Chapter 13 & HBR Readings

Aman Abbi FT 14105

Price has become one of the more important marketing variables.
Despite the increased role of nonprice factors in the modern marketing
process, price is a critical marketing element, especially in markets
characterized by monopolistic competition or oligopoly. Competition
and buyers that are more sophisticated has forced many retailers to
lower prices and in turn place pressure on manufacturers. Further,
there has been increasing buyer awareness of costs and pricing, and
growing competition within the channels, which in turn provides the
consumer with even more awareness of the pricing process.
In setting the price of a product, the company should follow a six-step
procedure:
1. Selecting the Pricing Objective: The company carefully
establishes its marketing objective(s), such as survival,
maximum current profit, maximum current revenue, maximum
sales growth, maximum market skimming or product-quality
leadership.
2. Determining Demand: The company determines the demand
schedule, which shows the probable quantity purchased per
period at alternative price levels. The more inelastic the demand,
the higher the company can set its price.
3. Estimating Costs: The company estimates how its costs vary at
different output levels, production levels, different marketing
strategies, differing marketing offers, and target costing based
on market research.
4. Analyzing Competitors Cost, Prices, and Offers: The
company examines competitors prices as a basis for positioning
its own price.
5. Selecting a Pricing Method: The company selects one of the
following pricing methods: markup pricing, target return pricing,
perceived-value pricing, value-pricing, going-rate pricing, and
sealed-bid pricing.
6. Selecting the Final Price: The company selects its final price,
expressing it in the most effective psychological way,
coordinating it with the other marketing mix elements, checking
that it conforms to company pricing policies, and making sure it
will prevail with distributors and dealers, company sales force,
competitors, suppliers, and government.
The following price-adaptation strategies are utilized by the company
as required by the varying conditions in the marketplace:

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1. Geographical pricing (Cash, Countertrade, Barter):
Marketplace adjustment based on a company decision related to
pricing distant customers.
2. Price discounts and allowances: Second area for adjustment
where the company establishes cash discounts, quantity
discounts, functional discounts, seasonal discounts, and
allowances.

3. Promotional pricing: Provides a third marketplace option, with

the company deciding on loss-leader pricing, special-event
pricing, cash rebates, low interest financing, longer payment
terms, warranties and service contracts and psychological
discounting.
4. Differentiated pricing: The fourth option, enables the company
to establish different prices for different customer segments,
product forms, brand images, places, and times.
5. Product-mix pricing: Enables the company to determine price
zones for several products in a product line, as well as differential
pricing for optional features, captive products, byproducts, and
product bundles.
When a firm considers initiating a price change, it must carefully
consider customer and competitor reactions. Customer reactions are
influenced by the meaning customers see in the price change.
Competitor reactions flow either from a set reaction policy or from a
fresh appraisal of each situation. The firm initiating the price change
must also anticipate the probable reactions of suppliers, middlemen,
and governments.
The firm encountering a competitor-initiated price change must
attempt to understand the competitors intent and the likely duration
of the change. If swiftness of reaction is desirable, the firm should
preplan its reactions to different possible competitor price actions.

Pricing: A Value-Based Approach

Determining Customer Value and Sensitivity to Pricing:Pricing
should be driven primarily by the value of the product to the customer.
Five major areas are:

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1. Product Category Factors: Price sensitivity depends on the
product category. For eg. Price sensitivity tends to be lower in
low-cost product categories.
2. Who Pays?: Some things the user of the product pays for;
sometimes not.
3. Competitive Factors: A number of competitive factors influence
price sensitivity.
4. Reference Price: In some situations, the consumer develops a
reference price which forms the foundation from which the
suitability of actual prices is judged.
5. Price/Quality Relationships: In some categories, particularly ones
in which product quality is difficult to judge by inspection before
purchase (e.g., perfume, consulting services), price can be used
as cue to product quality.

Assessing a Product's Value to Customers

It is important to develop an understanding of the products value to
customers. The major methods of assessing this value, whose
applicability varies by situation, are:
1. Judgments based on an understanding of the buyers cost
structure.
2. Surveys in which customers are asked either directly or indirectly
about value.
Customizing Price
customizing prices

to

Value

Delivered:

Four

methods

of

1. Product line sorting: Offering high-end products with many

features for the high-value customer and more basic models for
lower value.
2. Controlled availability: Involves making different prices available
only to certain groups.
3. Price based on buyer characteristics: Looking for characteristic of
buyers which correlates with willingness-to-pay.
4. Price based on transaction characteristics: Price is tied to the
particular features of the transaction.

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Integrating Price with Other Mix Elements: A key to effective
pricing is to have pricings value extraction in synch with the value
creation process of the other elements of the marketing mix.

Note on
Products:

Pricing

Strategies

for

Industrial

Industrial Product Pricing Modes: Three ways to set prices for

industrial products
1. Cost-Based Pricing: Bargaining focuses on elements of the
vendors cost structure (such as lanor, materials, overheads, and
profit) for the item to be supplied. Sellers objective is to are to
get a fair return and to minimize cost-factor risks. Buyers
objective are to negotiate a fair price and to get the benefit of
vendor-cost reduction that accrue through experience.
2. Prices Determined by Competitive Bidding: When suppliers do
not set prices through discussions of their costs with customers,
and when prices are not purely market-determined, then prices
are likely to be set up by competitive bidding.
3. Published List Pricing: In a broad range of supply industries, price
is market-determined in the sense that price levels are the result
of market forces, prices are published, and all customers pay the
same amount.

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