1 14Developing 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?
Rent Tuition Fee Fare Rate Toll Premium Honorarium Special assessment Bribe Dues Salary Commission Wage Tax Synonyms for Price
Pricing Decisions are Creating Major Challenges for Many Companies Examples Include: Threats to major airlines by discount carriers. Pressures on drug companies to reduce prices. Intense price competition on supermarket chains. Threats to strong brands by counterfeit products.
STRATEGIC ROLE OF PRICE …requires that we put pricing at the beginning of the process. For example, a multi-part marketing strategy usually is required in value-based pricing. Airlines’ complicated service packages with arcane restrictions, and their multiple channels of distribution must support pricing that reflects different values of the service to different segments. Without such a strategy, airlines would capture a much smaller portion of the value they have the potential to create. T. Nagle, Marketing News, 11/9/98, 4.
STRATEGIC ROLE OF PRICE ‘”Part of the reason that pricing is misused and poorly understood is the common practice of making it the last marketing decision. We think that we must design products, communication plans, and a method of distribution before we have something to price. We then use pricing tactically to capture whatever value we can.”
Common Pricing Mistakes • Determine costs and take traditional industry margins • Failure to revise price to capitalize on market changes • Setting price independently of the rest of the marketing mix • Failure to vary price by product item, market segment, distribution channels, and purchase occasion
Consumer Psychology and Pricing • Reference prices • Price-quality inferences • Price endings • Price cues
Remembering vs Knowing • Could you remember how much you last paid for a product you purchase periodically? • Many consumers will not remember this information, yet they will judge the advertised or actual price of the product to be “too expensive”, “a great deal,” or “about average”. • We all “know” things for which we cannot recall the source or even the exact nature of our knowledge. • Remembering = memory, ability to recall the specific items ---- EXPLICIT MEMORY • Knowing = nonconscious retrieval of previously encountered stimuli --- IMPLICIT MEMORY
Mental Accounting • Consumers tend to… • Segregate gains • Integrate losses • Integrate smaller losses with larger gains • Segregate small gains from large losses
“Fair price” Typical price Last price paid Upper-bound price Lower-bound price Competitor prices Expected future price Usual discounted price Possible Consumer Reference Prices
Overvalued Brands Land Rover Kia Volkswagen Volvo Mercedes Undervalued Brands Mercury Infiniti Buick Lincoln Chrysler Consumer Perceptions vs. Reality for Cars
Price Cues • “Left to right” pricing ($299 versus $300) • Odd number discount perceptions • Even number value perceptions • Ending prices with 0 or 5 • “Sale” written next to price
Table 14.3 Factors Leading to Less Price Sensitivity • The product is more distinctive • Buyers are less aware of substitutes • Buyers cannot easily compare the quality of substitutes • Expenditure is a smaller part of buyer’s total income • Expenditure is small compared to the total cost • Part of the cost is paid by another party • Product is used with previously purchased assets • Product is assumed to have high quality and prestige • Buyers cannot store the product
When to Use Price Cues • Customers purchase item infrequently • Customers are new • Product designs vary over time • Prices vary seasonally • Quality or sizes vary across stores
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 Pricing Objective • Survival • Maximum current profit • Maximum market share • Maximum market skimming • Product-quality leadership
Step 2: Determining Demand • Price sensitivity • Estimating demand curves • Price elasticity of demand
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
Step 5: Selecting a Pricing Method • Markup pricing • Target-return pricing • Perceived-value pricing • Value pricing • Going-rate pricing • Auction-type pricing
Auction-Type Pricing • English auctions • Dutch auctions • Sealed-bid auctions
Step 6: Selecting the Final Price • Impact of other marketing activities • Company pricing policies • Gain-and-risk sharing pricing • Impact of price on other parties
Price-Adaptation Strategies • Geographical pricing • Discounts/allowances • Promotional pricing • Differentiated pricing
Countertrade Barter Compensation deal Buyback arrangement Offset Discounts/ Allowances Cash discount Quantity discount Functional discount Seasonal discount Allowance Price-Adaptation Strategies
Promotional Pricing Tactics • Loss-leader pricing • Special-event pricing • Cash rebates • Low-interest financing • Longer payment terms • Warranties and service contracts • Psychological discounting
Placebo Effects of Marketing Actions: Consumer May Get What They Pay For Beliefs and expectations can affect more than judgments and subjective consumption experiences. Can consuming an energy drink that is purchased at a discount lead not only to judgments of lower quality or to a less favorable consumption experience and even less productive activities? Price can also trigger a placebo effect.
Price promotions quality price promotion • why could price promotions be bad? • placebo effect price
Differentiated Pricing and Price Discrimination • Customer-segment pricing • Product-form pricing • Image pricing • Channel pricing • Location pricing • Time pricing • Yield pricing
Increasing Prices • Delayed quotation pricing • Escalator clauses • Unbundling • Reduction of discounts
Brand Leader Responses to Competitive Price Cuts • Maintain price • Maintain price and add value • Reduce price • Increase price and improve quality • Launch a low-price fighter line
THE PLACEBO EFFECT Consumers' beliefs and expectations, shaped by experiences in their daily lives, often influence their judgments of products and services. Marketing actions, such as pricing, can alter the actual efficacy of products to which they are applied. This is called the ‘placebo effect’ which stems fro: the activation of expectancies about the efficacy of the product, a process that appears not to be conscious.
Placebo Effect in the Medical Domain Placebo phenomenon in the medical domain. Patients' beliefs and expectations about the treatment they are receiving (e.g., an antidepression medication) can yield real changes to their health, even if the treatment is actually inert and has no inherent power to produce health effects (e,g., an inert sugar pill that lcx)ks like the antidepression medication).
Theories underlying Placebo Effects Two notions are believed to account for placebo effects: expectancy theory and classical conditioning. According to expectancy theory, placebo effects arise because beliefs about a substance/procedure serving as a placebo activate expectations that a particular effect will occur, which then affect the subsequent effectiveness of the substance/procedure. The classical conditioning view considers consuming substances with known therapeutic effects to be conditioning trials.
Empirical Study on Placebo Effects of Pricing Strategy A study in which 38 members of a fitness center who exercised regularly (at least three times a week) consumed Twinlab Ultra Fuel before and during a workout session. Before consuming the energy drink, participants were shown the list of its ingredients and were told that the drink was from the most recently manufactured batch. One group of participants was told that we purchased the drink at the regular price of $2.89; another group was told that the regular price of the drink was $2.89 but that we had purchased it at a discounted price of $.89 because we bought it in bulk as institutional purchase. After exercising, participants rated the intensity of their workout on a scale that ranged from -3 ("not at all intense") to +3 ("very intense") and how fatigued they felt on a scale that ranged frotn 1 ("not at all") to 7 ("very"). The results show that participants in the reduced-price condition rated their workout intensity as lower (M = -.4) than did those in the regular-price condition (M = .6; F( 1, 36) = 7.5, p < .01 ), and participants in the reduced-price condition indicated that they were more fatigued (M = 4.5) than did those in the regular-price condition (M = 3.7; F(l. 36) = 3.5, p < .10).
Empirical Study on Placebo Effect of Price Number of Puzzles Solved Low expectancy strength High expectancy strength Notes: The number of puzzles solved in the control condition = 9.1.