1. 1
Chapter 11
Pricing Products:
Pricing Considerations and
Strategies
2. 2
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.
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.
3. 3
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.
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.
4. 4
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)
5. 5
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)
6. Price-Adjustment Strategies:
Discount & Allowance (pp. 403-404)
6
Adjusting the basic price to reward customers,
or to provide incentives for certain responses
(most are for channel members & business buyers)
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)
7. 7
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
8. Price-Adjustment Strategies:
Segmented Pricing (p. 404)
8
Selling products at different prices
based on differences in demand,
not on differences in cost
Customer segment
pricing
Location pricing
Product form pricing
Product - Form Time pricing
9. Price-Adjustment Strategies:
Psychological Pricing (pp. 405-407)
Considers the psychology of prices, not
just the economics.
Price is an important quality signal
when customers can’t otherwise judge
quality; price is used to “say
something” about a product.
Reference prices
9
Show price comparisons
Display with more/less expensive alternatives
Odd-pricing, even-pricing
E.g., $49.99 versus $50.00
10. Price-Adjustment Strategies:
Promotional Pricing (p. 408)
pricing products below
the regular price to
increase short-term
10
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sales
Danger – addictive;
over-reliance can damage
brand equity & train consumers
to be “deal prone”
11. 11
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?
12. 12
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
Consumer
Reaction:
• Positive; or
• Being replaced?
• Not selling?
• Co. in trouble?
• Quality lower?
• Prices coming
down further?
Consumer
Reaction:
• Negative
(explain,
disguise?)
• Positive
(“hot,”
prestige)
Competitor Response:
Follow? – oligopoly, perfect competition
Position against? – monopolistic competition
13. Assessing & Responding to
Competitor’s Price Changes
(Fig. 11.1, pp. 413-414)
13
Has competitor cut
price?
Will lower price
negatively affect our
market share & profits?
Can / should effective
action be taken?
Hold current price;
continue to monitor
competitor’s price
Reduce price
Raise perceived
quality
Improve quality
& increase price
Launch low-price
“fighting brand”
15. 15
Public Policy Issues:
Prohibited Pricing Practices
(pp. 415-420)
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.)
16. 16
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.
