CHAPTER STRATEGIC PRICING METHODS 14 Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
C H A P T E R
STRATEGIC PRICING METHODS
14
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
14-2
L E A R N I N G O B J E C T I V E S
Strategic Pricing Methods
LO1 Identify three methods that firms use to set their prices.
LO2 Describe the difference between an everyday low price strategy (EDLP) and a high/low strategy.
LO3 Explain the difference between a price skimming and a market penetration pricing strategy.
LO4 Identify tactics used to reduce prices to consumers.
LO5 Identify tactics used to reduce prices to businesses.
LO6 List pricing practices that have the potential to deceive customers.
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http://www.Groupon.com
How do you move from EDLP to higher prices?
Payless Website
Courtesy Groupon Inc.
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Cost-Based Methods
• Cost-base pricing
methods start with cost
• All costs calculated on a per unit basis
• Assumes costs don’t
vary for different levels of production
Ryan McVay/Getty Images
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Competition-Based Methods
• Set prices to signal information of how product compares with competitors
• Premium pricing
Zillow Website AP Photo/Matthias Rietschel
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Value-Based Methods
• Setting prices that focus on the overall value of the product
• Consumer perceptions
Mercedes-Benz Commercial Courtesy Rolex USA
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Costs of Ownership Method
• Consumers may be willing to spend more initially if, over the lifetime, the product will eventually cost less to own
• How do marketers justify the high cost of solar energy panels to homeowners?
Courtesy Citizen Watch Company
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1. What are the three different strategies for setting pricing?
2. How can you use value-based strategies for setting prices?
Check Yourself
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vs..
Everyday low pricing (EDLP)
High/low pricing
Everyday Low Pricing vs.. High/Low Pricing
Create value in different ways
EDLP saves search costs of finding lowest overall prices
High/low provides the thrill of the chase for the lowest price
Photodisc Collection/Getty Images
©Lars A Niki
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Odd Prices
• Odd prices may be so traditional that sellers are afraid to round them off
• They may suggest a good deal
• They may also suggest low quality
©Jeff Greenberg/PhotoEdit
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Consumers’ Use of Reference Prices
External reference
price
Internal reference
price
Photodisc Collection/Getty Images
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Reference Pricing
• How do consumers use reference pricing when shopping for cars?
• How does this ad help the consumer?
Courtesy Ford Motor Company
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Wine ranges in price from under $5 a bottle to over $100K a bottle. How do you know which to choose?
The Price-Quality Relationship
• Most inexperienced consumers use price as an indicator of quality
• Price becomes crucial when consumers have little knowledge about certain products/brands
Steve Mason/Getty Images
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Price Lining
• Marketers establish a price floor and price ceiling and set prices in between
• Allows for easy comparison
©M Hruby
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1. Explain the difference between EDLP and high/low pricing.
2. What pricing strategies should be considered when introducing a new product?
Check Yourself
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Pricing strategy Pricing tactics
Pricing Tactics
Digital Vision/Getty Images
Digital Vision/Getty Images
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Pricing Tactics Aimed at Consumers
Mark downs
Quantity Discounts
Seasonal Discounts
Coupons
Rebates
Leasing
Price Bundling
Leader Pricing
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Markdowns
• An integral component of high/low pricing strategy
• Enables retailers to get rid of slow moving or obsolete merchandise
• Used to generate store traffic
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Quantity Discounts for Consumers
Size discount
The more you buy the cheaper the
unit cost
©M Hruby
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Seasonal Discounts
Encourage consumers to use services or purchase products year round
Getty Images ©Brand X Pictures/PunchStock Tomi/PhotoLink/Getty Images ©Brand X Pictures/PunchStock
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Coupons and Rebates
Coupons
Retailer handles
Rebate
Manufacturer issues
Local Car Dealer Commercial
PhotoLink/Getty Images
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Price Bundling
Encourage sales of slow moving items
Encourage stock up
Encourage trial of new brand
Incentive to purchase
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Leader Pricing
Enticing consumers into the store with popular aggressively priced items and hoping they will pick up other items while shopping
©M Hruby
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Business Pricing Tactics and Discounts
Seasonal discounts
Cash discounts
Vendor Allowances
Quantity discounts
Uniform delivered vs. Zone pricing
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Seasonal Discounts
Designed to spur buyers into purchasing merchandise early
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Cash Discounts
• Reduced invoice cost if buyer pays prior to the end of the discount period
• Encourages buyers to pay before the discount period ends
• Seller benefits either way
©Corbis – All Rights Reserved
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Vendor Allowances
• Lowers the final cost in return for specific behavior
• Advertising allowance
• Slotting allowance
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Quantity Discounts
Cumulative quantity discount
Noncumulative quantity discount
Ryan McVay/Getty Images
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Uniform Delivered vs.. Zone Pricing
Addresses the impact of shipping, which is often a major cost for manufacturers
Chuan Khoo/Getty Images
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1. What are some consumer-oriented pricing tactics?
2. What are some business-oriented pricing tactics?
Check Yourself
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Legal Aspects and Ethics of Pricing
Deceptive or illegal price advertising
Predatory pricing
Price discrimination
Price fixing
Legal Aspects and Ethics of
Pricing
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Deceptive or Illegal Price Advertising
Deceptive reference prices
Loss leader pricing
Bait and switch
©Jeff Greenberg/PhotoEdit, Inc.
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Predatory Pricing
Prices set low with the intent to drive competitor out of
business
Illegal
Difficult to prove
©Digital Vision/Getty Images
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Price Discrimination
Federal law does not apply to sales to end consumers
Different rules in the B2B and B2C markets
Is not always illegal ©Tom Prettyman/PhotoEdit
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Price Fixing
Horizontal price fixing
Vertical price fixing
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