How do consumers process and evaluate prices?
How do consumers process and evaluate prices?
Marketing Management
Fifteenth Edition
Chapter 16
Developing
Pricing Strategies
and Programs
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Learning Objectives
16.1 How do consumers process and
evaluate prices?
16.2 How should a company set prices
initially for products or services?
16.3 How should a company adapt prices
to meet varying circumstances and
opportunities?
16.4 When and how should a company
initiate a price change?
16.5 How should a company respond to a
competitor’s price change?
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Setting the Price
Table 16.2 Steps in Setting a Pricing Policy
- Selecting the Pricing Objective
- Determining Demand
- Estimating Costs
- Analyzing Competitors’ Costs, Prices, and Offers
- Selecting a Pricing Method
- Selecting the Final Price
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Step 1: Selecting the Pricing Objective
• Survival
• Maximum current profit
• Other objectives
• Maximum market share
• Product-quality leadership
• Maximum market skimming
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Step 2: Determining Demand
• Price sensitivity
• Estimating demand curves
– Surveys, price experiments,
& statistical analysis
• Price elasticity of demand
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Figure 16.1 Inelastic And Elastic
Demand
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Price Sensitivity
Table 16.3 Factors That Reduce Price Sensitivity
• The product is more distinctive.
• Buyers are less aware of substitutes.
• Buyers cannot easily compare the quality of substitutes.
• The expenditure is a smaller part of the buyer’s total income.
• The expenditure is small compared to the total cost of the end product.
• Part of the cost is borne by another party.
• The product is used in conjunction with assets previously bought.
• The product is assumed to have more quality, prestige, or exclusiveness.
• Buyers cannot store the product.
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Step 3: Estimating Costs (1 of 3)
• Types of costs and levels of
production
– Fixed vs. variable costs
– Total costs
– Average cost
Figure 16.2 Cost per Unit at Different
Levels of Production per Period
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Step 3: Estimating Costs (2 of 3)
• Accumulated production
– Experience/learning curve
Figure 16.3 Cost per Unit as a Function of Accumulated Production: The
Experience Curve
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Step 3: Estimating Costs (3 of 3)
• Target costing
– Price less desired profit margin
– Costs change with production scale and experience.
They can also change as a result of a concentrated
effort by designers, engineers, and purchasing agents
to reduce them through target costing. Market research
establishes a new product’s desired functions and the
price at which it will sell, given its appeal and
competitors’ prices. This price less desired profit
margin leaves the target cost the marketer must
achieve.
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Step 4: Analyzing Competitors’ Prices
• Firm must take competitors’ costs, prices, & reactions
into account
– Value-priced competitors
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Step 5: Selecting a Pricing Method (1 of 6)
• Three major considerations in price
– Costs = price floor
– Competitors’ prices = orienting point
– Customers’ assessment of unique
features = price ceiling
Figure 16.4 The Three Cs Model
for Price Setting
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Step 5: Selecting a Pricing Method (2 of 6)
• Markup pricing
– Add a standard markup to the product’s cost
unit cost
Markup price 1 desired return on sales
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Step 5: Selecting a Pricing Method (3 of 6)
• Target-return pricing
– Price that yields its target rate of return on investment
desired return invested capital Target-return price unit cost
unit sales
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Figure 16.5 Break-Even for
Target-Return Price
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Step 5: Selecting a Pricing Method (4 of 6)
• Perceived-value pricing
– Based on buyer’s image of product, channel
deliverables, warranty quality, customer support, and
softer attributes (e.g., reputation)
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Step 5: Selecting a Pricing Method (5 of 6)
• Value pricing
• EDLP
– High-low pricing
• Going-rate pricing
– the firm bases its
price largely on
competitors’ prices
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Step 5: Selecting a Pricing Method (6 of 6) • Auction-type pricing
– English (ascending)
have one seller and many buyers. On sites such as eBay and
Amazon.com, the seller puts up an item and bidders raise their offer
prices until the top price is reached.
– Dutch (descending)
feature one seller and many buyers or one buyer and many sellers. In
the first kind, an auctioneer announces a high price for a product and
then slowly decreases the price until a bidder accepts. In the other, the
buyer announces something he or she wants to buy, and potential
sellers compete to offer the lowest price.
– Sealed-bid
feature one seller and many buyers or one buyer and many sellers. In
the first kind, an auctioneer announces a high price for a product and
then slowly decreases the price until a bidder accepts. In the other, the
buyer announces something he or she wants to buy, and potential
sellers compete to offer the lowest price.
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Step 6: Selecting the Final Price
• Additional factors to select final price:
‒ Impact of other marketing activities
‒ Company pricing policies
‒ Gain-and-risk-sharing pricing
‒ Impact of price on other parties
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Adapting the Price (1 of 5)
• Geographical pricing
– Barter
– Compensation deal
– Buyback arrangement
– Offset
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Adapting the Price (2 of 5)
• Price discounts and allowances
Table 16.4 Price Discounts and Allowances
Discount: A price reduction to buyers who pay bills promptly. A typical example is “2/10, net 30,”
which means payment is due within 30 days and the buyer can deduct 2 percent by
paying within 10 days.
Quantity Discount: A price reduction to those who buy large volumes. A typical example is “$10 per unit for
fewer than 100 units; $9 per unit for 100 or more units.” Quantity discounts must be
offered equally to all customers and must not exceed the cost savings to the seller.
They can be offered on each order placed or on the number of units ordered over a
given period.
Functional Discount: Discount (also called trade discount ) offered by a manufacturer to trade-channel
Members if they perform certain functions, such as selling, storing, and record keeping.
Manufacturers must offer the same functional discounts within each channel.
Seasonal Discount: A price reduction to those who buy merchandise or services out of season. Hotels,
motels, and airlines offer seasonal discounts in slow selling periods.
Allowance: An extra payment designed to gain reseller participation in special programs. Trade-in
allowances are granted for turning in an old item when buying a new one. Promotional
allowances reward dealers for participating in advertising and sales support programs.
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Adapting the Price (3 of 5)
• Loss-leader pricing
• Special event pricing
• Special customer pricing
• Cash rebates
• Low-interest financing
• Longer payment terms
• Warranties/service
contracts
• Psychological
discounting
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Adapting the Price (4 of 5)
• 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. In first-degree price
discrimination, the seller charges a separate price to each customer
depending on the intensity of his or her demand. In second-degree price
discrimination, the seller charges less to buyers of larger volumes. In
third-degree price discrimination, the seller charges different amounts to
different classes of buyers, as in the following cases
– Customer-segment pricing
– Product-form pricing
– Time pricing
– Image pricing
– Location pricing
– Channel pricing
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Adapting the Price (5 of 5)
• Price discrimination
– Yield pricing
The airline and hospitality industries use yield
management systems and yield pricing, by which
they offer discounted but limited early purchases,
higher-priced late purchases, and the lowest rates
on unsold inventory just before it expires.
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Initiating and Responding to Price
Changes (1 of 2)
• Initiating price cuts
– Domination of market
Either the company starts with lower costs than its competitors,
or it initiates price cuts in the hope of gaining market share and
lower costs.
• Price-cutting traps
– Low-quality: Consumers assume quality is low
– Fragile market share: Consumers assume quality is low
– Shallow pockets: Higher-priced competitors match the lower
prices but have longer staying power because of deeper cash
reserves
– Price war:Competitors respond by lowering their prices even
more, triggering a price war
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Initiating and Responding to Price
Changes (2 of 2)
• Initiating price increases
‒ Delayed quotation pricing
‒ The company does not set a final price until the product is finished or delivered. This
pricing is prevalent in industries with long production lead times, such as industrial
construction and heavy equipment.
‒ Escalator clauses
‒ The company requires the customer to pay today’s price plus all or part of any inflation
increase that takes place before delivery. Escalator clauses base price increases on some
specified price index. They are found in contracts for major industrial projects, such as
aircraft construction and bridge building.
‒ Unbundling
The company maintains its price but removes or prices separately one or more elements that
were formerly part of the offer, such as delivery or installation. Car companies sometimes
add higher-end audio entertainment systems or GPS navigation systems to their vehicles as
separately priced extras.
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Initiating Price Increases
Table 16.5 Profits before and after a Price Increase
Blank Before After Blank
Price $10 $10.10 (a 1% price increase)
Units sold 100 100 Blank
Revenue $1,000 $1,010 Blank
Costs −970 −970 Blank
Profit $30 $40 (a 33 ⅓% profit increase)
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Initiating and Responding to Price
Changes
• Anticipating competitive responses
• Responding to competitors’ price changes
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Copyright
The post How do consumers process and evaluate prices? appeared first on graduatepaperhelp.
"Looking for a Similar Assignment? Get Expert Help at an Amazing Discount!"
We are a leading academic writing company, which has been providing exclusive writing services for years.