Basic Marketing: A Global Managerial Approach

Perreault−McCarthy: Basic
Marketing: A
Global−Managerial
Approach, 14/e

18. Price Setting in the
    Business World

Text © The McGraw−Hill

Companies, 2002

Price Setting in the Business World 537

For retailers, price lining has several advantages. Sales may increase because (1)

they can offer a bigger variety in each price class and (2) it’s easier to get customers

to make decisions within one price class. Stock planning is simpler because demand

is larger at the relatively few prices. Price lining can also reduce costs because

inventory needs are lower.

Demand-backward pricingis setting an acceptable final consumer price and

working backward to what a producer can charge. It is commonly used by pro-

ducers of consumer products—especially shopping products such as women’s

clothing and appliances. It is also used with gift items for which customers will

spend a specific amount—because they are seeking a $10 or a $15 gift. Here a

reverse cost-plus pricing process is used. This method has been called market-minus

pricing.

The producer starts with the retail (reference) price for a particular item and

then works backward—subtracting the typical margins that channel members

expect. This gives the approximate price the producer can charge. Then the aver-

age or planned marketing expenses can be subtracted from this price to find how

much can be spent producing the item. Candy companies do this. They alter the

size of the candy bar to keep the bar at the expected price.

Demand estimates are needed for demand-backward pricing to be successful. The

quantity that will be demanded affects production costs—that is, where the firm

will be on its average-cost curve. Also, since competitors can be expected to make

the best product possible, it is important to know customer needs to set the best

amount to spend on manufacturing costs. By increasing costs a little, the value may

be so improved in consumers’ eyes that the firm will sell many more units.

Prestige pricingis setting a rather high price to suggest high quality or high sta-

tus. Some target customers want the best, so they will buy at a high price. But if

the price seems cheap, they worry about quality and don’t buy. Prestige pricing is

most common for luxury products such as furs, jewelry, and perfume.

It is also common in service industries—where the customer can’t see the prod-

uct in advance and relies on price to judge its quality. Target customers who respond

to prestige pricing give the marketing manager an unusual demand curve. Instead

of a normal down-sloping curve, the curve goes down for a while and then bends

back to the left again.^15 See Exhibit 18-14.

Demand-backward

pricing and prestige

pricing

Prestige pricing is often used with

luxury products like jewelry and

high-end consumer electronics

to suggest high quality. But

Paradigm wants consumers to

view its low price as a sign of

good quality and good value, not

as a signal of low quality.

0 Quantity

D

Price ($)

D

Exhibit 18-14

Demand Curve Showing a

Prestige Pricing Situation