MARKETING GROUP 8 – 66 A

SANDY SUGAMA
MANAGEMENT SEKAR PRIMANTHI A.

Chapter 16
DEVELOPING PRICING
STRATEGIES AND
PROGRAMS
Lecturer : Prof. Dr. Basu Swastha
Dharmesta, MBA

MASTER OF MANAGEMENT,FACULTY OF ECONOMICS AND BUSINESS,UNIVERSITAS GADJAH MADA

 This chapter examine how do consumers process and evaluate the prices, how should
company set prices initially for products or services, adapt prices to meet varying
circumstances and opportunities, how company initiate a price change and company respond
to a competitor’s price change.
Price is the one element of the marketing mix that produces revenue; the other
elements produce costs. Price also communicate the company’s intended value posistioning
of its product or brand. Price decisions are complex and must take into account many
factors-the company, the customers, the competition and the marketing environment.

A. UNDERSTANDING PRICING

Price is not just a number on a tag. It comes in many forms and performs many
functions. Ren, tuition, fares, fees, rates, tolls, retainers, wages, and commisions are all
the price you pay for some good or services. Price also has many components. Like if
we were buy a new car, the sticker price may be adjusted by rebates and dealer
incentives.

A.1 PRICING IN A DIGITAL WORLD

Traditionally, price has operated as a major determinant of buyer
choice. Consumers and purchasing agents who have acess to price information
and price discountes put pressure on retailers to lower their prices. Retailers in
turn put pressure on manufactures to lower their prices. The result can be a
marketplace characterized by heavy discounting and sales promotion.
For some years now, the internet has been changing the way buyers
and sellers interact. Here is a short list of how the internet allows sellers to
discriminate between buyers and buyers to discriminate between sellers.
Buyers can :
 Get instant price comparisons from thousands of vendors. Customers can
compare the prices offered by multiple retailers.

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  Check prices at the point of purchase. Customers can use smart phones to
make price comparisons in stores before deciding whether to purchase,
pressure the retailer to match or better price, or buy elsewhere.
 Name their price and have it met. For example, like on priceline.com,
customers state the price they want to pay for an airline ticket, hotel, or rental
car, and the site looks for any seller willing to meet the price. Volume-
aggregating sites combine the orders of many customers and press the
supplier for a deeper discount.
 Get Products free. Like open source, which is the free software movement
that started with linux, will erode margins for just about any company
creating software. The biggest challenge confronting microsoft, oracle, IBM,
and virtually every other major software producer is: “how do you compete
with programs that can be had for free?”.
Sellers can:
 Monitor customer behavior and tailor offers to individuals. GE Lighting,
which gets 55,000 pricing requests a year from its B-B customers, has Web
programs that evaluate 300 factors going into a pricing quote, such as past
sales data and discounts, so it can reduce processing time from up to 30 days
to six hours.
 Give certain customers access to special prices. for example, Ruelala is a
members-only web site that sells upscale women’s fashion, accessories and
footwear through limited time-sales, usually two-day events. Other business
marketers are already using extranets to get a precise handle on inventory,
cost, and demand at any given moment in order to adjust price instantly.
Both buyers and sellers can:
 Negotiate prices in online auctions and exchanges or even in person.

A.2 A CHANGING PRICING ENVIRONMENT

Pricing practices have changed significantly, thanks in part to a severe
recession in 2008-2009, a slow recovery, and rapid technological advances.
New millenial generation also brings new attitudes and values to consumption.

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 Often burdened by student loans and other financial demands, members of this
grouup (born between about 1977-1994) are reconsidering just what they really
need to own. Renting, borrowing, and sharing are valid options to many.
Some say these new behaviors are creating a sharing economy. Sharing
economy in which consumers share bikes, cars, clothes, couches apartments,
tools, and skills and extracting more value from what they already own. In a
sharing economy, someone can be both a consumer and a producer, reaping the
benefits of both roles. Trust and good reputation are crucial in any exchange,
but imperative in a sharing economy.
There are two pillars of a sharing economy, bartering and renting.
 Bartering
Bartering is one of the oldest ways of acquiring goods. is making a
comeback through transactions estimated to total $12 billion annualy in
the united states. Experts advice using barter only for goods and services
that someone would be willing to pay for anyway.
 Renting
The sector of the new sharing economy that is really exploding is rentals.
Such as renttherunways is a rentals of designer dresses. Customer are sent
two different size of the dress they choose to ensure better fit.

A.3 HOW COMPANIES PRICE

In small companies, the boss often sets prices. In large companies,
division and product line managers are set the price. Even the top management
sets general pricing objectives and policies and often approves lower
management’s proposals.
When pricing is a key competitive factor (aerospace, railroads, oil
companies), companies often establish a pricing department to set or assist
others in setting appropriate prices. Research suggest that pricing performance
improves when pricing authority is spread horizontally accross the sales,
marketing, finance units and when there is a balance in centralizing and

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 delegating that authority between individual salespeople and teams and central
management.

A.4 CONSUMER PSYCHOLOGY AND PRICING

Many economist traditionally assumed that consumers were “price
takers” who accepted prices at face value or as a given. Marketers, recognize
that consumers often actively process price information, interpreting it from
the context of prior purchasing experience.
Purchase decision are based on how consumers perceive prices and
what they consider the current actual price to be-not on the marketer’s stated
price. Customers may have a lower price threshold, below which prices signal
inferior or unacceptable quality, and an upper threshold, above which price
prohibitive and the product appears not worth the money.
Different people interpret prices in different ways, to understanding
how consumers arrive at their perceptions of prices is an important marketing
priority. There are three key topics-reference prices; price quality inferences,
and price endings :

1. Reference Price
When examining products, consumers often employ reference prices, to
compare an observed price to an internal reference price they remember or an
external frame of reference such as a posted “regular retail price”. Reference
price also can be define by the price that people expect or deem to be
reasonable for a certain type of product.
All types of reference prices are possible and sellers often attempt to
manipulate them. For example, a seller can situate its product among expensive
competitors to imply that it belongs in the same class. Department stores will
display women’s apparel in separate departments differentiated by price;
dresses in the more expensive department are assumed to be of better quality.

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 Fair Price

Typical Price

Last Price Paid

Upper-Bound Price

Lower Bound-Price

Historical competitor prices

Expected Future Prices

Usual Discounted price

Table 1. Possible Consumer reference prices

Marketers also encourage reference-price thinking by stating a high

manufacturer’s suggeste price, indicating that the price was much higher
originally, or pointing to a competitor’s high price.
Several factors affect reference price; Memory of past price, Frame of
reference (compared to competitive prices, pre-sales price, manufacturer’s
suggested price, channel spesific price, marked price before discounts,
substituteproduct prices, etc).

2. Price Quality Inferences

Many consumers use prices as an indicator of quality. Image pricing is
especially effective with ego-sensitive products such as perfumes, expensive
cars, and designer clothing. Example, Price and quality perceptions of cars
interact. Higher-priced cars are perceived to posses high quality. Higher-
quality cars are likewise perceived to be higher priced than they actually are.
When information about true quality is available, price becomes a less
significant indicator quality. When this information is not available, price acts
as a signal of quality.
Some brands adopt exclusivity and scarcity to signify uniqueness and
justify premium pricing. Luxury-goods makers of watch, jewelry, perfume and
other products often emphasize exclusivity in their communication message

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 and channel strategies. Consumers often rely heavily on price as a predictor of
quality and typically overestimate the strength of this relation. Furthermore,
the inferences of quality they make on the basis of price can influence their
actual purchase decision.

3. Price Endings
Many sellers believe prices should end in an odd number. Customers
perceive an item priced at $299 to be in the $200 rather than the $300 range,
they tend to process prices “left to right” rather than by rounding. another
explanation for the popularity of “9” endings is that they suggest a discount or
bargain, so if a company wants a high-price image, it should probably avoid
the odd-ending tactic. Price that end with “0” and “5” are also popular and are
thought to be easier for consumers to process and retrieve from memory.
“sale” signs next to prices spur demand, but only if not overused.
Pricing cues such as sale signs and prices that end in 9 are more
influential when consumers price knowledge is poor, when they purchase the
item infrequently or a new to the category, and when product designs vary over
time, prices vary seasonally, or quality or sizes vary across stores. Limited
availability (for example, “three days only”) also can spur sales among
consumers actively shopping for a product.

B. SETTING THE PRICE

A firm must set a price for the first time when it develops a new product, when it
introduces its regular product into a new distribution channel or geographical area, amd
when it enters bids on new contract work. The firm must decide where to position its
product on quality and price. Having a range of price points allow a firm to cover more
of the market and to give any one consumer more choices.
The firm must consider many factors in setting its pricing policy, so, here is the
six steps in the process of setting the price:

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 STEP 1. Selecting the pricing objective

STEP 2. Determining Demand

STEP 3. Estimating Costs

STEP 4. Analyzing Competitors' costs, prices,

and offers

STEP 5. Selecting a Pricing Methods

STEP 6. Selecting the final price

STEP 1.Selecting the pricing objective

The company first decides where it wants to position its market offering. The
clearer a firm’s objectives, the easier it is to set price. The objectives are divided into
five major; survival, maximum current profit, maximum market share, maximum
market skimming, and product-quality leadership.
 Survival.
Companies pursue survival as their major objective if they are plagued with
overcapacity , intense competition, or changing consumers wants. Survival is a
short-run objective; in the long run, the firm must learn how to add value face
extinction.

 Maximum Current Profit

Many companies try to set a price that will maximize current profits. They
estimate the demand and costs associated prices and choose the price that produces
maximum current profit, cash flow, or rate of return on investment.

 Maximum Market Share

Some companies want to maximize their market share. They believe a higher
sales volume will lead to lower unit costs and higher long-run profit, so they set the

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 lowest price, assuming the market price is sensitive. Texas Instruments famously
practiced this market-peetration pricing for years. The company would build a large
plant, set its price as low as possible, win a large market share, experiencce falling
costs, and cut its price further as costs fell.
The following conditions favor adopting a market-penetration strategy:
(1) The market is highly price sensitive and a low price stimulates market
growth.
(2) Production and distribution costs fall with accumulated production
experience
(3) A low price discourages actual and potential competition.

 Maximum Market Skimming

Companies unveiling a new technology favor setting high prices to maximize
market skimming. For example, like Sony. Sony has been a frequent practitioner of
market-skimming pricing, in which prices start high and slowly drop over time.
This strategy can be fatal, if a worthy competitor decides to price low. Moreover,
consumers who buy early at the highest prices may be dissatisfied if they compare
themselves with those who buy later at lower price.
Market skimming makes sense under the following conditions:
(1) A sufficient number of buyers have a high current demand
(2) The unit costs of producing a small volume are high enough to cancel the
advantage of charging what the traffic will bear.
(3) The high initial price does not attract more competitors to the market.
(4) The high price communicates the image of a superior product.

 Product-Quality Leadership
A company might aim to be the product-quality leader in the market. Many
brand striv to be “affordable luxuries”- products or services characterized by high
levels of perceived quality, taste, and status with a price just high enough not to be
out of consumers’ reach. Brands such as Starbucks, Aveda, Victoria’s Secret,
BMW, and Viking have positioned themselves as quality leaders in the categories.

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  Other-Objectives
Non profit and public organizations may have other pricing objectives.
Whatever the specific objective, business that use price as a strategic tool will
profit more than those that simply lest costs or the market determine their pricing.
A university aims for partial cost-recovery, knowing that it must rely on
private gifts and public grants to cover its remaining costs. For Art museum, which
earn an average of only 5 percent of their revenues from admission charges, pricing
can send a message that affects their public image and the amount of donations and
sponsorships they receive.

STEP 2. Determining Demand

Each price will lead to a different level of demand and have a different impact
on a company’s marketing objectives. The figure 1, show that the higher the price, the
lower the demand. For prestige goods, the demand curve sometimes slopes upward.
Some consumers take the higher price to signify a better product. If the price is too
high, demand may fall.

Figure 1. Inelastic and Elastic Demand

 Price Sensitivity
The demand curve shows the market’s probable purchase quantity at
alternative prices, summing the reactions of many individuals with different price

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 sensitives. The first step in estimating demand is to understand what affects price
sensitivity. They are also less price sensitive when :
(1) There are few or no substitutes or competitors
(2) They do not readily notice the higher price
(3) They are slow to change their buying habits
(4) They think the higher price are justified
(5) Price is only a small part of the total cost of obtaining, operating, and
servicing the product over its lifetime.
A seller can successfully charge a higher price than competitors if it can
convince customers that it offers the lowest total cost of ownership (TCO).
Companies prefer customers who are less price-sensitive. There are some
characteristic associated with decreased price sensitivity; The product more
distinctive, buyers are less aware of substitutes, buyers cannot easily compare the
quality of substitutes, the expenditure is a smaller part of the buyer’s total income,
the expenditure is small compared to the total cost of the end product, part of the
cost is borne by another party, the product is used in conjunction with assets
previously bought, the product is assumed to have more quality, prestige, or
exclusiveness and buyers cannot store the product.

 Estimating Demand Curves

Companies attempt to measure their demand curves using several different
methods :
(1). Survey, can explore how many units consumers would buy at different
proposed prices. Although consumers might understate their purchase intentions at
higher prices to discourage the company from pricing high, they also tend to
actually exaggerate their willingness to pay for new products or services.
(2). Price Experiments, can vary the prices of different products in a store or of the
same product in similar territories to see how the change affect sales.
(3). Statistic Analysis of past prices, quantities sold, and other factors can reveal
their relationships. The data can be longitudinal (over time) or cross-sectional
(from different locations at the same time). Building the appropriate model and

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 fitting the data with the proper stastical techniques call for considerable skill, but
sophisticated price optimization software and advances in database management
have improved marketers abilities to optimize pricing.
In measuring the price-demand relationship, the market researcher must
control for various factors that will influece demand. The competitor’s response
will make a difference, if the company changes other aspects of the marketing
program besides price, the effect of the price change itself will be hard to isolate.

 Price Elasticity of Demand

Marketers need to know how responsive, or elastic, demand is to a change in
price. Figure 1 show the two demand curve, (a). A price increase from $10 to $15
leads to a relatively small decline in demand from $105 to 100. (b). In demand
curve b, the same price increase leads to a substantial drop in demand from 150 to
50. If demand hardly changes with a small change in price, we call it is inelastic. If
demand changes considerably, it is elastic.
If demand is elastic, sellers will consider lowering the price to produce more
total revenue. Price elasticity depends on the magnitude and direction of the
contemplated price change. Long-run price elasticity may differ from short-run
elasticity. Buyers continue to buy from a current supplier after a price increase but
eventually switch suppliers. Demand is more elastic in the long run than in the
short run , or the reverse may happen: buyers may drop a supplier after a price
increase but return later. The distinction between short-run and long-run elasticity
means that sellers will not know the total effect of a price change until time passes.

STEP 3. Estimating Costs

 Types of costs and levels of production
Company’s cost divided into two forms, fixed and variable :
a) Fixed costs, also known as overhead, are costs that do not vary with
production level or sales revenue (rent, heat, interest, salaries, and so on).
b) Variable costs vary directly with the level of production. For example,
each tablet computer produced by samsung incurs the costs of plastic and
glass, microprocessor chips, and other electronics, and packaging.

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 They’re called variable costs becasuse their total varies with the number
of units produced.
Total cost, consist of the sum of the fixed costs and variable costs for any given
level of production. Average costs is the cost per unit at the level of production, it
equals total costs divided by production. To price intelligently, management needs to
know how its costs vary with different levels of production.
For example, Samsung has built a fixed size-plant to produce 1000 tablet
computers a day. The cost per unit is high few units are produced per day. As
production approach 1000 units per day, the average costs falls because the fixed cost
are spread over more units. Short run average costs increases after 1000 units, cause
the plant becomes inefficient. Worker must line up for machines, getting in each
other’s way and machines break down more often (Figure 2a)

Figure 2. Cost per unit at different levels of production per period

If samsung believes it can sell 2000 units per day, it should consider building a
larger plant. The plant will use more efficient machinery and work arrangements and
the unit cost of producing 2000 tablets per day will be lower than the unit cost of
producing 1000 per day. Its shown in the Long-run average cost curve (LRAC) 

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figure (2b). Fact, a 30000 capacity plant would be even more efficient, but 4000 daily
production plant would be less so because of increasing diseconomies of scale.
Figure 2b indicates that a 3000 daily production plant is the optimal size if demand is
strong enough to support this level of production.

 Accumuated Production
Figure 3 shows that average cost falls with accumulate production exprience. The
average cost of producing the first 100,000 tablets is $100 per tablet. When the
company has produced the first 200,000 tablets, the average costs has fallen to $90.
After its accumulated production experience doubles again to 400,000 , the average
cost is $80. Decline in the average cost with accumulated production experience
called experience curve or learning curve.

Figure 3. Cost
per unit as
function of
accumulated
production: The
experience curve

 Target Costing
Cost change with production scale and experience. They can also change as a
result of a concentrated effort by designers, engineers, and purchasing agents to
reduce them through target costing. Market research establishes a new product’s
desired functions and the price at which it will sell, given its appeal and competitor’s
price. This price less desired profit margin leaves the target cost the marketer must
achieve.

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 STEP 4. Analyzing Competitor’s costs, prices, and offers.
Within the range of possible prices identified by market demand and company
costs, the firm must take competitor’s costs, prices, and possible reactions into account.
If firm’s offer contains features not offered by the nearest competitor , it should
evaluate their worth to the customer and add value to competitor’s price. If competitor’s
offer contain some feature not offered by the firm, the firm should subtract their value
from its own price.
 Value price competitors
Companies offering the powerful combination of low price and high quality are
capturing the hearts and wallets of consumers.

STEP 5. Selecting A Pricing Method

The three major considerations in price setting: costs set a floor to the price.
Competitors price and the price of substitutes provide an orienting point. Customers
assessent of unique features establishes the price ceiling.

HIGH Customers’ Costs LOW

Orienting
PRICE PRICE
assessment point
Ceiling Competitors Floor
(no possible price of unique (no possible
prices & price demand at
demand at
product prices of this price)
this price)
features substitutes

Figure 4. The Three Cs Model for pricing setting

 Markup Pricing
The most elementary pricing method is to add a standart markup to the product’s
cost. Markups are generally higher on seasonal items (to cover the risk of not selling).
Marksup does not make logical sense, any pricing method that ignores current
demand, perceived value, and competition is not likely lead to lead the optimal price.

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Markup pricing works only if the marked-up price actually brings in the expected
level of sales.
Markup pricing remains popular. Sellers can determine costs much more easily
than they can estimate demand, when all firms in the industry use this pricing method,
prices tend to be similar and price competition is minimized, and many people feel
cost-plus pricing is fairer to both buyers and sellers. Markup Price Formula:

Markup Price = Unit Cost

(1 – desired return on sales)

 Target-Return Pricing
In Target return pricing, The firm determines the price that yields its target rate
of return on investment. Public utilties, which need to make a fair return on
investment, often use this method.

Target-Return Pricing = Unit Cost + Desired Return x Invested Capital

Unit Sales

The producer can prepare a break-even chart to learn what would happen at
other sales levels ( Figure5) .Variable costs, not shown in the figure, rise with volume.
Total costs equal the sum of fixed and variable costs. The total revenue curve starts at
zero and rises with each unit sold.

Figure 5. Break-even
chart for determining
target-return price and
break even volume

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 Break-even volume formula,

Break-even volume = fixed costs

(Price-variable cost)

The producer needs to consider different prices and estimate their

probable impacts on sales volume and profits. The producer should also search
for ways to lower its fixed or variable costs because lower costs will decrease its
required break-even volume.

 Perceived-value pricing
An increasing number of companies now base their price on the customer’s
perceived value. Perceived-value is made up of a host inputs, such as the buyer’s
image of the product performance, the channel deliverables, the warranty quality,
customer support, and softer attributes such as the supplier’s reputation,
trustworthiness, amd esteem. Companies must deliver the value promised by their
value proposition, and the customer must perceive this value.
The key to perceived-value pricing is to deliver more unique value than
competitors and to demonstrate this to perspective buyers. The company can try to
determine the value of its offering in several ways: managerial judgements within the
company, value of its similar products, focus groups, surveys, experimentation,
analysis of historical data, and contjoint analysis.

 Value Pricing
Company adopt value pricing win loyal customers by charging a fairly low price
for a high-quality offering. Value pricing is thus not a matter of simply setting lower
prices; it is a matter of reengineering the company’s operations to become a low-cost
producer without sacrificing quality to attract a large number 0f value-conscious
customers.

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  EDLP (everyday low pricing)
EDLP charges a constant low price with little or no price promotion or special
sales. Constant prices eliminate week-to-week price uncertainty and the high-low
pricing of promotion-oriented competitors. High low-pricing, retailers charge higher
price on everyday basis but runs frequent promotions with prices temporarily lower
than the EDLP level. These two strategies have been shown to affect consumer price
judgements-deep discounts (EDLP) can lead customers to perceive lower prices over
time frequent, shallow discounts (high-low), even if the price actually averages to the
same level.

 Going-Rate Pricing
In going-rate pricing, the firm bases its price largely on competitor’s prices.
Going-rate pricing is quite popular. Where costs are difficult to measure or
competitive response is uncertain, firms feel it is a good solution because they believe
it reflects the industry’s collective wisdom.

 Auction-type pricing
There are three major types of auctions and their separate pricing
procedures:
1. English auctions (ascending bids) one seller, many buyers. English
auctions are used for selling antiques, cattle, real estate, vehicles, etc.
2. Dutch auctions (descending bids), feature one seller and many buyers or
one buyer and many sellers. First, auctioneer announce a high price for a
product and then slowly decrease the price until a bidder accepts.
3. Sealed-bid auctions , let-would be suppliers submit only one bid, they
cannot know other bid.

STEP 6. Selecting The Final Price

Pricing methods narrow the range from which the company must select its
final price. In selecting that price, company must consider additional factors, including
the impact of other marketing activites, company pricing policies, gain-and-risk-sharing
pricing, and the impact of price on other parties

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  Impact of Other marketing activities
The final price must take into account the brand’s quality and advertising
relative to the competition. In classic study, there are relationships among relative
price, relative quality, and relative advertising:
 Brand with average relative quality but high relative advertising could
charge premium prices.
 Brands high quality and high relative advertising obtained the highest prices
 Market leaders, positive relationship between high prices and high
advertising held most strongly in the latest stages of the product life cycle.

 Company Pricing Policies

The price must be consistent with company pricing policies. Many companies
set up a pricing department to develop policies and establish or approve decisions. The
aim is to ensure salespeople quote prices that are reasonable to customers and
profitable to the company.

 Gain-and-Risk-Sharing Pricing
Buyers may resist accepting a seller’s proposal because they perceive a high
level of risk, the seller then has the optionn of offering to absorb part or all the risk if
it does not deliver the full promised value.

 Impact of price and other parties

The marketers must know the laws of govern pricing, the sellers must set price
without talking to competitors. Price-Fixing is illegal. Many federal and state statutes
protect consumers against deceptive pricing practices. For example, it is illegal for a
company to set artificially high “regular” prices, then announce a “sale” at prices close
to previous everyday prices.

C. ADAPTING THE PRICES

Companies usually do not set a single pice but rather develop a pricing structure
that reflects variations in geographical demand and costs, market-segment requirements,

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purchase-timing, order levels, delivery frequency, guarantees, service contracts, and other
factors. There are several price adaptation startegy : geographical pricing, price
discounts and allowances, promotional pricing, and differentiated pricing.

C.1 GEOGRAPHICAL PRICING (CASH, COUNTERTRADE, BARTER)

In geograhical pricing, the company decides how to price its products to

differen customers in different locations and countries. Should the company
charge higher prices to distannt customers to cover higher shipping costs or a
lower price to win additional business, how should it account for exchange rates
and the strength of different currencies and how to get paid. The critical issues
when buyers lack sufficient hard currency to pay for their purchase, so they offer
other items in payment. A practice called countertrade. Countertrade takes several
forms:
 Barter (the buyer and seller directly exchange goods, with no money and no
third party involved)
 Compensation deal (the seller receive some percentage of the payment in cash
and the rest in products)
 Buyback arrangement (The seller sells a plant, equipment, or technology to a
company in another country & agrees to accept as partial payment products
manufactured with the supplied equipment)
 Offset (the seller receive full payment in cash for a sale overseas but agrees to
spend a substantial amount of the money in that country a stated time period.

C2. PRICE DISCOUNTS AND ALLOWANCE

Most companies will adjust their list price and give discounts and allowance
for early payment, volume purchases, and off-season buying.

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 Discount ( a price reduction to buyers who pay bills promptly )

Quantity Discount (A price reduction to those who buy large volumes)

Functional Discount (discount also called trade discount offered by

manufacuturer to trade-channel members if they perform certain functions , such as
selling, storing, and record keeping)

Seasonal Discount (a price reductio to those who buy merchandise or services out
of season. ex: hotels, airlines, etc)

Allowance (an extra payment t gain reseller participato in special programs,

allowance divide in two forms; trade-in allowance & promotional allowance)

Figure 4. Discounts and Allowance

C3. PROMOTIONAL PRICING

There are several pricing technique that companies can use to stimulate early
pruchase :
a. Loss-leader pricing ( this pays if the revenue on the additional sales
compensates for the lower margins on the loss-leader items, manufacture
of loss-leader brands typically object cause this practice can dilute brand
image & complaints from retailer who charge list price)
b. Special Even Pricing ( sellers establish prices in certain seasons to draw in
more customers)
c. Special customer pricing ( seller offer special prices exclusively to certain
customers)
d. Cash Rebates (Companies offer cash rebates to encourage purchase of the
manufacturer’s product in specified time period, rebate can help clear
inventories without cutting the stated list price)
e. Low-interest financing (the company can offer low-interest financing,
automakers have used no-interest financing to attract more customers)

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 f. Warranties & service contracts ( companies promote sales by adding free
or low-cost warranty or service contract)
g. Psychological discounting ( The strategy sets an artificially high price and
then offers the product at substantial savings)

C4. DIFFERENTIATE PRICING

Companies often adjust their basic price to accomodate differences among
customers, products, locations, and so on. Price discrimination occurs when a
company sells a product or service at two or more prices that do not reflect a
proportional difference in costs.
First degree price discrimination  sellers charge charges a separate price to
each customer depending on the intensity of his or her demand. Second-degree
price discrimination  seller charges less to buyers of larger volumes. Third-
degree price discrimination  the seller charges different amount to different
classes of buyers, like the following case; customer-segment pricing, product-
form pricing, image pricing, channel pricing, location pricing, and time
pricing.
Although some forms of price discrimination are illegal, the practice is legal if
seller can prove its costs are different when selling different volumes or different
qualities of the same product to different retailers. Predatory pricing –selling
below cost with the intention of destroying competition is unlawful. For
discrimination to work, there are four conditions that must be exist. First, market
must be segmentable, and segments show different intensities of demand, second,
members in the lower price segment must not be able resell the product to higher
segment. Third, competitors must not be able to undersell the firm in higher price
segment. Fourth, cost of segmenting and policing the market not exceed extra
revenue derived from price discrimination

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D. INITIATING AND RESPONDING TO PRICE CHANGES

D1. INITIATING PRICE CUTS

Several circumstances might lead a firm to cut prices. one is excess plant
capacity (the firm ness and cannot generate through increased sales effort, product
improvement, or othe measures), company sometimes initiate price cut in drive
to dominate the market through lower costs.
A price cutting strategy can lead to other possible traps : Low quality trap 
consumers assume quality is low, Fragile-market-share-trap  a low price buys
market share but not market loyalty, Shallow –pockets trap  higher-prices
competitors match the lower prices but have longer staying power cause of deeper
cash reverses, Price-war trap  competitors respond by lowering their prices even
more, triggering a price war.

D2. INITIATING PRICE INCREASES

A sucessfull price increase can raise profits considerably. A major
circumstance provoking price increases is cost inflation. Rising cost unmatched
by productive gains squeeze profit margins and lead companies to regular rounds
of price increases. Companies often raise their prices by more than the cost
increase, anticipation of further inflation or government price controls, called
anticipatory pricing.
Another factor leading to price increases is demanding, it can be increase price
in the following ways :
 Delayed Quotation pricing (the company doesn’t set a final price until
products is finished or delivered)
 Escalator clauese (The company requires customer to pay today’s price plus
inflation increase that takes place before delivery)
 Unbundling (The company maintains its price but removes or price
separately one or more elements were formerly part of the offer)
 Reduction of discounts (the company instructs its sales force not to offer its
normal cash and quantity discounts).

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D3. ANTICIPATING COMPETITIVE RESPONSES
The Introduction or change of any price can provoke a response from
customers, competitors, distributors, suppliers, and even government.
Competitors are most likely to react when the number of firms is few, the product
is homogeneous, and buyers are highly informed.
Now, the company will need to research the competitor’s current financial
situation, recent sales, customer loyalty, and corporate objectives. If the
competitor has a market share objective, is is likely to match price differences or
changes. If it has a profit-maximization objectives, it may react by increasing its
advertising budget or improving product quality.

D4. RESPONDING COMPETITORS’ PRICE CHANGE

The company must consider the products stage in the life cycle, its importance
in the company’s portfolio, the competitor’s intention, and resources, the market’s
price and quality sensitivity, the behavior of costs with volume, and th e
company’s alternative opportunities.
The firm facing a competitor’s price change must try to understand the
competitors intent and the likely duration of the change. A market leader attacked
by lower-price competitors can seek to better differentiate itself, introduce its own
low-cost competitor, or transform itself completely.

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 CASE STUDY

“YOUR SALES WASN’T LOUD AS YOUR

SOUND”

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Harley-Davidson, Inc. (H-D), or Harley, is an American motorcycle manufacturer,
founded in Milwaukee, Wisconsin in 1903.

As one of two major American motorcycle manufacturers to survive the Great

Depression (along with Indian), The company has survived numerous ownership
arrangements, subsidiary arrangements (e.g., Aermacchi 1974-1978 and Buell 1987-
2009), periods of poor economic health and product quality, as well as intense global
competition — to become the world's fifth largest motorcycle manufacturer and an
iconic brand widely known for its loyal following — with owner clubs and events
worldwide as well as a company sponsored brand-focused museum.

Noted for a style of customization that gave rise to the chopper motorcycle
style, Harley-Davidson traditionally marketed heavyweight, air-
cooled cruiser motorcycles with engine displacements greater than 700 cc — and has
broadened its offerings to include its more contemporary VRSC (2001) and middle-
weight Street (2014) platforms.

Harley-Davidson manufactures its motorcycles at factories in York, Pennsylvania;

Milwaukee, Wisconsin; Kansas City, Missouri; Manaus, Brazil; and Bawal, India —
and markets its products worldwide.

Easily, Harley divided their product by 2 sub based. First, engine based, the classic
Harley-Davidson engines are V-twin engines, with a 45° angle between the cylinders.
The crankshaft has a single pin, and both pistons are connected to this pin through
their connecting rods.

This 45° angle is covered under several United States patents and is an engineering
tradeoff that allows a large, high-torque engine in a relatively small space. It causes
the cylinders to fire at uneven intervals and produces the choppy "potato-potato"
sound so strongly linked to the Harley-Davidson brand.

Second, model based, Modern Harley-branded motorcycles fall into one of six model
families. These model families are distinguished by the frame, engine, suspension, and
other characteristics. Here they are;

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 Touring

 Dyna

 Softail

 Sportster

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  Vrod

 Street

Another family model which created by Harley’s is CVO (Custom Vehicle

Operations) Motorcycle. This model is customization of Harley’s stock models. Every year
since 1999, the team has selected two to five of the company's base models and added higher-
displacement engines, performance upgrades, special-edition paint jobs, more chromed or
accented components, audio system upgrades, and electronic accessories to create high-dollar,
premium-quality customizations for the factory custom market. The models most commonly
upgraded in such a fashion are the Ultra Classic Electra Glide, which has been selected for
CVO treatment every year from 2006 to the present, and the Road King, which was selected
in 2002, 2003, 2007, and 2008. The Dyna, Softail, and VRSC families have also been
selected for CVO customization.

Harley – Davidson has been operated for more than a hundred years. They simply has been
developed in many times, as you could see on the picture below, there’s a history line of
Harley – Davidson inc. For note, we didn’t put all of the years that Harley been passed, we’re
only put some years that we’ve think, that its been a great years for Harley – Davidson inc.

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A more than hundred years is a milestone processed. They hadn’t just built an awareness but
they’ve built a culture. Harley Davidson Culture. Which means, everyone should has know?
What is Harley-Davidson? It's not hardware; it is a lifestyle, an emotional attachment. As an
American icon, Harley has come to symbolize freedom, rugged individualism, excitement
and a sense of "bad boy rebellion."

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According to a recent Harley-Davidson study, in 1987 half of all Harley riders were under
age 35. Now, only 15% of Harley buyers are under 35, and as of 2005, the median age had
risen to 46.7.

In 1987, the median household income of a Harley-Davidson rider was $38,000. By 1997,
the median household income for those riders had more than doubled, to $83,000.

Harley-Davidson attracts a loyal brand community, with licensing of the Harley-Davidson

logo accounting for almost 5% of the company's net revenue ($41 million in 2004). Harley-
Davidson supplies many American police forces with their motorcycle fleets.

Harley-Davidson motorcycles has long been associated with the sub-cultures of

the biker, motorcycle clubs, and Outlaw motorcycle clubs.

Problem Identification

Harley-Davidson Inc.’s market share continues to shrink amid discounting by Japanese rivals.
The Milwaukee-based motorcycle maker, which early Tuesday reported a 15% drop in
second quarter profit, said its sales trends improved in June after a weak April and May.

Harley’s share of the U.S. market for heavyweight motorcycles, those with engines of 601
cubic centimeters or greater, skidded to 47.5% in the second quarter from 50.3% a year
earlier. That compares with a peak of 58% in the final quarter of 2013. One factor, Harley
said, is the inclusion in market-share data of new three-wheeled vehicles resembling cars,
such as the Slingshot from Polaris Industries Inc. Harley doesn’t make a similar vehicle.

Pricing is the bigger issue. Harley fears it would destroy its profit margins and premium
brand image if it slashed prices to match those of rivals.

Harley’s profit in the second quarter was $299.8 million, or $1.44 per share, down from
$354.2 million, or $1.62 per share, a year earlier. Wall Street had expected earnings of about
$1.40 per share, according to FactSet. Revenue, including motorcycle sales and financial
services, declined 8.8% to $1.82 billion.

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In the U.S., second-quarter retail sales of Harley motorcycles were down 0.7%. Retail sales
outside the U.S., where Harley hopes to get much of its long-term growth, fell 2.7%. Harley’s
market share in Europe declined to 10.2% in the first half from 12.1% a year earlier. Second
quarter retail sales of Harley motorcycles fell 8.9% in the Europe, Middle East and Africa
region and 2.6% in Latin America but gained 16.6% from a low base in Asia, where Harley
said its smaller Street models are selling briskly.

Analysis, Solution, and Recommendation

Another main role of the stock market is to act as a barometer for financial health. And the
financial health has related to the working performance of the company. Recently, the main
problem of Harley’s was the declining of their stock price. It’s influenced by the sales
declining itself. As you could see in the picture below, for a recent years, Harley’s been
declining.

(source: Harley – Davidson’s annual report)

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Harley-Davidson reported that worldwide retail sales fell 1.3%, with dealers selling 56,661
bikes in the quarter compared to the 57,415 motorcycles sold a year ago. It was only slightly
better in the U.S., its largest market, where sales were down 0.7% to 35,488 motorcycles.

Harley-Davidson gave up the pretense this time around and simply shipped fewer bikes to
dealers worldwide in the first quarter, some 79,589 motorcycles versus 80,682 in the year-ago
period, and more important, announced it would be cutting full-year shipments to 276,000-
281,000 motorcycles worldwide. That's just 2%-4% more than it shipped in 2014, but is
significantly below the 4%-6% increase it had previously guided toward.

Increased competition and a decline in market share is part of the reason behind Harley –
Davidson’s stock decline. For past 5 years, there’s any competitor which got the momentum.
They’re Polaris Industries, an American manufacturer of snowmobiles, ATV,
and neighborhood electric vehicles. Polaris is based in the Minneapolis exurb
of Medina, Minnesota, USA. The company also manufactures motorcycles through
its Victory Motorcycles subsidiary and through the Indian Motorcycle subsidiary which it
purchased in April 2011.

(Source: Polaris August 2015 Investor Presentation)

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Besides that, another company has their momentum too, it was a Royal Enfield, Royal
Enfield, the motorcycle manufacturing company, which is a subsidiary of Eicher Motors
Limited, is headquartered in Chennai, India. Besides its trademark motorcycle Royal Enfield
Bullet, the company is famous for its mid-premium
motorcycles with high capacity engines and typical
thumping engine sounds.Based In Redditch,
Worcestershire, The Crown licensed the use of the
brand name Royal Enfield in 1890, under which the
Enfield Cycle Company made lawnmowers, bicycles,
motorcycles and stationary engines. The company
was shut in 1971. In 1956, Enfield of India started acquiring licensed UK components and
putting together Bullet motorcycles. In 1995 Eicher Motors Limited purchased Enfield
Motors Limited, along with the rights to use the Royal Enfield name.

Currently, Royal Enfield is the oldest motorcycle brand in the world, which is still in
production and the Bullet model is the longest running motorcycle in the history of
motorcycle production. In global sales, Royal Enfield has surpassed Harley’s.

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Above this, was an article. Which inform us, that RE’s was overtaking the Harley’s. Another
picture below, could give us information too.

As we could see, the sales of Harley’s was being declining. Increasing competition and
declining sales was a big problem for Harley’s. Though they’re still a market leader. They
should put their eyes in this section. It’ll become serious problem in the next time.

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Based on theory, the company should responding the competitor price. The competitor of
Harley’s can give reasonable price for their product. And Harley’s price has a gap with them.

First of all, Harley’s should evaluate their consumers segment. Harley’s sales depend
disproportionately — almost exclusively, in fact — on middle-aged. Riders younger than 40
generally lack the time, interest or the bankroll to buy a Harley. But by the time they get into
their 60s or older, the noise and joint pain have begun to make riding lose its allure. You
might still ride in your 60s, but you’re doing it less frequently and you probably aren’t buying
a new bike.

The sweet spot is the mid-40s to early 50s. And with the Baby Boomers — the largest and
wealthiest generation in history — now largely aged out of this key demographic bracket,
Harley has a serious problem. Generation X — my generation — is not nearly large enough
to pick up the slack, and Generation Y (aka “the Millennials” or “Echo Boomers”) are
decades away from being in the demographic sweet spot for Harley, and this assumes they
take to riding like their dads did.

By cutting the price, Harley’s can expand their market, the biggest problem for a youngster,
sometimes Harley – Davidson’s price could be unreasonable accepted. The price range of

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Harley’s was in $6000 - $50000. The price was in dollar, yes of course, the currency rate of
dollar could affected the real price in another’s currency. And lately, dollar was being in
strong position. It’s give Harley’s price become more unreasonable than their competitor.

After considering the consumer’s, then they can setting a new price. A cost production should
being bold. they must cut their cost production, without sacrificing the quality for sure. To
expand globally, they can do a FDI (Foreign Direct Investment) for example. Though its
surely adding a cost, but it was an investment, so it will affected in the long term. Analyzing
competitor was a must things to do. Cutting the price doesn’t mean diminishing their brand.
Because their brand was became a culture, a traditional American culture. A die hard fans in
the premium product couldn’t be a guarantee, though they had a biggest community fan. In
the future, they can easily change their minds. And it can be a big trouble.

Determining a new curve of supply and demand, Each price will lead to a different level of
demand and have a different impact on a company’s marketing objectives. Harley’s can
lowering price without sacrificing their own brand image. Cost of production, new
investment, government policies about tax, the currency rate of dollar its main focus for them
to think about.

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