Chapter 11

Pricing Strategies: Additional

Considerations

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Learning Objectives
11.1 Describe the major strategies for pricing new products.
11.2 Explain how companies find a set of prices that
maximizes the profits from the total product mix.
11.3 Discuss how companies adjust their prices to take into
account different types of customers and situations.
11.4 Discuss the key issues related to initiating and
responding to price changes.
11.5 Overview the social and legal issues that affect pricing
decisions.

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Learning Objective 1
Describe the major strategies for pricing new products.

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What Is a Price?
Price is the amount of money charged for a product or
service, or the sum of all the values that customers
exchange for the benefits of having or using the product or
service.

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Major Pricing Strategies (1 of 17)
Figure 10.1 Considerations in Setting Price

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Major Pricing Strategies (2 of 17)
Customer Value-Based Pricing

Value-based pricing uses the buyers’ perceptions of value

rather than the seller’s cost.
• Value-based pricing is customer driven.
• Cost-based pricing is product driven.
• Price is set to match perceived value.

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Major Pricing Strategies (3 of 17)
Figure 10.2 Value-Based Pricing versus Cost-Based Pricing

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New Pricing Strategies (2 of 2)
Market-penetration pricing involves setting a low price for a
new product in order to attract a large number of buyers and a
large market share.

AGIT Global North America

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New Pricing Strategies (1 of 2)
Market-skimming pricing strategy sets high initial prices to
“skim” revenue layers from the market.
• Product quality and image must support the price.
• Buyers must want the product at the price.

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Learning Objective 2
Explain how companies find a set of prices that maximizes
the profits from the total product mix.

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Product Mix 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 (1 of 3)
Product Line and Optional Product Pricing
Product line pricing takes into account the cost differences
between products in the line, customer evaluations of their
features, and competitors’ prices.
Optional product pricing takes into account optional or
accessory products along with the main product.

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Product Mix Pricing Strategies (2 of 3)
Captive product pricing sets prices of products that must
be used along with the main product.

Captive-product pricing: Amazon makes little profit on its

Kindle readers and tablets but makes up for the close-to-cost
prices through sales of content for the devices.

Future Publishing/Getty Images

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Product Mix Pricing Strategies (3 of 3)
Product Line and Optional Product Pricing
By-product pricing sets a price for by-products in order to
make the main product’s price more competitive.
Product bundle pricing combines several products at a
reduced price.

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Product Bundle pricing

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Learning Objective 3
Discuss how companies adjust their prices to take into
account different types of customers and situations.

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Price Adjustment Strategies
Table 11.2 Price Adjustments
Strategy Description
Discount and Reducing prices to reward customer responses such as volume
allowance pricing purchases, paying early, or promoting the product
Segmented pricing Adjusting prices to allow for differences in customers, products,
or locations
Psychological Adjusting prices for psychological effect
pricing
Promotional pricing Temporarily reducing prices to spur short-run sales
Geographical Adjusting prices to account for the geographic location of
pricing customers
Dynamic pricing Adjusting prices continually to meet the characteristics and
needs of individual customers and situations
International pricing Adjusting prices for international markets

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Price Adjustment Strategies (1 of 12)
Discount and allowance pricing reduces prices to reward
customer responses such as making volume purchases,
paying early, or promoting the product.

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Price Adjustment Strategies (2 of 12)
Segmented pricing involves selling a product or service at two or
more prices, where the difference in prices is not based on
differences in costs.

Customer-segment pricing: Walgreens holds regular Senior

Discount Day events, offering 20 percent price reductions to AARP
members and to its Balance Rewards members age 55 and over.

Walgreen Co.
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Price Adjustment Strategies (3 of 12)
Segmented Pricing
• Customer-segment pricing
• Product-form pricing
• Location-based pricing
• Time-based pricing

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Price Adjustment Strategies (4 of 12)
Segmented Pricing
For segmented pricing to be effective:
• Market must be segmentable
• Segments must show different degrees of demand
• Costs of segmenting cannot exceed the extra revenue
• Must be legal

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Price Adjustment Strategies (5 of 12)
Psychological Pricing
Psychological pricing considers the psychology of prices
and not simply the economics; the price is used to say
something about the product.
Reference prices are prices that buyers carry in their minds
and refer to when they look at a given product.

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Psychological Pricing

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Price Adjustment Strategies (6 of 12)
Promotional Pricing
Promotional pricing is characterized by temporarily pricing
products below the list price, and sometimes even below
cost, to increase short-run sales. Examples include:
• special-event pricing
• limited-time offers

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Price Adjustment Strategies (7 of 12)
Geographical pricing is used for customers in different
parts of the country or the world.
• FOB-origin pricing
• Uniform-delivered pricing
• Zone pricing
• Basing-point pricing

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Price Adjustment Strategies (8 of 12)
Geographical Pricing
FOB-origin (free on board) pricing is a geographical
pricing strategy in which goods are placed free on board a
carrier; the customer pays the freight from the factory to the
destination.
Uniform-delivered pricing is a geographical pricing
strategy in which the company charges the same price plus
freight to all customers, regardless of their location.

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Price Adjustment Strategies (9 of 12)
Geographical Pricing
Zone pricing is a strategy in which the company sets up two
or more zones where customers within a given zone pay the
same price.
Basing-point pricing means that a seller selects a given
city as a “basing point” and charges all customers the freight
cost from that city to the customer.

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Price Adjustment Strategies (11 of 12)
Dynamic pricing involves adjusting prices continually to meet the
characteristics and needs of individual customers and situations.

Dynamic online pricing benefits both sellers and buyers.

Consumers armed with instant access to product and price
comparisons can often negotiate better in-store prices.

© Lev Dolgachov / Alamy

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Price Adjustment Strategies (12 of 12)
International pricing: Companies must decide what price to charge in
different countries. It varies due to the following reasons: economic
conditions, competitive situations, laws and regulations etc.

James McCauley/Harrods via Getty Images

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Learning Objective 4
Discuss the key issues related to initiating and responding to
price changes.

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Price Changes (1 of 5)
Initiating Price Changes
Price cuts occur due to:
• Excess capacity
• Increased market share
Price increases occur due to:
• Cost inflation
• Increased demand
• Lack of supply

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Price Changes (2 of 5)
Buyer Reactions to Pricing Changes
• Price increases
– Product is “hot”
– Company greed
• Price cuts
– New models will be available
– Models are not selling well
– Quality issues

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Price Changes (3 of 5)
Competitor Reactions to Pricing Changes
• Why did the competitor change the price?
• Is the price cut permanent or temporary?
• Is the company trying to grab market share?
• Is the company doing poorly and trying to increase sales?
• Is it a signal to decrease industry prices to stimulate
demand?

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Price Changes (4 of 5)
Figure 11.1 Responding to Competitor Price Changes

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Price Changes (5 of 5)
Responding to Pricing Changes
Effective Action Responses
• 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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The Decoy Effect
•
https://www.youtube.com/watch?v=y35KuN8WDKE

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The Allais Paradox
•
https://www.youtube.com/watch?v=c26wIhnDK9Q&t=110s

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