Developing Pricing Strategies and Programs

1. Developing Pricing Strategies and Programs Key Concepts

2. Marketing Management at Gillette Commands a 70% share of the global market for razors and blades and charges premium prices.

3. Pricing Re-Considerations • Focusing 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.

4. 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.

5. Reference prices Price-quality inferences Price cues Consumer Psychology and Pricing

6. Steps in Setting Price Policy Select the objective Determine demand Estimate costs Analyze competitors Select the final price

7. Step 1: Selecting the Pricing Objective Survival Maximum current profit Maximum market share Maximum market skimming Product-quality leadership

8. Step 2: Determining Demand • Price sensitivity • Estimating demand curves • Survey consumers • Set different prices in similar territories • Statistical analysis of past prices, quantities sold, and other factors • Price elasticity of demand • Inelastic—small change in demand with small change in price. • Elastic—considerable change in demand with small change in price.

9. Fixed costs Variable costs Total costs Average cost Step 3: Estimating Costs

10. The Experience Curve

11. Target Costing Establish a new product’s desired functions, the price at which it will sell, and the desired profit margin.

12. 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?

13. Step 5: Selecting a Pricing Method • The three Cs in selecting a price: • Customers’ demand schedule • Cost function • Competitors’ prices

14. Price-Setting Methods • Markup pricing • Target-return pricing • Perceived-value pricing • Value pricing • Going-rate pricing • Auction-type pricing

15. Break-Even Chart

16. Breakthrough Marketing: eBay $7.3 billion in annual sales. It’s not all rosy worldwide, though!

17. Step 6: Selecting the Final Price • Factors to consider: • Impact of other marketing activities • Company pricing policies • Gain-and-risk sharing pricing • Impact of price on other parties

18. Price Adaptation Strategies Geographical pricing Price discounts and allowances Promotional pricing Differentiated pricing Product-mix pricing

19. Barter Compensation deal Buyback arrangement Offset Geographical Pricing

20. Price Discounts and Allowances • Discounts—price reductions • Cash • Quantity • Functional • Seasonal • Allowance—extra payment

21. Promotional Pricing • Loss-leader pricing • Special-event pricing • Cash rebates • Low-interest financing • Longer payment terms • Warranties and service contracts • Psychological discounting

22. Differentiated Pricing • Customer-segment pricing • Product-form pricing • Image pricing • Channel pricing • Location pricing • Time pricing

23. Product-Mix Pricing • Product-line • Optional-feature • Captive-product • Two-part • By-product • Product-bundling

24. Product-Mix Pricing • Product-line • Optional-feature • Captive-product • Two-part • By-product • Product-bundling

25. 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.

26. Delayed quotation pricing Escalator clauses Unbundling Reduction of discounts Increasing Prices

27. How to Respond to Low-Cost Rivals