DEVELOPING PRICING

STRATEGIES AND
PROGRAMS
CHAPTER QUESTIONS
 How do consumers process and
evaluate prices?
 How should a company set prices

initially for products or services?

 How should a company adapt prices to

meet varying circumstances and

opportunities?
 When should a company initiate a price

change?
 How should a company respond to a

competitor’s price challenge?

GILLETTE COMMANDS A PRICE
PREMIUM
SYNONYMS FOR PRICE
 Rent  Special assessment
 Tuition  Bribe

 Fee  Dues

 Fare  Salary

 Rate  Commission

 Toll  Wage

 Premium  Tax

 Honorarium
CONSUMER PSYCHOLOGY AND PRICING
 In 2007 JVC GR-D model of a mini digital video camera
cost a retail price of $330, [Link] was selling it
through its Ritz Camera merchant associate for $247 and
eBay was selling a “like new” version at buy it for now
price of $149. High manufacturer’s suggested retail price
is a psychological tool, a reference price that makes
people see they are getting something of value for less
than the top price.
CONSUMER PSYCHOLOGY
AND PRICING

Reference Prices

Price-quality inferences

Price endings

Price cues
POSSIBLE CONSUMER REFERENCE PRICES
1. Fair Price – What a product should cost
2. Upper Bound Price – The maximum price consumers
would pay.
3. Lower Bound Price – The lower threshold price or the
least consumers would pay.
4. Competitor Price
5. Expected Future Price
6. Usual Discounted Price
PRICE – QUALITY INFERENCES
1. Many consumers use price as an indicator of quality.
2. Image pricing is especially effective with ego sensitive
products such as perfumes and expensive cars.
3. A bottle of perfume priced at Rs 5000 might contain
Rs 500 worth of scent, but gift givers pay Rs 5000 to
communicate their high regard for the receiver.
4. Some brands adopt exclusivity and scarcity as a mean
to signify uniqueness and justify premium pricing.
STEPS IN SETTING PRICE
Select the price objective

Determine demand

Estimate costs

Analyze competitor price mix

Select pricing method

Select final price

STEP -1: SELECTING THE PRICE OBJECTIVE
1. Survival – As long as prices cover variable costs and
some fixed costs, the company stays in business.
2. Maximum Current Profit – Many companies try to set
a price that will maximize current profits.
3. Maximum market share – Companies believe that a
higher sales volume will lead to lower unit costs and
higher long – run profits. Texas Instruments followed
the market penetration pricing for years, they would
build a large plant, set its prices as low as possible, win
a large market share, experience falling market share
and cut its prices further as it fell.
4. Maximum Market Skimming – Sony is a frequent
practitioner of market skimming pricing, in which prices start
high and slowly drop over time.
5. Product Quality Leadership – Brands such as Starbucks,
Mercedes , BMW, Café Coffee Day and Taj group of hotels
have positioned themselves as leaders in quality, with
premium pricing and a very loyal customer base.
6. Other Objectives – A university aims for partial cost
recovery, knowing that it must rely on private gifts and
public grants to recover remaining costs.
STEP: 2 – DETERMINING DEMAND

 The first step in estimating demand is to understand price

sensitivities.
Customers are less price sensitive to
1. Low cost items or items they buy infrequently.
2. There are few or no substitutes or competitors.
3. They do not readily notice the higher price.
4. They are slow to change their buying habits.
5. They think the higher price is justified.
6. The expenditure is small compared to the total cost of the
end product
Estimating Demand Curves
1. Surveys – Surveys can explore how many units consumers
would buy at different proposed prices.
2. Price Experiments – It can vary the prices of different
products in a store or charge different prices for the same
product to see how the change affects sales.
3. Statistical Analysis – Analysis of past prices, quantities sold
and other factors can reveal their relationships.
Price Elasticity of Demand
4. Inelastic Demand – If demand hardly changes with a small
increase in price, we say it is inelastic demand.
5. Elastic Demand – If demand changes drastically due to
change in price, we say it is elastic demand.
FIGURE 14.2 INELASTIC
AND ELASTIC DEMAND
STEP:3 – ESTIMATING COSTS

1. Fixed Costs
2. Variable Costs
3. Total Costs = Fixed costs + Variable Costs
4. Average Costs – It equals to total costs divided by production.
5. Experience Curve – Experience curve plots the relationship
between the amount of products produced and the cost per
unit .
6. Target Costing – It is a cost management tool for reducing
the over all cost of a product over its entire life cycle with the
help of production, engineering, research and design.
STEP 3: ESTIMATING COSTS

Types of Costs

Accumulated
Production
Activity-Based
Cost Accounting

Target Costing
 COST TERMS AND PRODUCTION
 Fixed costs
 Variable costs

 Total costs

 Average cost

 Cost at different

levels of
production

Copyright © 2009 Dorling Kindersley (India) Pvt. Ltd. 14-17

FIGURE 14.4 COST PER UNIT AS A
FUNCTION OF ACCUMULATED PRODUCTION
TATA MOTORS DEVELOPED ‘NANO’ITS
SMALL CAR WITH A TARGET PRICE
STEP:4 – ANALYZING COMPETITORS
COSTS, PRICES AND OFFERS.
STEP:5- SELECTING A PRICING METHOD
 Mark Up Pricing – The most elementary pricing method
is to add a standard mark up to the production’s cost. A
retailer incurs a cost of Rs 85 to buy a product, he might
add a mark up of Rs 15, and fix the selling price of the
product to be Rs100.
 Target Return Price – The target return price is set by

marketers to achieve a specific rate of return on their

investment. General motors, General electric and DuPont
are examples of companies which follow this pricing
method.
 Suppose a marketer produces a product and the cost of each
unit is Rs 200. He made an investment of Rs 1,00,000 to set up
the business. He expects that he will be able to sell 500 units of
the product and obtain 15% return on investment. He will price
his product at
Target Return Pricing = Unit cost + (Desired return x Invested capital)
Unit Sales

Target Return Pricing = 200 + 0.15 x 1,00,000

500

Answer = Rs.230
 Perceived value Pricing – Caterpillar’s Pricing
The marketers set prices of
the products on the basis of $90,000 = Price of Competitor
their perceived value in the $7,000 = Superior Durability
minds of customers. $6,000 = Superior Reliability
 Caterpillar uses perceived
$5,000 = Superior Service
value to set its prices on its $ 2,000 = Longer Warranty
construction equipment. It $ 110,000 = Total price
might price its tractor at covering
$100,000, although a caterpillar’s
similar competitor’s tractor superior
might be priced at $90,000. value
-$10,00 = Discount

$100,000 = Final Price

 Going rate pricing – Going rate pricing is a simple method in
which a company simply follows the prevailing pricing
patterns in the market.
 Differentiated pricing – In differentiated pricing, marketers

adopt different prices for the same product at different

locations or for different types of customers.
 Value pricing – Value pricing is a method in which marketers

offer low prices for a high quality product.

 Market skimming – Certain companies prefer setting high

prices for their product and recover the costs incurred in

developing and producing them as early as possible.
STEP:6 – SELECTING THE FINAL PRICE

 Brands with average relative quality but high relative

advertising budgets were able to charge premium prices.
Consumers are willing to pay higher prices for known products
than unknown products.
 Brands with high relative quality and high advertising

obtained the highest prices.

 The price must be consistent with company pricing policies.
PROMOTIONAL PRICING
 Loss Leader Pricing: Supermarkets and Department
stores often drop the price on well known brands to
stimulate additional store traffic.
 Special Event Pricing: Sellers will offer special prices

in certain seasons to draw in more customers.

 Cash Rebates: Part of the list price back to the

customer. Usually reaching a particular slab. Example Rs

500 off on buying Rs 2,000 worth goods.
 Low interest financing: Automakers have used no-

interest financing to try to attract more customers.

PROMOTIONAL PRICING (CONT.)
 Longer payment terms: Followed by some sellers
especially mortgage banks and auto companies. It
increases affordability for the customers due to monthly
payments.
 Warranties and Service Contracts: Companies can

promote sales by adding a free or low-cost warranty or

service contract.
 Psychological Discounting: This strategy sets an

artificially high price and then offers the product at

substantial savings; for example, “Was Rs 359 now Rs
299.”
DIFFERENTIATED PRICING
Price Discrimination occurs when a company sells a
product or service at two or more prices that do not
reflect a proportional difference in the cost.
 Customer – segment pricing: Different customer

groups pay different prices for the same product or

service. Example: Indian railways, student plans etc.
 Product Form Pricing: Different versions of the

product are priced differently, but not in proportion to

their costs. Example: Cars different variants of the same
model are priced differently.
DIFFERENTIATED PRICING
 Image Pricing: Some companies price the same product
at two different levels based on image differences.
Example: Perfumes
 Channel Pricing: Pricing based on the channel of

purchase. Example Coca-Cola

 Location Pricing: The same product is priced differently

at different locations. Example: Theaters

 Time Pricing: Prices vary by season, day, or hour.

Example: Restaurants.