1. Chapter Eleven
Pricing Strategies

2. Pricing Products New-Product Pricing Strategies
Topic Outline
New-Product Pricing Strategies
Product Mix Pricing Strategies
Price Adjustment Strategies
Price Changes
Check this

3. What Is a Price?
Price is the only element in the marketing mix that produces revenue; all other elements represent costs

4. Customer Perceptions of Value
A price
Understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value

5. Price has many names: Rent Fee Tuition Dues Fare Interest Donation
Salary
Rent
Tuition
Fare
Rate
Commission
Wage

6. Steps in Setting Pricing

7. New-Product Pricing Strategies
Market-skimming pricing
Market- penetration pricing

8. New-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 price
Buyers must want the product at the price
Costs of producing the product in small volume should not cancel the advantage of higher prices
Competitors should not be able to enter the market easily

9. Market-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.

10. New-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 share
Price sensitive market
Production and distribution costs must fail as sales volume increases.
Low prices must keep competition out of the market
Note to Instructor
The 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.

11. Market-penetration pricing
For example , Dell used penetration pricing to enter the personal computer market, selling high quality computer products through lower cost direct channels.

12. Product Mix Pricing Strategies
Product line pricing
Optional-product pricing
Captive-product pricing
By-product pricing
Product bundle pricing

13. Product 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 Instructor
This 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.

14. Product Mix Pricing Strategies
Optional-product pricing takes into account optional or accessory products along with the main product
For example : a car buyer may choose to order a GPS navigation system & Bluetooth wireless communication.
Refrigerators come with optional ice maker

15. Product Mix Pricing Strategies
Captive-product pricing involves products that must be used along with the main product
Examples of Captive products are razor blade cartridges , Gillette once you bought the razor, you are committed to buying replacement cartridges at $25 an eight pack
Note to Instructor
Students 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.

16. Product Mix Pricing Strategies
Two-part pricing involves breaking the price into:
Fixed fee
Variable usage fee
For 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

17. Price 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.

18. Price 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

19. Price-Adjustment Strategies
Discount and allowance pricing
Segmented pricing
Psychological pricing
Promotional pricing
Geographicpricing
Dynamic pricing
International pricing
Note to Instructor
In slideshow view, click on movie icon to launch General Electric video snippet. See accompanying DVD for full video segment

20. Price-Adjustment Strategies
Pricing Strategies
Discount and allowance pricing reduces prices to reward customer responses such as paying early or promoting the product
Discounts
Allowances
Note to Instructor
Discounts 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.

21. Price-Adjustment Strategies
Price Discounts and Allowances
Quantity 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)

22. Price-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

23. Price-Adjustment Strategies
Pricing Strategies
Segmented pricing is used when a company sells a product at two or more prices even though the difference is not based on cost
Note to Instructor
The 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.

24. Segmented pricing
Customer 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 costs
Location pricing: company charges different prices for different locations
Time pricing : a firm varies it prices by the season , the month , the day and even the hour

25. Price-Adjustment Strategies
Pricing Strategies
Segmented Pricing
To be effective:
Market must be segmentable
Segments must show different degrees of demand
Watching the market cannot exceed the extra revenue obtained from the price difference
Must be legal
Note to Instructor
Discussion Question
How have you benefited from price segmentation?
Most likely they have had student discounts. Ask them why that is effective given the criteria above.

26. Price-Adjustment Strategies
Pricing Strategies
Psychological 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 product
Noting current prices
Remembering past prices
Assessing the buying situations
For example : a company could display its product next to more expensive ones in order to imply that it belongs in the same class
Note to Instructor
Discussion Question
How 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.

27. Price-Adjustment Strategies
Pricing Strategies
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
Note to Instructor
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.
Low-interest financing, longer warrantees, and free maintenance lower the consumer’s “total price.”

28. Price-Adjustment strategies
Promotional Pricing
Loss-leader pricing: supermarkets and department stores often drop the price on well known brands to stimulate additional store traffic
Special-event pricing: sellers well establish special pricing in certain seasons to draw in more customers
Cash rebates: companies offer cash rebates to encourage purchase of the manufacturers products within a specified time period
Low-interest financing: the company can offer customers low-interest financing

29. Price-Adjustment strategies
Longer payment terms: sellers especially mortgage banks and auto companies stretch loans over longer periods and thus lower the monthly payment
Warranties and service contracts: companies can promote sales by adding a free or low cost warranty or service contract

30. Price-Adjustment Strategies
Pricing Strategies
Risks of promotional pricing
Used too frequently, and copies by competitors can create “deal-prone” customers who will wait for promotions and avoid buying at regular price
Creates price wars

31. Price-Adjustment Strategies
Pricing Strategies
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

32. Price-Adjustment Strategies
Pricing Strategies
FOB (free on board) pricing means that the goods are delivered to the carrier and the title and responsibility passes to the customer
Uniformed-delivery pricing means the company charges the same price plus freight to all customers, regardless of location

33. Price Adjustment Strategies
Pricing Strategies
Zone pricing means that the company sets up two or more zones where customers within a given zone pay a single total price
Basing-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

34. Price-Adjustment Strategies
Pricing Strategies
Freight-absorption pricing means the seller absorbs all or part of the actual freight charge as an incentive to attract business in competitive markets

35. Price-Adjustment Strategies
Pricing Strategies
Dynamic pricing is when prices are adjusted continually to meet the characteristics and needs of the individual customer and situations
Note to Instructor
There 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

36. Price-Adjustment Strategies
Pricing Strategies
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
objective

37. International pricing
For example : Boeing sells its jetliners at about the same price everywhere, whether in the United states , Europe or the third world
A pair of Levi’s selling for $30 in Canada might go for $ 63 in Tokyo and $ 88 in Paris

38. Initiating Pricing Changes
Price Changes
Initiating Pricing Changes
Price cuts
( to boost sales and shares)
Price increases

39. Initiating Pricing Changes
Price Changes
Initiating Pricing Changes
Price cuts occur due to:
Excess capacity
Increased market share
Price increase from:
Cost inflation
Increased demand
Lack of supply

40. Buyer Reactions to Pricing Changes
Price Changes
Buyer Reactions to Pricing Changes
Price increases
Product is “hot” that means better made
Company is greedy
Price cuts
New models will be available
Models are not selling well
Quality issues
Note to Instructor
There 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.

41. 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?

42. Responding to Price Changes
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

43. Responding to Price Changes

44. Public Policy and Pricing
Pricing Within Channel Levels
Price fixing: Sellers must set prices without talking to competitors
Predatory 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

45. Public Policy and Pricing
Pricing Across Channel Levels
Robinson-Patman Act prevents unfair price discrimination by ensuring that the seller offer the same price terms to customers at a given level of trade

46. Public Policy and Pricing
Pricing Across Channel Levels
Robinson-Patman Act
Price discrimination is allowed:
If the seller can prove that costs differ when selling to different retailers
If the seller manufactures different qualities of the same product for different retailers

47. Public Policy and Pricing
Pricing Across Channel Levels
Retail (or resale) price maintenance is when a manufacturer requires a dealer to charge a specific retail price for its products

48. Public Policy and Pricing
Pricing Across Channel Levels
Deceptive pricing occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers
Scanner fraud failure of the seller to enter current or sale prices into the computer system
Price confusion results when firms employ pricing methods that make it difficult for consumers to understand what price they are really paying
Note to Instructor
This 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.