What Is Pricing?

Price is the only element in the marketing mix that produces revenue; all other elements represent costs. Price is also one of the most
flexible marketing mix elements. Unlike product features and channel commitments, prices can be changed quickly. At the same time,
pricing is the number one problem facing many marketing executives, and many companies do not handle pricing well. Some
managers view pricing as a big headache, preferring instead to focus on other marketing mix elements. However, smart managers treat
pricing as a key strategic tool for creating and capturing customer value. Prices have a direct impact on a firm's bottom line. A small
percentage improvement in price can generate a large percentage increase in profitability. More important, as part of a company's
overall value proposition, price plays a key role in creating customer value and building customer relationships.

Pricing refers to the decision-making process that goes into establishing a value for a product or service. There are many different
strategies that a business can use when setting prices, but they are all a form of pricing. The price that's set during the pricing process
is what the customer will pay for that product or service.

In this chapter, we will look at the complex dynamics of pricing. A company does not set a single price, but rather a pricing structure
that covers different items in its line. This pricing structure changes over time as products move through their life cycles. The
company adjusts product prices to reflect changes in costs and demand, and to account for variations in buyers and situations. As the
competitive environment changes, the company considers when to initiate price changes and when to respond to them. And as the
cellular phone example demonstrates forcefully, pricing decisions are subject to an incredibly complex array of environ-
mental and competitive forces.
This chapter examines the dynamic pricing strategies available to management. In turn, we look at new-product pricing strategies for
products in the introductory stage of the product life cycle, product-mix pricing strategies for related products in the product mix,
price-adjustment strategies that account for customer differences and changing situations, and strategies for initiating and
responding to price changes.2

Product-Mix Pricing Strategies

The strategy for setting a product's price often has to be changed when the product is part of a product mix. In this case, the firm looks
for a set of prices that maximizes the profits on the total product mix. Pricing is difficult because the various products have related
demand and costs, and face different degrees of competition. We now take a closer look at six product-mix pricing situations

Product line pricing

In a market, we rarely see companies market individual products. Instead, they group similar products and market them under one big
umbrella. This is known as a product line. Using product lines can help the company reduce customer acquisition costs, build brand
loyalty, and improve overall sales. A product line is a group of related products marketed under the same brand. These products are
often sold to the same group of customers within a given price range.To understand a company's product line, we must first consider
the types of products it has. For example, Coca-Cola has three main product types: sodas, Minute Maid, and mineral water. The soft
drinks line has five products - Coca-Cola, Diet Coke, Coke Zero, Fanta, and Sprite. In this example, the number of Coca-Cola product
lines is 3.Companies develop product lines to maximize the profit of popular items. For example, Coca-Cola is a popular soft drink
many people worldwide enjoy. To leverage the success of the original Coke, the company introduced several varieties to this product
line, such as Coke Zero, Diet Coke, Vanilla Coke, etc.
Here are more examples of major brands with multiple product lines:Nike's product lines include footwear, clothing, and
equipment.Starbucks' product lines include coffee, tea, food, and merchandise.Apple's product lines include Macbooks, iPhones,
iPads, Apple TV, music streaming services, desktop computers, and software.

Product line pricing means offering different versions of products or services at different price points depending on customer
preferences and perceptions. It comes with two main benefits. First, differential prices allow companies to extend their reach. For
example, a bakery has a low-priced drink or dessert to attract more people to the store while selling higher-value products. Second,
companies can target customers of different levels, including high-income, middle-income, and low-income.

Optional-Product Pricing

Many companies use optional product pricing - offering to sell optional or accessory products along with their main
product.Sometimes things that we buy can be supplemented by an additional purchase, like a case for a laptop or in-flight upgrades.
While it may feel like we really need to buy the extra item, it’s usually something that will simply improve our experience.When we
buy these optional items, they’re usually priced using a strategy called optional product pricing. The model is relevant to all different
types and sizes of businesses, from electronics retailers to car manufacturers to software companies.

The goal of this strategy is that if there are products that seem like they will be better with the purchase of another product, customers
are more likely to buy the second product and drive more sales precisely what businesses want.

Optional product pricing is when a business decides to sell their product for a much cheaper price than they ordinarily would and rely
on the sales of optional products to make up for the difference. In some cases, they may even sell the product at less than cost and rely
on the so-called "loss leader" to bring in customers that purchase other items.
Captive-Product Pricing
Companies that make products that must be used along with a main product are using captive-product pricing. Examples of captive
products are razors, camera film and computer software. Producers of the main products (razors, cameras and computers) often price
them low and set high mark-ups on the supplies. Thus Polaroid prices its cameras low because it makes its money on the film it sells.
And Gillette sells low-priced razors, but makes money on the replacement blades.

By-Product Pricing

In producing processed meats, petroleum products, chemicals and other products, there are often by-products. If the by-products have
no value and if getting rid of them is costly, this will affect the pricing of the main product. Using by-product pricing, the
manufacturer will seek a market for these by-products and should accept any price that covers more than the cost of storing and
delivering; them. This practice allows the seller to reduce the main product's price to make it more competitive. By-products can even
turn out to be profitable. For example,
many lumber mills have begun to sell bark chips and sawdust profitably as decorative mulch for home and commercial
landscaping.Example of By Product Pricing

When meat is processed for human consumption, the by-product can be used as food for dogs/cats. So the manufacturer can sell it in
the market to recover some of his expenses, say transportation and storage costs.

Product-Bundle Pricing
Using product-bundle pricing, sellers often combine several of their products and offer the bundle at a reduced price. Thus theaters
and sports teams sell season tickets at less than the cost of single tickets; hotels sell specially priced packages that include room, meals
and entertainment; computer makers include attractive software packages with their personal computers. Price bundling can promote
the sales of products that consumers might not otherwise buy, but the combined price must be low enough to get them to buy the
bundle.In other cases, product-bundle pricing is used to sell more than the customer really wants. Obtaining a ticket to an exclusive
sports event is difficult, but World Cup football finals tickets are available to people willing to buy them bundled with
a supersonic Concorde flight.

Two part pricing

Two-Part Pricing (also called Two Part Tariff) = a form of pricing in which consumers are charged both an entry fee (fixed price) and a
usage fee (per-unit price). Examples of two-part pricing include a phone contract that charges a fixed monthly charge and a per-minute
charge for use of the phone.The purpose of a two-part tariff is to extract more of the consumer surplus, by using a pricing scheme
made up of two parts: • A fixed, one-time fee charged to each user that entitles the person to make further purchases. It may be also
called entry fee, set-up charge, or enrollment fee.
 Price-Adjustment Strategies

Companies usually adjust their basic prices to account for various customer differences and changing situations. Table 17.2
summarizes seven price-adjustment strategies: discount and allowance pricing, segmented pricing, psychological pricing, promotional
pricing, -value pricing, geographical pricing and international pricing.

Discount and Allowance Pricing

Most companies adjust their basic price to reward customers for certain responses, such as early payment of bills, volume purchases
and off-season buying. These price adjustments - called discounts and allowances - can take
many forms.
● Cash Discounts: A cash discount is a price reduction to buyers who pay their bills promptly. A typical example is 2/10 net 30
which means that although payment is due within 30 days, the buyer can deduct 2% if the bill is paid within ten.
● Quantity Discounts: A quality discount is a price reduction to buyers who buy large volumes. A typical example might be Tk.
10 per unit for less than 100 units, Tk. 9 per unit for 100 or more units.
● Seasonal Discounts: A Seasonal discount is a price reduction to buyers who buy products or services out of season. Hotels
offer seasonal discounts in their slow periods.
● Allowances: Allowances are other types of reductions from the list price for example, trades in allowances are price
reductions given for turning in an old item. When introducing a new one.
Psychological Pricing
Price says something about the product. For example, many consumers use price to judge quality, A SI 00 bottle of perfume may
contain only S3 worth of scent, but some people are willing to pay the $100 because this price indicates something special.In using
psychological pricing, sellers consider the psychology of prices and not simply the economics.In using psychological pricing, sellers
consider the psychology of prices. The actual pricing difference between Tk.100 and Tk.99 is only 1 taka, but the psychological
difference can be much greater.

Promotional Pricing
With promotional pricing, companies will temporarily price their products below list price and sometimes even below cost.
Promotional pricing takes several forms. Supermarkets and department stores will price a few products as toss leaders to attract
customers to the store in the hope that they will buy other items at normal mark-ups.For instance, discounts, flash sales, seasonal sales,
coupons, gamified promotions, etc., are all examples of promotional pricing.

Geographical Pricing:

A company must also decide how to price its products to customers in different parts of the country or world.A company must also
decide how to price its products to customers located in different parts of the country or the world. Should the company risk losing the
business of more distant customers by charging them higher prices to cover the higher shipping costs? Or should the company charge
all customers the same prices regardless of location?
Discriminatory Pricing:

Customer-segment pricingDifferent customers pay different prices for the same product or service. Museums, for example, will
charge a lower admission for young people, the unwaged, students and senior citizens. In many parts of the world, tourists pay more to
see museums, shows and national monuments than do locals.

Location pricing Different locations are priced differently, even though the cost of offering each location is the same. For instance,
theaters vary their scat prices because of audience preferences for certain locations and EU universities charge higher tuition fees for
non-EU students.

Time pricing Prices vary by the season, the month, the day and even the hour. Public utilities vary their prices to commercial users by
time of day and weekend versus weekday. The telephone company offers lower 'off-peak' charges and resorts give seasonal discounts.

Product form pricing One of the variants of price discrimination where the seller charges two different prices for different versions
of the product not in proportion to their respective costs. This is quite a common practice where a company adds a new feature and
increases the price more than the cost difference it incurred in adding the new feature. Different prices charged for different variants of
the same product. E.g., The price of the same type of a car may vary because of different color and add-on features.

Image Pricing

Also known as ‘premium pricing’, image pricing is a widely practiced marketing strategy where the prices are set higher because it’s
believed that a premium price would also increase consumer desire. Customers are often willing to pay higher prices for branded items
because of the image associated with them. They would not investigate if the price accurately reflects the value.