11

Principles of Marketing

Pricing Products:
Pricing Strategies
Learning Objectives

After studying this chapter, you should be able to:

1. Describe the major strategies for pricing initiative a
nd new products
2. Explain how companies find a set of prices that max
imize the profits from the total product mix
3. Discuss how companies adjust their prices to take in
to account different types of customers and situatio
ns
4. Discuss the key issues related to initiating and respo
nding to price changes

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Chapter Outline

1. New-Product Pricing Strategies

2. Product Mix Pricing Strategies
3. Price Adjustment Strategies
4. Price Changes
5. Public Policy and Pricing

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New-Product Pricing Strategies

Pricing Strategies

• Market skimming pricing

• Market penetration pricing

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New-Product Pricing Strategies

Pricing Strategies
Market skimming pricing is a strategy with high initi
al prices to “skim” revenue layers from the market

• Product quality and image must support the price

• Buyers must want the product at the price
• Costs of producing the product in small volume sho
uld not cancel the advantage of higher prices
• Competitors should not be able to enter the market
easily

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New-Product Pricing Strategies

Pricing Strategies

Market penetration pricing sets a low initial price in

order to penetrate the market quickly and deeply to
attract a large number of buyers quickly to gain mar
ket share
• Price sensitive market
• Inverse relationship of production and distribution c
ost to sales growth
• Low prices must keep competition out of the market

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Product Mix Pricing Strategies

Pricing Strategies

• Product line pricing

• Optional product pricing
• Captive product pricing
• By-product pricing
• Product bundle pricing

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Product Mix Pricing Strategies

Pricing Strategies

Product line pricing takes into account the co

st differences between products in the line,
customer evaluation of their features, and c
ompetitors’ prices

Optional product pricing takes into account

optional or accessory products along with th
e main product

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Product Mix Pricing Strategies

Pricing Strategies

Captive product pricing involves products th

at must be used along with the main produc
t
• Two-part pricing is where the price is brok
en into:
• Fixed fee
• Variable usage fee

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Price Adjustment Strategies

Pricing Strategies

By-product pricing refers to products with litt

le or no value produced as a result of the m
ain product. Producers will seek little or no p
rofit other than the cost to cover storage an
d delivery. e.g sugarcane

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 Price Adjustment Strategies

Pricing Strategies

Product bundle pricing combines several p

roducts at a reduced price

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Price Adjustment Strategies

Pricing Strategies

• Discount and allowance pricing

• Segmented pricing
• Psychological pricing
• Promotional pricing
• Geographical pricing
• Dynamic pricing
• International pricing
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Price Adjustment Strategies

Pricing Strategies

Discount and allowance pricing reduces pri

ces to reward customer responses such as p
aying early or promoting the product
• Discounts
• Allowances

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Price Adjustment Strategies

Pricing Strategies

• Discounts
• Cash discount for paying promptly
• Quantity discount for buying in large volume
• Functional (trade) discount for selling, storing, di
stribution, and record keeping

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Price Adjustment Strategies

Pricing Strategies

• Allowances
• Trade in allowance for turning in an old item whe
n buying a new one
• Promotional allowance to reward dealers for parti
cipating in advertising or sales support programs

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Price Adjustment Strategies

Pricing Strategies

Segmented pricing is used when a company

sells a product at two or more prices even th
ough the difference is not based on cost
• Customer segment pricing
• Product form segment pricing
• Location pricing

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Price Adjustment Strategies

Pricing Strategies

To be effective:
• Market must be segmentable
• Segments must show different degrees of demand
• Watching the market cannot exceed the extra reven
ue obtained from the price difference
• Must be legal

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Price Adjustment Strategies

Pricing Strategies

Customer segment pricing is when different custom

ers pay different prices for the same product or serv
ice
Product form segment pricing is when different vers
ions of the product are priced differently but not acc
ording to differences in cost
Location pricing is when the product is sold in differe
nt geographic areas and priced differently in those a
reas, even thought the cost is the same.e.g petrol i
n karachi is less expensive than in Islamabad.

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Price Adjustment Strategies

Pricing Strategies
Robert Cross

Revenue management charges the right cust

omer the right price at the right time

Yield management balances price and deman

d

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Price Adjustment Strategies

Pricing Strategies

Psychological pricing occurs when sellers consider th

e psychology of prices and not simply the economic
s
• Reference prices are prices that buyers carry in thei
r minds and refer to when looking at a given produc
t
• Noting current prices
• Remembering past prices
• Assessing the buying situations

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 Price Adjustment Strategies

Pricing Strategies

Promotional pricing is when prices are temporarily price

d below list price or cost to increase demand
• Loss leaders
• Special event pricing
• Cash rebates
• Low interest financing
• Longer warrantees
• Free maintenance
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Price Adjustment Strategies

Pricing Strategies

Loss leaders are products sold below cost to attract cu

stomers in the hope they will buy other items at nor
mal markups
Special event pricing is used to attract customers dur
ing certain seasons or periods
Cash rebates are given to consumers who buy product
s within a specified time
Low interest financing, longer warrantees, and fr
ee maintenance lower the consumer’s “total price
”
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Price Adjustment Strategies

Pricing Strategies

Risks of promotional pricing

• Used too frequently, and copies by competit
ors can create “deal-prone” customers who
will wait for promotions and avoid buying at
regular price
• Creates price wars

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Price Adjustment Strategies

Pricing Strategies

Geographical pricing is used for customers in differe

nt parts of the country or the world
• FOB pricing
• Uniformed delivery pricing
• Zone pricing
• Basing point pricing
• Freight absorption pricing

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Price Adjustment Strategies

Pricing Strategies

FOB (free on board) pricing means that the goods ar

e delivered to the carrier and the title and responsib
ility passes to the customer.e.g Dawoo

Uniformed delivery pricing means the company char

ges the same price plus freight to all customers, reg
ardless of location.e.g transportation in.

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Price Adjustment Strategies

Pricing Strategies

Zone pricing means that the company sets up two or

more zones where customers within a given zone p
ay a single total price. McDonald's model town C fre
e delivery.

Basing point pricing means that a seller selects a giv

en city as a “basing point” and charges all customer
s the freight cost associated from that city to the cu
stomer location regardless of the city from which th
e goods are actually shipped

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Price Adjustment Strategies

Pricing Strategies

Freight absorption pricing means the seller

absorbs all or part of the actual freight char
ge as an incentive to attract business in com
petitive markets

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Price Adjustment Strategies

Pricing Strategies

• Dynamic pricing
• International pricing

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Price Adjustment Strategies

Pricing Strategies

Dynamic pricing is when prices are adjusted c

ontinually to meet the characteristics and ne
eds of the individual customer and situations

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 Price Adjustment Strategies

Pricing Strategies
International pricing is when prices are set in
a specific country based on country-specific f
actors
• Economic conditions
• Competitive conditions
• Laws and regulations
• Infrastructure
• Company marketing objective. END
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Price Changes

Initiating Pricing Changes

• Price cuts
• Price increases

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Price Changes

Initiating Pricing Changes

Price cuts is a reduction in price

• Excess capacity
• Increase market share

Price increases is an increase in selling price

• Cost inflation
• Increased demand and lack of supply

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Price Changes

Buyer Reactions to Pricing Changes

• Price cuts
• New models will be available
• Models are not selling well
• Quality issues
• Price increases
• Product is “hot”
• Company greed

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Price Changes

Responding to Price Changes

Questions
• Why did the competitor change the price?
• Is the price cut permanent or temporary?
• What is the effect on market share and prof
its?
• Will competitors respond?
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Price Changes

Responding to Price Changes

Solutions
• Reduce price to match competition
• Maintain price but raise the perceived value
through communications
• Improve quality and increase price
• Launch a lower-price “fighting brand”
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Public Policy and Pricing

Pricing Within Channel Levels

Price fixing: Sellers must set prices without tal

king to competitors

Predatory pricing: Selling below cost with the

intention of punishing a competitor or gaini
ng higher long-term profits by putting comp
etitors out of business

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Public Policy and Pricing

Pricing Across Channel Levels

Robinson Patman Act prevents unfair price discrimin

ation by ensuring that sellers offer the same price t
erms to customers at a given level of trade
• Price discrimination is allowed:
• If the seller can prove that costs differ when selling to diff
erent retailers
• If the seller manufactures different qualities of the same p
roduct for different retailers

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Public Policy and Pricing

Pricing Across Channel Levels

Retail (resale) price maintenance is when a manufa

cturer requires a dealer to charge a specific retail p
rice for its products

Deceptive pricing occurs when a seller states prices o

r price savings that mislead consumers or are not a
ctually available to consumers

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Public Policy and Pricing

Pricing Across Channel Levels

Deceptive pricing occurs when a seller states prices o

r price savings that mislead consumers or are not a
ctually available to consumers
• Scanner fraud failure of the seller to enter current o
r sale prices into the computer system
• Price confusion results when firms employ pricing
methods that make it difficult for consumers to und
erstand what price they are really paying

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The End