THE UNIVERSITY OF DANANG
UNIVERSITY OF ECONOMICS
Chapter 5
Managing Pricing
and Sales
Promotions
Marketing Managemen
Faculty of Marketing
LEARNING OBJECTIVES
LO1. Describe the role that pricing plays in marketing
management.
LO2. Identify the key psychological factors that influence
how consumers perceive prices.
LO3. Explain the factors that a manager must consider
when setting prices.
LO4. Discuss how to respond to competitive price cuts.
LO5. Explain how to design and manage incentives.
Understanding Pricing
• Negotiations between buyers and sellers
• One price for all buyers
• Internet pricing
TL1
Consumer Psychology and
Pricing
Reference prices
Image pricing
Price cues
LO2
Setting the Price
Six main steps:
▪ Defining the pricing objective
▪ Determining demand
▪ Estimating costs
▪ Analyzing competitors’ costs, prices, and offers
▪ Selecting a pricing method
▪ Setting the final price
TL1 LO3
Defining the Pricing Objective
Common pricing objectives:
▪ Short-term profit
▪ Market penetration
▪ Market skimming
▪ Quality leadership
TL1 LO3
Determining Demand
Price elasticity of demand
▪ The degree to which a change in price leads to a change in quantity
sold
TL1 LO3
Figure 11.1 Inelastic And
Elastic Demand
TL1 LO3
Estimating Costs (1 of 2)
Fixed costs
▪ Costs that do not vary with production level or sales revenue
Variable costs
▪ Vary directly with the level of production
Total costs
▪ The sum of the fixed and variable costs
TL1 LO3
Estimating Costs (2 of 2)
Experience curve effects
▪ Experience curve
▪ Experience curve pricing
TL1 LO3
Analyzing Competitors’ Prices
Firm must take competitors’ costs, prices, and
reactions into account
▪ Value-priced competitors
TL1 LO3
Selecting a Pricing Method (1 of
6)
Three major considerations in price
▪ Costs
• Set a price floor
▪ Competitors’ prices
• Provide an orienting point
▪ Customers’ assessment of unique features
• Establish a price ceiling
TL1 LO3
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 )
TL1 LO3
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
TL1 LO3
Figure 11.2 Break-Even Chart for
Determining Target-Return Price
and Break-Even Volume
TL1 LO3
Selecting a Pricing Method
(4 of 6)
Economic value-to-customer pricing
▪ Based on buyer’s image of product, channel deliverables, warranty
quality, customer support, and softer attributes
TL3 LO3
Selecting a Pricing Method
(5 of 6)
Competitive pricing
▪ The firm bases its price largely on competitors’ prices
TL1 LO3
Selecting a Pricing Method
(6 of 6)
Auction pricing
▪ English (ascending)
▪ Dutch (descending)
▪ Sealed-bid
TL1 LO3
Setting the Final Price (1 of 2)
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
• First degree
• Second degree
• Third degree
TL1 LO3
Setting the Final Price (2 of 2)
Third degree price discrimination:
▪ Customer segment pricing
▪ Product form pricing
▪ Channel pricing
▪ Location pricing
▪ Time pricing
TL1 LO3
Product Mix Pricing
• Loss-leader pricing
• Optional feature pricing
• Captive pricing
• Two-part pricing
• By-product pricing
• Product bundling pricing
TL1 LO3
Initiating and Responding
to Price Changes (1 of 2)
Initiating price cuts
▪ Excess plant capacity
▪ Domination of market
TL1 LO4
Initiating and Responding
to Price Changes (2 of 2)
Initiating price increases
▪ Cost inflation
• Rising costs unmatched by productivity gains squeeze profit
margins and lead companies to regular rounds of price
increases
–Anticipatory pricing
TL1 LO4
Responding to Price Changes
• Anticipating competitive responses
• Responding to competitors’ price changes
TL1 LO4
Managing Incentives
Incentives
▪ Sales promotion tools, mostly short-term, designed to stimulate
quicker or greater purchase of particular products or services by
consumers or the trade
TL1 LO5
Incentives as a Marketing
Device
Sales promotions
▪ Can produce a high sales response in the short run but little
permanent gain over the longer term
▪ Can prompt consumers to engage in stockpiling
▪ Can devalue the company’s offering in buyers’ minds
TL1 LO5
Major Incentive Decisions (1 of 5)
Establishing the objectives of incentives
▪ Consumer incentives
▪ Retailer incentives
TL1 LO5
Major Incentive Decisions (2 of 5)
Defining the size and approach for incentives
▪ Determine size
▪ Establish conditions for participation
▪ Decide on duration
▪ Choose a distribution vehicle
▪ Establish timing
▪ Set total sales promotion budget
TL1 LO5
Major Incentive Decisions (3 of 5)
Selecting Consumer Incentives
• Price reductions • Frequency programs
• Coupons
• Prizes
• Cash refunds
• Price packs • Tie-in promotions
• Premiums
• Seasonal discounts
• Financing
Major Incentive Decisions (4 of 5)
Selecting trade incentives
▪ Allowances
▪ Free goods
▪ Price-off
▪ Payment discount
TL LO5
Major Incentive Decisions (5 of 5)
Selecting sales force incentives
▪ Aim to encourage the sales force to support a new product or model,
boosting prospecting and stimulating off-season sales
TL1 LO5
Discussion Questions (1 of 2)
Fast food restaurants usually offer a variety of “meal deals”
comprising a sandwich, a side dish, and a drink.
▪ Which pricing objective are companies pursuing with this type of
product pricing?
▪ How do consumers view “meal deals” as compared to individually
priced menu items?
Discussion Questions (2 of 2)
Uber riders have become accustomed to surge pricing, knowing
that following a concert or sporting event they may pay two or
three times as much as usual for a ride.
▪ How has technology changed pricing strategy?
▪ Compare and contrast surge pricing on Uber with peak pricing on
airlines. Could airlines use an Uber pricing model?