Chapter 19 Pricing Strategies. 19-2 Chapter Objectives 1.Compare the alternative pricing strategies...
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Chapter 19Chapter 19
Pricing StrategiesPricing Strategies
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19-2
Chapter ObjectivesChapter Objectives
1. Compare the alternative pricing strategies and explain when each strategy is most appropriate.
2. Describe how prices are quoted.
3. Identify the various pricing policy decisions that marketers must make.
4. Relate price to consumer perceptions of quality.
5. Contrast competitive bidding and negotiated prices.
6. Explain the importance of transfer pricing.
7. Compare the three alternative global pricing strategies.
8. Relate the concepts of cannibalization, bundle pricing, and bots to online pricing strategies.
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Pricing StrategiesPricing Strategies
Skimming pricing strategy Skimming pricing strategy [Gouge pricing [Gouge pricing strategy]strategy]: involves the use of a high price relative to competitive offeringsOften used by marketers of high-end productsAlso by firms introducing a distinctive good
with little or no competitionAllows firms to control demand during the
introductory stages of a products life cycleCan be used as a tool for segmenting a
product’s market on a price basis
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Figure 19.1Figure 19.1Distinctive
Flat-Screen TVs Marketed with a Skimming Pricing Strategy
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WeberWeberDistinctive Grills Marketed through a Skimming
Pricing Strategy
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Lincoln NavigatorLincoln NavigatorMaintaining a High Price in Periods of High Demand
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Figure 19.3Figure 19.3Price Reductions to Increase Market Share
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Penetration pricing Penetration pricing strategystrategy: 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 acceptanceDesigned to
generate many trial purchases
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Figure 19.4Figure 19.4Credit-Card
Offers: Penetration Pricing
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Everyday low Everyday low pricing (EDLP):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 salesWal-Mart
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Southwest Airlines, Known for It’s Low Prices, Often Enters New Markets with Incredibly Low Penetration Prices and Then Maintains Market Share With Everyday Low Pricing Strategy
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Competitive Pricing Competitive Pricing StrategyStrategy: reduces emphasis on price as a competitive variable by pricing goods at the general level of competitorsFirms focus their
own marketing efforts on the product, distribution and promotion elements of the marketing mix
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Figure 19.6Figure 19.6American
Airlines: Reducing the Emphasis on Price Competition
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Price QuotationsPrice Quotations List pricesList prices: Established prices normally quoted
to potential buyersGasoline Prices: Where the Money Goes
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Market priceMarket price: Price that an intermediary or final consumer pays for a product after subtracting any discounts, rebates, or allowances from the list priceKraft offering a
rebate promotion
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Reductions from List Price Reductions from List Price Cash discountCash 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
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Trade DiscountsTrade Discounts: payment to a channel member or buyer for performing marketing functions; also known as a functional discount
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Quantity discountQuantity discount: price reduction granted for a large-volume purchaseJustified 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
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AllowancesAllowancesTrade-in: credit allowance given for a used
item when a new item is purchasedPromotional allowance: advertising or
promotional funds provided by a manufacturer to other channel members in an attempt to integrate the promotional strategy within the channel
RebatesRebates: refund for a portion of the purchase price, usually granted by the product’s manufacturer
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Figure 19.9Figure 19.9Rebates for Computer-Related Goods
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Geographic Considerations Geographic Considerations FOB (free on board) plant or FOB originFOB (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 absorptionFreight absorption: system for handling transportation costs under which the buyer may deduct shipping expenses from the costs of goods
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Uniform-delivered priceUniform-delivered price: system for handling transportation costs under which all buyers are quoted with the same price, including transportation expenses
Zone pricingZone 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 systemBasing-point system: system for handling transportation costs in which the buyer’s costs included the factory price plus freight charges from the basing-point city nearest the buyer. Seeks to equalize competition between distant marketers.
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Pricing PoliciesPricing Policies
Pricing policyPricing policy: general guidelines based on pricing objectives and intended for use in specific pricing decisions
Psychological pricingPsychological pricing: pricing policy based on the belief that certain prices or price ranges make a good or service more appealing than others to buyers
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Odd pricingOdd pricing: pricing policy based on the belief that a price ending with and odd number just below a round number is more appealingJohn Deere at
$1,999 instead of $2000
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Unit pricingUnit pricing: pricing policy in which prices are stated in terms of a recognized unit of measurement or a standard numerical countFor example, a gallon of milk, or one
dozen eggs
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Price FlexibilityPrice Flexibility: pricing policy that permits variable prices for goods and servicesCar dealerships traditionally employ a
flexible pricing strategy
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Figure 19.10Figure 19.10Fractional
Ownership of a Personal Jet: Example of Variable Pricing
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Product-line pricingProduct-line pricing: practice of marketing different lines of merchandise at a limited number of pricesHallmark has
different prices for its card lines
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Promotional pricingPromotional 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
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Loss leaderLoss 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?
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Price-Quality RelationshipsPrice-Quality RelationshipsWithout other cues, price serves as an
important indicator of a product’s quality to buyers
Customers often view price as an indicator of a product’s overall quality and may be willing to pay a higher price
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Figure 19.11Figure 19.11Rolex Cellini
Cellissima Watch: Example of the Price-Quality Relationship
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Competitive Bidding and Negotiated PricesCompetitive 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 OnlineNegotiated Prices OnlineBuyers and sellers can communicate and
negotiate prices online
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Online Auctions: Purest form of negotiated pricing
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The Transfer Price DilemmaThe Transfer Price Dilemma
Transfer priceTransfer price: cost assessed when a product is moved from one profit center to another
Profit centerProfit center: any part of an organization to which revenue and controllable costs can be assigned
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Global Considerations and Online PricingGlobal Considerations and Online Pricing
International markets are subject to external influences such as regulatory limitations, trade restrictions, competitor’s 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.
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Traditional Global Pricing StrategiesTraditional Global Pricing StrategiesStandard 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
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Characteristics Of Online PricingCharacteristics Of Online PricingCannibalization: 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
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Figure 19.14Figure 19.14Cable TV
Companies and Bundle Pricing
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End of Chapter NineteenEnd of Chapter Nineteen