Marketing Management Arab World Edition Kotler Keller Hassan

Marketing Management Arab World Edition Kotler, Keller, Hassan, Baalbaki and Shamma Chapter 14 Developing Pricing Strategies and Programs

Chapter 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 competitor’s price challenge? Copyright © 2012 Pearson Education 14 -2

Chapter Question 1: How do consumers process and evaluate prices? Understanding Pricing A Changing Pricing Environment • Pricing practices have changed significantly in recent years. • Many companies no longer follow the low-pricing trend, and have successfully traded consumers up to more expensive products. Nescafé Cappucino was introduced at a higer price than their regular coffee sachets. . Copyright © 2012 Pearson Education 14 -3

Chapter Question 1: How do consumers process and evaluate prices? A Changing Pricing Environment The internet allows sellers to discriminate between buyers, and buyers to discriminate between sellers. Buyers can: • Get instant price comparisons from thousands of vendors. pricena, price-scan • Name their price and have it met. Priceline. com • Get products free. Microsoft Sellers can: • Monitor customer behavior and tailor offers to individuals. GE • Give certain customers access to special prices. access Both buyers and sellers can: • Negotiate prices in online auctions and exchanges. Souq. com Copyright © 2012 Pearson Education 14 -4

Chapter Question 1: How do consumers process and evaluate prices? How Companies Price Companies do their pricing in a variety of ways. Often it is not done well. Common pricing mistakes include: • Simplistically determining costs and taking 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. Effective pricing strategies must: • Understand consumer pricing psychology. • Have a systematic approach to setting, adapting, and changing prices. Copyright © 2012 Pearson Education 14 -5

Chapter Question 1: How do consumers process and evaluate prices? Consumer Psychology and Pricing Understanding how consumers arrive at their perceptions of prices is an important marketing priority. Here we consider three key topics: 1. Reference prices 2. Price–quality inferences 3. Price endings Copyright © 2012 Pearson Education 14 -6

Chapter Question 1: How do consumers process and evaluate prices? Consumer Psychology and Pricing 1 - Reference Prices Consumers often employ reference prices, comparing an observed price to an internal reference price they remember. Box 14. 2: Possible Consumer Reference Prices Copyright © 2012 Pearson Education 14 -7

Chapter Question 1: How do consumers process and evaluate prices? Consumer Psychology and Pricing 1 - Reference Prices When consumers think of one or more of these frames of reference, their perceived price can vary from the stated price. High reference prices in the consumer electronics industry have trained consumers to gravitate toward ‘sale’ prices. Copyright © 2012 Pearson Education 14 -8

Consumer Psychology and Pricing Chapter Question 1: How do consumers process and evaluate prices? 2 - Price-Quality Inferences • Many consumers use price as an indicator of quality. • Image pricing is especially effective with ego-sensitive products such as perfumes and expensive cars. Box 14. 3: Consumer Perceptions versus Reality for Cars Copyright © 2012 Pearson Education 14 -9

Chapter Question 1: How do consumers process and evaluate prices? Consumer Psychology and Pricing 2 - Price-Quality Inferences • Some brands adopt exclusivity and scarcity as a means to signify uniqueness and justify premium pricing, e. g. luxury goods. For years, the link between price and quality was what made Azza Fahmy special. The luxury jewelry store was successful in introducing exclusive designer jewelry that justified premium prices. Copyright © 2012 Pearson Education 14 -10

Chapter Question 1: How do consumers process and evaluate prices? Consumer Psychology and Pricing 3 - Price Endings • Many sellers believe prices should end in an odd number. • Customers see an item priced at US$299 in the $200 rather than the $300 range. • Prices that end with 0 and 5 are also common in the marketplace; they are thought to be easier for consumers to remember. • ‘Sale’ signs next to prices increase demand, but only if not overused. Copyright © 2012 Pearson Education 14 -11

Chapter Question 1: How do consumers process and evaluate prices? Consumer Psychology and Pricing 3 - Price Endings When to use price cues: • Customers purchase item infrequently • Customers are new • Product designs vary over time • Prices vary seasonally • Quality or sizes vary across stores Copyright © 2012 Pearson Education 14 -12

Chapter Question 2: How should a company set prices initially for products or services? Setting the Price Six-step procedure for setting a pricing policy: • Select the price objective • Determine demand • Estimate costs • Analyze competitor price mix • Select pricing method • Select final price Let’s look at each step… Copyright © 2012 Pearson Education 14 -13

Step 1: Selecting the Pricing Objective Chapter Question 2: How should a company set prices initially for products or services? The company first decides where to position its market offering. The clearer a firm’s objectives, the easier it is to set price. Five major objectives are: • Survival (Competitions – change wants) / V cost • Maximum current profit (Cash caw) long run? • Maximum market share (volume lower the cost)/Market penetration • Maximum market skimming (High>low)/max profit • Product-quality leadership (Rolex-BMW) Copyright © 2012 Pearson Education 14 -14

Step 2: Determining Demand Chapter Question 2: How should a company set prices initially for products or services? A demand curve illustrates the relationship between price and demand. Fig. 14. 1: Inelastic and Elastic Demand Price Sensitivity: No substitute – Habit – justified- small part Copyright © 2012 Pearson Education 14 -15

Step 2: Determining Demand Chapter Question 2: How should a company set prices initially for products or services? Estimating Demand Curves Companies can try to measure their demand curves, using: • Surveys • Price experiments (places – Internt) • Statistical analysis Table 14. 1: Price Optimization to Boost Sales and Profits Copyright © 2012 Pearson Education 14 -16

Chapter Question 2: How should a company set prices initially for products or services? Step 3: Estimating Costs Demand sets a maximum on the price the company can charge for its product. Costs set the minimum. Types of Cost and Levels of Production • Fixed costs (Buildings – rent- net – loans) • Variable costs (materials-packages) • Total cost • Average cost (T/P) • Activity-based cost (Real cost associated with each customers ) Fig. 14. 2: Cost per Unit at Different Levels of Production per Period Copyright © 2012 Pearson Education 14 -17

Chapter Question 2: How should a company set prices initially for products or services? Step 3: Estimating Costs Accumulated Production Average cost falls with accumulated production experience. This decline in the average cost with accumulated production experience is called the experience curve or learning curve. Fig. 14. 3: Cost per Unit as a Function of Accumulated Production: The Experience Curve Copyright © 2012 Pearson Education 14 -18

Chapter Question 2: How should a company set prices initially for products or services? Step 3: Estimating Costs Target Costing • Costs can also change as a result of a concentrated effort by designers, engineers, and purchasing agents to reduce them through target costing. • The firm must examine each cost element—design, engineering, manufacturing, sales—and consider ways to bring down costs to within the target cost range. Copyright © 2012 Pearson Education 14 -19

Step 4: Analyzing Competitors’ Costs, Prices, and Offers Chapter Question 2: How should a company set prices initially for products or services? • The company must take competitors’ costs, prices, and possible price reactions into account. • The introduction of any price or the change of any existing price can provoke a response from customers, competitors, distributors, suppliers, and even government. Copyright © 2012 Pearson Education 14 -20

Step 5: Selecting a Pricing Method Three major considerations in price setting are summarized in Fig. 14. 4: • Costs • Competitors • Customers Fig. 14. 4: The Three Cs Model for Price Setting Copyright © 2012 Pearson Education 14 -21 Chapter Question 2: How should a company set prices initially for products or services?

Step 5: Selecting a Pricing Method Chapter Question 2: How should a company set prices initially for products or services? Six price-setting methods: 1. Markup pricing - pricing an item by adding a standard increase to the product’s cost. (Services 20%) 2. Target-return pricing - determining the price that would yield the firm’s target rate of return on investment (ROI). Fig. 14. 5: Break. Even Chart for Determining Target -Return Price and Break-Even Volume Copyright © 2012 Pearson Education 14 -22

Step 5: Selecting a Pricing Method Chapter Question 2: How should a company set prices initially for products or services? Six price-setting methods (continued): 3. Perceived-value pricing - the value promised by the company’s value proposition and perceived by the customer. 4. Value pricing - winning loyal customers by charging a fairly low price for a high-quality offering. Ikea, Arabia Airline 5. Going-rate pricing - price based largely on competitors’ prices. Steel-cement 6. Auction-type pricing – price achieved in an auction. Different types of auctions include English(ascending bids), Dutch (descending bids), and sealed-bid auctions. Copyright © 2012 Pearson Education 14 -23

Step 6: Selecting the Final Price Chapter Question 2: How should a company set prices initially for products or services? In selecting the price, the company must consider additional factors, including • Impact of other marketing activities • Company pricing policies • Gain-and-risk sharing pricing • Impact of price on other parties Copyright © 2012 Pearson Education 14 -24

Chapter Question 3: How should a company adapt prices to meet varying circumstances and opportunities? Adapting the Price Companies usually set a pricing strategy rather than a single price. Price adaptation strategies include: • Geographical pricing • Discounts/allowances • Promotional pricing • Differentiated pricing Copyright © 2012 Pearson Education 14 -25

Chapter Question 3: How should a company adapt prices to meet varying circumstances and opportunities? Geographical Pricing In geographical pricing, the company decides how to price its products to customers in different locations and countries. Countertrade is when buyers offer other items in payment. This can take the form of: • Barter (no money) • Compensation • Buyback • Offset deal (Money + product) arrangement (Money + production) (spend some to offest) Copyright © 2012 Pearson Education 14 -26

Price Discounts and Allowances Many companies will adjust their list price and give discounts and allowances for early payment, volume purchases, and off-season buying. Chapter Question 3: How should a company adapt prices to meet varying circumstances and opportunities? Box 14. 5: Price Discounts and Allowances Copyright © 2012 Pearson Education 14 -27

Chapter Question 3: How should a company adapt prices to meet varying circumstances and opportunities? Promotional Pricing Companies can use several pricing techniques to stimulate early purchase: • Loss-leader pricing • Special-event pricing • Cash rebates • Low-interest financing • Longer payment terms • Warranties and service contracts • Psychological discounting Copyright © 2012 Pearson Education 14 -28

Chapter Question 3: How should a company adapt prices to meet varying circumstances and opportunities? Differentiated Pricing Price discrimination occurs when a company sells a product or service at two or more prices that do not reflect a difference in costs. • In first-degree price discrimination, the seller charges a separate price to each customer depending on the intensity of their demand. • In second-degree price discrimination, the seller charges less to buyers who buy a larger volume. • In third-degree price discrimination, the seller charges different amounts to different classes of buyers, as in the following cases: o Customer-segment pricing o Product-form pricing o Image pricing o Channel pricing o Location pricing o Time pricing Al-Ahly Football Club charges different prices for its football games, depending on the popularity of the rival team. Copyright © 2012 Pearson Education 14 -29

Initiating and Responding to Price Changes Chapter Question 4: When should a company initiate a price change? Initiating Price Cuts Companies might cut prices due to: • Excess plant capacity • Drive to dominate the market through lower costs • Hope of gaining market share Copyright © 2012 Pearson Education 14 -30

Chapter Question 4: When should a company initiate a price change? Initiating Price Cuts Price-cutting strategy can lead to possible traps: • Encourages customers to demand price concessions • Trains salespeople to offer price concessions • Low-quality trap – consumers assume quality is low • Fragile market-share trap – buys share but not loyalty • Shallow-pockets trap – competitors have deeper cash reserves • Price-war trap Copyright © 2012 Pearson Education 14 -31

Initiating Price Increases Chapter Question 4: When should a company initiate a price change? A successful price increase can raise profits considerably. Table 14. 1: Profits Before and After a Price Increase Copyright © 2012 Pearson Education 14 -32

Initiating Price Increases Price can be increased in the following ways: • Delayed quotation pricing • Escalator clauses • Unbundling • Reduction of discounts Copyright © 2012 Pearson Education 14 -33 Chapter Question 4: When should a company initiate a price change?

Initiating Price Increases Chapter Question 4: When should a company initiate a price change? Alternative approaches: • Shrinking the amount of product instead of raising the price. • Substituting less-expensive materials or ingredients. • Reducing or removing product features. • Removing or reducing product services, such as installation or free delivery. • Using less-expensive packaging material or larger package sizes. • Reducing the number of sizes and models offered. • Creating new economy brands. Copyright © 2012 Pearson Education 14 -34

Responding to Competitors’ Price Changes Chapter Question 5: How should a company respond to a competitor’s price change? A company needs to consider the following issues: 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 company’s market share and profits if it does not respond? Are other companies going to respond? 4. What are the competitors’ and other firms’ responses likely to be to each possible reaction? Copyright © 2012 Pearson Education 14 -35

Responding to Competitors’ Price Changes Chapter Question 5: How should a company respond to a competitor’s price change? Market leaders often face aggressive price cutting by smaller firms trying to gain market share. Possible responses include: • Maintain price and add value • Reduce price • Increase price and improve quality • Launch a low-price fighter line Copyright © 2012 Pearson Education 14 -36

Credits Slide 1 Press Association Images: DON RYAN / AP • Slide 3 Alamy Images: mediablitzimages (uk) Limited • • Slide 5 Peter J. Howe, “The Next Pinch: Fees to Check Bags, ” Boston Globe, March 8, 2007; Katherine Heires, “Why It Pays to Give Away the Store, ” Business 2. 0, October 2006, pp. 36– 37; Kerry Capel, “Wal-Mart with Wings, ” Business. Week, November 27, 2006, pp. 44– 45; Matthew Maier, “A Radical Fix for Airlines: Make Flying Free, ” Business 2. 0, April 2006, pp. 32– 34; Gary Stoller, “Would You Like Some Golf Balls with That Ticket, ” USA Today, October 30, 1996 • Slide 8 Adapted from Russell S. Winer, “Behavioral Perspectives on Pricing: Buyers’ Subjective Perceptions of Price Revisited, ” in Issues in Pricing: Theory and Research, ed. Timothy Devinney (Lexington, MA: Lexington Books, 1988), pp. 35– 57 • • Slide 10 David Kiley, “U. S. Automakers Get a Bum Rap, ” USA Today, January 15, 2004, p. B 5. Copyright © 2004 USA TODAY. Reprinted with permission • • Slide 9 Getty Images: Bloomberg 8 t Slide 11 Azza Fahmy. Reproduced with permission Slide 17 Adapted from Thomas T. Nagle and Reed K. Holden, The Strategy and Tactics of Pricing, 3 rd edn (Upper Saddle River, NJ: Prentice Hall, 2001), Chapter 4 • Slide 32 Corbis: Nameer. Galal / Demotix 395