Lesson 9
Pricing strategy
Learning Objectives
1. How do consumers process and evaluate prices?
2. How should a company set prices for products or services?
3. How should a company adapt prices to meet varying circumstances and
opportunities?
Why is price important?
• Capture value
• Change easily
• Easy to be realized by customers
• Easy to be compared by customers
• A signal of product positioning
Synonyms for price
• Rent Special assessment
• Tuition Bribe
• Fee
Dues
• Fare
Salary
• Rate
• Toll Commission
• Premium Wage
• Honorarium Tax
Understanding Pricing
• Pricing in a digital world
Get instant vendor price comparisons
Check prices at the point of purchase
Name your price and have it met
Get products free
Monitor customer behavior & tailor offers
Give customers access to special prices
Negotiate prices online or even in person
• Pricing in a sharing economy
HONEY
• Honey believe everyone should have the
information they need to make the best decisions
with their money.
• Honey give everyone the tools it takes to find the
best savings, perks, and all around value.
Understanding Pricing
• How companies price
• Small companies: boss
• Large companies: division/product line managers
• How companies should price
• Understanding of consumer pricing psychology
• a systematic approach to setting, adapting, and changing prices
Product Positioning and Pricing
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Consumer Psychology and Pricing
Reference prices
Price-quality inferences
Price endings
Reference prices
• When customers compare an observed price to an internal reference price they
remember or an external frame of reference e.g. “regular price”
• Keywords:
• “Fair price”
• Typical price
• Last price paid
• Upper-bound price
• Lower-bound price
• Competitor prices
• Expected future price
• Usual discounted price
Reference prices
Last price paid
Discounted price
Price-quality inferences
• Gap = $14.50
• H&M = $7.90
• Armani = $275
Price endings
• “Left to right” pricing ($299 vs $300)
• Odd number discount perceptions
• Even number value perceptions
• Ending prices with 0 or 5
• “Sale” written next to price
Setting the Price
• Six main steps:
1. Defining the pricing objective
2. Determining demand
3. Estimating costs
4. Analyzing competitors’ costs, prices, and offers
5. Selecting a pricing method
6. Setting the final price
Step 1: Defining the Pricing Objective
• Common pricing objectives:
• Short-term profit
• Quality leadership
• Market penetration
• Market skimming
• Market Skimming - Sony Betamax
US$1,295 at launch!
• Market penetration - IKEA slashed its
price to the lowest in the world
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Step 2: Determining Demand
• Price sensitivity
• Estimating demand curves
• Surveys, price experiments, & statistical
analysis
• Price elasticity of demand
Inelastic And Elastic Demand
Step 3: Estimating Costs
• Types of costs and levels of production
• Fixed vs. variable costs
• Total costs
• Average cost
Step 4: Analyzing Competitors’ Prices
• Firm must take competitors’ costs, prices, & reactions into
account
• Value-priced competitors
Competitors’ Prices
Toyota RAV 4 GX, $35,144
$43,997
$35,144 $40,354 Mazda CX5 MAXX, $38,240
Honda CRV Vi 2WD, $30,990
Step 5: Selecting a Pricing Method
• Three major considerations in price
• Costs = price floor
• Competitors’ prices = orienting point
• Customers’ assessment of unique features =
price ceiling
Step 5: Selecting a Pricing Method
• Economic value-to-customer pricing (perceived-value pricing)
• Based on buyer’s image of product, channel deliverables, warranty
quality, customer support, and softer attributes (e.g., reputation)
Step 5: Selecting a Pricing Method
• Value pricing
• Companies that adopt value
pricing win loyal customers
by charging a fairly low price
for a high-quality offering.
Step 5: Selecting a Pricing Method
• EDLP
• A retailer using everyday low
pricing (EDLP) charges a
constant low price with little
or no price promotion or
special sales
Step 5: Selecting a Pricing Method
• Going-rate pricing
• The firm bases its price
largely on competitors’
prices
Step 5: Selecting a Pricing Method
• Auction pricing
English (ascending)
Dutch (descending)
Sealed-bid
Step 6: Setting the Final Price
• 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
• Second degree
• Third degree
Step 6: Setting the Final Price
• Third degree price discrimination:
• Customer segment pricing
• Product form pricing
• Channel pricing
• Location pricing
• Time pricing
Adapting the Price
• Price discounts and allowances
Adapting the Price
• Promotional pricing:
• Loss-leader pricing • Low-interest financing
• Special event pricing • Longer payment terms
• Special customer pricing • Warranties/service contracts
• Cash rebates • Psychological discounting
"Price is what you pay. Value is what you get."
- Warren Buffett
the chairman and CEO of Berkshire Hathaway
