1. Chapter 10 &11
Pricing Strategies

2. What is a Price?
In the narrowest sense, price is the amount of money charged for a product or a service.
More broadly, price is the sum of all the values that customers give up to gain the benefits of having or using a product or service.
Price is the only element in the marketing mix that produces revenue; all other elements represent costs.

3. Major Pricing Strategies
The price the company charges will fall somewhere between one that is too low to produce a profit and one that is too high to produce any demand.

4. Value Based Pricing Vs Cost Based Pricing

5. Customer Value-Based Pricing
Customer value-based pricing uses buyers’ perceptions of value as the key to pricing.
The company first assesses customer needs and value perceptions.
It then sets its target price based on customer perceptions of value.
The targeted value and price drive decisions about what costs can be incurred and the resulting product design.

6. Good-Value Pricing
In response, many companies have changed their pricing approaches to bring them in line with changing economic conditions and consumer price perceptions.
More and more, marketers have adopted good-value pricing strategies ─ offering the right combination of quality and good service at a fair price.

7. Everyday low pricing (EDLP)
Good-Value Pricing
EDLP involves charging a constant, everyday low price with few or no temporary price discounts.
Everyday low pricing (EDLP)
It involves charging higher prices on an everyday basis but running frequent promotions to lower price temporarily on selected items.
High-Low Pricing

8. Value-Added Pricing
Many companies adopt value-added pricing strategies.
Rather than cutting prices to match competitors, they attach value-added features and services to differentiate their offers and thus support their higher prices.

9. Cost-Based Pricing
Cost-Based pricing involves setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for its effort and risk.
A company’s costs may be an important element in its pricing strategy.

10. Fixed costs (over-head)
Types of Costs
The sum of the fixed and variable costs for any given level of production.
Fixed costs (over-head)
Variable costs
Total costs
Costs that do not vary with production or sales level.
Costs that vary directly with the level of production.

11. New Product Pricing Strategies
Market Skimming
Setting a High Price for a New Product to “Skim” Maximum Revenues layer by layer from the segments willing to pay the high price.
Results in Fewer, But More Profitable Sales.
Use Under These Conditions:
Product’s Quality and Image Must Support Its Higher Price.
Costs Can’t be so High that They Cancel the Advantage of Charging More.
Competitors Shouldn’t be Able to Enter Market Easily and Undercut the High Price.

12. New Product Pricing Strategies
Market Penetration
Setting a Low Price for a New Product in Order to “Penetrate” the Market Quickly and Deeply.
Attract a Large Number of Buyers and Win a Larger Market Share.
Use Under These Conditions:
Market Must be Highly Price-Sensitive so that a Low Price Produces More Market Growth.
Production/ Distribution Costs Must Fall as Sales Volume Increases.
Must Keep Out Competition & Maintain Its Low Price Position or Benefits May Only be Temporary.

13. Product Mix Pricing Strategies
Strategy
Description
Product Line Pricing
Setting price steps between line items
Optional Product Pricing
Pricing optional or accessory products
Captive Product Pricing
Pricing products that must be used with the main product
By-Product Pricing
Pricing low value by-products to get rid of them
Product Bundle Pricing
Pricing bundles of products sold together

14. Product Mix-Pricing Strategies: Product Line Pricing
Involves setting price steps between various products in a product line based on:
Cost differences between products,
Customer evaluations of different features, and
competitors’ prices.

15. Product Mix- Pricing Strategies
Optional-Product
Pricing optional or accessory products sold with the main product.
Decide which to offer with base price and which to provide as option
Captive-Product
Pricing products that must be used with the main product.
Producers often have the base item marked low but the supplies marked high
The essence is to capture the customer

16. Product Mix- Pricing Strategies
By-Product
Pricing low-value by-products to get rid of them and make the main product’s price more competitive.
Applicable when
By products have little or no value
Are expensive to store and dispose
Companies should settle for a price that covers the cost
Product-Bundling
Combining several products and offering the bundle at a reduced price.

17. Price-Adjustment Strategies
Strategy
Description
Discount & Allowance Pricing
Reducing prices to reward customer responses eg. Pay early or at a time, or promote
Segmented Pricing
Adjusting prices to allow for differences in segments
Psychological Pricing
Adjusting prices for psychological effect
Promotional Pricing
Temporally reduce prices for short run sales
Geographic Pricing
Adjust for geographic location
Dynamic Pricing
Adjusting prices to continuously meet the needs of individual customers & situations
International Pricing
Adjusting Prices for International Markets

18. Discount & Allowance Pricing
Cash Discount: on time
Quantity Discount: on quantity
Functional/Trade Discount: on performance (selling,storing, and record keeping)
Seasonal Discount: to balance seasonal demands

19. Segmented Pricing
Difference in price is not because of difference in cost.
To be effective
The market must be segmentable.
Segments must have different degrees of demand.
The prices should reflect the customer’s perceived value.
Customer Segment
Location pricing
Product-Form
Time Pricing

20. Customer-segment pricing
Segmented Pricing
Customer-segment pricing
Different customers pay different prices for the same
product or service.

21. Segmented Pricing Product-form pricing
Different versions of the product are priced differently but
not according to differences in their costs.

22. Segmented Pricing Location pricing
A company charges different prices for different locations,
even though the cost of offering each location is the same.

23. Segmented Pricing Time pricing
A firm varies its price by the season, the month, the day,
and even the hour.

25. Psychological Pricing
Many consumers use price to judge quality.
When consumers cannot judge due to lack of information or skill, price becomes an indicator of quality.
Reference Prices
Product placement and visibility
Sale signs
Prices ending in 99
Signpost Pricing
Price Matching guarantees

26. Psychological Pricing
Considers the psychology of prices and not simply the economics.
Odd pricing

27. Promotional Pricing
Companies temporarily price their products below list price to create urgency and excitement.
If used too frequently, the brand loses the novelty and also, no one would buy them at regular price anymore.
However, since it’s the easiest thing to do, to increase short run sales, it is quite addictive.

28. Promotional Pricing Loss Leaders Special-Event Pricing Cash Rebates
Low-Interest Financing
Longer Warranties
Free Maintenance
Psychological Discounting
Loss Leaders

29. Promotional Pricing

30. Geographical Pricing
Uniform Delivered Pricing: Easier to manage and advertise nationally.
Zone Pricing: Rather than individual city or town, pricing is done on a zone basis.
Basing-Point Pricing: use another city as base.
Freight Absorption Pricing: Absorb all or part of the cost to penetrate the market.

31. Dynamic and Internet Pricing
They are using dynamic pricing ─ adjusting prices continually to meet the characteristics and needs of individual customers and situations.
For example, Amazon.com can mine their databases to gauge a specific shopper’s behavior, and price products accordingly.
Opposite of maintaining fixed price policies.

32. Dynamic Pricing
Adjust prices continuously to meet the characteristics and needs of customers.
Particularly effective for internet marketing.
Opposite of maintaining fixed price policies.

33. International Pricing
Companies that market their products internationally must decide what prices to charge in different countries.
The price that a company should charge in a specific country depends on many factors, including economic conditions, competitive situations, laws and regulations, and the nature of the wholesaling and retailing system.