Pricing Strategies: Additional Considerations

(Chapter 11)

Lecture #11
Lecturer: Donna-Kay Smith
Date: June 29, 2016
 New Product Pricing Strategies

 Product Mix Pricing Strategies

 Price Adjustment Strategies

 Price Changes

 Public Policy & Pricing

 For products in the introductory stage of the
Product Life Cycle (PLC).

 Companies launching new products face the

challenge of setting prices for the first time.

 Two (2) broad strategies can be used:

1. Market-Skimming Pricing
2. Market Penetration Pricing
 Market-skimming pricing (price skimming) – Setting
a high initial price for a new product to skim
maximum revenues layer by layer from smaller
segments willing to pay the high price; the company
makes fewer but more profitable sales.
 To be effective:
 Product quality and image must support the higher price.
 Enough buyers must want the product at that price.
 Costs of producing smaller volume cannot be so high that
they cancel the advantage of charging more.
 Competitors should not be able to enter the market easily
and undercut the high price.
 Market-penetration pricing – Setting a low initial
price for a new product in order to attract a large
number of buyers and a large market share.
 High sales volume results in falling costs, allowing
companies to cut their prices even further.
 To be effective:
 The market must be highly price sensitive
 Production and distribution costs must decrease as sales
volume increases
 Low prices must help keep out the competition
 The company must maintain its low-price position
  When the product is part of a product
mix/portfolio, the firm searches for a set of
prices that will maximize profits from the
total product mix.

 Five (5) product mix pricing situations:

Optional- Captive- Product
Product Line By-Product
Product Product Bundle
Pricing Pricing
Pricing Pricing Pricing
 Product line pricing – Setting the price steps
between various products in a product line
based on cost differences between products,
customer evaluations of different features
and competitors’ prices.

 The company’s task is to establish perceived

value differences that support the price
differences.
 Optional-product pricing – The pricing of
optional or accessory products along with a
main product.

 Companies must decide which items to

include in the base price and which items to
offer as options.
 Captive-product pricing – Setting a price for
products that must be used along with a main
product.

 Producers of the main product often price

them low and set high markups on supplies.

 For services, captive-product pricing is called

two-part pricing. It is broken into:
 Fixed fee + variable usage rate
 By-product pricing – Setting a price for by-products
in order to make the main product’s price more
competitive.
 Allows companies to seek a market for by-products to
help offset costs of disposing of them and help make
the price of the main product more competitive.
 Producers will seek little or no profit other than the
cost to cover storage and delivery.
 By-products can also be profitable – turning trash into
cash.
 Product bundle pricing – Combining several
products and offering the bundle at a reduced
price.

 Bundling can promote the sales of products

consumers might not otherwise buy, but the
combined price must be low enough to give
them a bundle to buy.
 Companies must adjust base prices to
account for various customer differences and
changing situations.

 Seven (7) price adjustment strategies are:

Discount and Segmented Psychological
allowance pricing pricing pricing

Promotional Geographic Dynamic International

pricing pricing pricing pricing
 Discount & Allowance Pricing – Reducing prices to reward
customer responses such as volume purchases, paying early or
promoting the product.
 Discount – A straight reduction in prices on purchases during a
stated period of time or of larger quantities.
 Four (4) types of discount are:
 Cash Discount – A price reduction to buyers who pay their bills
promptly.
 Quantity Discount – A price reduction to buyers who buy large
volumes
 Functional discount (trade discount) – Offered to trade-channel
members who perform certain functions such as selling, storing and
record keeping.
 Seasonal Discount – A price reduction to buyers who buy
merchandise or services out of season.
 Allowance – Promotional money paid by
manufacturers to retailers in return for an
agreement to feature the manufacturer’s
products in some way.

 Two (2) types of allowances are:

 Trade-in Allowances – Price reductions given for
turning in an old item when buying a new one.
 Promotional Allowances – Price reductions that
reward dealers for participating in advertising and
sales-support programs.
 Segmented Pricing – Selling a product or service at
two or more prices, where the difference in prices is
not based on differences in cost.
 Four (4) types of segmented pricing are:
 Customer-segment pricing – Different customers pay
different prices for the same products or services.
 Product form pricing – Different versions of the product
are priced differently but not according to differences in
their cost.
 Location-based pricing – Different prices for different
locations even though the cost of offering each location is
the same.
 Time-based pricing – A firm varies its price by season,
month, day and the hour.
 To be effective:
 Markets must be segmentable
 Segments must show different degrees of
demand
 Cost of segmenting and reaching the market
cannot exceed the extra revenue obtained from
the price difference.
 Segmented pricing must be legal
 Segmented prices should reflect real differences
in customers’ perceived value.
 Psychological Pricing – Pricing that considers the
psychology of prices and not simply the economics.

 The price is used to say something about the product.

 Reference prices – Prices that buyers carry in their

minds and refer to when looking at a given product.

 Reference prices might be formed by:

 Noting current prices
 Remembering past prices
 Assessing the buying situations
 Pricing cues are often provided by sellers in
the form of:
 Sales signs
 Price-matching guarantees
 Loss-leader pricing

 Even small differences in price can signal

product differences.
 Promotional Pricing – Temporarily pricing products below the list
price, and sometimes even below cost, to increase short-run sales.
 This strategy is used to create buying excitement and urgency.
 Several forms of promotional pricing:
 Discounts from normal prices used to increase sales and reduce
inventories
 Loss leaders – Products sold below cost to attract customers in the
hope they will buy other items at normal markups.
 Special event pricing – Used in certain seasons to draw more
customers
 Limited time offers – Create buying urgency and make buyers feel
lucky to have gotten the deal – E.g. flash sales
 Cash rebates – Offered to consumers who buy the product from
dealers within a specified time
 Low-interest financing
 Longer warranties
 Free maintenance – To reduce the consumer's lifetime price
 Risks of promotional pricing:
 During holiday season – It becomes an ‘all-out bargain
war’.
 Used too frequently – Can create ‘deal-prone’ customers
who wait until brands go on sale before buying them.
 Constantly reducing prices – Erode a brand’s value in the
eyes of customers.
 Used as quick fix in tight economic times – Promotions
become so ingrained in the minds of consumers that its
difficult to stop offering them.

 Companies must be careful to balance short-term

sales incentives against long-term brand building.
 Geographical pricing – Setting prices for
customers located in different parts of the
country or world.

 Five (5) types of geographical pricing are:

 FOB-origin pricing
 Uniformed-delivered pricing
 Zone pricing
 Basing-point pricing
 Freight-absorption pricing
 FOB-origin pricing – Goods are placed free on board a carrier; the customer
pays the freight from the factory to the destination.

 Uniformed-delivered pricing – The company charges the same price plus

freight to all customers, regardless of location.

 Zone pricing – The company sets up two or more zones where customers
within a given zone pay the same total price; the more distant the zone, the
higher the price.

 Basing-point pricing – The seller designates a city as a “basing point” and

charges all customers the freight cost associated from that city to the
customer, regardless of the city from which the goods are actually shipped.

 Freight-absorption pricing – The seller absorbs all or part of the actual

freight charges in order to get the desired business. Used in competitive
markets.
 Dynamic Pricing – Adjusting prices continually to
meet the characteristics and needs of individual
customers and situations.
 If done well, can help sellers optimize sales and serve
customers better.
 If done poorly, can trigger margin-eroding price wars
and damage customer relationships and trust.
 Showrooming – When consumers visit stores to see
an item, compare prices online while in the store and
buy the item online at a lower price.
 Companies that market products internationally must decide what
prices to charge in different countries.
 International pricing – Setting prices for a specific country based
on factors such as:
 Economic conditions
 Competitive situations
 Laws and regulations
 The nature of the wholesaling and retailing system
 Infrastructure
 Consumer perceptions and preferences
 Company marketing objectives

 Price escalation may result from differences in selling strategies

or market conditions or from higher costs of selling in another
country – E.g. cost of operation, shipping, insurance, import
tariffs, exchange rate fluctuations.
 Price cuts occur due to:
 Excess capacity
 Falling demand due to strong price competition or
weakened economy
 Attempts to boost sales or increase market share
 Attempts to dominate the market through lower
costs
 Price increase occurs as a result of:
 Cost inflation
 Over-demand – When a company cannot supply all that its
customers need
 Lack of supply

 Companies must avoid being perceived as a price

gouger by using the following techniques:
 Maintain a sense of fairness surrounding any price increase
 Consider ways to meet higher costs or demand without
raising prices
 Shrink the product
 Substitute less expensive ingredients
 Price Increase – Buyers may believe:
 Product as more exclusive or better made
 The supplier is being unreasonable

 Price Cuts – Buyers may believe:

 They are getting a better deal
 Quality has been reduced
 The brand’s luxury image has been tarnished

 Marketers must always be mindful that a brand’s

price and image are often closely linked.
 Competitors are most likely to react when:
 The number of firms involved is small
 The product is uniform
 Buyers are well informed about products/services

 Competitors may believe the company:

 Is trying to grab a larger market share
 Is doing poorly and trying to boost sales
 Wants the whole industry to cut prices to increase total
demand

 Competitors will react predominantly by matching

the price change
 The company must consider:
 Why did the competitor change the price?
 Is the price change permanent or temporary?
 What is the effect on market share and profits if it
does not respond?
 Are other competitors going to respond?
 Its own situation and strategy
 Customer reactions to price changes
 The company may:
 Reduce price to match competition or reduce
product quality, services and marketing
communication
 Maintain price but raise the perceived value of its
offer through communications
 Improve quality and increase price – i.e. move the
brand into a higher price value proposition
 Launch a lower-price “fighter” brand – adding a
lower price item to the line or creating a separate
lower-price brand
 Many federal, state and local laws govern rules
of fair pricing.

 Companies must consider broader societal

pricing concerns.

 Major public policy issues in pricing include

potentially damaging:
 pricing practices within a given level of the channel
 Pricing practices across channel levels
 Potentially damaging pricing practices
within a given level of the channel
 Price fixing - Sellers must set prices without
talking to competitors
 Predatory pricing - Selling below cost with the
intention of punishing a competitor or gaining
higher long-term profits by putting competitors
out of business
 Pricing practices across channel levels
 Retail price maintenance - when a manufacturer requires a
dealer to charge a specific retail price for its products
 Deceptive pricing – when a seller states prices or price savings
that mislead consumers or are not actually available to
consumers
 Discriminatory pricing – Occurs when sellers do not offer the
same price terms to customers at a given level of trade
 Robinson-Patman Act – Prevents unfair price discrimination.
Price discrimination is allowed:
 If the seller can prove that costs differ when selling to
different retailers.
 If the seller manufactures different qualities of the same
product for different retailers.
 Price confusion results when firms employ
pricing methods that make it difficult for
consumers to understand what price they are
really paying.
 Reputable sellers go beyond what is required by
law.
 Treating customers fairly is an important part of
building strong and lasting customer
relationships.
 The End

Any questions?