CHAPTER

14

LEARNING OBJECTIVES

DEVELOPING PRICING
STRATEGIES AND
PROGRAMS

In this chapter, we will address the following questions:

1. How do consumers process and evaluate prices?
2. How should a company set prices initially for products or services?
3. How should a company adapt prices to meet varying circumstances and
opportunities?
4. When should a company initiate a price change?
5. How should a company respond to a competitors price change?
CHAPTER SUMMARY
1) Despite the increased role of nonprice factors in modern marketing, price remains a
critical element of the marketing mix. Price is the only element that produces revenue;
the others produce costs.
2) In setting pricing policy, a company follows a six-step procedure. It selects its pricing
objective. It estimates the demand curve, the probable quantities it will sell at each
possible price. It estimates how its costs vary at different levels of output, at different
levels of accumulated production experience, and for differentiated marketing offers. It
examines competitors costs, prices, and offers. It selects a pricing method. It selects the
final price.
3) Companies do not usually set a single price, but rather a pricing structure that reflects
variations in geographical demand and costs, market-segment requirements, purchase
timing, order levels, and other factors. Several price-adaptation strategies are available:
(1) geographical pricing; (2) price discounts and allowances; (3) promotional pricing; and
(4) discriminatory pricing.
4) Firms often need to change prices. A price decrease might be brought about by excess
plant capacity, declining market share, a desire to dominate the market through lower
costs, or economic recession. A price increase might be brought about by cost inflation or
overdemand. Companies must carefully manage customer perceptions in raising prices.
5) Companies must anticipate competitor price changes and prepare a contingent
response. A number of responses are possible in terms of maintaining or changing price
or quality.
6) The firm facing a competitors price change must try to understand the competitors
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intent and the likely duration of the change. Strategy often depends on whether a firm is
producing homogeneous or nonhomogeneous products. A market leader attacked by
lower-priced competitors can seek to better differentiate itself, introduce its own low-cost
competitor, or transform itself more completely.
OPENING THOUGHT
Students should have a good understanding of price in their role as consumers. The
instructor is encouraged to expand the students definition of a price by using examples
of different pricing structures (cell phone plans for example), promotional pricing,
geographical pricing, and price discrimination.
An area for some misunderstanding for students new to marketing is how the firm
reviews competitors reactions to price changes. Students will have some degree of
difficulty in assuming the role of a competitor and formulating defensive and/or
offensive plans to price changes. Sufficient classroom time should be spent in clarifying
these roles.
Discriminatory pricing is also an area that students new to marketing can have some
difficulty understanding for the first time. Although discriminatory pricing is not illegal,
per se, the distinctions are sometimes porous between the two.
TEACHING STRATEGY AND CLASS ORGANIZATION
PROJECTS
1. At this point in the semester-long marketing plan project, students should be prepared
to hand in their pricing strategy decisions for their fictional product/service. In
reviewing this section, the instructor should make sure that the students have
addressed all or most of the material concerning pricing covered in this chapter.
2. Consumer perceptions of prices are also affected by alternative pricing strategies.
Marriott Hotels, for example, has different brands for differing price points. Building
upon the Marriott example, students are to scan the environment to find examples of a
company whose pricing strategy is closely tied to its branding strategy. Caution:
students may want to list just the different price points in the same company such as
Ford automobiles. What this project is designed to accomplish, is that students should
note that the Lincoln line of cars are priced at a premium to the Ford and Mercury
divisions. Good students will also have researched the actual percentage difference
between the three divisions.
3. Sonic PDA Marketing Plan: Pricing is a critical element in any companys marketing
plan, because it directly affects revenue and profit goals. Effective pricing strategies
must consider costs as well as customer perceptions and competitor reactions,
especially in highly competitive markets.

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You are in charge of pricing Sonics first PDA. Review your SWOT Analysis and
Competition Analysis. Also, think about the markets you are targeting and the
positioning you want to achieve. Then, answer the following questions about pricing:

What should Sonics primary pricing objective be? Why?

Are PDA customers likely to be price-sensitive? Is demand elastic or inelastic?
What are the implications of the answers for pricing decisions?
What price adaptations such as discounts, allowances, and promotional pricing
should Sonic include in its marketing plan?

Document your pricing strategies and programs in a written marketing plan or type them
into the Marketing Mix section of Marketing Plan Pro.
ASSIGNMENTS
Marketers recognize that consumers often actively process price information, interpreting
prices in terms of their knowledge from prior purchasing experience, formal
communications, informal communications, point-of-purchase, or online resources.
Purchase decisions are based on how consumers perceive prices and what they consider
to be the current actual pricenot the marketers stated price. In small groups, ask the
students to choose a service good, such as education, legal advice, tax advice, or other
such services, and have them map out their perception of prices and what they consider to
be the current actual price. Finally, students should compare and contrast their
perceptions with the stated or published prices for these services. In completing this
assignment, students should explain the differences between perception and stated prices
in terms of consumer buying behavior models from Chapter 6 of this text.
Many consumers use price as an indicator or quality. As a group assignment, students
should choose a product produced by a firm. Subsequently, the students should conduct a
small research project (utilizing the material learned from Chapter 4) and either, confirm,
or deny this relationship for the chosen product. For example, do more women or men
rely on price as an indicator of quality for product X? If there is a difference, what is the
quantifiable difference in terms of marketing research data? Does this difference suggest
that marketers must or can revise, or revamp price clues to reach their target market?
Katherine Heires in Business Week 2.0, October 2006, wrote Why it Pays to Give Away
the Store. Either in small groups or individually, have the students read Ms. Heires
article and comment on the validity/invalidity of these nine suggestions as being
applicable to key service companies.
Table 14.1 lists some possible consumer reference prices and students should comment
on whether or not these consumer reference prices are applicable today. Is this list
inclusive or are there new reference points caused by the increased use of such Web sites
like eBay or Craigslist?

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Table 14.3 lists nine factors that the authors contend leads to less price sensitivity in
consumers. Choose a product that is available online and in stores (books or tires, for
example) and ask the students to research the various pricings choices available online.
After collecting this data, ask the students to comment on whether or not, the variety of
price points found lowers their price sensitivity?
For many firms pricing is the domain of the financial disciplines in the company. Using
accepted accounting and financial processes, some companies price strictly according to
these models. Assign students the assumed role of defenders of this practice and others
as innovators, challenging these models and supporting some of the newer pricing
models such as perceived and value pricing for products. Have the students come
prepared to defend their positions using the concepts developed in this chapter.
Paul W. Farris and David J. Reibstein, in their article, How Prices, Expenditures, and
Profits Are Linked, Harvard Business Review (November-December 1979); pp. 173184, found a relationship between relative price, relative quality, and relative advertising
(their findings are summarized in the chapter). Students should read the full report, and
then be prepared to discuss the validity of this study in light of the consumer information
explosion that has occurred due to the emergence of the Internet. Are these relationships
still valid today? If not, why or what has caused them to change?
END-OF-CHAPTER SUPPORT
MARKETING DEBATEIs the Right Price a Fair Price?
Prices are often set to satisfy demand or to reflect the premium that consumers are willing to
pay for a product or service. Some critics shudder, however, at the thought of $2 bottles of
water, $150 running shoes, and $500 concert tickets.
Take a position: Prices should reflect the value that consumers are willing to pay versus prices
should primarily just reflect the cost involved in making a product or service.
Pro: Price, perhaps more than any other element of the marketing mix, communicates value to
the consumer. In the consumer decision-making process, we have learned that customers are
value-maximizers. They form an expectation of value and act on it. A buyers satisfaction is a
function of the products perceived performance and the buyers expectations. So, if the
product meets these consumers value definitions and the given price point reflects these
values, price is seen as acceptable. If the price and the products value definition in the minds
of the consumer are not consistent, sales will decline and prices will drop until prices reach
equilibrium with the consumers definition of value.
Con: Marketers have an obligation to the consumers to produce products (or services) that
meet consumer needs at the lowest price possible. Fair pricing does not assign any consumer
value definition into its equation and it should not because each consumer will have
differing definitions of value according to their prejudices. When marketers try to assign a
value definition to its product, it runs the risks of alienating current customers and missing
other potential customers. Therefore, assigning a fair price, composed of actual costs plus
fair margins, allows the marketer to maximize its customer bases.
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MARKETING DISCUSSION
Think of the pricing methods described in this chaptermarkup pricing, target-return pricing,
perceived value pricing, value pricing, going rate pricing, and auction-type pricing. As a
consumer which method do you personally prefer to deal with. Why? If the average price
were to stay the same, which would you prefer: (1) for firms to set one price and not deviate,
or (2) to employ slightly higher prices most of the year, but slightly lower discounted prices or
specials for certain occasions.
Student answers will differ. However, the following notation from research is worth reenforcing during the class discussions.

The two different pricing strategies have been shown to affect consumer price
judgments.
Deep discounts (EDLP) can lead to lower perceived prices by consumers over time
than frequent shallow discounts (high-low) even if the actual averages are the same.

Marketing Excellence: EBAY

1) Why has eBay succeeded as an online auction marketplace while so many
others have failed?
Suggested Answer: eBays success truly created a pricing revolution by allowing buyers
to determine what they would pay for an item; the result pleases both sides because
customers gain control and receive the best possible price while sellers make good
margins due to the sites efficiency and wide reach. For years, buyers and sellers used
eBay as an informal guide to market value. eBay has evolved to also offer a fixed-price
buy it now option to those who dont want to wait for an auction and are willing to pay
the sellers price.
2) Evaluate eBays fee structure. Is it optimal or could it be improved? Why?
How?
Suggested Answer: eBays pricing structure was developed to attract high-volume sellers
and deter those who list only a few low-priced items. With eBays expansion into a wide
range of other categoriesfrom boats and cars and travel and tickets to health and beauty
and home and gardencollectibles now make up only a small percentage of eBay sales
and eBay can and should revisit its pricing structure to maximize profits on products that
more and more people are buyingthe fixed price option.
3) Whats next for eBay? How does it continue to grow when it needs both buyers
and sellers? Where will this growth come from?
Suggested Answer: Students answers will vary. Some might suggest that eBay will
become or morph into a version of AMAZON.COM. Others think that eBays business
plan and popularity will fade as other retailers embark on auction type sellingeither
English or Dutch auction.
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Marketing Excellence: SOUTHWEST AIRLINES

1) Southwest has mastered the low-price model and has the financial results to
prove it. Why dont the other airlines copy Southwests model?
Suggested Answer: Southwests business model is based on streamlining its operations,
and is an integrated part of the corporate philosophy and structure of the company. Other
airline companies would have to discard their entire manual of operations, labor
relations, and equipment and schedules to copy the Southwest model.
A few airlines are copying Southwest: JetBlue, RyanAir, and Asia Airlines to name a
few.
2) What risks does Southwest face? Can it continue to thrive as a low cost airline
when tough economic times hit?
Suggested Answer: The risks to Southwests strategy are in a number of areas.
Competitors copying Southwests low fares and point-to-point route structure is one,
increased fuel costs is two, and three, consumer sentiments about flying is three.
Yes, there will always be a market for the low price leader in any consumer category
airlines, computers, or retailers.
DETAILED CHAPTER OUTLINE
Price is the one element of the marketing mix that produces revenue; the other elements
produce costs. Prices are perhaps the easiest element of the marketing program to adjust;
product features, channels, and even promotion take more time. Price also communicates to
the market the companys intended value positioning of its product or brand. A well-designed
and marketed product can command a price premium and reap big profits. But new economic
realities have caused many consumers to pinch pennies, and many companies have had to
carefully review their pricing strategies as a result.
Pricing decisions are clearly complex and difficult, and many marketers neglect their pricing
strategies. Holistic marketers must take into account many factors in making pricing
decisionsthe company, customers, competition, and marketing environment. Pricing
decisions must be consistent with the firms marketing strategy and its target markets and
brand positionings.
UNDERSTANDING PRICING
Price is not just a number on a tag or an item. Price comes in many forms and performs
many functions.
A) Throughout most of history prices were set by negotiation between buyers and sellers.
B) Setting one price for all buyers is a relatively modern idea.
C) Traditionally, price has operated as the major determinant of buyer choice.
A Changing Pricing Environment
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Pricing practices have changed significantly.

At the turn of the 21st Century, consumers had easy access to credit, so by combining
unique product formulations with enticing marketing campaigns, many firms successfully
traded consumers up to more expensive products and services.
The onset of the Great Recessiona recession more severe than previous recessions
which resulted in many jobs lost and many businesses and consumers unable to receive
loans due to their poorly leveraged situationschanged things though.
A combination of environmentalism, renewed frugality, and concern about jobs and
home values forced many U.S. consumers to rethink how they spent their money. They
replaced luxury purchases with basics.
Downward price pressure from a changing economic environment coincided with some
longer-term trends in the technological environment. For some years now, the Internet
has been changing how buyers and sellers interact. Here are some ways:
1.
2.
3.
4.
5.
6.

Get instant price comparisons from thousands of vendors.

Name their price and have it met.
Get products free.
Monitor customer behavior and tailor offers to individuals.
Give certain customers access to special prices.
Negotiate prices in online auctions and exchanges or even in person.

Marketing Insight: Giving it all away

Giving away products free via sampling has been a successful marketing tactic for years;
today with the advent of the Internet software, product and service companies are
following suit. Ryanair is an example.
How Companies Price
Companies do their pricing in a variety of ways.
A) In small companies, prices are often set by the boss.
B) Where pricing is a key factor, companies often establish a pricing department to set or
assist others in setting appropriate prices.
C) In large companies, top management sets general pricing objectives, policies, and
D) Effectively designing and implementing pricing strategies requires a thorough
understanding of consumer pricing psychology and a systematic approach to setting,
adapting, and changing prices.
Consumer Psychology and Pricing
Marketers recognize that consumers often actively process price information, interpreting
prices in terms of their knowledge from prior purchasing experiences, formal
communications, and point-of-purchase or online resources.
A) Purchase decisions are based on how consumers perceive prices.
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B) What they consider the current actual pricenot the marketers stated price.
C) Consumers may have a lower price threshold below which prices may signal inferior
or unacceptable quality.
D) Upper price threshold above which prices are prohibitive and seen as not worth the
money.
E) Consumer attitudes about pricing took a dramatic shift in the recent economic
downturn as many found themselves unable to sustain their lifestyles.
F) Understanding how consumers arrive at their perceptions of prices is an important
marketing priority.
Reference Prices
When examining products, consumers often employ reference prices.
A) In considering an observed price, consumers often compare it to an internal reference
price (pricing from memory).
B) An external frame of reference (posted regular retail price).
C) All types of reference prices are possible.
a. fair price
b. Typical price
c. Last price paid
d. Upper-Bound price
e. Lower-Bound price
f. Historical competitor price
g. Expected future price
h. Usual discounted price
D) When consumers evoke one or more of these frames of reference, their perceived
price can vary from the stated price.
1) These unpleasant surpriseswhen perceived price is lower than the stated
pricecan have a greater impact on purchase.
2) Consumer expectations also play a key role in price response.
Price-Quality Inferences
A) Many consumers use price as an indicator of quality.
B) Some companies adopt exclusivity and scarcity to justify premium prices.
Price Endings
A) Many sellers believe that prices should end in an odd number.
B) Research has shown that consumers tend to process prices in a left-to-right manner
rather than by rounding.

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C) Prices that end with a 0 or 5 are also popular and are thought to be easier for
consumers to process and retrieve from memory.
D) Pricing cues like sale signs and prices that end in a 9 are less effective the more they
are employed.
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 geographic area, and
when it enters bids on new contract work.
A) The firm must decide where to position its product on quality and price.
B) Most marketers have 3 to 5 price points or tiers.
C) The firm has to consider many factors in setting its pricing policy.
1) Six-step procedure
i.

Selecting the pricing objective

ii.

Determining demand

iii.

Estimating costs

iv.

Analyzing competitors costs, prices, and offers

v.

Selecting a pricing method

vi.

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
firms objectives, the easier it is to set price. The five major objectives are: survival,
maximum current profit, maximum market share, maximum market skimming, and
product-quality leadership.
Survival
Companies pursue survival as their major objective when they are plagued with
overcapacity, intense competition, or changing consumer wants.
A) Survival is a short-run objective.
Maximum Current Profit
Many companies try to set a price that will maximize current profits. They estimate the
demand and costs associated with alternative 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 that a higher sales
volume will lead to lower unit costs and higher long-run profit.
A) This practice is called market-penetration pricing.
B) The following conditions favor setting a low price:
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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.
A) This is also called market-skimming pricing, where prices start high and are slowly
lowered over time.
Product-Quality Leadership
A company might aim to be the product-quality leader in the market.
A) Many brands strive to be affordable luxuriesproducts 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.
Other Objectives
Nonprofit and public organizations may have other pricing objectives. Whatever the
specific objective, businesses that use price as a strategic tool will profit more than those
who simply let costs or the market determine their pricing.
1. Partial cost recovery
2. Nonprofit hospital
Step 2: Determining Demand
Each price will lead to a different level of demand and therefore have a different impact
on a companys marketing objectives.
A) The normally inverse relationship between price and demand is captured in a
demand curve.
Price Sensitivity
The demand curve shows the markets probable purchase quantity at alternative prices.
The first step in estimating demand is to understand what affects price sensitivity.
A) Generally speaking, customers are most price-sensitive to products that cost a lot or
are bought frequently.
B) Customers are less price-sensitive to low-cost items or items they buy infrequently.
C) They are also less price-sensitive when:
a. There are few or no substitutes or competitors
b. They do not readily notice the higher price
c. They are slow to change their buying habits
d. They think the higher prices are justified
e. Price is only a small part of the total cost of obtaining, operating, and servicing
the product over its lifetime (total cost of ownershipTCO).
D) Companies prefer customers who are less price-sensitive.
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Estimating Demand Curves

Most companies attempt to measure their demand curves using several different methods.
A) Surveys can explore how many units consumers would buy at different proposed
prices.
B) Price experiments can vary the prices of different products to see how the change
affects sales.
C) Statistical analysis of past prices, quantities sold, and other factors can reveal their
relationships. These can be:
1) Longitudinal
2) Cross-sectional
Price Elasticity of Demand
Marketers need to know how responsive or elastic, demand would be to a change in
price.
A) The higher the elasticity, the greater the volume growth resulting from a 1% price
reduction. If demand is elastic, sellers will consider lowering the price.
B) Price elasticity depends on the magnitude and direction of the contemplated price
change. It may be negligible with a small price change and substantial with a
large price change. It may differ for a price cut versus a price increase, and there
may be a price indifference band within which price changes have little or no
effect.
C) Long-run price elasticity may differ from short-run elasticity. Buyers may
continue to buy from a current supplier after a price increase but eventually
switch suppliers. Here 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
Demand sets a ceiling on the price the company can charge for its product. Costs set the
floor.
Types of Costs and Levels of Production
A companys costs take two forms, fixed and variable.
A) Fixed costs (also known as overhead) are costs that do not vary with production or
sales revenue.
B) Variable costs vary directly with the level of production.
C) Total costs consist of the sum of the fixed and variable costs for any given level of
production.
D) Average cost is the cost per unit at that level of production

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E) Management wants to charge a price that will at least cover the total production costs at
a given level of production.
F) To price intelligently, management needs to know how its costs vary with different
levels of production.
G) To estimate the real profitability of dealing with different retailers, the
manufacturer needs to use activity-based accounting (ABC).
1) ABC accounting tries to identify the real costs associated with serving each
customer.
2) The key to effectively employing ABC is to define and judge activities properly.
Accumulated Production
The decline in the average cost with accumulated production experience is called the
experience curve or learning curve.
A) Experience-curve pricing carries major risks.
1) Aggressive pricing might give the product a cheap image.
2) The strategy assumes that competitors are weak followers.
B) Most experience-curve pricing has focused on manufacturing costs, but all costs,
including marketing costs, can be improved on.
Target Costing
Costs change with production scale and experience. They can also change as a result of a
concentrated effort to reduce them through target costing.
A) The objective is to bring the final cost projections into the target cost range.
Step 4: Analyzing Competitors Costs, Prices, and Offers
Within the range of possible prices determined by market demand and company costs, the
firm must take competitors costs, prices, and possible price reactions into account.
A) The firm should first consider the nearest competitors price.
B) The introduction of any price or the change of any existing price can provoke a
response from customers, competitors, distributors, suppliers, and even the
government.
C) How can a firm anticipate a competitors reactions?
1) One way is to assume the competitor reacts in the standard way to a price
being set or changed.
Step 5: Selecting a Pricing Method
Given the customers demand schedule, the cost function, and competitors prices, the
company is now ready to select a price.
A) Costs set the floor to the price.
B) Competitors prices and the price of substitutes provide an orienting point.
C) Customers assessment of unique features establishes the price ceiling.
D) There are six price-setting methods:
1) Markup pricing
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2) Target-return pricing
3) Perceived-value pricing
4) Value pricing
5) Going-rate pricing
6) Auction-type pricing
Markup Pricing
A) The most elementary pricing method is to add a standard markup to the products cost.
B) Does the use of standard markups make logical sense?
1) Generally, no. Any pricing method that ignores current demand, perceived value,
and competition is not likely to lead to the optimal price.
C) Markup pricing remains popular.
1) Sellers can determine costs much more easily than they can estimate demand.
2) By tying the price to cost, sellers simplify the pricing task.
3) Where all firms in the industry use this pricing method, prices tend to be similar.
4) Many people feel that cost-plus pricing is fairer to both buyers and sellers.
Target-Return Pricing
A) In target-return pricing, the firm determines the price that would yield its target
rate of return on investments (ROI).
B) Target-return pricing tends to ignore price elasticity and competitors prices.
Perceived-Value Pricing
An increasing number of companies base their price on the customers perceived value. They
must deliver the value promised by their value proposition, and the customer must perceive
this value.
A) Perceived value is made up of several characteristics:
1) Buyers image of the product performance
2) Channel deliverables
3) The warranty quality
4) Customer support
5) Suppliers reputation
6) Trustworthiness
7) Esteem
The key to perceived-value pricing is to deliver more value than the competitor and to
demonstrate this to prospective buyers.
Value Pricing

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In recent years, several companies have adopted value pricing: they win loyal customers by
charging a fairly low price for a high-quality offering.
A) Value pricing is not a matter of simply setting lower prices.
B) It is a matter of reengineering the companys operations to become a low-cost
producer without sacrificing quality.
C) Lowering prices significantly helps to attract a large number of value-conscious
customers.
D) An important type of value pricing is everyday low pricing (EDLP) that takes place at
the retail level.
E) A retailer who holds to an EDLP pricing policy charges a constant low price with little
or no price promotions and special sales.
F) In high-low pricing, the retailer charges higher prices on an everyday basis but then
runs frequent promotions in which prices are temporarily lowered below the EDLP
level.
G) The two different pricing strategies have been shown to affect consumer price
judgments.
1) Deep discounts (EDLP) can lead to lower perceived prices by consumers over
time than frequent shallow discounts (high-low) even if the actual averages are the
same.
I) Some retailers have even based their entire marketing strategy around what could be
called extreme everyday low pricing.
Going-Rate Pricing
In going-rate pricing, the firm bases its price largely on competitors prices.
A) The firm might charge the same, more, or less than major competitor(s).
B) Going-rate pricing is quite popular where costs are difficult to measure or competitive
response is uncertain.
Auction-type pricing
A) Auction-type pricing is growing more popular, especially with the growth of the
Internet.
B) There are three types of auction-type pricing:
1) English auctions (ascending bids)
2) Dutch auctions (descending bids)
3) Sealed-bid auctions
Step 6: Selecting the Final Price
Pricing methods narrow the range from which the company must select its final price. In
selecting the price, the company must consider additional factors, including the impact of
other marketing activities, 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 brands quality and advertising relative to the
competition.
A) Farris and Reibsteins findings suggest that price is not as important as quality and
other benefits in the market offering.
Marketing Insight: Stealth price increase
Companies trying to figure out how to increase revenue without really increasing prices
are increasingly charging additional fees for what had once been free features/services.
Company Pricing Policies
The price must be consistent with company pricing policies.
A) Many companies set up a pricing department to develop policies and establish or
approve pricing decisions.
1) The aim is to ensure that salespeople quote prices that are reasonable to customers,
and
2) Profitable to the company.
Gain-and-Risk Sharing Pricing
Buyers may resist accepting a sellers proposal because of a high-perceived level of risk.
A) The seller has the option of offering to absorb part or all of the risk if he does not
deliver the full promised value.
Impact of Price on Other Parties
Management must also consider the reactions of other parties to the contemplated price:
A) How will distributors and dealers feel about it?
B) Will the sales force be willing to sell at that price?
C) How will competitors react?
D) Will suppliers raise their prices when they see the companys price?
E) Will the government intervene and prevent this price from being charged?
F) Marketers need to know the laws regulating pricing in the United States.
ADAPTING THE PRICE
Companies usually do not set a single price but rather develop a pricing structure that reflects
variations in geographical demand and costs, market-segment requirements, purchase timing,
order levels, delivery frequency, guarantees, service contracts, and other factors.

Geographical Pricing (Cash, Countertrade, Barter)

A) In geographical pricing, the company decides how to price its products to different
customers in different locations and countries.

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B) Another question is how to get paid. This issue is critical when buyers lack sufficient
hard currency to pay for their purchases. Many buyers want to offer other items in
payment, a practice known as countertrade.
C) Barter. The buyer and seller directly exchange goods, with no money and no third
party involved.
D) Compensation deal. The seller receives some percentage of the payment in cash and
the rest in products. A British aircraft manufacturer sold planes to Brazil for 70% cash
and the rest in coffee.
E) Buyback arrangement. The seller sells a plant, equipment, or technology to another
country and agrees to accept as partial payment products manufactured with the
supplied equipment. A U.S. chemical company built a plant for an Indian company
and accepted partial payment in cash and the remainder in chemicals manufactured at
the plant.
F) Offset. The seller receives full payment in cash but agrees to spend a substantial
amount of the money in that country within a stated time period. PepsiCo sold its cola
syrup to Russia for rubles and agreed to buy Russian vodka at a certain rate for sale in
the United States.

Price Discounts and Allowances

Most companies will adjust their list price and give discounts and allowances for early
payment, volume purchases, and off-season buying (see Table 14.5). Companies must do this
carefully or find their profits much lower than planned.
A) Discount pricing has become the modus operandi of a surprising number of
companies offering both products and services.
B) Some product categories tend to self-destruct by always being on sale.
C) Discounting can be a useful tool if the company can gain concessions in return.
D) Sales management needs to monitor the proportion of customers who are receiving
discounts.
E) Higher levels of management should conduct a net price analysis to arrive at the real
price of their offering.
Promotional Pricing
Companies can use several pricing techniques to stimulate early purchase:
A) Loss-leader pricing
B) Special-event pricing
C) Special customer pricing
D) Cash rebates
E) Low-interest financing
F) Longer payment terms
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G) Warranties and service contracts

H) Psychological discounting
Promotional-pricing strategies are often a zero-sum game.
Differentiated Pricing
Companies often adjust their basic price to accommodate differences in customers, products,
locations, and so on.
A) 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.
1) In first-degree price discrimination, the seller charges a separate price to each
customer depending on the intensity of his or her demand.
2) In second-degree price discrimination, the seller charges less to buyers who buy a
larger volume.
3) In third-degree price discrimination, the seller charges different amounts to
different classes of buyers:
a. Customer-segment pricing
b. Product-form pricing
c. Image pricing
d. Channel pricing
e. Location pricing
f. Time pricing
B) Yield pricing, and yield management systems are used to offer discounts based upon
some criteria.
C) The phenomenon of offering different pricing schedules to different consumers is
exploding.
D) Research shows that constant price variations work best in situations where there is no
bond between buyer and seller.
E) The tactic most companies favor, however, is to use variable prices as a reward rather
than a penalty.
F) Some forms of price discrimination are illegal.
G) Price discrimination is legal if the seller can prove that its costs are different when
selling different volumes or different quantities of the same product to retailers.
H) Predatory pricingselling below cost with the intent of destroying competitionis
unlawful.
I) For price discrimination to work, certain conditions must exist:
1) The market must be segmentable and the segments must show different intensities
of demands.
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2) Members in the lower-price segment must not be able to resell the product to the
higher-price segment.
3) Competitors must not be able to undersell the firm in the higher-price segment.
4) The cost of segmenting and policing the market must not exceed the extra revenue
derived from price discrimination.
5) The practice must not breed customer resentment and ill will.
6) The particular form of price discrimination must not be illegal.
INITIATING AND RESPONDING TO PRICE CHANGES
Companies often face situations when they may need to cut or raise prices.
Initiating Price Cuts
Several circumstances might lead a firm to cut prices:
A) Excess plant capacity
B) Companies may initiate a price cut in a drive to dominate the market through lower
costs.
C) Either the company starts with lower costs or initiates price cuts in hope of gaining
market share and lower costs.
D) A price-cutting strategy involves possible traps:
1) Low-quality trap
2) Fragile market-share trap
3) Shallow-pockets trap
4) Price-war trap
Initiating Price Increases
A successful price increase can raise profits considerably.
A) A major circumstance provoking price increases is cost inflation.
1) Rising costs unmatched by productivity gains squeeze profit margins and lead
companies to regular rounds of price increases.
B) Companies often raise their prices by more than the cost increase in anticipation of
further inflation or governmental price controls, in a practice called anticipatory
pricing.
C) Another factor leading to price increase is over-demand.
1) The price can be increased in the following ways:
a. Delayed quotation pricing
b. Escalator clauses
c. Unbundling
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d. Reduction of discounts
D) A company needs to decide whether to raise its price sharply on a one-time basis or to
raise it by small amounts several times.
1) Generally, consumers prefer small price increases on a regular basis to sudden,
sharp increases.
E) In passing on price increases to consumers, the company must avoid looking like a
price gouger. Customer memories are long, and they can turn against companies they
perceive as price gougers.
F) Several techniques help consumers avoid sticker shock and a hostile reaction when
prices rise:
1. Sense of fairness must surround any price increase.
2. Customers must be given advance notice so that they can do forward buying or
shop around.
3. Sharp price increases need to be explained in understandable terms.
4. Making low-visibility price moves first is also a good technique:
a. Eliminating discounts
b. Increasing minimum order sizes
c. Curtailing production of low-margin products
d. Creating new economy brands
Given strong consumer resistance, marketers go to great lengths to find alternate
approaches that avoid increasing prices when they otherwise would have done so. Here
are a few popular ones.
1. Shrinking the amount of product instead of raising the price. (Hershey Foods
maintained its candy bar price but trimmed its size. Nestl maintained its size but
raised the price.)
2. Substituting less-expensive materials or ingredients. (Many candy bar companies
substituted synthetic chocolate for real chocolate to fight cocoa price increases.)
3. Reducing or removing product features. (Sears engineered down a number of its
appliances so they could be priced competitively with those sold in discount
stores.)
4. Removing or reducing product services, such as installation or free delivery.
5. Using less-expensive packaging material or larger package sizes.
6. Reducing the number of sizes and models offered.
7. Creating new economy brands. (Jewel food stores introduced 170 generic items
selling at 10% to 30% less than national brands.)
Responding to Competitors Price Changes
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How should a firm respond to a price cut initiated by a competitor? The best response
varies with the situation.
A) One way is to assume that the competitor reacts in a set way to price changes.
B) The other is to assume that the competitor treats each price change as a fresh challenge
and reacts according to self-interests at that time.
C) In markets characterized by high product homogeneity, the firm should search for ways
to enhance its augmented product.
1) If not it will have to meet the price reduction.
D) In non-homogeneous product markets, the firm has more latitude. It needs to consider
the following:
1. Why did the competitor change the price?
2. Does the competitor plan to make the price change temporary or permanent?
3. What will happen to the companys market share and profits if it does not
respond?
4. Are other companies going to respond?
5. What are the competitors and other firms responses likely to be to each
possible reaction?
E) Market leaders frequently face aggressive price cutting by smaller firms trying to build
market share.
F) The brand leader can respond in several ways:
1. Maintain price
2. Maintain price and add value
3. Reduce price
4. Increase price and improve quality
5. Launch a low-price fighter line
G) The company has to consider the products:
1. Stage in the life cycle
2. Importance in the companys portfolio
3. The competitors intentions and resources
4. The markets price and quality sensitivity
5. The behavior costs of /with volume
6. The companys alternative opportunities
H) An extended analysis of alternatives may not be feasible when the attack occurs.
I) It would make better sense to anticipate possible competitors price changes and to
prepare contingent responses.
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Marketing Memo: How to fight low-cost rivals

The first approach to competing against cut-price players is to differentiate the product or
service through various means. Secondly, companies must not use differentiation tactics
in isolation; companies must be able to persuade consumers to pay for the additional
benefits; companies must first bring costs and benefits in line.

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