Pricing Strategies Chapter 12. 12- 1 Objectives Learn the major strategies for pricing imitative and new products. Understand how companies find a set.

Pricing Pricing StrategiesStrategies

Chapter 12Chapter 12

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Objectives

Learn the major strategies for Learn the major strategies for pricing imitative and new pricing imitative and new products.products.

Understand how companies find Understand how companies find a set of prices that maximizes a set of prices that maximizes the profits from the total the profits from the total product mix.product mix.

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Objectives

Learn how companies adjust Learn how companies adjust their prices to take into their prices to take into account different types of account different types of customers and situations.customers and situations.

Know the key issues related Know the key issues related to initiating and responding to to initiating and responding to price changes.price changes.

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Price is #1 factor Price is #1 factor influencing choice of influencing choice of cellular companiescellular companiesPrices in wireless Prices in wireless industry dropped 25% industry dropped 25% in three yearsin three years

Few companies were Few companies were profitableprofitable

mLife ad campaign mLife ad campaign attempted to build the attempted to build the AT&T wireless brand AT&T wireless brand so consumers would so consumers would consider value rather consider value rather than just pricethan just price

Campaign met with Campaign met with strong initial successstrong initial success

cAT&T Wireless Wireless

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Definitions

Market-Skimming PricingMarket-Skimming Pricing Setting a high price Setting a high price

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

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Definitions

Market-Penetration PricingMarket-Penetration Pricing

Setting a low price Setting a low price for a new product for a new product in order to attract in order to attract a large number of a large number of buyers and a large buyers and a large market share.market share.

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Which pricing strategy does Dell appear to use?

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

product line items.product line items. Price pointsPrice points

Product Mix Pricing Strategies

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Optional-Product PricingOptional-Product Pricing Pricing optional or Pricing optional or

accessory products sold accessory products sold with the main productwith the main product

Supplemental software, Supplemental software, digital cameras, and digital cameras, and printers sold with a new printers sold with a new PC are examplesPC are examples


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Captive-Product PricingCaptive-Product Pricing Pricing products that must Pricing products that must

be used with the main be used with the main productproduct

High margins are often High margins are often set for supplies set for supplies

Services: two-part pricing Services: two-part pricing strategystrategy

Fixed fee plus a Fixed fee plus a variable usage rate variable usage rate


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Country clubs are an Country clubs are an example of entities example of entities that use a two-part that use a two-part pricing strategy.pricing strategy.

Name some other Name some other examples.examples.

Discussion Question

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By-Product By-Product PricingPricing Pricing of Pricing of

low-value low-value by-products by-products to get rid of to get rid of themthem


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Product Bundle Product Bundle PricingPricing Pricing bundles of Pricing bundles of

products sold products sold togethertogether

Common in fast Common in fast food industryfood industry


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Price Adjustment Strategies

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 Promotional

allowancesallowances

Discount / Discount / allowance allowance

SegmentedSegmented

PsychologicalPsychological

PromotionalPromotional

GeographicalGeographical

InternationalInternational

StrategiesStrategies

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Hotels offer seasonal Hotels offer seasonal discounts during slow discounts during slow sales periods. sales periods.

What are some other What are some other examples of products examples of products or services that could or services that could benefit from a seasonal benefit from a seasonal pricing strategy?pricing strategy?

Discussion Question

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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 managementCertain conditions Certain conditions must exist for must exist for segmented pricing to segmented pricing to be effectivebe effective

Discount / Discount / allowanceallowance

SegmentedSegmented






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Conditions Necessary for Conditions Necessary for Segmented Pricing Effectiveness Segmented Pricing Effectiveness

Market can be Market can be segmentedsegmentedLower priced segments Lower priced segments are not able to resell to are not able to resell to higher priced segmentshigher priced segmentsCompetitors can not Competitors can not undersell segments undersell segments charging higher pricescharging higher prices

Pricing must be legalPricing must be legalCosts of segmentation Costs of segmentation can not exceed can not exceed revenues earnedrevenues earnedSegmented pricing Segmented pricing must reflect real must reflect real differences in buyers’ differences in buyers’ perceived valueperceived value

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The price is used to The price is used to say something about say something about the product.the 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 psychologically influence the buyerinfluence the buyer


SegmentedSegmented






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Temporarily pricing Temporarily pricing products below the list products below the list price or even below price or even below costcostLoss 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 Promotional pricing can have adverse can have adverse effectseffects


SegmentedSegmented






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Promotional Pricing Strategies Promotional Pricing Strategies

Easily copied by Easily copied by competitorscompetitors

Creates deal-prone Creates deal-prone consumersconsumers

May erode the May erode the brand’s valuebrand’s value

Not a substitute for Not a substitute for effective strategic effective strategic planningplanning

Frequent use leads Frequent use leads to industry price to industry price wars which benefit wars which benefit only a few firmsonly a few firms

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How might Home Depot How might Home Depot use various promotional use various promotional pricing tactics to engage pricing tactics to engage shoppers, while shoppers, while minimizing the potential minimizing the potential negative consequences? negative consequences?

For example, what For example, what products would work well products would work well as loss leaders?as loss leaders?

Discussion Question

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

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

pricingpricing


SegmentedSegmented






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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


SegmentedSegmented






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Figure 12-1:

Assessing & Responding to Competitor’s Price Changes

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Metreo Video Clip

Whether or not to match competitor’s pricing in an attempt to win a sale is a question faced by many B2B marketers.

BusinessNow

Click the picture above to play video

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Has excess capacityHas excess capacity Faces falling market Faces falling market

share due to price share due to price competitioncompetition

Desires to be a Desires to be a market share leadermarket share leader

Price Changes

Initiating Price Cuts is Desirable Initiating Price Cuts is Desirable When a Firm:When a Firm:

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Price Increases Price Increases are Desirable:are Desirable: If a firm can If a firm can

increase profit, increase profit, faces cost faces cost inflation, or faces inflation, or faces greater demand greater demand than can be than can be supplied.supplied.

Price Changes

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Methods of Increasing PriceMethods of Increasing Price Eliminating discountsEliminating discounts Adding higher-priced units to the Adding higher-priced units to the

product lineproduct line

Alternatives to Increasing PriceAlternatives to Increasing Price Reducing product sizeReducing product size Using less expensive materialsUsing less expensive materials Unbundling the productUnbundling the product

Price Changes

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

Price Changes

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Competitors are more likely to Competitors are more likely to react to price changes under react to price changes under certain conditions.certain 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 negatively Market share / profits will be negatively

affected if nothing is changed.affected if nothing is 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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Scott Towels is a good example of a fighting brand. The value-priced brand costs less than P&G’s Bounty but delivers high customer satisfaction.

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Figure 12-2:

Public Policy Issues in Pricing

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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 to set prices other 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 gaining higher long-run profits or running a competitor out of business. running 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 pricingBogus reference / comparison pricing Scanner fraudScanner fraud Price confusionPrice confusion

Public Policy and Pricing

Pricing Strategies Chapter 12. 12- 1 Objectives Learn the major strategies for pricing imitative and new products. Understand how companies find a set.

Documents

pricing imitative

pricing strategies chapter

seasonal pricing strategy

total product mix

major strategies

high price

price campaign

low price