MRKT20052 Marketing Management and Digital Communications
Lecture 7: Developing Pricing Strategies and Programs
• In today’s lecture we will discuss:
• The Nature of Pricing;
• Setting Prices – including the Consumer Psychology behind it;
• Determining Demand; and
• Responding to Price Changes.
Lecture 7 Overview
Understanding Pricing
• Price is not just a number on a tag or item.
Marketing Mix Pricing
Easiest element
of marketing
mix to adjust.
Signals intended
value
positioning.
Price
premium
command.
Price review
is important.
Pricing
decisions are
complex.
Pricing
decisions
must be
consistent.
Reference Price
• Consumers often compare a product’s price to an internal memory price
and often bring supporting evidence.
• Sellers often attempt to manipulate reference prices by implying it belongs
to a more expensive product class.
• Marketers also encourage reference-price thinking by stating a high
manufacturer’s suggested price or by indicating that the product was
priced much higher originally.
Price-Quality Inferences
• Many consumers use price as a quality indicator.
• Image pricing is effective with ego-sensitive products like luxury goods.
• Some companies adopt exclusivity and scarcity to justify premium prices.
Price Endings
• Many sellers believe prices should end in an odd
number.
• Research shows that consumers process prices in
a “left-to-right” manner rather than by rounding.
• Prices that end with a 0 or 5 are also popular and
are thought to be easier for consumers to process.
• Pricing cues like “sale” signs and prices that end in
a 9 are less effective the more they are employed.
Determining Demand to Set Price
• The first step in estimating demand is to understand what affects price
sensitivity. Factors that lead to less price sensitivity include:
Estimating Costs to Set Price
Cost
Estimation
Fixed
Costs
Variable
Costs
Total Costs Average
Cost
Activity-Based
Cost
Accounting
Target
Costing
Step 4: Analyzing Competitors’ Costs, Prices and Offers
• A business must understand market demand, company costs as well as
competitors’ costs, prices and possible price reactions.
• The business must examine the closest competitor’s price as a
benchmark.
In the Philippines, Jollibee
beats McDonald’s at its
game by having cheaper
supplies and adapting to
local tastes.
Step 5: Selecting a Pricing Method
Price-Setting
Markup Pricing Methods
Target-Return
Pricing
Perceived-Value
Pricing Value Pricing
Going-Rate
Pricing
Auction-Type
Pricing
Markup Pricing
• This method involves adding a standard markup to the product’s cost. Is
this logical?
• Any pricing method that ignores current demand, perceived value, and
competition is not likely to lead to the optimal price.
Target-Return Pricing
• The business determines the price that would yield its target rate of return
on investments (ROI).
• This tends to ignore price elasticity and competitors’ prices.
• The manufacturer will realize 20 percent ROI provided its
costs and estimated sales turn out to be accurate.
• But what if sales do not reach 50,000 units?
• The manufacturer can prepare a break-even chart to learn
what would happen at other sales levels.
Perceived-Value Pricing
• An increasing number of businesses are basing their price on the
customer’s perceived value.
• Perceived value comprises of several elements including:
• Buyers image of the product performance;
• The channel deliverables;
• The warranty quality;
• Customer support;
• Supplier’s reputation;
• Trustworthiness; and
• Esteem.
• The key is to deliver more value than the competitor and to demonstrate
this to prospective buyers.
Value Pricing
• Value pricing focuses on winning loyal customers by charging a fairly low
price for a high-quality offering.
• Value pricing is a matter of re-engineering the company’s operations to
become a low-cost producer without sacrificing quality.
• The most important reason retailers adopt this, is that constant sales and
promotions are costly and have eroded consumer confidence in the
credibility of everyday shelf prices.
Going-Rate Pricing
• The business bases its pricing largely on competitors’ prices.
• The business may charge the same price, more or less than their major
competitors.
• Going-rate pricing is quite popular where costs are difficult to measure or
competitive response is uncertain.
Auction-Type Pricing
• Auction-type pricing is growing more popular, especially with the growth of
the internet.
To Sum Up
• Pricing is not simply a number on a tag.
• Prices communicate the company’s intended value positioning.
• Setting prices and selecting a pricing method are strategic functions.
• Consumers use prices as a cue for value and quality.
• Prices must be reviewed and adjusted systematically.
End of Lecture 7.