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    How Do Consumers Process and Evaluate Prices?: Chapter 14: Developing Pricing Strategies and Programs

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    Consumer psychology and pricing strategies are important considerations for companies. Prices should be set based on 1) the target objective, 2) estimating demand through surveys and experiments, and 3) analyzing costs and competitors. Companies can then 4) adapt prices based on circumstances through various strategies like discounts, promotional pricing, and differentiated pricing. Price changes may be needed for reasons like excess capacity or market share goals. The response to a competitor's lower price challenge depends on factors like the company's brand position and goals.

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    How Do Consumers Process and Evaluate Prices?: Chapter 14: Developing Pricing Strategies and Programs

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    ankita_shreeram
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    Consumer psychology and pricing strategies are important considerations for companies. Prices should be set based on 1) the target objective, 2) estimating demand through surveys and experiments, and 3) analyzing costs and competitors. Companies can then 4) adapt prices based on circumstances through various strategies like discounts, promotional pricing, and differentiated pricing. Price changes may be needed for reasons like excess capacity or market share goals. The response to a competitor's lower price challenge depends on factors like the company's brand position and goals.

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    Chapter 14

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    Consumer psychology and pricing strategies are important considerations for companies. Prices should be set based on 1) the target objective, 2) estimating demand through surveys and experiments, and 3) analyzing costs and competitors. Companies can then 4) adapt prices based on circumstances through various strategies like discounts, promotional pricing, and differentiated pricing. Price changes may be needed for reasons like excess capacity or market share goals. The response to a competitor's lower price challenge depends on factors like the company's brand position and goals.

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    1K views4 pages

    How Do Consumers Process and Evaluate Prices?: Chapter 14: Developing Pricing Strategies and Programs

    Uploaded by

    ankita_shreeram
    Consumer psychology and pricing strategies are important considerations for companies. Prices should be set based on 1) the target objective, 2) estimating demand through surveys and experiments, and 3) analyzing costs and competitors. Companies can then 4) adapt prices based on circumstances through various strategies like discounts, promotional pricing, and differentiated pricing. Price changes may be needed for reasons like excess capacity or market share goals. The response to a competitor's lower price challenge depends on factors like the company's brand position and goals.

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    of 4

    Chapter 14: Developing Pricing Strategies and Programs

    1. How do consumers process and evaluate prices?


    Consumer Psychology and Pricing

    Reference Prices
    Consumers often compare prices to an internal reference price they remember or an external frame
    of reference such as a ‘regular retail price’.
    • “Fair price”
    • Typical price
    • Last price paid
    • Upper-bound price (reservation price or what most consumers would pay)
    • Lower-bound price (lower threshold price or the least consumers would pay)
    • Competitor prices
    • Expected future price
    • Usual discounted price

    Price-quality inferences
    Price endings
    Price cues
    • “Left to right” pricing ($299 vs. $300): Consumers process prices in a left to right manner
    rather than rounding
    • Odd number discount perceptions: 9 at the end of a price conveys a discount or a bargain
    • Even number value perceptions
    • Ending prices with 0 or 5
    • “Sale” written next to price

    When to use price cues: Consumer’s price knowledge is poor, Customers purchase item infrequently,
    Customers are new, Product designs vary over time, Prices vary seasonally, Quality or sizes vary
    across stores

    2. How should a company set prices initially for products or services?


    1. Select the price objective

    • Survival
    • Maximum current profit
    • Maximum market share
    • Maximum market skimming (Price the product high initially to skim maximum revenue, then
    drop price gradually)
    • Product-quality leadership Eg: CCD, Taj, Mercedes
    2. Determine demand
     Price Sensitivity

    Consumers are less price sensitive when:

     Items are low-cost or ones they buy infrequently


     There are few or no substitutes or competitors
     They do not readily notice the higher price
     They are slow to change their buying habits
     They think the high prices are justified
     The price is only a small part of the total cost of obtaining, operating and servicing the
    product over its lifetime.

    Factors leading to price sensitivity:

    • The product is more distinctive


    • Buyers are less aware of substitutes
    • Buyers cannot easily compare the quality of substitutes
    • The expenditure is a smaller part of buyer’s total income
    • The expenditure is small compared to the total cost of the end product
    • Part of the cost is paid by another party
    • The product is used with previously purchased assets
    • The product is assumed to have high quality and prestige
    • Buyers cannot store the product

     Estimating Demand Curves: Through surveys, price experiments & statistical analysis
     Price Elasticity of Demand: How responsive or elastic the demand would be to a change in
    price.

    3. Estimate costs

     Types of Costs & levels of production: Fixed costs, Variable costs, Total costs, Average cost
    (per unit), Cost at different levels of production
     Accumulated Production: Average cost falls as the production increases
     Activity-Based Cost Accounting: Tries to identify the real costs associated with each
    consumer
     Target Costing: Costs can change as a result of a concentrated effort by designers, engineers
    and purchasing agents to reduce them through target costing.

    4. Analyze competitor price mix

    5. Select pricing method

    • Markup pricing: Add a standard markup to the product’s cost


    • Target-return pricing: Price that would yield the firm’s target ROI
    • Perceived-value pricing: Customer’s perceived value
    • Value pricing: Fairly low price for a high quality offering
    • Going-rate pricing: Price based largely on competitors’ prices
    • Auction-type pricing: On Internet

    6. Select final price

     Impact of other marketing activities


     Company pricing policies
     Gain-and-risk sharing pricing: The seller can offer to absorb part or all of the risk if it does
    not deliver the full promised value.
     Impact of price on other parties (Distributors and dealers)

    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

    3. How should a company adapt prices to meet varying circumstances


    and opportunities?
    Price Adaptation Strategies:

    Geographical Pricing (Different price for different regions)

    Discounts/Allowances:

     Cash discount (to consumers who pay bills promptly),


     Quantity discount,
     Functional discount (to traders if they perform functions like selling, storing),
     Seasonal discount (offseason purchases),
     Allowance (to gain reseller participation)

    Promotional Pricing:

     Loss-leader pricing, (pricing big brands low in malls to attract traffic)


     Special-event pricing, (special prices in certain seasons)
     Cash rebates, (help clear inventories without cutting the stated list price)
     Low-interest financing, (companies offer this)
     Longer payment terms,
     Warranties and service contracts,
     Psychological discounting (setting an artificially high price and then lowering)
    Differentiated Pricing: Customer-segment pricing, Product-form pricing (clothes), Image pricing
    (cosmetics – different in mall & chemist), Channel pricing, Location pricing, Time pricing, Yield pricing
    (airline)

    Countertrade: Barter, Compensation deal (part payment in cash and part in goods), Buyback
    arrangement (seller accepts as partial payment products manufactured with the equipment sold),
    Offset (Seller agrees to spend some of the payment in that country within a stated time period)

    4. When should a company initiate a price change?


    Decreasing Prices

    This may be necessary when there is excess plant capacity or when firms are in a drive to dominate
    the market through lower costs. But price cutting leads to traps like:

     Low quality trap – when consumers often quality is low


     Fragile market share trap – low price does not buy customer loyalty
     Shallow pockets trap – Higher priced competitors match the lower prices but have longer
    staying power because of deeper cash reserves
     Price war trap – competitors respond by lowering prices even more

    Increasing Prices

    Companies may increase prices in anticipation of further inflation or due to overdemand. Ways to
    increase price:

     Delayed quotation pricing: Company doesn’t set a final price until product is finished or
    delivered
     Escalator clauses: Pay today’s price and all or part of any inflation increase that takes place
    before delivery
     Unbundling: Same price but extra items removed
     Reduction of discounts

    5. How should a company respond to a competitor’s price challenge?


    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

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