Pricing

Dr A R M Harunur Rashid
Learning objectives in pricing
Two basic pricing mode
Price positioning three options
Market segmentation and other techniques
include example from undercover
economist
Psychological adjustment of your price
Price & Pricing
Price: the exchange value of a good or
service it represents whatever that
product can be exchanged for in the
marketplace. Price does not necessarily
denote money [barter].

The act of setting up price for a product or
service is called pricing.

Importance of pricing
Pricing is the most difficult task in
marketing management
Most businesses think of increasing profit
by increasing advertisement, recruiting
more salespeople, providing discount or
lower prices thereby increasing sales.
However, most of them ignore that just by
increasing price cleverly they could
increase profit margin.
what is best for profits10 percent more
sales (units) or a 10 percent higher price.
If you are currently selling $100,000 worth
of a product, take a look at Exhibit 1.1 to
see what would happen



Note that in Exhibit 1.2 , you d have:
$2,500 more profi tsselling 10 percent more units
$10,000 more profi tswith a 10 percent higher price
$6,500 more profi tswith a 10 percent higher price
even if it lowered units sold by 10 percent

Typically, with the cost structure at most
companies,
a 1 percent increase in price yields a 12
percent gain in
profits (Dolan and Simon, 1996).

Pricing Objectives and the
Marketing Mix
Prices, and the resulting sales,
determine how much revenue a
company receives
Prices thus influence a firms
profits

Objective Purpose Example
Profitability
Objectives
Profit
Maximization
Target Return
Low introductory interest
rates on credit cards with
high standard rates after 6
months.
Volume
Objectives
Sales
Maximization
Market Share
Dells low-priced PCs
increase market share and
sales of services
Meeting
Competition
Objectives
Value Pricing

Per-song charges for music
downloads
Prestige
Objectives

Lifestyle
Image
High-priced luxury autos
such as BMW and watches
by Piaget
Not-for-Profit
Objectives
Profit
Maximization
Cost Recovery
Market Incentives
Market
Suppression
High prices for tobacco and
alcohol to reduce
consumption

Profitability Objectives
For-profit firms must set prices with
profitability in mind
Profit Maximization: point at which the
additional revenue gained by increasing
the price of a product equals the increase
in total costs
Target-Return Objectives: Short-run or
long-run pricing objectives of achieving a
specified return on either sales or
investment

Volume Objectives
Sales maximization: A minimum profit
level is set and firms seek to maximizes
sales
Market-share objectives: the goal set for
controlling a portion of the market for a
firms good or service
The Product Impact of Market Strategies
(PIMS) Project: Research that discovered
a strong positive relationship between a
firms market share and product quality and
its return on investment [profitability]

Figure
Southwest
Airlines:
Focusing on
Product
Quality and
Market
Share
Price as a Tool
to Achieve
Volume
Objectives
e.g.Hotel
Glad
GladWare
Containers
Using Price to
Achieve a
Market Share
Objective
Clorox
Increasing
Profitability
through Product
Quality and
Market Share
Meeting Competition: Seeks simply to meet
competitors prices
Value Pricing: Pricing strategy that
emphasizes the benefits derived from a product
in comparison to the price and quality levels of
competing offerings

Prestige
Objectives: Prices
are set at a
relatively high level
in order to develop
and maintain an
image of quality
and exclusiveness
that appeals to
status-conscious
consumers
Waterford
Prestige Pricing
Maintains a High-
Quality Image
Figure
The Diamond is Forever Campaign:
Prestige Pricing
Pricing Objectives of Not-for-
Profit Organizations
Profit maximization single events or a series
of events

Cost recovery recover only actual costs

Market incentives offer lower-than-average
pricing or a free service to encourage
increased usage of their goods or services

Market suppression- pricing used to
discourage consumption [parking fees and
fines]
Demand curve
Usually it is asked to prepare demand curves to
capture the price elasticity of demand
In normal English, that means you are to track
how
many units you can sell at diff erent pricesso
you can fi nd the most optimal price.
If you can sell 6.5 percent more units at price A
and 4.3percent more at price B, then your
decision is easy. You just calculate the profi ts
and total sales at each price and your decision is
made for you.
Problems of using demand curves

To create demand curves, you need do the followings which are difficult and many
cases give wrong result.
Offer your product or service at 1520 different prices
to see how many sell.
Offer each different price for long enough to get at
least 40 sales for each price (so the results gain some
statistical reliability).
Offer all 1520 different prices at the same time (otherwise
your results could be skewed by a time variable).
Keep people from finding out about all these different
pricesor they ll skew the test results (hard to do
especially with services).
Two Most popular pricing methods
Nagle and Holden (2002) say cost-plus pricing is the
most prevalent. This strategy adds up your costs then tacks
on an extra percentage of the total for profits. Use of this
(generally terrible) strategy is often the result of the pricing
decision being left to the finance department or to an
entrepreneur
who doesnt understand pricing.

Noble and Gruca (1999) found competitive pricing
was used by three times as many companies they studied as
any other strategy. They define competitive pricing as trying
to match or come in close to the prices of the competing
products already on the market.
Cost-Plus Pricing
It is a price that includes your
costs plus a fi xed percentage (15 percent or 50 percent
whatever your target is) for profi ts. Example: You need to
price a new product that costs you $85 for materials. You
estimate it also needs to cover $15 of your overhead. So your
total costs are $100. You want to make 15 percent profit, so
you price this product at $115.

With the exception of custom made products(say If you build
custom houses, then you mayuse it), this cost pricing should
NOT be used.
Using this strategy for any other situation
is throwing away money.
Merits of cost plus pricing
In first look, easy to calculate
Demerits of cost plus pricing
1. Variable costs usually vary unpredictably:
Variable costs are just that: variable. They depend
on how many you buy. In the previous example, your
$85 for materials depends on the quantity you order of
each. Let s say you projected you would sell 500 products
every month. So you order 1,000 (two months
worth) of materials for those products at a time for a
total cost of $85 each. What happens if you fi nd you
can only sell 250 each month? The next time you order
for two months, you ll only order 500. So the vendors
will charge you a higher price. Your actual price might
come out to $100 each instead of $85. With your $15
of overhead, your actual costs are $115 instead of $100.
In this example, you set your price to get a guaranteed
profi t of 15 percent. You thought your costs
would be $100, giving you $15 profi t for each item
you sell. But since you re only selling half as many
as you thought you would, your costs are $115(original cost + 15 usd
overhead)so
you re receiving zero dollars of profi t for each item.

For a New product, you really can t know how many you will sell. You only
find it out after launching in the real market.
2. Not considering consumer perceptions
of value::
Suppose you guessed right about the quantity you
would sell. So you got your planned 15 percent ($15)
profi t on each item, What if the people who wanted this
product
and bought it at $115, would have been just as willing
to pay $130? You could have had double the profits
you re actually getting for each item. You just cost
yourselfor your companya lot of money. And you
will continue to lose that money until the day you
learn how to set a better price.
competitive pricing
It is NOT suggested as well. However, it is better than
cost plus pricing.
It is suggested only in the following two cases which are
in generally most unlikely for most products.
Case 1: your new product is almost identical to the
competitor products already being sold(disadv: why
should people switch to your product than their trusted
and tested brand)
Case 2: your new product has very little advantage over
competitor products and the competitors are pretty tame
(e.g., when they don t compete hard against each other)
[Fact: most markets usually have fierce competition]
Demerits of competitive pricing
The problem with pricing a new product relative to
your competitors is that it doesn t give you enough price
bonus for your product s advantages over the competitors.
It also doesn t account well for any negatives your product
has relative to the competitors.
For example, suppose you create a new product that is
10 percent better than the competitors. What is that extra
10 percent of eff ectiveness worth to consumers? Maybe not
a single penny more. Or maybe double or triple your competitors
prices.
The v alue of your new product has no basis in your costs
or the degree of improvement over competitor products.
The value to your customers is in the degree to which they
want your new advantage.


Matching your competitors prices doesn t capture the
true value to consumers of your product s specifi c benefi ts.
Nor does it recognize your product s disadvantages compared
to competitors.

Both of these can cause the value of your product
or service to diff er substantially from your competitors.
So matching competitor prices could lose you the price
premium you could have commanded (because you are
underpriced for the value you deliver) and/or lose you
substantial unit sales because you re overpriced for your
perceived value.
Analyzing Competitors Prices
Every product sold today has competitors.Proof that everyone has
competitors:
The marketers who launched the Segway motorized
scooter a few years back probably had more reason than
most to believe they didn t have competitors. But they did.
Their competitors are anything anyone buys that will make
going short distances easier and faster.
Segway competitors listed in order of price consumers pay:
Skateboard
Rollerblades
Bike
Motorbike
Motorcycle
Golf cart for in-town use
Car
They
got great publicity by having news media people try out a
Segway. They showed up on the news, on morning shows,
in magazines; they got millions (maybe billions!) of dollars
of free advertising. But consumers, for the most part, didn t
buy. Instead, Segways today are purchased mainly by security
personnel at shopping centers and universities, and police
in congested big cities.

If people aren t already buying a product that would be
a direct competitor, then you have to convince people they
need a product they have never thought they needed. For
example, when Apple launched the iPod, they didn t have to
do missionary marketing. People were already used to buying
things (portable radios and tape decks) that would let them
take their music with them. The iPod just made it easier.

Direct vs. Indirect Competitors
Direct competitors are those products consumers are
most likely to substitute for your product as an alternative.
Consider them equivalent products.
Your direct competitors are also likely to be where consumers
get their ideas as to what a fair price would be for
your product. See Exhibit 3.2 .
It gets a little more complicated if you don t have a
competitor as close as in Exhibit 3.2 . Then your direct
competitors may be a little broader group, such as shown in
Exhibit 3.3 .

Indirect competitors are less directly competitive
with you. They are items consumers could substitute for yourproduct, but that
they probably would not. For example,
if you sell hiking boots, consumers could buy dress shoes
insteadbut they probably would not. But dress shoes will
protect your feet, just like hiking boots will.

How Consumers Evaluate Prices

While many consumers do know the going price of staple
products (bread, milk, and a few other items they buy frequently),
most consumers have no idea what your price is
or was.

A reference price is a price in the mind of consumers
as to what they would expect to pay for your kind of
product.
In a few staple product cases, it s an actual price.
More often it s a general range (e.g., low $30 or
$400 something).
Frequently consumers have no particular price number
in mind when they start considering a purchase; they
develop their reference price when they start looking at the competitor options.
This is almost always true with products or services consumers buy infrequently
Environmental Factors
Its not green environmental legislation like
things, it is all about everything happening
around you and your product. The
environmental factors include:
The economy
Competitors
Government regulation and legal
Social trends
Technological change
These factors will not be discussed in detail in
this course. For details, please check Chapter 4,
Price Positioning
There are basically three price positioning
strategies as follows:
1. penetration pricing (Lower than your
competitors)
2. skimming pricing (Higher than your
competitors)
3. competitive pricing (Roughly the same
as your competitors)
1.penetration pricing (Lower than
your competitors)

Penetration pricing strategy:
involves the use of a relatively low
entry price as compared with
competitive offerings; based on the
theory that this initial low price will
help secure market acceptance

Designed to
generate many trial
purchases

Figure
Price Reductions to Increase Market Share
Penetration pricing Not suggested
for two reasons
It is not suggested, especially for small and medium
business owners adopting this one is very dangerous.
Reason #1: To Avoid a Perception of Poor Quality::A
low price on an unknown brand is almost always
perceived as being due to a lower quality. If the risk is
great, the likelihood of a successful low pricing strategy
is lower. If the risk is minimal, the quality perceptions can
be managed with ads and/or product packaging that
stress quality. Example: Attorney hiring low or higher
rate one when you are facing murder accusation.

Reason #2: To Prevent a Price War

If you under-price the current products in your marketplace,
you will likely start a price war with your competitors

If you re not going to end up being the low-cost competitor,
it s better to be second lowest at a higher price than
second lowest at a rock-bottom price.

no company really wins a price war. One
company will emerge from such a war holding the lowprice
position, but its profi ts will be greatly reduced. Because
once you ve lowered your prices for a product, it s very, very
hard (often impossible) to raise them back up when the war
is over. If consumers have learned that you can buy product
X for $15, then you raise it back to $21, you ll fi nd your sales
will disappear!
Penetration pricing might be used
only in three cases
1. New product or service launches where the product/
service gains value only when it has large numbers of
buyers/users.
Examples:
You are launching the first fax machine. A fax
machine is worthless unless other people have them.
If not, who will you fax to?
2. Anyone who has costs that are sustainably 30 percent
or more lower than their competitors. If you re in this
position, penetration pricing is great. What you need
to do is explain your lower costs to the marketplace
so they ll not infer poor quality by your prices, but
understand you can price lower because your costs
are lower.
Example: web designer based in Bangladesh charging less than American
counterpart.
Penetration pricing might be used
only in three cases (contd)
3. Existing products or services are keeping very
high profit. And as a new entrant, you would be
able to survive by making lesser profit than
existing ones. For example, when there was only
one mobile operator(i.e.Citycell) in Bangladesh,
it was charging a lot for handsets and call tariffs.
Then a new entrant(i.e. Gramen phone) got in
and cut in the price though it could make a
reasonable profit.
Figure
Credit-Card
Offers:
Penetration
Pricing
Everyday low
pricing (EDLP):
Pricing strategy of
continuously offering
low prices rather than
relying on such short
term price cuts as
cents-off coupons,
rebates, and special
sales
Wal-Mart
Southwest Airlines, Known for Its Low Prices,
Often Enters New Markets with Incredibly Low
Penetration Prices and Then Maintains Market Share
With Everyday Low Pricing Strategy

2. skimming pricing (Higher than
your competitors)

involves the use of a high price relative to competitive offerings. If possible, it should
be used as it is the most profitable option usually.

Companies that have the highest price positions in a marketplace
are usually smaller, with less sales than companies
that price lower. But they are usually some of the most profitable
companies. Example: Timex sells more watches and
probably has higher dollar sales, but for profi ts we d both
have more cash if we owned Rolex!

The
premium-price position in most (not all) industries is
the most profi table.
There are two types of skimming pricing:
1. Temporary premium
2. Prestige pricing
Skimming pricing strategy usage
Often used by marketers of high-end products
Also by firms introducing a distinctive good
with little or no competition
Allows firms to control demand during the
introductory stages of a products life cycle
Can be used as a tool for segmenting a
products market on a price basis
2a. Temporary skimming/premium
price strategy
A temporary skimming/premium price strategy works best
for unique products, or those with a clear (usually technological)
benefi t over the competitors. The price is set high at
the launch, because either the product has no competitors or
it is demonstrably better.
But you do expect competitors to arrive and/or improve
their products to become comparable to yours. Once competitors
catch up, it is expected that your price will be lowered
to end up in the same ballpark as your competitors.

Example: iphone
LCD tv
2b.Prestige Pricing
A prestige pricing strategy is where you decide to have the
best quality and highest (or one of the highest) priced products
in a market. A luxury product.
What s a luxury product? It isn t determined by the
actual dollar price of the product; it s the price relative to
your competitors.

This is a great, highly profi table strategyunless there s
already a brand in your market that owns the prestige position.
For example, Sony used to own the prestige position in consumer
electronics products

However, there could be a prestige position that is even
higher than the one owned by a brand. Example: Rolex is the prestige brand for most
of us when considering a watch
to buy. However, there are some brands much more expensive
for a diff erent target group of customersthose who think a Rolex is too ordinary.
Figure
Distinctive 3D TVs
Marketed with a
Skimming Pricing
Strategy
Weber
Distinctive Grills Marketed through a
Skimming Pricing Strategy
Lincoln Navigator
Maintaining a High Price in Periods of High Demand
3. competitive pricing (Roughly the
same as your competitors)

Match-competitor prices is a strategy that requires
no investigation of the best price. You just pick a price
similar to competitors and run with it. It is substantially
better than a cost-plus pricing strategy,

A competitive pricing strategy is the end result of an
analysis of your competitors and their products benefi
ts and negatives, as well as an analysis of what customers
want from products in your category.

Among companies that do not use cost-plus as their
pricing strategy, competitive price positioning is the next
most utilized, probably because it requires the least amount
of time investment.

Example: price of newspaper
Among companies that do not use cost-plus as their
pricing strategy, competitive price positioning is the next
most utilized, probably because it requires the least amount
of time investment.

In studying successful new-product pricing practices,
Ingenbleek et al. (2003) found competition-informed (or
based) pricing was:
Successful in highly competitive markets when relative
product advantage is low
Unsuccessful in highly competitive markets when you
have a high relative product advantage
Competitive
Pricing Strategy:
reduces emphasis
on price as a
competitive
variable by pricing
goods at the
general level of
competitors
Firms focus their own
marketing efforts on
the product,
distribution and
promotion elements of
the marketing mix
Figure
American
Airlines:
Reducing
the
Emphasis
on Price
Competition
Special situational pricing tips

in high-risk scenarios, people
prefer to pay higher price option
Ask yourself if you were on trial for your life , which of
the following attorneys you d want to hirebased solely on
their prices:
$390/hour
$350/hour
$325/hour
$250/hour
I submit that given any way you could afford it (and
even if you couldn t!) you would not want to hire the $250/
hour attorney

Rejection of the lowest price alternative also happens
where we don t have enough other ways of ascertaining
quality than the price.
Price discrimination is profitable
whenever possible
Many, many services can be more profitable by charging
higher prices to those willing to pay extra and lower prices
to those who are the most price sensitive.

How can you discover who among your customers
doesn t really care if your price is higher? You don t have to figure this out. You can
structure your pricing so your
customers divide themselves into groups based on their price
sensitivity.
These technique works well for movie theaters, sports
parks, amusement parks, and many other services.

Example: Bashundhara star Cineplex

Just remember: You re not charging extra for peak
times. Instead, you re offering bargain rates for un-peak
times. Psychologically it s a huge difference. Nobody wants to pay an add-on fee.
But people love having ways to get a discount.

Price discrimination using different
attributes

Consumer identifiable characteristics: Charging different prices according to
age group, profession, affiliation, location, type of delivery, and means of
payment.
Quality: Selling high-quality versions of the product/service to high-income
buyers,
and low-quality versions to low-income buyers. Segmentation of this type
is possible only if the desire for higher quality increases with income. Note
that firms often reduce quality (damaging the good/service) to keep differential
pricing.Example: airport lounge

Bundling and tying: Bundling refers to volume discounts(buy more and get
discount). Tying means to add something to another thing buyer would not usually
buy or like that.

Delivery time and delay: The seller segments the market according to consumers
willingness to pay for how fast the product or service is provided or
delivered. This segmentation is feasible provided that those consumers who urgently
need the product or service are willing to pay a higher amount than those
who dont mind waiting.
Components: Sellers can segment the market by mixing different components
and providing a different number of components comprising the system to be
used by the buyer. This strategy is commonly observed in the software industry,
where a piece of software is sold in standard, pro, and professional versions.

Advance booking and refunds: Sellers can segment the market based on consumers
willingness to commit to showing up at the time the service is scheduled
to be delivered. Market segmentation is achieved by charging lower prices either
to those who reserve in advance or to those who seek less refund on a no-show.
Conversely, those who seek to obtain a full refund on a no-show are charged a
higher price.
Firms often reducing quality in low
price version to keep differential
pricing

The most surprising examples of all come from the world of
computers. For instance, IBMs LaserWriter E, a low-end laser
printer, turned out to be exactly the same piece of equipment
as their high-end LaserWriterexcept that there was an additional
chip in the cheaper version to slow it down. The most
effective way for IBM to price-target their printers was to design
and mass-produce a single printer, then sell it at two prices. But
of course to get anyone to buy the expensive printer they had to
slow down the cheap one. It seems wasteful, but presumably it
was cheaper for IBM to do this than design and manufacture two
completely different printers.

Software packages often have two or more versions: one
has
full functionality (the professional package), and the other
sells
to the mass market at a considerably reduced price. What
some
people dont realize is that the professional version is
typically
designed first, and certain features are disabled for the
massmarket
version. Despite the high price of the professional version,
its the cheaper version that actually has an extra up-front
cost for the developer, and of course both versions are sold
on CDs, which cost the same to manufacture

a famous example from the early days of the trains in
France:
It is not because of the few thousand francs which would
have to be spent to put a roof over the third-class carriage or
to upholster the third-class seats that some company or other
has open carriages with wooden benches. . . . What the company
is trying to do is prevent the passengers who can pay
the second-class fare from traveling third class; it hits the
poor, not because it wants to hurt them, but to frighten the
rich. . . . And it is again for the same reason that the companies,
having proved almost cruel to the third-class passengers
and mean to the second class ones, become lavish in
dealing with first-class customers. Having refused the poor
what is necessary, they give the rich what is superfluous.
Price discrimination and leak

The first leak in a price-targeting strategy, then, is that rich
customers may buy cheap products, unless the products are deliberately
sabotaged. The second leak is a particularly difficult
one for companies using a group-target strategy to plug: their
products may leak from one group to another. The risk is that
the customers who are being offered a discount buy the product
and then resell it at a profit to the customers who are being charged
a higher price. Up until now, weve mostly been discussing services
that cant be resold (like a bus trip or a visit to Disney World)
or products that are probably too much hassle to resell (such as a
sandwich or a cup of coffee). Thats not coincidence. Services
and convenience products are the most fertile grounds for pricetargeting
strategies, because they dont leak

The really great
pricing tricks take place on airlines, in restaurants and cocktail
bars (not many bookstores have a happy hour), in supermarkets,
and at tourist attractions.
Another classification of price
discrimination

Traditionally, academic economists (see, for example, Varian 1989) classify price
discrimination according to first, second, and third degrees as follows:
First degree: Consumers may be charged different prices so that the price of each
unit they buy equals each consumers maximum willingness to pay.
Second degree: Each consumer faces the same price schedule, but the schedule
involves different prices for different amounts of the good purchased. This
practice is sometimes referred to as bundling (quantity discounts).
Third degree: The seller segments the market into different consumer groups
(with identifiable characteristics) that are charged different per-unit prices. This
practice is referred to as market segmentation.
Psychological adjustment/aspects
of pricining

Higher price = Better quality

If you want your product to be perceived as one of the best
quality choices among your competitors, you can t have the
lowest price. Period! By the same token, if you have the lowest
price (or one of the lowest prices), consumers will refuse
to believe your product is high quality.

The customers know that you know. You know better than
anyone the quality of your product. So if you put a low price
on it, the consumer will believe you know that a low price is
all it s worth. If you put a higher price on it, the consumer
will believe you know that a high price is what it s worth.
Carpet Study
Carpet buyers can be repelled by low priceseven if
their senses should be telling them the quality is good.
Gabor and Granger (1966) found that even consumers
handed a carpet sample, so they could ascertain the
quality for themselves, were uninterested in buying it
if the price was low.
They handed buyers a sample of a quality carpet that
normally sold at 72 shillings per square yard. Here s
how likely they were to buy when given an artifi cially
low price:
60 percent likely when told the price was 4060
shillings
30 percent likely, when told the price was 2040
shillings
Price-Quality Relationships
Without other cues, price serves as an
important indicator of a products quality to
buyers
Customers often view price as an indicator of
a products overall quality and may be willing
to pay a higher price

Figure
Rolex Cellini
Cellissima
Watch:
Example of
the Price-
Quality
Relationship
Effects of Numbers used in price

Putting some decimal units in the price make it look like
discounted
And
Below the range of next digit price (i.e. 99.99 seems cheaper
than 100 though there is little difference)


There are certain numbers you can use that cause buyers to
think your product or service is discounted. And that can be
a good thingor a bad thingdepending on the perceptions
you want for your off ering.
Pennies in any price over $40 look like a discount price,
which buyers in most industries will perceive as meaning
the product is a discount-type of product.

A 9 on the far right end of a product/service price
also signals discount to buyers, often with the discount
label extending to the product s quality.

High-end restaurants predominantly use a 0 or a 5
as the farthest-right digit of their menu prices, while
low-end fast-food restaurants primarily use a 9. In
a number of studies, Naipaul and Parsa (2001) found
consumer reaction to menus from fi ctitious restaurants
could be infl uenced by the rightmost digit of the
prices. Subjects rated menus with prices ending in a
0 as higher in quality than those with menu prices
ending in a 9.
Odd pricing:
pricing policy
based on the
belief that a
price ending
with and odd
number just
below a round
number is more
appealing
John Deere at
$1,999 instead of
$2000
Barriers/Threshold values in
Prices
Our brains have developed artificial
psychological barriers or threshold values
about how we see numbers in price.
There are two methods to find such values
a) trial and error ; b) statistical market
survey

A key part of brain development is learning how to screen
out unnecessary noise from our senses. Otherwise we
would be paralyzed by all the input coming in every
minute.
Native speakers of any language that reads left to right,
as ours does, have learned that the numbers on the left side
of a number are far more important than the numbers on
the right. On the right are cents, or dollars. On the left are
thousands, millions, or even billions.
In addition to paying more attention to the leftmost
parts of numbers, we have also learned that larger equals
bigger.
Together these learned perceptions create artifi cial barriers
in how we see numbers.

For example, consider your
reaction to each of these two prices:
$1,000
$999
If you see them together like this, the eff ect is diluted.
Your left (logical) brain can recognize there is only $1 diff erence
between them. But if you saw only one of these prices,
attached to something you wanted, your perception of how
expensive the item is would be quite diff erent, depending
on which of these prices was attached.
Direct-mail and Internet marketers have found that crossing
the barrier to a larger leftmost number (e.g., from an 8 to
a 9) can cause a drop of 1015 percent in response.
The largest barrierswith the greatest danger in
response fall-off add an extra digit to the price, as in the
above as well as:
$9.99 to $10.00
$99 to $100
But you can easily see a 10 percent drop in response
by moving from $29 to $30. We re wired to notice the leftmost
part of the number. And even though the digits haven t
increased, we have moved from a price of $20-something to
$30-something

You knowand they knowthat $99.99 is virtually
the same as $100. But if 1015 percent fewer customers will
buy at $100 as will buy at $99.99, then buyers are telling
you something you have to listen to in order to sell. They re
telling you to adjust your price so they can both have what
they want and feel like a smart shopper (or at least not feel
like a poor shopper).
Increasing Prices up to Barriers
This works the other way as well. It means that prices under
the barrier can often be moved up with no drop at all in
response, as long as they don t cross a barrier.
Examples:
Suppose you re considering a price of $9.85. There s
a very good chance you could move your price up to
$9.95 or $9.99 and not have any drop in response.
Suppose you re considering $85. You could almost certainly
charge $89 and see little if any dropoff .
Visually Appealing Prices
Some numbers in prices look appealing to
consumers.
e.g. 7 in price

there is research on using a 7 in your
prices; typically it can raise response rates. If you look at
most magazine and newsletter subscription prices you ll
see most of them end in a 7 or at least include a 7. That s
because publications do a lot of price testing and they have
found buyer preference for a 7 to be a fact. (You can see
specifi c research on this in my Pricing Psychology Report book
at PricingPsychology.com. )
Don t make your prices look
strange
If price tag seems strange, people might
think there might be something wrong. So
dont use strange pricing if it is not a
discounted product.
Some other pricing modes

Price Quotations
List prices: Established prices normally
quoted to potential buyers
Gasoline Prices: Where the Money Goes

Market price:
Price that an
intermediary or
final consumer
pays for a
product after
subtracting any
discounts,
rebates, or
allowances from
the list price
Kraft offering a
rebate promotion

Reductions from List Price
Cash discount: price reduction offered to a
consumer, industrial user, or marketing
intermediary in return for prompt payment of
a bill
2/10 net 30, a common cash discount notation,
allows consumers to subtract 2 percent from the
amount due if payment is made within 10 days
Trade Discounts: payment to a
channel member or buyer for
performing marketing functions; also
known as a functional discount
Quantity discount: price reduction
granted for a large-volume purchase
Justified on the grounds that large orders
reduce selling expenses, storage, and
transportation costs
Cumulative quantity discounts reduce
prices in amounts determined by purchases
over stated time periods
Non-cumulative quantity discounts
provide one-time reductions in the list price

Allowances
Trade-in: credit allowance given for a used
item when a new item is purchased
Promotional allowance: advertising or
promotional funds provided by a manufacturer
to other channel members in an attempt to
integrate the promotional strategy within the
channel

Rebates: refund for a portion of the
purchase price, usually granted by the
products manufacturer
Figure
Rebates for Computer-Related Goods
Geographic Considerations
FOB (free on board) plant or FOB origin:
Price quotation that does not include
shipping charges. Buyer pays all freight
charges to transport the product from the
manufacturer
Freight absorption: system for handling
transportation costs under which the buyer
may deduct shipping expenses from the
costs of goods
Uniform-delivered price: system for
handling transportation costs under which all
buyers are quoted with the same price,
including transportation expenses
Zone pricing: system for handling
transportation costs under which the market
is divided into geographic regions and a
different price is set in each region
Basing-point system: system for handling
transportation costs in which the buyers
costs included the factory price plus freight
charges from the basing-point city nearest
the buyer. Seeks to equalize competition
between distant marketers.
Unit pricing: pricing policy in which
prices are stated in terms of a
recognized unit of measurement or a
standard numerical count
For example, a gallon of milk, or one
dozen eggs



Price Flexibility: pricing policy that
permits variable prices for goods and
services
Car dealerships traditionally employ a
flexible pricing strategy

Figure
Fractional
Ownership of
a Personal
Jet: Example
of Variable
Pricing
Product-line
pricing: practice of
marketing different
lines of
merchandise at a
limited number of
prices
Hallmark has
different prices for
its card lines

Promotional
pricing: pricing
policy in which a
lower than normal
price is used as a
temporary
ingredient in the
marketing strategy
Buy one, get one
free is a common
pricing promotion

Loss leader: product offered to
consumers at less than cost to attract
them to stores in the hope that they
will buy other merchandise at regular
prices
What are some loss leaders in a
grocery store?

Competitive Bidding and
Negotiated Prices
Many purchases are made through
competitive bidding, a process in which
potential suppliers and manufacturers are
invited to quote prices on proposed
purchases or contracts
Negotiated Prices Online
Buyers and sellers can communicate and
negotiate prices online

Online Auctions: Purest form of negotiated pricing
The Transfer Price Dilemma
Transfer price: cost assessed when a product is
moved from one profit center to another
Profit center: any part of an organization to which
revenue and controllable costs can be assigned

Global Considerations and
Online Pricing
International markets are subject to
external influences such as regulatory
limitations, trade restrictions,
competitors actions, economic events,
and the global status of the industry
The effect the exchange rate can have
on international trade can be
significant. It is important that pricing of
products take exchange rates into
account.
Traditional Global Pricing Strategies
Standard Worldwide: Pricing strategy in
which exporters set standard worldwide
prices for products, regardless of their
target markets
Dual Pricing: Pricing strategy that
distinguishes between domestic and export
sales, and maintains a distinct set of prices
for each
Market Differentiated: Flexible pricing
strategy that sets prices according to local
marketplace and economic conditions

Characteristics Of Online Pricing
Cannibalization: Loss of sales of an
existing product due to competition from a
new product in the same line
Shopping Bots: Search engines which act
as comparison shopping agents

Bundle pricing: Offering two or more
complementary products and selling them
for a single price

Figure
Cable TV
Companies
and Bundle
Pricing
References
SETTING PROFITABLE PRICES:A Step-by-
Step Guide to Pricing Strategywithout Hiring a
Consultant by Marlene Jensen,PhD in
Marketing, Faculty of Lock Haven University
How to Price:A Guide to Pricing Techniques and
Yield Management by Oz Shy
THE UNDERCOVER ECONOMIST by Tim
Harford