Transcript Chapter 16 Developing Price Strategies and Programs

Chapter 16
Developing Price Strategies
and Programs
by
Dr. Saleh Alqahtani
Kotler on
Marketing
Sell value,
not price.
Dr. Saleh Alqahtani
Chapter Objectives
 In this chapter, we focus on three
questions:
 How should a price be set on a product or
service for the first time?
 How should the price be adapted to meet
varying circumstances and opportunities?
 When should the company initiate a price
change, and how should it respond to a
competitor’s price change?
Dr. Saleh Alqahtani
Price - Quality Strategies
Price
Product Quality
High
Med
High
Medium
Low
Premium
Value
High
Value
Super
Value
Overcharging
Medium
Value
Good-Value
Rip-Off
False
Economy
Economy
Low
Dr. Saleh Alqahtani
Figure 16.2: Price Should Align with Value
Dr. Saleh Alqahtani
Setting Pricing Policy
1. Selecting the pricing
objective
2. Determining demand
3. Estimating costs
4. Analyzing competitors’
costs, prices, and offers
5. Selecting a pricing
method
Dr. Saleh Alqahtani
6. Selecting final price
Adapting the Price
 Geographical Pricing (Cash,
Countertrade, Barter)
 Countertrade
 Barter
 Compensation deal
 Buyback arrangement
 Offset
 Price Discounts and Allowances
Dr. Saleh Alqahtani
Table 16.2: Price Discounts and Allowances
Cash Discount:
A price reduction to buyers who pay bills
promptly. A typical example is “2/10, net 30,”
which means that payment is due within 30
days and that the buyer can deduct 2
percent by paying the bill within 10 days.
Quantity Discount:
A price reduction to those who buy large
volumes. A typical example is “$10 per unit
for less 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.
See text for complete table
Dr. Saleh Alqahtani
Types of Costs
Fixed Costs
(Overhead)
Variable Costs
Costs that don’t
vary with sales or
production levels.
Costs that do vary
directly with the
level of production.
Executive Salaries
Rent
Raw materials
Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production
Dr. Saleh Alqahtani
The Three C’s Model
for Price Setting
Low Price
Costs
No possible
profit at
this price
Dr. Saleh Alqahtani
Competitors’
prices and
prices of
substitutes
Customers’ High Price
assessment
No possible
of unique
demand at
product
this price
features
Pricing Methods






Markup Pricing
Target Return Pricing
Perceived Value Pricing
Value Pricing
Going-Rate Pricing
Sealed-Bid Pricing
Dr. Saleh Alqahtani
Some important pricing
definitions
 Utility: The attribute
that makes it capable of
want satisfaction
 Value: The worth in
terms of other products
 Price: The monetary
medium of exchange.
Dr. Saleh Alqahtani
Value Example:
Caterpillar
Tractor is $100,000 vs.
Market $90,000
$90,000 if equal
7,000 extra durable
6,000 reliability
5,000 service
2,000 warranty
$110,000 in benefits $10,000 discount!
Promotional Pricing







Loss-leader pricing
Special-event pricing
Cash rebates
Low-interest financing
Longer payment terms
Warranties & service contracts
Psychological discounting
Dr. Saleh Alqahtani
Psychological Pricing
 Most Attractive?
A
32 oz.
$2.19
 Better Value?
 Psychological reason
to price this way?
B
$1.99
26 oz.
Assume Equal Quality
Dr. Saleh Alqahtani
Discriminatory Pricing
Customer Segment
Product-form
Location
Time
Dr. Saleh Alqahtani
Price-Reaction Program for Meeting
a Competitor’s Price Cut
Has competitor
cut his price?
No
Hold our price
at present level;
continue to watch
competitor’s
price
No
No
Yes
Is the price
Is it likely to be
How much has
likely to
permanent Yes his price been
significantly Yes aprice
cut?
cut?
hurt our sales?
By less than 2%
Include a
cents-off coupon
for the next
purchase
Dr. Saleh Alqahtani
By 2-4%
Drop price by
half of the
competitor’s
price cut
By more than 4%
Drop price to
competitor’s
price
Adapting the Price
 Promotional Pricing







Loss-leader pricing
Special-event pricing
Cash rebates
Low-interest financing
Longer payment terms
Warranties and service contracts
Psychological discounting
Dr. Saleh Alqahtani
Adapting the Price
 Discriminatory Pricing






Customer segment pricing
Product-form pricing
Image pricing
Channel pricing
Location pricing
Time pricing
 Yield pricing
Dr. Saleh Alqahtani
Adapting the Price
 Product-mix pricing
 Product-Line Pricing
 Optional-Feature Pricing
 Captive-Product Pricing
 Captive products
 Two-Part Pricing
 By-Product Pricing
 Product-Bundling Pricing
 Pure bundling
 Mixed bundling
Dr. Saleh Alqahtani
Initiating and Responding to
Price Changes
 Initiating Price Cuts
 Drive to dominate the market
through lower costs
 Low quality trap
 Fragile-market-share trap
 Shallow-pockets trap
Dr. Saleh Alqahtani