Pricing Strategies Chapter 12. 12 - 1 Definitions Market-Skimming Pricing Market-Skimming Pricing Setting a high price for a new product to skim maximum

Pricing StrategiesPricing Strategies

Chapter 12Chapter 12

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Definitions• Market-Skimming PricingMarket-Skimming Pricing

Setting a high price for a new product Setting a high price for a new product to skim maximum revenues layer by to skim maximum revenues layer by layer from segments willing to pay the layer from segments willing to pay the high price.high price.

• Market-Penetration PricingMarket-Penetration Pricing Setting a low price for a new product in Setting a low price for a new product in

order to attract a large number of order to attract a large number of buyers and a large market share.buyers and a large market share.

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• Product Line PricingProduct Line Pricing Setting price steps between product Setting price steps between product

line items.line items. Price pointsPrice points

• Optional-Product PricingOptional-Product Pricing Pricing optional or accessory Pricing optional or accessory

products sold with the main productproducts sold with the main product

Product Mix Pricing Strategies

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• Captive-Product PricingCaptive-Product Pricing Pricing products that must be used Pricing products that must be used

with the main productwith the main product High margins are often set for suppliesHigh margins are often set for supplies

Services: two-part pricing strategyServices: two-part pricing strategy Fixed fee plus a variable usage rateFixed fee plus a variable usage rate


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• By-Product PricingBy-Product Pricing Pricing low-value by-products to Pricing low-value by-products to

get rid of themget rid of them

• Product Bundle PricingProduct Bundle Pricing Pricing bundles of products sold Pricing bundles of products sold

togethertogether


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Price Adjustment Strategies

• Discount / Discount / allowance allowance

• SegmentedSegmented• PsychologicalPsychological• PromotionalPromotional• GeographicalGeographical• InternationalInternational

• Types of discountsTypes of discounts Cash discountCash discount Quantity discountQuantity discount Functional (trade) Functional (trade)

discountdiscount Seasonal discountSeasonal discount

• AllowancesAllowances Trade-in allowancesTrade-in allowances Promotional allowancesPromotional allowances

StrategiesStrategies

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• Discount / Discount / allowanceallowance


• Types of segmented Types of segmented pricing strategies:pricing strategies: Customer-segmentCustomer-segment Product-form pricingProduct-form pricing Location pricingLocation pricing Time pricingTime pricing

• Also called revenue or Also called revenue or yield managementyield management

• Certain conditions must Certain conditions must exist for segmented exist for segmented pricing to be effectivepricing to be effective


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Conditions Necessary for Conditions Necessary for Segmented Pricing EffectivenessSegmented Pricing Effectiveness


• Market is Market is segmentablesegmentable

• Lower priced Lower priced segments are not segments are not able to resellable to resell

• Competitors can not Competitors can not undersell segments undersell segments charging higher charging higher pricesprices

• Pricing must be legalPricing must be legal

• Costs of segmentation Costs of segmentation can not exceed revenues can not exceed revenues earnedearned

• Segmented pricing must Segmented pricing must reflect real differences in reflect real differences in customers’ perceived customers’ perceived valuevalue

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• The price is used to say The price is used to say something about the something about the product.product. Price-quality relationshipPrice-quality relationship Reference pricesReference prices Differences as small as Differences as small as

five cents can be five cents can be importantimportant

Numeric digits may have Numeric digits may have symbolic and visual symbolic and visual qualities that qualities that psychologically influence psychologically influence the buyerthe buyer


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• Temporarily pricing Temporarily pricing products below the list products below the list price or even below costprice or even below cost

• Loss leadersLoss leaders Special-event pricingSpecial-event pricing Cash rebatesCash rebates Low-interest financing, Low-interest financing,

longer warranties, free longer warranties, free maintenancemaintenance

• Promotional pricing can Promotional pricing can have adverse effectshave adverse effects


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Promotional Pricing ProblemsPromotional Pricing Problems


• Easily copied by Easily copied by competitorscompetitors

• Creates deal-prone Creates deal-prone consumersconsumers

• May erode brand’s May erode brand’s valuevalue

• Not a legitimate Not a legitimate substitute for effective substitute for effective strategic planningstrategic planning

• Frequent use leads to Frequent use leads to industry price wars industry price wars which benefit few firmswhich benefit few firms

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• Types of geographic Types of geographic pricing strategies:pricing strategies: FOB-origin pricingFOB-origin pricing Uniform-delivered Uniform-delivered

pricingpricing Zone pricingZone pricing Basing-point pricingBasing-point pricing Freight-absorption Freight-absorption

pricingpricing


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• Prices charged in a Prices charged in a specific country specific country depend on many depend on many factorsfactors Economic conditionsEconomic conditions Competitive situationCompetitive situation Laws / regulationsLaws / regulations Distribution systemDistribution system Consumer perceptionsConsumer perceptions Cost considerationsCost considerations


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• Initiating Price Cuts is Initiating Price Cuts is Desirable When a Firm:Desirable When a Firm: Has excess capacityHas excess capacity Faces falling market share due Faces falling market share due

to price competitionto price competition Desires to be a market share Desires to be a market share

leaderleader

Price Changes

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• Price Increases are Desirable:Price Increases are Desirable: If a firm can increase profit, faces cost If a firm can increase profit, faces cost

inflation, or faces greater demand than inflation, or faces greater demand than can be supplied.can be supplied.

• Methods of Increasing PriceMethods of Increasing Price• Alternatives to Increasing PriceAlternatives to Increasing Price

Reducing product size, using less Reducing product size, using less expensive materials, unbundling the expensive materials, unbundling the product.product.

Price Changes

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• Buyer reactions to price changes Buyer reactions to price changes must be considered.must be considered.

• Competitors are more likely to react Competitors are more likely to react to price changes under certain to price changes under certain conditions.conditions. Number of firms is smallNumber of firms is small Product is uniformProduct is uniform Buyers are well informedBuyers are well informed

Price Changes

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• Respond To Price Changes Only If: Respond To Price Changes Only If: Market share / profits will be Market share / profits will be

negatively affected if nothing is negatively affected if nothing is changed.changed.

Effective action can be taken:Effective action can be taken: Reducing priceReducing price Raising perceived qualityRaising perceived quality Improving quality and increasing priceImproving quality and increasing price Launching low-price “fighting brand”Launching low-price “fighting brand”

Price Changes

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• Pricing Pricing withinwithin Channel Levels Channel Levels Price-fixingPrice-fixing

Competitors can not work with each Competitors can not work with each other other to set prices to set prices

Predatory pricingPredatory pricing Firms may not sell below cost with the Firms may not sell below cost with the

intention of punishing a competitor or intention of punishing a competitor or gaining higher long-run profits or running gaining higher long-run profits or running a competitor out of business.a competitor out of business.

Public Policy and Pricing

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• Pricing Pricing acrossacross Channel Levels Channel Levels Price discriminationPrice discrimination Retail price maintenanceRetail price maintenance Deceptive pricingDeceptive pricing

Bogus reference / comparison Bogus reference / comparison pricingpricing

Scanner fraudScanner fraud Price confusionPrice confusion

Public Policy and Pricing

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Pricing Strategies Chapter 12. 12 - 1 Definitions Market-Skimming Pricing Market-Skimming Pricing Setting a high price for a new product to skim maximum