Pricing Strategies of Products

Alternative
Pricing Strategies
MUKESH ROR
Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-1
Flow of presentation
1. Compare the alternative pricing strategies and
explain when each strategy is most appropriate.
2. Describe how prices are quoted.
3. Identify the various pricing policy decisions that
marketers must make.
4. Relate price to consumer perceptions of quality.
5. Contrast competitive bidding and negotiated prices.
6. Explain the importance of transfer pricing.
7. Compare the three alternative global pricing
strategies.
8. Relate the concepts of cannibalization, bundle
pricing, and bots to online pricing strategies.
Pricing Strategies
 Skimming pricing strategy:
strategy involves the use of
a high price relative to competitive offerings
Often used by marketers of high-end products
Also by firms introducing a distinctive good
with little or no competition
Allows firms to control demand during the
introductory stages of a products life cycle
Can be used as a tool for segmenting a
product’s market on a price basis
Price Reductions to Increase Market Share
 Penetration pricing strategy:
strategy involves the
use of a relatively low entry price as
compared with competitive offerings; based
on the theory that this initial low price will
help secure market acceptance
 Everyday low pricing (EDLP): Pricing

strategy of continuously offering low prices
rather than relying on such short term price
cuts as cents-off coupons, rebates, and
special sales
 Competitive Pricing Strategy:
Strategy
reduces emphasis on price as a
competitive variable by pricing goods
at the general level of competitors
Firms focus their own marketing
efforts on the product, distribution
and promotion elements of the
marketing mix
Price Quotations
 List prices:
prices Established prices normally
quoted to potential buyers
 Market price:
price Price that an intermediary or
final consumer pays for a product after
subtracting any discounts, rebates, or
allowances from the list price
 Reductions from List Price
Cash discount:
discount price reduction offered to a
consumer, industrial user, or marketing
intermediary in return for prompt payment of
a bill
 2/10 net 30, a common cash discount
notation, allows consumers to subtract 2
percent from the amount due if payment is
made within 10 days
 Trade Discounts:
Discounts payment to a channel
member or buyer for performing marketing
functions; also known as a functional discount
 Quantity discount:
discount price reduction granted
for a large-volume purchase
Justified on the grounds that large orders
reduce selling expenses, storage, and
transportation costs
Cumulative quantity discounts reduce
prices in amounts determined by purchases
over stated time periods
Non-cumulative quantity discounts
provide one-time reductions in the list price
 Allowances
Trade-in: credit allowance given for a used
item when a new item is purchased
Promotional allowance: advertising or
promotional funds provided by a manufacturer
to other channel members in an attempt to
integrate the promotional strategy within the
channel
 Rebates:
Rebates refund for a portion of the purchase
price, usually granted by the product’s
manufacturer
 Geographic Considerations
FOB (free on board) plant or FOB origin:
origin
Price quotation that does not include
shipping charges. Buyer pays all freight
charges to transport the product from the
manufacturer
Freight absorption:
absorption system for handling
transportation costs under which the buyer
may deduct shipping expenses from the
costs of goods
Uniform-delivered price:
price system for
handling transportation costs under which all
buyers are quoted with the same price,
including transportation expenses
Zone pricing:
pricing system for handling
transportation costs under which the market
is divided into geographic regions and a
different price is set in each region
Basing-point system:
system system for handling
transportation costs in which the buyer’s
costs included the factory price plus freight
charges from the basing-point city nearest
the buyer. Seeks to equalize competition
between distant marketers.
Pricing Policies
 Pricing policy:
policy general guidelines based on
pricing objectives and intended for use in
specific pricing decisions
 Psychological pricing:
pricing pricing policy based on
the belief that certain prices or price ranges
make a good or service more appealing than
others to buyers
 Odd pricing:
pricing pricing policy based on the belief
that a price ending with and odd number just
below a round number is more appealing
 Unit pricing:
pricing pricing policy in which prices are
stated in terms of a recognized unit of
measurement or a standard numerical count
 Price Flexibility:
Flexibility pricing policy that permits
variable prices for goods and services
 Product-line pricing:
pricing practice of marketing
different lines of merchandise at a limited number
of prices
 Promotional pricing:
pricing pricing policy in
which a lower than normal price is used
as a temporary ingredient in the
marketing strategy
Loss leader:
leader product offered to
consumers at less than cost to attract
them to stores in the hope that they
will buy other merchandise at regular
prices
 Leader pricing
 Price-Quality Relationships
Without other cues, price serves as an
important indicator of a product’s quality
to buyers
Customers often view price as an
indicator of a product’s overall quality
and may be willing to pay a higher price
Competitive Bidding and Negotiated Prices
 Many purchases are made through

competitive bidding, a process in which
potential suppliers and manufacturers are
invited to quote prices on proposed
purchases or contracts
 Negotiated Prices Online

Buyers and sellers can communicate and
negotiate prices online
The Transfer Price Dilemma
 Transfer price:
price cost assessed when a product
is moved from one profit center to another
 Profit center:
center any part of an organization to
which revenue and controllable costs can be
assigned
Global Considerations and Online Pricing
 International markets are subject to external

influences such as regulatory limitations,
trade restrictions, competitor’s actions,
economic events, and the global status of
the industry
 The effect the exchange rate can have on
international trade can be significant. It is
important that pricing of products take
exchange rates into account.
 Traditional Global Pricing Strategies
Standard Worldwide: Pricing strategy in
which exporters set standard worldwide
prices for products, regardless of their
target markets
Dual Pricing: Pricing strategy that
distinguishes between domestic and export
sales, and maintains a distinct set of prices
for each
Market Differentiated: Flexible pricing
strategy that sets prices according to local
marketplace and economic conditions
 Characteristics Of Online Pricing
Cannibalization: Loss of sales of an
existing product due to competition from a
new product in the same line
Shopping Bots: Search engines which act
as comparison shopping agents
 Bundle pricing: Offering two or more

complementary products and selling them for a
single price
conclusion
 One of the four major elements of the
marketing mix is price. Pricing is an important
strategic issue because it is related to product
positioning. Furthermore, pricing affects other
marketing mix elements such as product
features, channel decisions, and promotion.
 While there is no single recipe to determine
pricing, the following is a general sequence of
steps that might be followed for developing
the pricing of a new product

Pricing Strategies of Products

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Pricing Strategies of Products

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Alternative

 Everyday low pricing (EDLP): Pricing

 Many purchases are made through

 Negotiated Prices Online

 International markets are subject to external

 Bundle pricing: Offering two or more

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