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Pricing Products: Pricing Strategies

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1 Pricing Products: Pricing Strategies
PRINCIPLES OF MARKETING Eighth Edition Philip Kotler and Gary Armstrong Chapter 11 Pricing Products: Pricing Strategies

2 Price - Quality Strategies
Higher Lower Premium Strategy Good-Value Strategy Higher Overcharging Strategy Economy Strategy Quality Lower

3 New Product Pricing Strategies
This CTR relates to the material on pp New Product Pricing Strategies Market Skimming Pricing Innovative Products Market Skimming Pricing. Market skimming pricing is the strategy of setting high initial prices to skim maximum profits from each successive layer of the target market. Market Penetration Setting a High Price for a New Product to Maximize Revenues from the Target Market. Results in Fewer, More Profitable Sales. Setting a Low Price for a New Product in Order to Attract a Large Number of Buyers. Results in a Larger Market Share. Skimming strategies typically set a price as high as some segments will bear. Once all customers within this segment have purchased, prices are lowered only so far as the next segment needs to be persuaded to buy. Skimming usually works well only when: Product Distinctiveness. Product quality, image, and innovation are sufficiently distinct to support a high price. Costs of Small Production Runs. The costs of producing small volume are not prohibitive. Barriers to Entry. Competitors should not be able to enter the market easily and undercut the high price. Market Penetration Pricing. Some innovations are priced low upon introduction in order to capture large market share quickly thus penetrating the market. High volume results in lower costs, which helps keep prices low. Several conditions favor penetration pricing: Price Sensitive Markets. Highly price-sensitive markets with very large volume potential so that low price produces more market growth are needed. Falling Costs. Production and distribution costs must fall as sales volume increases. Barriers to Entry. Here the low costs must generate a sustainable advantage that cannot easily be duplicated by competitors. Discussion Note: Penetration pricing may also accelerate overall market adoption rates thus supporting low price continuance that may discourage competitors from entering the market.

4 Product Mix Pricing Strategies
Product Line Pricing Setting Price Steps Between Product Line Items i.e. $299, $399 Optional-Product Pricing Pricing Optional or Accessory Products Sold With The Main Product i.e. Car Options Product Mix Pricing Strategies Product-Mix Pricing Strategies This CTR corresponds to Table 11-1 on p. 331 and the relates to the material on pp Captive-Product Pricing Pricing Products That Must Be Used With The Main Product i.e. Razor Blades, Film, Software By-Product Pricing Pricing Low-Value By-Products To Get Rid of Them i.e. Lumber Mills, Zoos Product-Mix Pricing Strategies Product Line Pricing. Companies usually develop product lines rather than single products. In product line pricing, management must decide on the price steps to set between each product in the line. Companies often use price points to target distinctive combinations of product features and value represented by a particular price. Optional-Product Pricing. Under this strategy, the company offers a base product and prices differently for each combination of additional features or options added to the base product as desired by the customer. Automobile pricing is famous -- or infamous -- for this practice. But many manufacturers use optional-product pricing, such as personal computer makers. Captive-Product Pricing. Under this strategy, producers price products that must be used with a main product. The text describes razor blades as an example. The razor is priced low while high markups are attached to the price of the blades. Discussion Note: Students should distinguish captive pricing from optional pricing on the basis of need versus convenience. When Apple Computer prices its keyboards separately from its computers, it is practicing captive-product pricing. When it offers additional RAM beyond the included board memory, it is practicing optional-product pricing. By-Product Pricing. Waste from production and distribution may be marketable as by-products. Selling by-products allows producers to lower prices and costs on their main products. Otherwise, the prices of main products must cover the disposable or storage of by- products. Product-Bundle Pricing. This strategy combines several products and offers them at a reduced price from the cost of each product purchased separately. Season tickets and group rates are examples. Product Mix Pricing Strategies Product-Bundle Pricing Pricing Bundles Of Products Sold Together i.e. Season Tickets, Computer Makers

5 Price-Adjustment Strategies
Price Adjustment Strategies I This CTR corresponds to Table 11-2 on p. 334 and relates to the material on pp Price-Adjustment Strategies Segmented Adjusting Prices to Allow for Differences in Customers, Products, or Locations. Discount & Allowance Reducing Prices to Reward Customer Responses such as Paying Early or Promoting the Product. Price Adjustment Strategies Companies typically adjust their prices to account for various customer differences and changing situations: Cash Discount Discount and Allowance Pricing. Several forms of discount and allowance pricing are used by marketers: Cash Discounts. These are price reductions to buyers who pay bills promptly. Quantity Discounts. These refer to price reductions per unit on large volumes. Functional Discounts. These are granted to channel members who perform various marketing functions. Seasonal Discounts. These are granted to buyers who purchase merchandise out of season. Allowances. These are discounts such as trade-ins for turning in old items on new purchases or promotional allowances for participating in seller sponsored advertising can also lower buyer prices. Segmented Pricing. Segmented pricing refers to pricing differences not based on costs and takes several forms: Customer-segment pricing. These target a specific segment, as in senior citizen discounts. Product-form pricing. This varies costs on versions of a product by features but not production costs. Location pricing. This stems from preferences where different locations have different perceived values, such as seating in a theater. Time pricing. This refers to price breaks given at times of lower demand. Customer Quantity Discount Product Form Functional Discount Location Seasonal Discount Time Trade-In Allowance

6 Price-Adjustment Strategies
Adjustment Strategies - II This CTR corresponds to Table 11-2 on p. 334 and relates to the discussion on pp Psychological Pricing Promotional Pricing Adjusting Prices for Psychological Effect. Price Used as a Quality Indicator. Geographical Pricing Psychological Pricing. A key component in psychological pricing is the reference price consumers carry in their mind when considering sellers prices. Promotional Pricing. Promotional prices are temporary reductions below list and sometimes below costs, used to attract customers: Loss leaders. These may be offered below costs to attract attention to an entire line. Special event. This type of pricing may be used during slow seasons. Cash rebates or low financing. These “extras” may bring in customers “on the brink” and help them to decide to finally purchase. Geographical Pricing. Several forms of geographical pricing are common: FOB-Origin. Free On Board has customer pay freight. Uniform Delivered. Here the company charges the same price to all. Zone. Zone uses different areas pay different prices on freight but all customers within the same area pay the same freight charges. Basing-Point. Under this system, all customers charged freight from a specified billing location. Freight-Absorption. Here the seller pays all or part of the shipping costs to get the desired business. International Pricing. Firms may charge the same price throughout the world, especially for high-ticket, high-tech products like jetliners. Or it may offer different prices based upon differing taxes, tariffs, distribution, and promotion costs. Temporarily Reducing Prices to Increase Short-Run Sales. i.e. Loss Leaders, Special-Events International Pricing Adjusting Prices to Account for the Geographic Location of Customers. i.e. FOB-Origin, Uniform-Delivered, Zone Pricing, Basing-Point, & Freight-Absorption. Adjusting Prices for International Markets. Price Depends on Costs, Consumers, Economic Conditions & Other Factors.

7 Initiating and Responding to Price Changes
This CTR relates to the material on pp Initiating and Responding to Price Changes Competitor Reactions to Price Changes Initiating Price Cuts Initiating Price Changes Price changes may be initiated for several reasons, including: Price Cuts. Reasons for cutting prices may stem from overcapacity, falling market share, or attempts to dominate the market through lower costs. Price Increases. Inflation is a major source of price increases but so is the tendency to speculate on inflationary trends and raise prices beyond the rate of inflation. Over demand may also cause prices to rise. Higher prices can also increase profit margins. Buyer Reactions to Price Changes. Buyer reactions usually respond directly to price changes but not always. Usually lower prices pleases consumers, higher prices do not. But sometimes higher prices support quality improvements and lower prices mean company or product problems. Whether the buyer is correct or not in these perceptions will not immediately change their inclination to act on them. Competitor Reactions to Price Changes. Competitors most often react in industries with a small number of firms, uniform products in the market, and buyers are well informed. Competitive reactions may be similar price changes or increased non price competition. Companies should anticipate probable competitive moves prior to initiating price changes. Price Changes Buyer Reactions to Price Changes Initiating Price Increases

8 Price-Adjustment Strategies
Has Competitor Cut Price? Price-Adjustment Strategies Hold Current Price; Continue to Monitor Competitor’s Price. No Will Lower Price Negatively Affect Our Market Share & Profits? Reduce Price No Can/ Should Effective Action be Taken? Raise Perceived Quality Improve Quality & Increase Price No Launch Low-Price “Fighting Brand” Yes

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