Chapter-6 Marketing Management

(Developing Pricing Strategies and Programs)

Price:
“Price is the amount of money charged for a product or service.”
 Rent, tuition, fares, fees, rates, tolls, wages, and commissions are all the forms of price
paid for good or service.

Importance of Pricing:
Price is the only element in the marketing mix that produces revenue; all other elements
represent costs. Prices are perhaps the easiest element of the marketing program to adjust;
product features, channels, and even communications take more time.
Price also communicates to the market the company’s intended value positioning of its product
or brand.

Consumer Psychology and Pricing:

Many economists traditionally assumed that consumers were “price takers” and accepted prices
at “face value” or as given.
Marketers, however, recognize that consumers often actively process price information,
interpreting it from the context of prior purchasing experience, formal communications
(advertising, sales calls, and brochures), informal communications (friends, colleagues, or family
members), point-of purchase or online resources, and other factors.
Purchase decisions are based on how consumers perceive prices and what they consider the
current actual price to be—not on the marketer’s stated price. Customers may have a lower
price threshold below which prices signal inferior or unacceptable quality, as well as an upper
price threshold above which prices are prohibitive and the product appears not worth the money.
Consumer attitudes about pricing took a dramatic shift in the recent economic downturn as many
found themselves unable to sustain their lifestyles.
Consumers began to buy more for need than desire and to trade down more frequently in price.
Even purchases that had never been challenged before were scrutinized. Almost 1 million U.S.
patients became “medical tourists” in 2010 and traveled overseas for medical procedures at
lower costs, sometimes at the urging of U.S. health insurance companies.
Understanding how consumers arrive at their perceptions of prices is an important marketing
priority. Here we consider three key topics—reference prices, price–quality inferences, and
price endings.
1- Reference Prices: Are prices that buyers carry in their minds and refer to when looking at a
given product. The reference price might be formed by noting current prices, remembering past
prices.

For example, a seller can situate its product among expensive competitors to imply that it belongs
in the same class. Department stores will display women’s apparel in separate departments
differentiated by price; dresses in the more expensive department are assumed to be of better
quality.
Consumer expectations can also play a key role in price response. On Internet auction sites such
as eBay, when consumers know similar goods will be available in future auctions, they will bid
less in the current auction

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, expensive cars, and designer clothing. A $100 bottle of
perfume might contain $10 worth of scent, but gift givers pay $100 to communicate their high
regard for the receiver.
Price and quality perceptions of cars interact. Higher-priced cars are perceived to possess high
quality. Higher-quality cars are likewise perceived to be higher priced than they actually are.
When information about true quality is available, price becomes a less significant indicator of
quality. When this information is not available, price acts as a signal of quality.
Some brands adopt exclusivity and scarcity to signify uniqueness and justify premium pricing.
Luxury-goods makers of watches, jewelry, perfume, and other products often emphasize
exclusivity in their communication messages and channel strategies. For luxury-goods customers
who desire uniqueness, demand may actually increase price, because they then believe fewer
other customers can afford the product.

3- Price Endings:

Many sellers believe prices should end in an odd number. Customers see an item priced at $299
as being in the $200 rather than the $300 range; they tend to process prices “left-to-right” rather
than by rounding. Price encoding in this fashion is important if there is a mental price break at
the higher, rounded price.
Another explanation for the popularity of “9” endings is that they suggest a discount or bargain,
so if a company wants a high-price image, it should probably avoid the odd-ending tactic.
Prices that end with 0 and 5 are also popular and are thought to be easier for consumers to
process and retrieve from memory. “Sale” signs next to prices spur demand, but only if not
overused: Total category sales are highest when some, but not all, items in a category have sale
signs; past a certain point, sale signs may cause total category sales to fall
Pricing cues such as sale signs and prices that end in 9 are more influential when consumers’ price
knowledge is poor, when they purchase the item infrequently or are new to the category, and
when product designs vary over time, prices vary seasonally, or quality or sizes vary across stores.
They are less effective the more they are used. Limited availability (for example, “three days
only”) also can spur sales among consumers actively shopping for a product.

Selecting a Pricing Method:

Given the customers’ demand schedule, the cost function, and competitors’ prices, the company
is now ready to select a price.
Three major considerations in price setting are:
Costs set a floor to the price.

Competitors’ prices and the price of substitutes provide an orienting point.

Customers’ assessment of unique features establishes the price ceiling.

We will examine six price-setting methods: markup pricing, target-return pricing, perceived-value
pricing, value pricing, going-rate pricing, and auction-type pricing.
(i) Markup Pricing:

The most elementary pricing method is to add a standard markup to the product’s cost.

Construction companies submit job bids by estimating the total project cost and adding a standard markup
for profit. Lawyers and accountants typically price by adding a standard markup on their time and costs.

(ii) Target-return Pricing:

In target-return pricing, the firm determines the price that yields its target rate of return on investment.
Public utilities, which need to make a fair return on investment, often use this method.

(iii) Perceived-value Pricing:

An increasing number of companies now base their price on the customer’s perceived value.

Perceived value is made up of a host of inputs, such as the buyer’s image of the product performance,
the channel deliverables, the warranty quality, customer support, and softer attributes such as the
supplier’s reputation, trustworthiness, and esteem.

Companies must deliver the value promised by their value proposition, and the customer must perceive
this value.

Firms use the other marketing program elements, such as advertising, sales force, and the Internet, to
communicate and enhance perceived value in buyers’ minds
example:

Caterpillar uses perceived value to set prices on its construction equipment. It might price its tractor at
$100,000, although a similar competitor’s tractor might be priced at $90,000. When a prospective
customer asks a Caterpillar dealer why he should pay $10,000 more for the Caterpillar tractor, the
dealer answers:

$90,000 is the tractor’s price if it is only equivalent to the competitor’s tractor

$7,000 is the price premium for Caterpillar’s superior durability

$6,000 is the price premium for Caterpillar’s superior reliability

$5,000 is the price premium for Caterpillar’s superior service

$2,000 is the price premium for Caterpillar’s longer warranty on parts

____________________________________________________________

$110,000 is the normal price to cover Caterpillar’s superior value

_______________________________________________________________

– $10,000 discount

$100,000 final price

The Caterpillar dealer is able to show that although the customer is asked to pay a $10,000 premium, he
is actually getting $20,000 extra value! The customer chooses the Caterpillar tractor because he is
convinced its lifetime operating costs will be lower. Even when a company claims its offering delivers
more total value, not all customers will respond positively. Some care only about price. But there is also
typically a segment that cares about quality

(iv) Value Pricing:

In recent years, several companies have adopted value pricing: They win loyal customers by
charging a fairly low price for a high-quality offering. Value pricing is thus not a matter of simply
setting lower prices; it is a matter of reengineering the company’s operations to become a low-
cost producer without sacrificing quality, to attract a large number of value conscious customers.
An important type of value pricing is everyday low pricing (EDLP). A retailer that holds to an EDLP
pricing policy charges a constant low price with little or no price promotions and special sales.
Constant prices eliminate week-to-week price uncertainty and the “high-low” pricing of
promotion-oriented competitors.
In high-low pricing, the retailer charges higher prices on an everyday basis but runs frequent
promotions with prices temporarily lower than the EDLP level.
The most important reason retailers adopt EDLP is that constant sales and promotions are
costly and have eroded consumer confidence in everyday shelf prices.
(v) Going-rate Pricing
In going-rate pricing, the firm bases its price largely on competitors’ prices. In oligopolistic industries
that sell a commodity such as steel, paper, or fertilizer, all firms normally charge the same price.
Smaller firms “follow the leader,” changing their prices when the market leader’s prices change rather
than when their own demand or costs change.

Going-rate pricing is quite popular. Where costs are difficult to measure or competitive response is
uncertain, firms feel the going price is a good solution because it is thought to reflect the industry’s
collective wisdom.

(vi) Auction-type Pricing

Auction-type pricing is growing more popular, especially with scores of electronic marketplaces selling
everything from pigs to used cars as firms dispose of excess inventories or used goods. These are the
three major types of auctions and their separate pricing procedures:

(a) English auctions (ascending bids) have one seller and many buyers. On sites such as eBay and
Amazon.com, the seller puts up an item and bidders raise the offer price until the top price is
reached. The highest bidder gets the item. English auctions are used today for selling antiques,
cattle, real estate, and used equipment and vehicles

(b) Dutch auctions (descending bids) feature one seller and many buyers, or one buyer and many
sellers. In the first kind, an auctioneer announces a high price for a product and then slowly
decreases the price until a bidder accepts. In the other, the buyer announces something he or she
wants to buy, and potential sellers compete to offer the lowest price.

(c) (c) Sealed-bid auctions let would-be suppliers submit only one bid; they cannot know the other
bids. The U.S. government often uses this method to procure supplies. A supplier will not bid
below its cost but cannot bid too high for fear of losing the job. The net effect of these two pulls
is the bid’s expected profit.
 (MCQ Type)
Chapter- 5 Developing Pricing Strategies and Programs
1. ______________ is the amount of money charged for a product or service.

A. Product B. Price
C. Placement D. Promotion

2. There are different forms of price. For example ___________, __________, __________, ______

3. Price is the only element in the marketing mix that produces _______; all other elements
represent _______

A. Cost, revenue B. Revenue, cost

4. Many economists traditionally assumed that consumers were _____________

A. “price makers” B. “price takers”

C. “price designers” D. “price generator”
5. Customers may have a lower price threshold below which prices signal __________ or
unacceptable quality

A. Superior B. Inferior

6. Customers may have a ________ price threshold below which prices signal inferior or
unacceptable quality

A. Upper B. Lower C. Middle

7. Customers may have a _________ price threshold ________ which prices signal inferior or
unacceptable quality

A. Upper, below B. Lower, upper

8. Reference Prices are prices that buyers carry in their minds and refer to when looking at a given
product.

A. True B. False

9. Many consumers use price as an indicator of quality

A. True B. False

10. Price does not act as a signal of quality.

 A. True B. False

11. Customers tend to process prices “right-to-left” rather than by rounding.

A. True B. False

12. The pricing method in which a standard markup is added in cost and price is calculated is called
_________

A. Target return pricing B. Markup pricing

C. Perceived-value Pricing D. None among the above

13. Perceived value is made up of a host of inputs, such as:

A. _____________________

B. _____________________

C. ____________________

D. ____________________

14. EDLP stands for ___________________________________

15. When the firms set their prices on the basis of competitors’ prices, its called_________

A. Auction-type Pricing B. Value Pricing

C. Going-rate Pricing D. everyday low pricing
16. Auction type pricing has three types namely:
__________________________, __________________________, __________________________
17. In _______________seller puts up an item and bidders raise the offer price until the top price is
reached.
A. Dutch auctions B. English auctions
C. Sealed-bid auctions D. None among the above

18. In ________________an auctioneer announces a high price for a product and then slowly
decreases the price until a bidder accepts.

A. Dutch auctions B. English auctions

C. Sealed-bid auctions D. None among the above
19. Consumers usually perceive higher-priced products as ________.

A. not within reach of most people

B. having a higher quality
C. having high profit margins
D. popular brands
E. being in the introductory stage of the product life cycle
 20. Which of the following refers to the prices that a buyer carries in his or her mind and refers to
when looking at a given product?

A. target prices
B. reference prices
C. promotional prices
D. geographical prices
E. dynamic prices

21. When consumers cannot judge quality because they lack the information or skill, price becomes
________.

A. less important
B. insignificant
C. an important quality signal
D. the only driver of the purchase
E. none of the above

22. When consumers cannot judge the quality of a product because they lack information or skill,
they are likely to perceive a higher-priced product as having low quality.

A. True B. False

Answer the following Short Questions:

1. What is the importance of pricing for any organization?

2. Traditionally it was believed that consumers are “price takers”. In the current scenario, is it true
or not? Give arguments in the support of your answer.
3. Sometimes the mentioned price on any product is 199/- Rupees. Why the organizations do this?
Why they simply mention price as 200/- Rupees.
4. Name the six price-setting methods and discuss all the price setting methods.
 Chapter-7 Marketing Management
Placement (Distribution) Strategies
Placement:
It is the 3rd P of marketing mix. Placement includes company activities that make the product
available to target consumers.
 Most producers do not sell their goods directly to the final users; between them stands
a set of intermediaries performing a variety of functions.
 These intermediaries constitute a marketing channel (also called a trade channel or
distribution channel).
 Marketing channels are sets of interdependent organizations participating in the process
of making a product or service available for use by the consumer or business user.
Marketing channels are also called distribution channels.
 Some intermediaries—such as wholesalers and retailers—buy, take title and resell the
merchandise; they are called merchants.
 Agents are the entities like brokers, manufacturers’ representatives, sales agents who
search for customers and may negotiate on the producer’s behalf but do not take title to
the goods.
 Facilitators are entities like transportation companies, independent warehouses, banks
who assist in the distribution process but neither take title to goods nor negotiate
purchases or sales.

The Importance of Channels

1- Producers use intermediaries because they create greater efficiency in making goods
available to target markets.
2- Through their contacts, experience, specialization, and scale of operation, the intermediaries
usually offer the firm more than it can achieve on its own.
3- Intermediaries can provide economies as they reduce the amount of work that must be done
by both producers and consumers. (see below figure)
4- Distribution channel decisions often involve long-term commitments to other firms so the
companies cannot replace these channels quickly with company-owned stores or internet sites.
Therefore, management must design its channels carefully, with an eye on both today’s likely
selling environment and tomorrow’s as well.
5- From the economic system’s point of view, the role of marketing intermediaries is to transform
the assortments of products made by producers into the assortments wanted by consumers.
Producers make narrow assortments of products in large quantities, but consumers want broad
assortments of products in small quantities. Marketing channel members buy large quantities
from many producers and break them down into the smaller quantities and broader assortments
desired by consumers.
6- Intermediaries play an important role in matching supply and demand.

Direct and indirect marketing channel

 Direct marketing channel:
A marketing channel that has no intermediary levels so the company sells directly to
consumers. The major examples are door-to-door sales, home parties, mail order,
telemarketing, TV selling, Internet selling, and manufacturer-owned stores.
 Indirect marketing channel:
A marketing channel containing one or more intermediary levels like wholesalers or
retailers.
Consumer and Business Marketing Channels
Channel-1 is direct while 2,3 are indirect.

Hybrid Channels or Multichannel Marketing:

Hybrid channels or multichannel marketing occurs when a single firm uses two or more
marketing channels to reach customer segments.
For example a firm XYZ is using following two marketing channels to reach its customers:
1- XYZ firm ------wholesalers-----retailer -----consumer
2- XYZ firm ------consumer (selling online)
HP (Hewlett-Packard) is an American multinational information technology company
headquartered in Palo Alto, California has used its
 sales force to sell to large accounts
 outbound telemarketing to sell to medium-sized accounts
 direct mail with an inbound number to sell to small accounts
 retailers to sell to still smaller accounts

Push and Pull strategies of distribution

A push strategy uses the manufacturer’s sales force, trade promotion money, or other means to
motivate intermediaries to carry, promote, and sell the product to end users.
A push strategy is particularly appropriate when there is low brand loyalty in a category, brand
choice is made in the store, the product is an impulse item
In a pull strategy the manufacturer uses advertising, promotion, and other forms of
communication to motivate consumers to demand the product from intermediaries.
Pull strategy is particularly appropriate when there is high brand loyalty and high involvement in
the category, when consumers are able to perceive differences between brands, and when they
choose the brand before they go to the store.

Strategies based on number of intermediaries:

Three strategies based on the number of intermediaries are following:
1- Exclusive distribution means extremely limited number of intermediaries.
“In the exclusive distribution, the producer gives only a very limited number of dealers the
exclusive right to distribute its products in their territories (area).”
It’s appropriate when the producer wants to maintain his maximum control. Exclusive
distribution is often found in the distribution of luxury brands, distribution of new automobiles,
some major appliances.
2- Selective distribution: means the use of some of the number of intermediaries
“The use of more than one but fewer than all of the intermediaries that are willing to carry the
company’s products.”
This kind of distribution is found in the distribution of appliances, mobile phones, etc.
3- Intensive distribution: means the use of as many possible number of intermediaries.
“It is a strategy in which the companies use as many outlets as possible to distribute their
products.”
These products must be available where and when consumers want them. For example,
toothpaste, candy, and other similar items are sold in millions of outlets to provide maximum
brand exposure and consumer convenience.
 (MCQ Type)
Chapter- 6 Placement (Distribution) Strategies
1. There are four elements of marketing mix namely__________, ________, ________, ________

2. Placement is the ___________ P of marketing mix

A. 1st B. 2nd C. 3rd D. 4th

3. Placement includes company activities that make the product available to target consumers

A. True B. False

4. Marketing channels are also called ________________ or ___________________

5. Marketing channels are sets of ______________ organizations participating in the process of

making a product or service available for use by the ______________ or _____________.

A. Dependent, consumers, business users

B. Independent, consumers, business users
C. Interdependent, consumers, business users

6. Some intermediaries—such as wholesalers and retailers—buy, take title and resell the
merchandise; they are called _____________

A. Agents B. facilitator C. merchants D. none among the options given

7. ______________search for customers and may negotiate on the producer’s behalf but do not
take title to the goods.

A. Merchants B. Agents C. facilitator D. none

8. ___________ are entities like transportation companies, independent warehouses, banks who
assist in the distribution process but neither take title to goods nor negotiate purchases or sales.

A. Merchants B. Agents C. facilitator D. none

9. Producers use intermediaries because they create less efficiency in making goods available to
target markets.

A. True B. False

10. A marketing channel that has no intermediary levels so the company sells directly to consumers
is called_____________

A. Direct marketing channel B. indirect marketing channel

11. door-to-door sales, home parties, mail order, telemarketing, TV selling, Internet selling, and
manufacturer-owned stores are examples of ______________

A. Direct marketing channel B. indirect marketing channel

12. A marketing channel containing one or more intermediary levels like wholesalers or retailers is
called _____________________

A. direct marketing channel B. indirect marketing channel

13. Hybrid channels or multichannel marketing occurs when a single firm uses
____________marketing channels to reach customer segments

A. one or more B. two or more C. three or more D. four or more

14. if any manufacturer is using sales force, trade promotion money, or other means to motivate
intermediaries to carry, promote, and sell the product to end users, then this distribution strategy
is known as _____________

A. Pull strategy B. Push strategy

15. If any manufacturer is using advertising, promotion, and other forms of communication to
motivate consumers to demand the product from intermediaries, then this distribution strategy
is known as ____________

A. Pull strategy B. Push strategy

16. Three strategies based on the number of intermediaries are ________________,

_______________, __________________

17. __________________means the use of extremely limited number of intermediaries

A. Selective distribution B. exclusive distribution C. exclusive distribution

18. __________________means the use of as many possible number of intermediaries

A. Selective distribution B. exclusive distribution C. exclusive distribution

19. __________________means the use of some of the number of intermediaries

A. Selective distribution B. exclusive distribution C. exclusive distribution

20. For toothpaste, candy, and other similar items, the ________________ is appropriate

A. Selective distribution B. exclusive distribution C. exclusive distribution

21. For the distribution of luxury brands, distribution of new automobiles, the ____________ is
appropriate
 A. Selective distribution B. exclusive distribution C. exclusive distribution

22. For the distribution of appliances, mobile phones, the ________________ is appropriate

A. Selective distribution B. exclusive distribution C. exclusive distribution

Answer the following short questions:

1. You are brand manager of Colgate toothpaste. You have to make your product available
to your target market. Based on the number of intermediaries involved, which
distribution strategy you will follow among the three strategies discussed in class?

2. Discuss the pull and push strategies of distribution.

3. A firm wants to involve in multichannel marketing/hybrid channels. What options does

this firm might have to do so.

4. Discuss direct and indirect marketing channels along with suitable example.

5. Define the following:

A. Marketing channels
B. Merchants
C. Agents
D. facilitator