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Chapter 11

Pricing Products:

Pricing Considerations and Strategies

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New Product Pricing Strategies (pp. 399-400)

Market Skimming

Setting a high price to “skim” maximum revenues from the target market.

Results in fewer, but more profitable, sales.

May reduce price later to attract more price sensitive markets.

Market Skimming

Setting a high price to “skim” maximum revenues from the target market.

Results in fewer, but more profitable, sales.

May reduce price later to attract more price sensitive markets.

Use Under These Conditions: Product’s quality & image

support its higher price.

Market not price sensitive.

Costs of producing small volumes can’t be so high that they cancel the advantage of charging more (i.e., don’t need economies of scale).

Competitors shouldn’t be able to enter market easily & undercut the high price.

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New Product Pricing Strategies (pp. 399-400)

Market Penetration

Setting a low price in order to “penetrate” the market quickly and deeply.

Attract a large number of buyers quickly & win a larger market share.

Market Penetration

Setting a low price in order to “penetrate” the market quickly and deeply.

Attract a large number of buyers quickly & win a larger market share.

Use Under These Conditions: Market is large & highly

price-sensitive so a low price produces market growth.

Production & distribution costs must fall as sales volume increases (i.e., economies of scale).

Low price can effectively keep out competition & low price position can be maintained.

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Product Mix Pricing Strategies (pp. 400-403)

Goal – to maximize profit over the product mix:

Product Line Pricing -- Involves setting price steps between various products in a product line. Based on: Cost differences between products, or

Customer evaluations of different features, or

Competitors’ prices

(e.g., lawnmowers - $259.95, $299.95, $399.95)

Optional Product Pricing -- Pricing optional or accessory products sold with the main product.(e.g., car options)

Captive Product Pricing -- Pricing products that must be used with the main product. (e.g., razor blades, toner cartridges)

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Product Mix Pricing Strategies (pp. 400-403)

Goal – to maximize profit over the product mix:

By-Product Pricing -- Pricing low-value by-products to get rid of them & reduce costs.

(e.g., wood chips, Zoo Doo)

Product Bundle Pricing -- Combining several products and offering the bundle at a reduced price.

e.g., season tickets, magazine subscription, computer with software, car

option packages, Costco)

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Price-Adjustment Strategies:Discount & Allowance (pp. 403-404)

Cash discount(pay early, e.g., 2/10 net 30)

Functional discount(price to channel members)

Quantity discount(buy more from one seller)

Trade-in allowance

Seasonal discount(buy early or out of season)

Promotional allowance(to help channel members

promote product)

Adjusting the basic price to reward customers,or to provide incentives for certain responses

(most are for channel members & business buyers)

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Example of Functional Discount (p. 404)

Functional discounts represent product prices charged channel intermediaries – compensates channel members (wholesalers & retailers) for stocking & selling the product

E.g., pricing a book – manufacturing cost ~$2.00

publisher’s suggested retail price $20.00(price a consumer pays at a bookstore)

bookstore (40% discount) 12.00

wholesaler (55% discount) 9.00

distributor (65% discount) 7.00

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Price-Adjustment Strategies:Segmented Pricing (p. 404)

Customer segmentpricing

Location pricing

Product - Form Time pricing

Selling products at different pricesbased on differences in demand,

not on differences in cost

Product form pricing

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Price-Adjustment Strategies:Psychological Pricing (pp. 405-407)

Considers the psychology of prices, not just the economics.

Price is an important quality signalwhen customers can’t otherwise judge quality; price is used to “say

something” about a product.

Reference prices Show price comparisons

Display with more/less expensive alternatives

Odd-pricing, even-pricing E.g., $49.99 versus $50.00

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Loss leadersLoss leaders

Special-event pricingSpecial-event pricing

Cash rebatesCash rebates

Low-interest financingLow-interest financing

Longer warrantiesLonger warranties

Free merchandiseFree merchandise

Temporarilypricing products below

the regular price to increase short-term

sales

Price-Adjustment Strategies:Promotional Pricing (p. 408)

Danger – addictive;

over-reliance can damage brand equity & train consumers to be “deal prone”

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Discussion Connections

Many industries have created “deal-prone” consumers through the heavy use of promotional pricing – e.g., fast foods, airlines, department stores, and others.

Pick a company in one of these industries and suggest ways that it might deal with this problem.

How does the concept of value relate to promotional pricing? Does promotional pricing add to or detract from customer value?

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Initiating Price Changes(pp. 411-413)

Why?

•Excess capacity

•Falling market share

•Strategy to dominate market

through

lower costs

Why?

•Cost inflation

•Over-demand

•Increase profit margin

Price Cut

Price Increase

ConsumerReaction:• Positive; or• Being replaced?• Not selling?• Co. in trouble?• Quality lower?• Prices coming

down further?

ConsumerReaction:• Negative(explain,disguise?)

• Positive(“hot,”prestige)

Competitor Response:Follow? – oligopoly, perfect competitionPosition against? – monopolistic competition

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Assessing & Responding to Competitor’s Price Changes(Fig. 11.1, pp. 413-414)

Has competitor cut price?

Will lower price negatively affect our

market share & profits?

Can / should effective action be taken?

Hold current price;continue to monitorcompetitor’s price

Reduce price

Raise perceived quality

Improve quality & increase price

Launch low-price“fighting brand”

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Public Policy Issues:Prohibited Pricing Practices(Fig. 11.2, pp. 415-420)

Manufacturer A

• Price-fixing• Predatory pricing

Manufacturer B

Manufacturer A

• Price-fixing• Predatory pricing

Manufacturer B

• Retail pricemaintenance• Discriminatorypricing

Retailer 1

• Price-fixing• Predatory pricing

Retailer 2

Retailer 1

• Price-fixing• Predatory pricing

Retailer 2

• Deceptivepricing

Consumers

• Deceptivepricing

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Within channel levels: Price fixing – cannot talk to each other when setting prices

Predatory pricing – cannot set low prices for purposes of driving competitors out of market

Across channel levels: Retail price maintenance – manufacturer cannot dictate

the price charged by retailers

Discriminatory pricing – cannot charge different prices to different intermediaries (except based on actual costs)

Deceptive pricing – cannot deceive consumers (e.g., through bogus reference prices, bait & switch, creating price confusion, etc.)

Public Policy Issues:Prohibited Pricing Practices(pp. 415-420)

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Review of Concept Connections

Describe the major strategies for pricing new products.

Explain how companies set prices to maximize profits from the total product mix.

Discuss the ways companies adjust their prices to take into account different types of customers and situations.

Discuss the key issues related to initiating and responding to price changes.

Identify the key prohibited pricing practices.