit one bid and cannot know other bids • Group Pricing • Internet is facilitating a method whereby consumers and business buyers can join groups to buy at a lower price

19. 6. Selecting the Final Price[1] • Impact of other marketing activities Final price must take into account brand’s quality & advertising relative to competition • Brands with average relative quality but high relative advertising budgets charged premium prices • Brands with high relative quality and high relative advertising budgets obtained the highest prices • The positive relationship between high advertising budgets and high prices held most strongly in the later stages of the product life cycle for market leaders • Company Pricing Policy Price must be consistent with company pricing policies

20. 6. Selecting the Final Price[2] • Gain-and-Risk-Sharing Pricing Buyers resist accepting a seller’s proposal because of high perceived level of risk • Impact of Price on Other Parties *

21. Adapting the Price[1] • Geographical Pricing (Cash, Counter Trade, Barter) Barter: direct exchange of goods, with no money and no other party involved Compensation Deal: seller receives some percentage of the payment in cash and rest in products Buyback Arrangement: seller sells a plant, equipment, or technology to another country and agrees to accept as partial payment products manufactured with the supplied equipment Offset: seller receives full payment in cash but agrees to spend a substantial amount of the money in that country within a stated time period

22. Prices Discounts & Allowances Adapting the Price[2]

23. Adapting the Price[3] Promotional Pricing Pricing technique to stimulate early purchase • Loss-leader pricing:supermarkets and department stores often drop the price on well-known brands to stimulate additional store traffic • Special-event pricing:seller will establish special price in certain seasons to draw in more customers • Cash rebates:to encourage purchase of the manufacture’s products within a specified time period • Low-interest financing:instead of cutting its price, company offer low-interest financing • Longer payments term:sellers, especially mortgage banks and auto companies, extend loans over longer periods and thus lower the monthly payments • Warranties and service contracts:companies can promote sales by adding a free or low-cost warranty or service contracts • Psychological Discounting:setting an artificially high price and then offering the product at substantial savings.

24. Adapting the Price[4] Differentiated Pricing Price Discrimination: a company sells a product or service at two or more prices that do not reflect a proportional difference in costs • The seller charges a separate prices to each customer depending on the intensity and or volume of his or her demand • The seller charges different amounts to different classes of buyers, as in the following cases: Customer segment pricing Product-form pricing Image pricing Channel pricing Location pricing Time pricing Yield pricing *

25. Initiating and Responding to Price Changes [1] • Initiating Price Cuts • Low Quality Trap: consumer will assume that the quality is low • Fragile-market-share Trap: a low price buys market share but not market loyalty • Shallow-pocket Trap: higher-priced competitors may cut their prices and may have longer staying power because of deeper cash reserves • Price-war Trap: competitors respond by lowering the price even more

26. Initiating and Responding to Price Changes [2] Initiating price increase: • Cost Inflation • Over Demand Possible responses to higher costs or overhead without raising price include: • Shrinking the amount of product instead of raising the price • Substituting less expensive materials or ingredients • Reducing or removing product features • Removing or reducing product services, such as installation or free delivery • Using less expensive packaging material or larger package sizes • Reducing the number of sizes and models offered • Creating new economy brands

27. Initiating and Responding to Price Changes [3] Reaction to Price Changes • Customer Reaction: Question the motivation behind prices changes • Competitor Reaction: React when the number of firms are few, the product is homogenous, and buyers are highly informed

28. Initiating and Responding to Price Changes [3] Responding Competitor’s Price Change • Maintain Price • Maintain Price and Add Value • Reduce Price • Increase Price and Improve Quality • Launch a low-price fighter line

29. End of Chap. 14