1. Lecture 12
Pricing strategiesPricing strategies

2. Pricing strategiesPricing strategies
GeographicalGeographicalGeographicalGeographical
DiscountDiscountDiscountDiscount
PromotionalPromotionalPromotionalPromotional Product-mixProduct-mixProduct-mixProduct-mix
New-productNew-productNew-productNew-product
DiscriminatoryDiscriminatoryDiscriminatoryDiscriminatory

3. GEOGRAPHICAL PRICINGGEOGRAPHICAL PRICING
• FOB ORIGIN PRICING - the goods are placed free on board a
carrier, at which point the title and responsibility passes to the
customer, who pays the freight from the factory to the destination.
• UNIFORM DELIVERED PRICING - the company charges
the same price plus freight to all customers regardless of their
location. (=postage stamp pricing)
• ZONE PRICING - the company establishes two or more zones.
All customers within a zone pay the same total price; and this price
is higher in the more distant zones.
• BASING-POINT PRICING - allows the seller to designate
some city as a basing point and charge all customers the freight
cost from that city to the customer location regardless of the city
from which the goods are actually shipped.
• FREIGHT ABSORPTION PRICING - the seller who is
anxious to do business with a particular customer geographical
area might absorb all or part of the actual freight charge in order to
get the business. Freight absorption pricing is used for market
penetration and also to hold on to increasingly competitive
markets.

4. DISCOUNT PRICING ANDDISCOUNT PRICING AND
ALLOWANCESALLOWANCES
• CASH DISCOUNTS - a cash discount is a
price reduction to buyers who pay their bill
promptly
• QUANTITY DISCOUNTS - is a price
reduction to buyers who buy large volumes
• FUNCTIONAL DISCOUNTS - are offered
by the manufacturer to trade channel
members who perform certain functions
such as selling, storing, and record keeping.
• ALLOWANCES - are other types of
reductions from the list price.

5. Cash discounts
Direct payment mechanisms
• Companies may offer a price reduction to those
customers who pay their bills using a direct debit
system.
• For example, in the United Kingdom the utility
providers offer discounts to customers who opt for
direct debit payments.
• This allows the utility company to withdraw a set
amount directly from the customer's bank account
on a specific day each month or quarter of the year.
• This reduces potential delays for the utility company
receiving payment (subject to there being sufficient
funds in the customer's bank or credit card
account), and provides an incentive to the customer
to adopt a direct payment method.

6. • The principle that manufacturer prices
are at their cheapest when large
quantities are produced (economies of
scale)
• Money is received quickly
• Removing chances for the competition
(in bulk purchase)
• Adding benefits for the customer

7. Trade-in allowances
• A company may offer a prospective
buyer a price reduction for trading in an
old item when a new one is purchased.
• This approach has been used
extensively in the car retail business.
Car owners trade in their used car for
another used car, or a new one. The
dealer offers owners a trade-in priсе for
their old car, and this is offset against
the price of the new purchase.

8. PROMOTIONAL PRICINGPROMOTIONAL PRICING
• (pricing below the list price and below cost)
• Pricing a few products as loss leaders to
attract customers so that they will buy other
things at normal markups.
• Special-event pricing in certain seasons to
draw in more customers
• Offering cash rebates to consumers who
buy the product from dealers within a
specified time period.
• Psychological discounting - the seller puts
an artificially high price on a product and
offers it at substantial savings

9. Special event pricing
• This is a special price set for a product, product
range or service for a limited time frame and
event.
• For example, a supplier or retailer might
celebrate an anniversary, and advertise special
discounts for the anniversary week or month.
These could be based upon, for example:
• The length of the anniversary, such as '25 per
cent off all products to celebrate our 25 years in
business'
• The prices for similar products when the retailer
first opened.

10. • High fixed costs
• The relevant application of seasons and
timings
• Benefit to both the producer and the
customer
• Geo-demographics
• The same products or services being sold in
the same position at different prices
geographically
Special event pricing

11. Special-event pricing
Differential pricing
This is normally a price reduction for buyers who
purchase the product or service out of its normal
seasonal pattern. Here are a few examples:
• Winter fashions are discounted just prior to the
arrival of the spring/summer collections.
• Garden furniture and barbecues may be
discounted during the autumn/winter period.
Retailers use this type of discounting to move old
stock in preparation for the arrival of new lines.
• Holiday companies use differential pricing during
peak and off-peak seasons. For example, a
vacation in southern Spain will be cheaper in
April/May when the weather is milder than in
July/August when it is usually hot and dry - ideal
for beach and sun lovers. Hotels may charge a

12. Special-event pricing
Book early discount
• Travel companies use this technique to
sell holidays several months
beforehand.
• A holiday booked for July but paid for in
January may command a significant
discount.

13. Psychological pricing
• It could be argued that all pricing relies
on a combination of economics and
psychology.
• While pricing may be rooted in
economics in terms of supply and
demand, it is often from the
psychological perspective that we
decide to make the purchase.

14. Psychological pricing
Prestige pricing
• The word 'prestige' symbolizes reputation, glamour, respect,
power and influence. These are not only 'value-driven'
phrases but clearly psychological ones as well. Therefore
products or services that exemplify such characteristics
need to reflect these in the price. Indeed prestige pricing
can often be used to create an 'extreme image' of the
product or service, which defines it within its prescribed
segment of the marketplace. It also significantly
differentiates it from other general market segments.
• Russian caviar. In many countries caviar has a prestige
value and so carries an associated high price.
• Luxury sports cars. Whether these are Aston Martins or
Ferraris, their prestige value is reflected in their pricing.
• Certain types of drinks. For instance fine cham­pagne or
Napoleon Cognacs may be priced at €500 or more a bottle.
• A five-star hotel.

15. Psychological discounting
Odd-even pricing
• Here the product is priced at an odd number
rather than being rounded up to a whole or even
number, for example a CD priced at UK£4.99
rather than UK£5.00.
• While it is obvious it is only one penny cheaper,
the perception is that it is cheaper. Consumers
may focus more on the '4' or even the '99' rather
than rounding up the number.
• This method of psychological pricing may well
entice the consumer to buy more products in the
price range.

16. Psychological discounting:Psychological discounting:
BUY ONE GET ONE FREEBUY ONE GET ONE FREE
• This is also known as a BOGOF promotion, and is
generally used in the retail sector as a means of
promoting own-label brands.
• Originally it was limited to two identical items such
as two bars of soap.
• Increasingly it has been broadened to include a
range of products, but generally they are all own-
label brands.
• Companies that use BOGOF promotions tend to
set specific time frames, for example, 'for two
weeks only'.
• This is a further psychological incentive to
prospective buyers.

17. Buy one get one freeBuy one get one free
There are several variations on this theme:
• Three for the price of two, which as the title suggests is a
greater value incentive to the purchaser. The retailer may
use this option as a means of reducing a stock inventory.
• Lower price item reduced: when two items are bought
from a particular range the lower-priced item is
discounted. The objective here is to create an incentive
for the buyer to try another product within the product
range.
• Free product with every purchase: this can be used as a
co-branding exercise where the company links up with a
related product: for example, a toothpaste manufacturer
co-brands with one that produces toothbrushes. Although
the toothbrush is free it provides the manufacturer with a
promotional outlet which may lead to increasing
purchases

18. Bundling or the all-inclusive
concept
• Here several products or services are offered as
a package at a single price.
• Vacations, computers, restaurant menus and
DVD box sets are four common examples of
where companies use bundling techniques.
• Generally the all-inclusive concept goes much
further and covers practically everything a hotel
or resort has to offer, including all drinks, taxes,
transfers from and to airport to hotel and sports.
• A result of such a price package, in most
cases, is money being eliminated from the
holiday experience and the visitor knowing in
advance what their holiday is likely to cost,
except for personal expenses, such as
telephone calls, laundry, car hire, dining off-
property and shopping.

19. DISCRIMINATORY PRICINGDISCRIMINATORY PRICING
Modification of the basic price to accommodate
differences in customers, products, locations:
Takes place on the:
1. Customer basis - different customers pay
different amounts for the same product or service
2. Product-form basis - different versions of the
product are priced differently but not
proportionately to their respective costs
3. Place basis - different locations are priced
differently
4. Time basis - prices are varied seasonally, by
the day, and even by the hour

20. NEW PRODUCT PRICINGNEW PRODUCT PRICING
PRICING AN INNOVATIVE PRODUCT:
Market-skimming pricing
1. sufficient number of buyers have a high current demand;
2. the unit costs of producing a small volume are not so much
higher that they cancel the advantage of charging what the
traffic will bear; the high initial price will not attract more
competitors;
3. the high price supports the image of a superior product.
Market penetration pricing
1. the market is highly price-sensitive, and a low price stimulates
more market growth;
2. production and distribution costs fall with accumulated
production experience;
3. a low price discourages actual and potential competition,

21. Price skimming
• The objective here is to charge a higher than normal price
for a specific time frame.
• Assuming that the product or service demonstrates
volume sales, the difference between the normal price and
the higher price can be 'skimmed off'.
• A company may choose price skimming during the
introductory and early growth stages of the product's life
cycle.
• This is because the product or service may be price
inelastic.
• A company is unlikely to be able to maintain a price
skimming strategy for a significant length of time.
• If the product is based on a new technology, once that
technology is established and can be imitated there will be
new entrants to the market­place.

22. Penetration pricing
• The overall objective of penetration pricing is to
find a way of accessing a market by cutting
through existing pricing structures or strategies.
• Penetration pricing can be used to achieve the
following aims:
• Entry into an existing market through the introduction
and maintenance of very low prices set against the
average price for that product or service.
• The development of a new low-price segment, often
within the existing marketplace.
• The acquisition of increased market share over the
medium and longer term.

23. Pricing an imitative new product
• A company that plans to develop an
imitative new product faces a product-
positioning problem. It must decide where
to position the product on quality and price.
• The table 1 shows nine possible
price/quality strategies.

24. Price/quality High Medium Low
High Premium
strateg
y
Penetration
strategy
Superb-
value
strategy
Medium Overcha
rging
strateg
y
Average
strategy
Good value
strategy
Low Rip-off
strateg
Borax
strategy
Cheap value
strategy
Pricing an imitative new
product

25. PRODUCT MIX MARKETINGPRODUCT MIX MARKETING
The logic of setting a price is differentThe logic of setting a price is different
in four situations:in four situations:
• product-line pricing
• optional product pricing
• captive product pricing
• byproduct pricing

26. Product-line pricing
• Companies normally develop product lines rather than
single products.
• The relationship between the price of the new product
and other products in the company's product line.
• A company that produces and markets several similar
products will need to consider the effect of the new
product on existing ranges.
• Pricing the product too low, for example, may cannibalize
sales from the company's existing ranges as well as from
competitors.
• While this might in the short term be good for the new
product, it will have a financial impact on existing trusted
brands. In the longer term this could be damaging to the
company, especially if the new product begins to lose
ground in the marketplace.

27. Optional product pricing
• Many companies offer to sell optional or accessory
products along with their main product.
• The automobile buyer can order electric window
controls, defoggers, and light dimmers.
• However, pricing these options is a sticky problem.
Automobile companies have to decide which items
to build into the price and which ones to offer as
options.
• General Motors' normal pricing strategy is to
advertise a stripped-down model for $6,000 to pull
people into the showrooms and devote most of the
showroom space to displaying loaded cars at
$8,000 or $9,000.

28. Captive product pricing
• Companies in certain industries produce products
that must be used with the main product.
• Examples of captive products are razor blades
and camera: film.
• Manufacturers of the main products (razors and
cameras) often price them low and set high
markups on the supplies.
• Thus Kodak prices its cameras low because it
makes its money on selling film. Those camera
makers who do not sell film have to price their
cameras higher in order to make the same
overall profit.

29. Byproduct pricing
• In producing processed meats, petroleum
products, and other chemicals, there are often
byproducts.
• If the byproducts have no value and disposing of
them is in fact costly, this will affect the pricing of
the main product.
• The manufacturer will seek a market for these
byproducts and should accept any price that
covers more than the cost of storing and
delivering them.
• This will enable the seller to reduce the main
product's price to make it more competitive.

30. INTERNATIONAL PRICINGINTERNATIONAL PRICING
• There are many issues to consider
when pricing products and services
across international boundaries. As a
result companies may adopt a variety of
pricing mechanisms for international
business.
• It is important to remember that these
mechanisms are not set in stone and
thus can be changed depending on the
circumstances facing the company.

31. INTERNATIONALINTERNATIONAL
PRICINGPRICINGStandard worldwide pricing
• This is a pricing tactic that can be used to cover
all international markets.
• It is determined by averaging the unit cost, made
up of fixed, variable and export-related costs
(including special packaging, insurance,
warehousing and tariff charges - refer to
Incoterms and other charges as stated earlier).
• Generally, this has been considered a
theoretical model. However, with the
development of European Monetary Union, it
may be possible for companies operating in this
zone to create standard pricing for some
products.

32. INTERNATIONAL PRICINGINTERNATIONAL PRICING
Dual pricing mechanism
• In dual pricing domestic and international prices are
differentiated. Two approaches or methods can be used to
calculate the international price: the cost-plus method and
marginal cost method.
• Cost-plus: this is a full allocation of both domestic and
international costs, and includes an effective margin.
However, there are two key problems with such a method.
First, it can make the product too expensive for the intended
market. To overcome this obstacle, companies often build in
a degree of flexibility. This usually comes in the form of
discounts to meet local market conditions. Second, the
company can under price the product or service. In addition
to the potential loss of revenues, buyers may perceive the
product or service as inferior because of its low price.

33. INTERNATIONAL PRICINGINTERNATIONAL PRICING
Dual pricing mechanism
• Marginal cost: here the company considers
the direct costs of producing, marketing and
selling the product for export. The fixed costs
of plant, equipment, research and
development, domestic overheads and
domestic marketing costs are not included. As
a result, the company can lower prices if it
believes it needs to be more competitive
(purely on price) within the market.

34. MARKET PRICING
• In such cases, companies price their products
and services appropriately for specific individual
markets.
• Such price discrimination involves charging a
price each market will accept. The determinants
are reflected in the company and its products,
the market and external factors.
• These factors vary to a greater or lesser extent
from one country to another. These dynamics
are often reflected in the pricing policies of
multinational companies.

35. ETHICAL AND ILLEGAL
PRICING ISSUES
• Pricing tactics are not without the need for
serious ethical consideration. Every one of us
makes transactions in order to obtain and
consume products and services.
• In each and every case we are seeking both
perceived and real value for the money
exchanged. We want to know that we have paid
the right price for the product or service.
• Unfortunately, we are all - individuals and
companies alike -susceptible to being cheated by
unethical business practices.

36. ETHICAL AND ILLEGAL PRICING ISSUES:
DUMPING
• Companies may decide to 'dump' their
products on the market by pricing them below
their marginal cost. This implies that the
seller is making a loss on each transaction.
This tactic has been used to penetrate difficult
or highly competitive markets, and thus
increase market share.
• Once the company has gained market entry
and established a position, it can increase
prices and/or introduce newer products into
that market.
• While it could be argued that the customer is
benefiting in the short term, there are long-
term implications.

37. ETHICAL AND ILLEGAL PRICING
ISSUES: DUMPING
• Dumping has been made illegal in many
countries, including the European
Union, because it is anticompetitive. If a
company can gain significant market
share by dumping its products, it could
reduce the effectiveness of the
competitive environment.
• Some rivals might be forced to seek
alternative markets or cease operations.
In the longer term this is detrimental to
customers because the element of
choice is either restricted or removed
altogether.

38. ETHICAL AND ILLEGAL PRICING
ISSUES
Price fixing - cartel operations
• A cartel is where groups of competing companies
or countries agree on a set price for a product or
service. The world's leading cartel is the
Organization of Petroleum Exporting Countries
(OPEC).
• Formed in I960, this is a cartel of 13 oil-producing
nations which meet regularly to coordinate both
the level of production and the price per barrel of
crude oil originating from them.
• While it could be argued that the formation of
OPEC was a justifiable response to the
dominance of Western oil producers,
contemporary cartel operations cannot provide

39. ETHICAL AND ILLEGAL PRICING
ISSUES
Bait and switch
• According to Hoyer and Maclnnis (1997), this is a tactic
used to draw a customer into a store by advertising a
product at a particularly low price (the 'bait').
• Once potential customers are in the store a sales person
attempts to persuade them to trade up to a higher-priced
product (the 'switch').
• Sales staff uses several techniques to persuade
customers to buy the higher-priced product.
• For instance, they might claim the advertised product is
out of stock, such was the demand for it. Of course, the
product advertised might not have existed in the first
place, or there might be no difference in quality between it
and the 'trade-up' product. Clearly, the aim is to get the
customer to spend more through the use of deceptive
tactics. Such actions may well be illegal as well as
unethical.

41. Pricing constraints are factors that limit the latitude of
prices a firm may set. Pricing constraints include:
• demand for the product class, product, and brand
• newness of the product: stage in the product life cycle
• single product versus a product line
• cost of producing and marketing the product
• cost of changing prices and time period they apply
• competitor prices
• type of competitive markets
• pure monopoly
• oligopoly
• monopolistic competition
• monopoly

42. REACTIONS TO PRICE
CHANGES
Any price change can provoke
a response from customers,
competitors, suppliers, and
even government.
We will look at the response from
customers and competitors

43. Customers' Reactions
to Price changes
A price cut can be interpreted in
different ways:
• The item is about to be replaced by
a new item is faulty and is not
selling well;
• The firm is in financial trouble; the
come down even further; the quality
has been reduced.

44. Customers' Reactions
to Price changes
A price increase, which would
normally deter sales, may carry some
positive things to customers:
• The item is "hot" and represents an
unusually good value.
• Customers are most price sensitive
to products that cost a lot or are
bought infrequently. They hardly
notice higher prices on low-cost
items that they buy infrequent.

45. Competitors' Reactions to Price
changes
• Competitors are most likely to
react where the number of firms
are few, the product is
homogeneous, and buyers are
highly informed.

46. Anticipating competitors’ reactions
• One way is to assume that the competitor reacts in
a set way to price changes.
• The other is to assume that the competitor treats
each price change as a fresh challenge and reacts
according to self-interest at the time.
• In this case, the company will have to figure out what lies
in the competitor's self-interest.
• It will need to research the competitor's current financial
situation, recent sales, customer loyalty, and corporate
objectives.
• If the competitor has a market-share objective, it is likely
to match the price change.
• If it has a profit-maximization objective, it may react by
increasing the advertising budget or improving product
quality.

47. RESPONDING TO COMPETITORS'
PRICE CHANGES
• If the competitor raises its price in a
homogeneous product market, the
other firms might not match it, unless
the price increase will benefit the
industry as a whole.
• By not matching it, the leader will have
to rescind the increase.

48. RESPONDING TO COMPETITORS'
PRICE CHANGES
• In nonhomogeneous product markets, a firm has more
latitude. The firm needs to consider the following issues:
• (1) Why did the competitor change the price? Is it to steal
the market, to utilize excess capacity, to meet changing
cost conditions, or to lead an industrywide price change?
• (2) Does the competitor plan to make the price change
temporary or permanent?
• (3) What will happen to the company's market share and
profits if it does not respond? Are other companies going
to respond?
• (4) What are the competitor's and other firms' responses
likely to be to each possible reaction?

49. Market leader responding strategies
• Market leaders frequently face
aggressive price cutting by smaller firms
trying to build market share.
• Using price, Fuji attacks Kodak, Bic
attacks Gillette, and Compaq Hacks
IBM.
• Brand leaders also face lower-priced
private store brands. The brand leader
can respond in several ways:

50. The leader might maintain its price and profit margin,
believing that:
• (1) it would lose too much profit if it reduced its price,
• (2) it would not lose much market share, and
• (3) it could regain market share when necessary.
• The leader believes that it can hold on to good customers
and give up the poorer ones.
• However, the argument against price maintenance is that
the attacker gets more confident, the leader's sales force
gets demoralized, and the leader loses more share than
expected.
• The leader panics, lowers price to regain share, and finds
that regaining its market position is more difficult and
costly than expected.
Maintain priceMaintain price

51. Maintain price and add value
• The leader could improve its product,
services, and communications. The firm
may find it cheaper to maintain price
and spend money to improve perceived
quality than to cut price and operate at
a lower margin.

52. Seduce price
• The leader might drop its price to match
the competitor's price. It might do so
because
• (1) its costs fall with volume,
• (2) it would lose market share because
the market is price sensitive, and
• (3) it would be hard to rebuild market
share once it is lost. This action will cut
profits in the short run.

53. Increase price and improve
quality
• The leader might raise its price and
introduce new brands to bracket
the attacking brand.

54. Launch a low-price fighter line
• Add lower-price items to the line or
create a pirate lower-price brand.
• Miller Beer launched a lower-priced
beer brand called Red Dog.

55. RESPONDING TO COMPETITORS'
PRICE CHANGES
• The best response varies with situation.
The company has to consider the
product’s stage in the life cycle, its
importance in the company's portfolio,
the competitor's intentions and
resources, the market's price and
quality sensitivity, the behaviour of
costs with volume, and the company's
alternative opportunities.

56. Thank you forThank you for
attention!attention!