8New-Product Pricing Strategies Market-skimming pricing is a strategy for setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price, the company make fewer but more profitable sales.Product quality and image must support the priceBuyers must want the product at the priceCosts of producing the product in small volume should not cancel the advantage of higher pricesCompetitors should not be able to enter the market easily
9Market-skimming pricing For example when Sony introduced the world first high definition television (HDTV) to the Japanese market , the high tech sets cost 43,000$ . These televisions were purchased only by customers who really wanted the new technology and afford to pay high prices.
10New-Product Pricing Strategies 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 sharePrice sensitive marketProduction and distribution costs must fail as sales volume increases.Low prices must keep competition out of the marketNote to InstructorThe text gives an excellent example of IKEA in China:When IKEA first opened stores in China in 2002, people crowded to take advantage of the freebies—air conditioning, clean toilets, and even decorating ideas.Chinese consumers are famously frugal. When it came time to actually buy, they shopped instead at local stores just down the street that offered knockoffs of IKEA’s designs at a fraction of the price.So IKEA slashed its prices in China to the lowest in the world.The penetration pricing strategy worked. IKEA now captures a 43 percent market share of China’s fast-growing home wares market.
11Market-penetration pricing For example , Dell used penetration pricing to enter the personal computer market, selling high quality computer products through lower cost direct channels.
13Product Mix Pricing Strategies Product line pricing takes into account the cost differences between products in the line, customer evaluation of their features, and competitors’ prices * For example channel offers 20 different collections of bags of all shapes and sizes at price that range from under $50 to more than $1,250.Note to InstructorThis Web link brings you to Bluemountain.com. Many students may know this site for its free greeting cards. Notice how they have product line pricing—you can get some basic cards for free but need to join to be able to use more advanced features.
14Product Mix Pricing Strategies Optional-product pricing takes into account optional or accessory products along with the main productFor example : a car buyer may choose to order a GPS navigation system & Bluetooth wireless communication.Refrigerators come with optional ice maker
15Product Mix Pricing Strategies Captive-product pricing involves products that must be used along with the main productExamples of Captive products are razor blade cartridges , Gillette once you bought the razor, you are committed to buying replacement cartridges at $25 an eight packNote to InstructorStudents will quickly realize this is what their cell phone bill might be. Ask them how they feel about this pricing. This Web link goes to an ad for AT&T’s campaign for rollover minutes.
16Product Mix Pricing Strategies Two-part pricing involves breaking the price into:Fixed feeVariable usage feeFor example : Jawwal company charge a flat rate for a basic calling plan, then charge for minutes over what the plan allows.The service firm must decide how much to charge for the basic service and how much for the variable usage.Another example is when you visit a park , you pay a ticket charge + fee for food and additional features
17Price Mix Pricing Strategies 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 other than the cost to cover storage and delivery.petroleum products often results in by-products.
18Price Mix Pricing Strategies Product bundle pricing combines several products at a reduced price For example : fast food restaurants bundle a burger , fries and a soft drink at a combo price
19Price-Adjustment Strategies Discount and allowance pricingSegmented pricingPsychological pricingPromotional pricingGeographicpricingDynamic pricingInternational pricingNote to InstructorIn slideshow view, click on movie icon to launch General Electric video snippet. See accompanying DVD for full video segment
20Price-Adjustment Strategies Pricing StrategiesDiscount and allowance pricing reduces prices to reward customer responses such as paying early or promoting the productDiscountsAllowancesNote to InstructorDiscounts are either cash discount for paying promptly, quantity discount for buying in large volume, or functional (trade) discount for selling, storing, distribution, and record keeping.Allowances include trade-in allowance for turning in an old item when buying a new one and promotional allowance to reward dealers for participating in advertising or sales support programs.
21Price-Adjustment Strategies Price Discounts and AllowancesQuantity discount: The more you buy, the cheaper it becomes-- cumulative and non-cumulative.Trade discounts” functional”: Reductions from list for functions performed-- storage, promotion.Cash discount: A deduction granted to buyers for paying their bills within a specified period of time, (after first deducting trade and quantity discounts from the base price)
22Price-Adjustment Strategies Functional discount: discount offered by a manufacturer to trade-channel members if they will perform certain functions.Seasonal discount: a price reduction to those who buy out of season.Allowance: an extra payment designed to gain reseller participation in special programs.Trade in allowances: are price reductions given for turning in an old item when buying a new one ( Automobiles industry)Promotional allowances: are payments or price reductions to reward dealer for participating in advertising and sales support program
23Price-Adjustment Strategies Pricing StrategiesSegmented pricing is used when a company sells a product at two or more prices even though the difference is not based on costNote to InstructorThe three types of segmented pricing are:Customer segment pricing is when different customers pay 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 sold in different geographic areas is priced differently even though the cost is the same.
24Segmented pricingCustomer segment pricing: different customers pay different prices for the same product or service . For ex. Museums charge a lower admission for students .Product from pricing: different versions of the product are priced differently but not according to differences in their costsLocation pricing: company charges different prices for different locationsTime pricing : a firm varies it prices by the season , the month , the day and even the hour
25Price-Adjustment Strategies Pricing StrategiesSegmented PricingTo be effective:Market must be segmentableSegments must show different degrees of demandWatching the market cannot exceed the extra revenue obtained from the price differenceMust be legalNote to InstructorDiscussion QuestionHow have you benefited from price segmentation?Most likely they have had student discounts. Ask them why that is effective given the criteria above.
26Price-Adjustment Strategies Pricing StrategiesPsychological pricing occurs when sellers consider 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 looking at a given productNoting current pricesRemembering past pricesAssessing the buying situationsFor example : a company could display its product next to more expensive ones in order to imply that it belongs in the same classNote to InstructorDiscussion QuestionHow well do you carry prices of coffee, pizza, and milk in your head?It might be interesting to collect the prices of items sold near or on campus including coffee, pizza, and sandwiches. Ask them how well they know these prices, have them write down the price of these items and then check themselves. You will often find that people do NOT know prices as well as they think they do.
27Price-Adjustment Strategies Pricing StrategiesPromotional pricing is when prices are temporarily priced below list price or cost to increase demandLoss leadersSpecial event pricingCash rebatesLow-interest financingLonger warranteesFree maintenanceNote to InstructorLoss 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.Low-interest financing, longer warrantees, and free maintenance lower the consumer’s “total price.”
28Price-Adjustment strategies Promotional PricingLoss-leader pricing: supermarkets and department stores often drop the price on well known brands to stimulate additional store trafficSpecial-event pricing: sellers well establish special pricing in certain seasons to draw in more customersCash rebates: companies offer cash rebates to encourage purchase of the manufacturers products within a specified time periodLow-interest financing: the company can offer customers low-interest financing
29Price-Adjustment strategies Longer payment terms: sellers especially mortgage banks and auto companies stretch loans over longer periods and thus lower the monthly paymentWarranties and service contracts: companies can promote sales by adding a free or low cost warranty or service contract
30Price-Adjustment Strategies Pricing StrategiesRisks of promotional pricingUsed too frequently, and copies by competitors can create “deal-prone” customers who will wait for promotions and avoid buying at regular priceCreates price wars
31Price-Adjustment Strategies Pricing StrategiesGeographical pricing is used for customers in different parts of the country or the worldFOB pricingUniformed-delivery pricingZone pricingBasing-point pricingFreight-absorption pricing
32Price-Adjustment Strategies Pricing StrategiesFOB (free on board) pricing means that the goods are delivered to the carrier and the title and responsibility passes to the customerUniformed-delivery pricing means the company charges the same price plus freight to all customers, regardless of location
33Price Adjustment Strategies Pricing StrategiesZone pricing means that the company sets up two or more zones where customers within a given zone pay a single total priceBasing-point pricing means that a seller selects a given city as a “basing point” and charges all customers the freight cost associated from that city to the customer location, regardless of the city from which the goods are actually shipped
34Price-Adjustment Strategies Pricing StrategiesFreight-absorption pricing means the seller absorbs all or part of the actual freight charge as an incentive to attract business in competitive markets
35Price-Adjustment Strategies Pricing StrategiesDynamic pricing is when prices are adjusted continually to meet the characteristics and needs of the individual customer and situationsNote to InstructorThere is an excellent example in the text for dynamic pricing:Alaska airlines Web banner promotes “fly Alaska Airlines to Honolulu for $200 round trip.”Alaska Airlines is introducing a system that creates unique prices and advertisements for people as they surf the Web. The system identifies consumers by their computers, using a small piece of code known as a cookie. It company then combines detailed data from several sources to paint a picture of who’s sitting on the other side of the screen.When the person clicks on an ad, the system quickly analyzes the data to assess how price-sensitive customers seem to be.Ex. Alaska airlines creates unique prices and advertisements for people as they surf the web
36Price-Adjustment Strategies Pricing StrategiesInternational pricing is when prices are set in a specific country based on country-specific factorsEconomic conditionsCompetitive conditionsLaws and regulationsInfrastructureCompany marketingobjective
37International pricing For example : Boeing sells its jetliners at about the same price everywhere, whether in the United states , Europe or the third worldA pair of Levi’s selling for $30 in Canada might go for $ 63 in Tokyo and $ 88 in Paris
38Initiating Pricing Changes Price ChangesInitiating Pricing ChangesPrice cuts( to boost sales and shares)Price increases
39Initiating Pricing Changes Price ChangesInitiating Pricing ChangesPrice cuts occur due to:Excess capacityIncreased market sharePrice increase from:Cost inflationIncreased demandLack of supply
40Buyer Reactions to Pricing Changes Price ChangesBuyer Reactions to Pricing ChangesPrice increasesProduct is “hot” that means better madeCompany is greedyPrice cutsNew models will be availableModels are not selling wellQuality issuesNote to InstructorThere is an example in the book about a Tiffany’s price changes:In the late 1990s, the high-end jeweler responded to the “affordable luxuries” craze with a new “Return to Tiffany” line of less expensive silver jewelry.The “Return to Tiffany” silver charm bracelet quickly became a must-have item, as teens jammed Tiffany’s hushed stores clamoring for the $110 silver bauble. Sales skyrocketed.But despite this early success, Tiffany’s bosses grew worried that the bracelet fad could alienate the firm’s older, wealthier, and more conservative clientele.So, in 2002, to chase away the teeny-boppers, the firm began hiking prices on the fast-growing, highly profitable line of cheaper silver jewelry and at the same time, it introduced pricier jewelry collections, renovated its stores, and showed off its craftsmanship by highlighting spectacular gems like a $2.5 million pink diamond ring.
41Responding to Price Changes QuestionsWhy 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?
42Responding to Price Changes SolutionsReduce price to match competitionMaintain price but raise the perceived value through communicationsImprove quality and increase priceLaunch a lower-price “fighting” brand
44Public Policy and Pricing Pricing Within Channel LevelsPrice fixing: Sellers must set prices without talking to competitorsPredatory pricing: Selling below cost with the intention of punishing a competitor or gaining higher long-term profits by putting competitors out of business , this will protect small sellers from larger ones
45Public Policy and Pricing Pricing Across Channel LevelsRobinson-Patman Act prevents unfair price discrimination by ensuring that the seller offer the same price terms to customers at a given level of trade
46Public Policy and Pricing Pricing Across Channel LevelsRobinson-Patman ActPrice discrimination is allowed:If the seller can prove that costs differ when selling to different retailersIf the seller manufactures different qualities of the same product for different retailers
47Public Policy and Pricing Pricing Across Channel LevelsRetail (or resale) price maintenance is when a manufacturer requires a dealer to charge a specific retail price for its products
48Public Policy and Pricing Pricing Across Channel LevelsDeceptive pricing occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumersScanner fraud failure of the seller to enter current or sale prices into the computer systemPrice confusion results when firms employ pricing methods that make it difficult for consumers to understand what price they are really payingNote to InstructorThis is an interesting Web link to the Professional Jewelers Magazine Web site. It contains an article encouraging jewelers to fight deceptive pricing in their industry.