UNIT 4

Video Case: Song Airlines 11-2

https://youtube/JOuoVK8W1uQ?si=OaEjWHz9tghk2iWR

Discussion Questions:
1. How did Song lower fixed costs? How did the company lower variable costs?
2. Which of the external factors do you believe had the largest impact on
Song’s pricing decisions?
3. What pricing approach did Delta use when setting prices for passenger
tickets on Song flights?
4. Can Delta successfully employ the lessons learned from Song?
Chapter Outline 11-3

1. New-Product Pricing Strategies

2. Product Mix Pricing Strategies
3. Price Adjustment Strategies
4. Price Changes
5. Public Policy and Pricing
New-Product Pricing Strategies 11-4

Two Broad Strategies

 Market skimming pricing – set a high initial price
 Market penetration pricing – set a low initial price
New-Product Pricing Strategies 11-5

Market skimming pricing is a strategy with high initial prices to “skim”

revenues layer-by-layer from the market.

 Product quality and image must support the price.

 Buyers must want the product at the price.
 The costs of producing a smaller volume cannot be so high that they cancel the
advantage of higher prices.
 Competitors should not be able to enter the market easily and undercut the high
price.
 New-Product Pricing Strategies 11-6

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
market share.

 Price sensitive market

 Production and distribution costs must fall as sales volume increases
 Low prices must keep competition out of the market.
Product-Mix Pricing Strategies 11-7

The firm looks for a set of prices that maximizes the profits on
the total product mix.
Five product mix pricing situations

 Product line pricing – the products in the product line

 Optional product pricing – optional or accessory products
 Captive product pricing - complementary products
 By-product pricing – by-products
 Product bundle pricing – several products
Product-Mix Pricing Strategies 11-8

Product line pricing takes into account the cost difference between products in
the line, customer evaluation of their features, and competitors’ prices. – the price
differences represent the perceived quality differences

Normal Hair Anti-dandruff Hair Fall Defense Oily Hair

$3.90 $4.90 $4.90 $3.90
Product-Mix Pricing Strategies 11-9

Optional product pricing takes into account optional or accessory

products along with the main product. – Decide which items
to include in the base price and which to offer as
options

New car with sports rims

$60,000
New car with ordinary rims
$59,000
Product-Mix Pricing Strategies 11-10

Captive product pricing involves products that must be used along with the
main product.

– Price the main, or driver product low and seek high margins on the supplies

 For services: two-part pricing is where the price is broken into fixed fee
and variable usage fee.
– Decide how much to charge for the basic service and how much for the variable
usage
– The fixed amount should be low enough to induce usage of the service; profit can be
made on the variable fees
Product-Mix Pricing Strategies 11-11

By-product pricing refers to products with little or no value produced

as a result of the main product.

 Producers will seek little or no profit

 Producers should accept any price that covers more than the cost to
cover storage and delivery.
 Product-Mix Pricing Strategies 11-12

Product bundle pricing combines several products and offer the bundle
at a reduced price.

 Price bundling can promote the sales of products

1 bottle: $2.70 Bundled 2 bottles: $4.90

 Product Line Pricing:
Example: Apple
Apple offers a range of products such as iPhones, iPads, and
MacBooks. Each product within the line is priced differently based on
its features and capabilities. For instance, within the iPhone product
line, different models are priced at varying levels to cater to different
customer segments.

 Optional Product Pricing:

Example: Airlines
Airlines often use optional product pricing by offering additional
services such as extra legroom, priority boarding, or in-flight meals
at an additional cost. Passengers can choose to pay for these
optional services based on their preferences.
Captive Product Pricing:
Example: Printers and Ink Cartridges
Printer manufacturers often sell printers at a relatively low
price and make profits through the sales of ink cartridges,
which are proprietary and must be purchased from the
same manufacturer. The initial low printer price acts as a
"captive" product to drive ongoing revenue from
consumables.
 Product Bundle Pricing:
Example: Fast Food Chains
Fast food restaurants often offer bundled meals where customers can purchase a
combination of items (burger, fries, and a drink) at a lower price than if they were
bought individually. This encourages customers to buy more items in a single
transaction.
 Price Adjustment Strategies 11-16

Companies adjust basic prices to account for various

customer differences and changing situations.
 Discount and allowance pricing
 Segmented pricing
 Psychological pricing
 Promotional pricing
 Geographical pricing
 Dynamic pricing
 International pricing
 Discount and Allowance Pricing
 Discount Pricing:
• Definition: Discount pricing involves reducing the selling price of a
product or service, either temporarily or permanently, to stimulate
sales or attract customers.
• Objective: The primary purpose of discount pricing is to increase sales
volume, clear out excess inventory, or encourage customers to make a
purchase they might otherwise postpone.
• Examples:
• Offering a percentage discount (e.g., 20% off) on clothing items during a
clearance sale.
• Providing a cash discount (e.g., $50 off) on electronic gadgets for a limited time.
• Implementing a buy-one-get-one-free (BOGO) promotion on food items at a
grocery store.
• Offering seasonal discounts, such as holiday sales or back-to-school discounts.
 Allowance Pricing:
Definition: Allowance pricing involves offering incentives or
concessions to customers or intermediaries, such as retailers or
distributors, to encourage them to promote or sell the product.
Purpose: The primary purpose of allowance pricing is to encourage
intermediaries to carry the product, provide shelf space, or engage
in promotional activities.
Examples:
• Providing trade discounts to retailers for purchasing large quantities of
products.
• Offering promotional allowances to retailers for featuring the product
prominently in their stores or running special promotions.
• Giving cooperative advertising allowances to retailers to help cover the
cost of advertising the product.
• Providing slotting allowances to retailers for granting shelf space to a new
product.
 Price Adjustment Strategies 11-19

Discount and allowance pricing reduces prices to reward customer for

certain responses such as paying early, volume purchases, and off-
season buying.
 Discounts
 Cash discount for paying promptly
 Quantity discount for buying in large volume
 Functional (trade) discount for selling, storing, distribution, and record
keeping
 Allowances
 Trade-in allowance for turning in an old item when buying a new one
 Promotional allowance to reward dealers for participating in advertising or sales
support programs
 Price Adjustment Strategies 11-20

Segmented pricing is used when a company sells a product at

two or more prices even though the difference is not based on
cost.
 Adjust basic prices to allow for differences in customers, products, and
locations
 Airlines, hotels and restaurants – revenue management or yield management
 To be effective:
– Market must be segment able
– Segments must show different degrees of demand
– Watching the market cannot exceed the extra revenue obtained from the
price difference
– Must be legal
 Price Adjustment Strategies 11-21

 Customer segment pricing is when different

customer pay for different prices for the same product
or service.
 Product form segment pricing is when different
versions of the product are priced differently but not
according to differences in cost.
 Location pricing is when the product is sold in
different geographic areas and priced differently in
those areas even though the cost is the same.
 Time pricing is when a firm varies its prices by the
season, the month, the day, and even the hour.
Price Adjustment Strategies 11-22

Psychological pricing occurs when sellers consider the

psychology of prices and not simply the economics.

Reference prices are prices that buyers carry in their minds and
refer to when looking at a given product.

 Noting current prices

 Remembering past prices
 Assessing the buying situations 9
9
9.
$2
Price Adjustment Strategies 11-23

Promotional pricing is when prices are temporarily priced below

list price or cost to increase demand.
 Loss leaders
 Special event pricing
 Cash rebates
 Low interest financing
 Longer warrantees
 Free maintenance
 Risks of promotional pricing
 Used too frequently
 Copies by competitors can create “deal-prone” customers who will
wait for promotions and avoid buying at regular price.
 Creates price wars.
 Price Adjustment Strategies 11-24

Promotional Pricing
 Loss leaders are products sold below cost to attract customers in the
hope they will buy other items at normal markups.
 Special event pricing is used to attract customers during certain seasons
or periods.
 Cash rebates are given to consumers who buy products within a specified
time. A cash rebate is a type of promotional incentive offered by
companies to encourage consumers to purchase their products
 Low interest financing, longer warrantees, and free maintenance
lower the consumer’s “total price.”
1.Loss Leaders:
Example: Grocery Stores: Many grocery stores
offer loss leaders, such as deeply discounted
prices on staple items like milk or eggs, to attract
customers into the store with the expectation
that they will also purchase other items at regular
prices.
2.Special Event Pricing:
Example: Best Buy: Best Buy often offers special
event pricing during sales events like Black Friday
or Cyber Monday. They discount electronics and
appliances significantly during these events to
drive traffic to their stores and website.
3.Cash Rebates:
Example: Toyota: Toyota frequently offers cash rebates on select models as
part of their promotional campaigns. These rebates incentivize customers to
purchase vehicles by providing them with a cash incentive after the
purchase.
4.Low Interest Financing:
Example: Ford: Ford Motor Company offers low-interest financing deals on
many of its vehicles, especially during promotional periods. These financing
offers allow customers to purchase vehicles with lower monthly payments,
making them more affordable and attractive.
5.Longer Warranties:
Example: Apple: Apple often extends the warranty period on its products as
a promotional strategy. For instance, they may offer a one-year extended
warranty on certain products, providing customers with additional peace of
mind and confidence in their purchase.
Price Adjustment Strategies 11-27

Geographical pricing is used for customers in

different parts of the country or the world.
 FOB pricing
 Uniformed delivery pricing
 Zone pricing
 Basing point pricing
 Freight absorption pricing
11-28
Price Adjustment Strategies 11-29

 Dynamic pricing is when prices are adjusted continually to

meet the characteristics and needs of the individual customer
and situations.
 International pricing is when prices are set in a specific
country based on country-specific factors.
– Economic conditions
– Competitive conditions
– Laws and regulations
– Infrastructure
– Company marketing objectives
Price Changes 11-30

Initiating Pricing Changes

 Price cuts is a reduction in selling price.
 Excess capacity
 Increase market share
 Price increases is an increase in selling price
 Cost inflation
 Increased demand and lack of supply
Buyers’ Interpretation to Price Changes
 Price cuts
 New models will be available
 Models are not selling well
 Quality issues
 Price increases
 Product is “hot”
 Company greed
 Price Changes 11-31

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 profits?
 Will competitors respond?
 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”
Public Policy and Pricing
Public Policy and Pricing refers to the various laws, regulations, and government
interventions that influence how businesses set prices for their products and services.
Governments often step in to regulate pricing practices to protect consumers,
promote fair competition, and ensure that essential goods and services are accessible
to all. Public policy also shapes the broader economic environment in which pricing
decisions are made, balancing business interests with consumer protection and social
welfare.

Here are the main ways in which public policy influences pricing:
 Price Controls
 Antitrust Laws and Competition Policy
 Consumer Protection Laws
 Subsidies and Government Pricing Support
 Taxes and VAT (Value-Added Tax)
 International Trade and Tariffs
1. Price Controls
Price controls are legal restrictions imposed by the government on how high or low a price
can be. These controls are often implemented to protect consumers from prices that may be
deemed unfair, exploitative, or harmful to the economy.

Types of Price Controls:

• Price Ceilings (Maximum Price Limits): A price ceiling is a government-imposed

limit on how high a price can be charged for a product. This is often used in situations
where essential goods are deemed too expensive for consumers.

Example: Rent control laws in some cities place a cap on how much landlords can charge
tenants. Another example is gasoline price ceilings during crises like natural disasters or wars,
where governments might impose limits on how much gas stations can charge.

• Price Floors (Minimum Price Limits): A price floor sets a minimum price for a good
or service, ensuring that businesses cannot sell below a certain level. Price floors are
used to ensure that producers, particularly in agriculture or labor markets, are
compensated fairly.

Example: Minimum wage laws set the lowest legal hourly wage that can be paid to
workers, ensuring fair compensation for labor. Similarly, minimum price guarantees for
agricultural products can help farmers avoid selling at a loss.
 2.Antitrust Laws and Competition Policy

Antitrust laws are designed to prevent monopolies and promote competition in the
market. These laws influence pricing by restricting certain business practices that
could harm competition and lead to unfair pricing.

Key Antitrust Policies and Their Impact on Pricing:

• Predatory Pricing: Predatory pricing is the practice of setting prices extremely low
in order to drive competitors out of the market. Once competitors are eliminated,
the firm may raise prices. Governments regulate this behavior to prevent anti-
competitive practices.

Example: Large companies like Amazon and Walmart have faced accusations of
predatory pricing in certain markets to eliminate local competition, after which they may
raise prices once dominance is achieved.

• Merger and Acquisition Scrutiny: When companies merge or acquire one

another, antitrust regulators often evaluate whether the merger would lead to less
competition and higher prices in the market.

Example: In 2020, the U.S. Federal Trade Commission (FTC) blocked the proposed
merger between T-Mobile and Sprint on the grounds that it would reduce competition
and harm consumers by increasing prices.
3. Consumer Protection Laws
Consumer protection laws are designed to safeguard the interests of consumers, ensuring
they are treated fairly and transparently by businesses. These laws can have a significant
effect on how businesses price their products.

Key Consumer Protection Policies:

•Truth in Advertising and Pricing: Governments regulate how businesses advertise

prices to ensure that consumers are not misled by deceptive pricing practices.
Example: The Federal Trade Commission (FTC) in the U.S. enforces laws that require
businesses to clearly disclose the total price of products, including any hidden fees or
additional charges.

•Unfair or Deceptive Pricing Practices: Businesses are prohibited from using false or
misleading pricing strategies, such as bait-and-switch tactics or hidden fees, to attract
customers.
Example: If a retailer advertises a product at a low price but then attempts to charge
customers higher prices once they reach the checkout, it would be considered deceptive
pricing, and the business could be penalized under consumer protection laws.

•Warranty and Return Policies: Some pricing strategies are also influenced by
requirements for product warranties and return policies, ensuring that consumers are not
unfairly charged for defective products.
4.Subsidies and Government Pricing Support

In some industries, governments provide subsidies or direct financial support to help reduce
the cost of goods and services, making them more affordable for consumers.
Examples of Government Subsidies:

•Agricultural Subsidies: Governments may provide subsidies to farmers to keep the price of
food products low for consumers, ensuring that essential goods remain affordable even in
times of fluctuating demand or poor harvests.

Example: U.S. farm subsidies help keep prices for staple crops such as corn, wheat, and
soybeans lower, benefiting both consumers and producers.

•Energy Subsidies: In some countries, governments may subsidize the cost of energy (such as
electricity or fuel) to ensure that citizens can access affordable energy, especially in
developing regions.

Example: Subsidized electricity in certain developing countries helps keep energy prices low
for consumers, often at the expense of government budgets.

•Public Health Initiatives: Governments may subsidize the cost of medications or vaccines to
ensure public health accessibility. This is particularly important in managing public health
crises, such as pandemics.

Example: During the COVID-19 pandemic, many governments provided subsidized pricing
for vaccines and personal protective equipment (PPE) to ensure they were affordable and
available to everyone.
5.Taxes and VAT (Value-Added Tax)

Governments often impose taxes on goods and services, which can directly influence
the final price that consumers pay. Taxes can be levied on various products, and
companies may pass these costs onto customers through higher prices.
Types of Taxes Impacting Pricing:

•Sales Tax: A tax added to the sale of goods and services, which can increase the final
price paid by consumers.
Example: European Union countries impose Value-Added Tax (VAT) on most
consumer goods, which businesses include in the final price.

•ExciseTax: A specific tax on certain goods, such as alcohol, tobacco, and fuel, which
increases their price.
Example: Tobacco companies often raise prices on cigarettes to account for excise
taxes, making these products more expensive for consumers.

•Carbon Tax: Governments may impose taxes on products that contribute to

environmental pollution or carbon emissions, which can affect pricing in industries
like energy, transportation, and manufacturing.
Example: Fuel prices in some countries may be higher due to carbon taxes aimed at
reducing environmental impact.
6.International Trade and Tariffs

Governments may impose tariffs or trade barriers on imported goods, which

can increase the price of foreign products in a domestic market. These
policies are often used to protect domestic industries but can also lead to
higher costs for consumers.

Example: The U.S.-China trade war led to tariffs being imposed on a

wide range of goods, including electronics and consumer products. As a
result, prices for imported goods increased for American consumers.

Example: European Union countries have tariffs on certain agricultural

imports, which affects the price of imported foods, leading to higher prices
for consumers.