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How do consumers process and evaluate prices?Marketing ManagementFifteenth EditionChapter 16DevelopingPricing Strategiesand ProgramsCopyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedCopyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedLearning Objectives16.1 How do consumers process andevaluate prices?16.2 How should a company set pricesinitially for products or services?16.3 How should a company adapt pricesto meet varying circumstances andopportunities?16.4 When and how should a companyinitiate a price change?16.5 How should a company respond to acompetitor’s price change?Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedSetting the PriceTable 16.2 Steps in Setting a Pricing PolicySelecting the Pricing ObjectiveDetermining DemandEstimating CostsAnalyzing Competitors’ Costs, Prices, and OffersSelecting a Pricing MethodSelecting the Final PriceCopyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedStep 1: Selecting the Pricing Objective• Survival• Maximum current profit• Other objectives• Maximum market share• Product-quality leadership• Maximum market skimmingCopyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedStep 2: Determining Demand• Price sensitivity• Estimating demand curves– Surveys, price experiments,& statistical analysis• Price elasticity of demandCopyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedFigure 16.1 Inelastic And ElasticDemandCopyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedPrice SensitivityTable 16.3 Factors That Reduce 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 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.• Buyers cannot store the product.Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedStep 3: Estimating Costs (1 of 3)• Types of costs and levels ofproduction– Fixed vs. variable costs– Total costs– Average costFigure 16.2 Cost per Unit at DifferentLevels of Production per PeriodCopyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedStep 3: Estimating Costs (2 of 3)• Accumulated production– Experience/learning curveFigure 16.3 Cost per Unit as a Function of Accumulated Production: TheExperience CurveCopyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedStep 3: Estimating Costs (3 of 3)• Target costing– Price less desired profit margin– Costs change with production scale and experience.They can also change as a result of a concentratedeffort by designers, engineers, and purchasing agentsto reduce them through target costing. Market researchestablishes a new product’s desired functions and theprice at which it will sell, given its appeal andcompetitors’ prices. This price less desired profitmargin leaves the target cost the marketer mustachieve.Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedStep 4: Analyzing Competitors’ Prices• Firm must take competitors’ costs, prices, & reactionsinto account– Value-priced competitorsCopyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedStep 5: Selecting a Pricing Method (1 of 6)• Three major considerations in price– Costs = price floor– Competitors’ prices = orienting point– Customers’ assessment of uniquefeatures = price ceilingFigure 16.4 The Three Cs Modelfor Price SettingCopyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedStep 5: Selecting a Pricing Method (2 of 6)• Markup pricing– Add a standard markup to the product’s cost unit costMarkup price 1 desired return on sales Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedStep 5: Selecting a Pricing Method (3 of 6)• Target-return pricing– Price that yields its target rate of return on investmentdesired return invested capital Target-return price unit costunit sales Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedFigure 16.5 Break-Even forTarget-Return PriceCopyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedStep 5: Selecting a Pricing Method (4 of 6)• Perceived-value pricing– Based on buyer’s image of product, channeldeliverables, warranty quality, customer support, andsofter attributes (e.g., reputation)Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedStep 5: Selecting a Pricing Method (5 of 6)• Value pricing• EDLP– High-low pricing• Going-rate pricing– the firm bases itsprice largely oncompetitors’ pricesCopyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedStep 5: Selecting a Pricing Method (6 of 6) • Auction-type pricing– English (ascending) have one seller and many buyers. On sites such as eBay andAmazon.com, the seller puts up an item and bidders raise their offerprices until the top price is reached.– Dutch (descending) feature one seller and many buyers or one buyer and many sellers. Inthe first kind, an auctioneer announces a high price for a product andthen slowly decreases the price until a bidder accepts. In the other, thebuyer announces something he or she wants to buy, and potentialsellers compete to offer the lowest price.– Sealed-bid feature one seller and many buyers or one buyer and many sellers. Inthe first kind, an auctioneer announces a high price for a product andthen slowly decreases the price until a bidder accepts. In the other, thebuyer announces something he or she wants to buy, and potentialsellers compete to offer the lowest price.Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedStep 6: Selecting the Final Price• Additional factors to select final price:‒ Impact of other marketing activities‒ Company pricing policies‒ Gain-and-risk-sharing pricing‒ Impact of price on other partiesCopyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedAdapting the Price (1 of 5)• Geographical pricing– Barter– Compensation deal– Buyback arrangement– OffsetCopyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedAdapting the Price (2 of 5)• Price discounts and allowancesTable 16.4 Price Discounts and AllowancesDiscount: A price reduction to buyers who pay bills promptly. A typical example is “2/10, net 30,”which means payment is due within 30 days and the buyer can deduct 2 percent bypaying within 10 days.Quantity Discount: A price reduction to those who buy large volumes. A typical example is “$10 per unit forfewer than 100 units; $9 per unit for 100 or more units.” Quantity discounts must beoffered equally to all customers and must not exceed the cost savings to the seller.They can be offered on each order placed or on the number of units ordered over agiven period.Functional Discount: Discount (also called trade discount ) offered by a manufacturer to trade-channelMembers if they perform certain functions, such as selling, storing, and record keeping.Manufacturers must offer the same functional discounts within each channel.Seasonal Discount: A price reduction to those who buy merchandise or services out of season. Hotels,motels, and airlines offer seasonal discounts in slow selling periods.Allowance: An extra payment designed to gain reseller participation in special programs. Trade-inallowances are granted for turning in an old item when buying a new one. Promotionalallowances reward dealers for participating in advertising and sales support programs.Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedAdapting the Price (3 of 5)• Loss-leader pricing• Special event pricing• Special customer pricing• Cash rebates• Low-interest financing• Longer payment terms• Warranties/servicecontracts• PsychologicaldiscountingCopyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedAdapting the Price (4 of 5)• Price discrimination– occurs when a company sells a product or service at two or more pricesthat do not reflect a proportional difference in costs. In first-degree pricediscrimination, the seller charges a separate price to each customerdepending on the intensity of his or her demand. In second-degree pricediscrimination, the seller charges less to buyers of larger volumes. Inthird-degree price discrimination, the seller charges different amounts todifferent classes of buyers, as in the following cases– Customer-segment pricing– Product-form pricing– Time pricing– Image pricing– Location pricing– Channel pricingCopyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedAdapting the Price (5 of 5)• Price discrimination– Yield pricing The airline and hospitality industries use yieldmanagement systems and yield pricing, by whichthey offer discounted but limited early purchases,higher-priced late purchases, and the lowest rateson unsold inventory just before it expires.Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedInitiating and Responding to PriceChanges (1 of 2)• Initiating price cuts– Domination of market Either the company starts with lower costs than its competitors,or it initiates price cuts in the hope of gaining market share andlower costs.• Price-cutting traps– Low-quality: Consumers assume quality is low– Fragile market share: Consumers assume quality is low– Shallow pockets: Higher-priced competitors match the lowerprices but have longer staying power because of deeper cashreserves– Price war:Competitors respond by lowering their prices evenmore, triggering a price warCopyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedInitiating and Responding to PriceChanges (2 of 2)• Initiating price increases‒ Delayed quotation pricing‒ The company does not set a final price until the product is finished or delivered. Thispricing is prevalent in industries with long production lead times, such as industrialconstruction and heavy equipment.‒ Escalator clauses‒ The company requires the customer to pay today’s price plus all or part of any inflationincrease that takes place before delivery. Escalator clauses base price increases on somespecified price index. They are found in contracts for major industrial projects, such asaircraft construction and bridge building.‒ UnbundlingThe company maintains its price but removes or prices separately one or more elements thatwere formerly part of the offer, such as delivery or installation. Car companies sometimesadd higher-end audio entertainment systems or GPS navigation systems to their vehicles asseparately priced extras.Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedInitiating Price IncreasesTable 16.5 Profits before and after a Price IncreaseBlank Before After BlankPrice $10 $10.10 (a 1% price increase)Units sold 100 100 BlankRevenue $1,000 $1,010 BlankCosts −970 −970 BlankProfit $30 $40 (a 33 ⅓% profit increase)Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedInitiating and Responding to PriceChanges• Anticipating competitive responses• Responding to competitors’ price changesCopyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights ReservedCopyrightThe post How do consumers process and evaluate prices? appeared first on Lion Essays. “Looking for a Similar Assignment? Get Expert Help at an Amazing Discount!”How do consumers process and evaluate prices? was first posted on April 20, 2019 at 11:05 pm.©2019 “Lion Essays”. Use of this feed is for personal non-commercial use only. If you are not reading this article in your feed reader, then the site is guilty of copyright infringement. 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