3. Introduction
Price is the one element of marketing mix that
produces revenue (others produce costs)
Pricing decisions are clearly complex and
difficult
Must be consistent with the firm’s marketing
strategy and its target markets and brand
positionings
5. Understanding Pricing
Comes in many forms, performs many
functions
Rent, tuition, fares, fees, rates, tolls, retainers,
wages, commissions
Has many components
Price has operated as a major determinant of
buyers choice
6. Concept 1: A Changing Pricing
Environment
21st century
Access to credit cards, debit cards
allowed firms to offer more expensive products and
services
Great Recession
Shift from luxury to basics needs
Less spending, smart buying
Shift to more economic and practical purchases
Technological environment
7. Concept 1: A Changing Pricing
Environment
Technological environment (Internet)
Buyers can get instant price comparisons from thousands
of vendors
Name their price and have it met
Get products free
Give certain customers access to special prices
Negotiate prices in online auctions and
Intelligent shopping with the help of the internet
Example (Kotler)
mySimon.com, PriceSCAN.com – Compare prices of multiple
bookstores
Example (local)
Olx.com.ph (formerly sulit.com), Zalora, Lazada
Example (medical)
Forums about where to find the cheapest medical equipment
(e.g. bambang), or an affordable doctor, or cheap hospitals
8. Concept 2: Consumer Psychology
and Pricing
Consumers actively process price information
Prior purchasing experience, formal
communications, informal communications, point-
of-purchase or online resources, etc.
Purchase decisions – consumer’s perception of
the price vs. what they consider the current
actual price to be
9. Concept 2: Consumer Psychology
and Pricing
Example (Kotler)
A Black T-Shirt, Gap ($14.90) vs. Armani ($275)
Example (local)
Nescafe small coffee bottle (Php 50.00) is considered
expensive but Starbucks coffee (Php 150.00) is
considered normal because customers are paying for
the “brand” the ambience, etc.
Example (medical)
Doctor X charges a higher PF to his patients in TMC
than his patients in other private less known hospitals
because he knows patients who go to TMC . Despite
offering the same services, and having the same set
of skills, his PF varies
10. Concept 2: Consumer Psychology
and Pricing
Understanding how consumers arrive at their
perceptions of prices is an important marketing
priority
Reference Prices
Price-Quality Inferences
Price Endings
12. Concept 3: Reference Prices
Examples
Kotler: Dept stores will display women’s apparel
in separate departments differentiated by price;
dresses in more expensive department are
assumed to be of better quality
Local: Suggested retail price “Ariel Php 7.50”
Medical: An Welch Allyn diagnostic set in a
medical equipment store is worth 20k. A
consumer with a knowledge of competitor prices
(reference price) will prefer to buy it in Bambang
for 14.5k
13. Concept 4: Price-Quality
Inference
Price as an indicator of quality
Image pricing is effective with ego-sensitive
products
Examples
Kotler: Higher-priced cars are perceived to possess
high quality. Higher-quality cars are likewise perceived
to be higher priced than they actually are
Local: Products bought from divisoria are perceived to
be of low quality and would not sell at a high price.
Medical: Doctors who charge higher PF are assumed
to be very good doctors and would offer better
services. “They must be THAT good to charge that
15. Setting the Price
Step 1: Selecting the Pricing Objective
Survival, max current profit, max market share,
product-quality leadership, other objectives
Step 2: Determining Demand
Step 3: Estimating Costs
Step 4: Analyzing Competitors’ Costs, Prices,
and Offers
Step 5: Selecting a Pricing Method
Step 6: Selecting the Final Price
16. Step 1: Setting the Price
Objective
Survival
Maximum Current Profit
Maximum Market Share
Maximum Market Skimming
Product Quality Leadership
Other objectives (e.g. partial cost recovery)
17. Step 2: Determining Demand
Concept 5: Price Sensitivity
Price Sensitivity – reactions of consumers to price changes
Normally inverse relationship
Elastic vs. Inelastic Demand
If demand is elastic, sellers will consider lowering the price
Lower price will produce more total revenue
Long-run price elasticity vs. Short-run elasticity
18. Step 2: Determining Demand
Concept 5: Price Sensitivity
Price sensitivity
Customers are less price-sensitive:
Distinct product
No/few/unknown substitutes
Cannot easily compare quality of substitutes
Expenditure is small part of total income
Expenditure is small compared to the total cost of the end
product
Part of the cost is borne by another party
Product is used in conjunction with assets previously
bought
Product is assumed to have more qualilty, prestige, or
exclusiveness
Buyers cannot store the product
19. Step 2: Determining Demand
Concept 5: Price Sensitivity
Price Sensitivity – Examples
Kotler: Internet increases price sensitivity. Car buyers
use the internet to gather information and borrow the
negotiating clout of an online buying service
Local: Consumers are less sensitive to price
increases in SM supermarkets, than in stores such as
H&M, Zara, etc . Consumers are less sensitive to
price increases of basic needs (inelastic demand)
than luxury items (elastic demand)
Medical: Consumers are less sensitive to rates of the
emergency room (need, no substitutes) than doctors’
professional fees (many alternatives)
20. Step 3: Estimating Costs
Types of Costs and Levels of Production
Demand: sets a ceiling price; Costs: set the floor
price
Costs
fixed costs + variable costs = total cost
Average cost per unit
To price intelligently, management needs to know
how its costs vary with different levels of
production
To estimate the real profitability of selling to
different types of retailers or customers,
manufacturer needs to use activity-based cost
accounting instead of standard cost accounting
21. Step 3: Estimating Costs
Accumulated Production
Experience curve or Learning Curve
Decline in average cost with accumulated production
experience
Methods improve, workers learn shortcuts, materials flow
more smoothly, procurement costs fall
Experience-curve pricing is risky
Target Costing
22. Step 4, Concept 6: Analyzing
Competitors’ Costs, Prices and
Offers
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
Examples
Kotler: Green Works – affordable price, biodegradable
ingredients, packaged in recyclable materials, not tested
on animals
Local: Sun Cellular – unlimited calls and texts – drove
Globe and Smart to lower prices to unlimited calls and
texts as well
Medical – Laboratory clinics offering services at lower
prices will drive the other clinics in the area to match
23. Step 5: Selecting a Pricing
Method
Costs set a floor
Competitor’s prices, price of subs provide an
orienting point
Customer’s perception of quality establishes
price ceiling
Price-setting methods: Mark-up Pricing,
Target-return pricing, perceived-value pricing,
value pricing, going-rate pricing, and auction
type pricing
24. Price-setting methods
Mark-up pricing – adding a standard mark up to
the product’s cost
Target-return pricing – firm determines the price
that yields its target rate of ROI
Perceived-value pricing – pricing based on
buyer’s image of the product performance, the
channel deliverables, the warranty quality,
customer support; supplier’s reputation,
trustworthiness and esteem.
Value pricing – firms win loyal customers by
charging fairly low price for a high-quality offering
25. Price-setting methods
Concept 7: Value Pricing
Value pricing Examples
Kotler: IKEA, Target
Local: Globe subscribers offered unlimited data
for a reasonable price plus an iPhone for a lower
price as well. Despite increasing complaints about
service, consumers stay with Globe because of
loyalty and their reasonable offers
Medical: Patients will go to the doctors whose PF
are fairly acceptable, as long as they feel like they
can trust the doctor and that they can be made to
feel at ease
26. Price-setting methods
Concept 8: Going-rate pricing
Going rate pricing – the firm bases its price
largely on competitors’ prices
Example (Kotler): Gasoline companies
Example (local): Most service fees such as
manicure pedicure, haircut, etc.
Example (medical): PF of doctors
Auction type
27. Step 6: Selecting the Final Price
Considerations
Impact of other marketing activities
Company pricing policies
Gain-and-risk-sharing pricing
Impact of price on other parties
28. Step 6: Selecting the Final Price
Impact of other marketing activities
Average quality, high relative advertising budgets
– could charge premium prices
High relative quality, high relative advertising –
highest prices
Low quality and low advertising – lowest prices
30. Adapting the Price
Geographical pricing
Price discounts and allowances
Promotional pricing
Differentiated pricing
31. Adapting the Price
Concept 9: Geographic Pricing
Geographic Pricing – company decides how to price its
products to different customers in different locations and
countries
Barter – exchange of goods
Compensation deal – payment partly in cash, the rest in goods
Example (kotler) – British aircraft manufacturer, 70% cash, the rest in
coffee
Example (local) – Globe iPhone forever: Give your old iPhone +
some cashout = new iphone
Example (medical) – med reps sending you to conferences out of
the country+ pocket money in exchange for you prescribing their
drug (UNETHICAL BUT IT HAPPENS!)
Buyback agreement – an equipment, plant or technology in
exchange for the products it will produce
Offset – full payment in cash, but that cash should be spent in
that country within a stated time period
32. Adapting the Price
Price Discounts and Allowances
Early payment
Volume purchases
Off-season buying
Promotional Pricing
Loss-leader pricing
Special event pricing
Special customer pricing
Cash rebates
Low-interest financing
Longer payment terms
Warranties and service contracts
Psychological discounting
34. Adapting the Price
Concept 10: Location Pricing
Location pricing
Example (Kotler): Theater varies its seat prices
according to audience preferences for different
locations
Example (local): Parking fee in SM Marikina is
less expensive (Php 30) than parking fee in SM
Aura (Php 50)
Example (medical): Pfof Doctor X in TMC is
different from PF of Doctor X in TMC satellites