MARKETING

Chapter 13
Pricing Strategies
• A firm must consider its pricing goals as well as compatibility
of price with other elements of marketing mix.

• In addition discounts and absorption of shipping cost must

also be considered.

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The Price Determination Process
Select Pricing Objective
Select Method of determining the base price
Cost Plus Pricing Prices based on Prices set in
both demand and relation to market
costs alone
Design Appropriate Strategies
Price vs Non Price Geographic Pricing High-Low vs
Competition Everyday Low Pricing
Skimming Vs One Price vs Flexible Resale Price
Penetration pricing Price mechanism

Discounts and Leader Pricing Reactive vs Proactive

allowances changes
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Price Versus Non Price Competition
i) Price Competition
Offering products at low prices and little services e.g.
computers, electronic, air travel etc
Retailers like Wall Mart, K Mart and Dollar Shop also adopt this
strategy
Value Pricing is improving product value i.e. ratio of its
benefits to price
Implementation of value pricing is
a) Offer product with low prices but added benefits
b) Reduce expense to maintain profits
With value pricing strategy, products often have to be
redesigned to expand benefits and/or shave costs CHP: 13
ii) Non-price Competition
Emphasize on other aspects of marketing mix except price.

Shifting of demand curve to right by product differentiation and

promotion

In case of pure competition there is very little brand loyalty and

affects company’s revenue so company prefer non price
competition to increase loyalty and maintain sales

In order to build brand equity, the best approach is non price

competition

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 D D‘
Price
350
330 D’
D
35 55
Quantity
Shift in demand Curve for Skis
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Market Entry Strategies
i) Market Skimming Pricing
Setting relatively high initial price (highest possible that a
customer can pay)
Reasons
In order to cover R & D Costs quickly
Indicate increased quality
Control the demand
Flexibility (can reduce price afterwards)
This strategy is suitable when
Product has distinctive features
At early stages of Product Life Cycle
Entry barriers for competitors are available e.g. PatentsCHP: 13
ii) Market Penetration Pricing
Setting low initial price

Reasons
Penetrate mass market quickly
Generate substantial revenues
Discourage competitors

This strategy is suitable when

Large market exists
Later stages of Product Life Cycle
Fierce Competition
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Discounts and Allowances
It can be in form of reduced price or other concessions e.g. free
merchandise or advertising allowances

i) Quantity Discounts
Encourage customers to buy in large amounts (in form of $ or
units) e.g. Golf balls $ 2 each but $ 5 for three balls

A Cumulative discount is based on total volume purchased

over a specified period e.g. Air line frequent traveler programs
or Hotel’s Frequent Guest Programs

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ii) Trade Discounts

Also called as functional discounts.

A reduction in list price offered to buyer in payment for

marketing function performed by the buyers.

e.g. List price $ 400, and 40 % trade discount goes to retailer

who pays the wholesaler $ 240 and the wholesaler pays the
manufacturer $ 216 (10 % trade discount goes to wholesaler)

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iii) Cash Discounts

Given to clients for paying their bills in stipulated time

compensated on net amount due after deducting trade and
quantity discounts

e.g. 2/10, n/30, 2 % discount will be paid if the buyer pays

within 10 days of invoice date, otherwise he has to pay full
amount in 30 days

These discounts vary from industry to industry

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iv) Other Discounts and Allowances

Rebate is a discount given on a product after submitting a

form/certificate provided by a seller

Types of rebates include

a) A coupon is a small printed certificate having discount

value mentioned on it
b) A mail in rebate is when a customer fill a form , enclosed
proof of purchase and send to address and receives a
check from seller

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Seasonal Discounts are given in off seasons

Promotional Allowances are given as payment of

Promotional services performed by the buyers e.g. a hardware
manufacturer gives free goods to dealers who prominently
display its product line.

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Geographic Pricing Strategies
Freight is a very important consideration as whether the buyer,
seller or both are going to absorb its cost

i) Point of Product Pricing

Quoting price at the point of production.
FOB (Free on board) the buyer pays all freight cost (also called
as Ex Factory price)
Better approach for consumer who are near by

ii) Uniform Delivered Pricing

Same delivered price to all buyers regardless of their location
Used where freight costs are small part of seller total costs
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iii) Zone Delivered Pricing

The seller divide the market into limited broader zones, then set
uniform delivered price for each zone (usually by Courier
Companies )

iv) Freight Absorption Pricing

Company pays part of freight (absorb) equal to a competitor

near the customers
Adopted to offset the disadvantages of FOB
Useful for companies who have excess capacity, high fixed
costs and low variable costs
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Special Pricing Strategies and
Situations
i) One Price and Flexible Price Strategies
One price is same price to all similar customers who buy in
identical quantities. One price is applicable in automobiles.
A variation of one pricing is Flat Rate Pricing that is a consumer
pays stipulated single amount and use product as little or as
much e.g. Disney Land or unlimited internet access
A Single price strategy is an extreme form of one price strategy
where all products are sold out at one price e.g. Dollar Shop

Flexible Price is similar customers may pay different prices

buying identical quantities. In flexible pricing, bargaining often
determine the final price.
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ii) Price Lining
Select limited number of prices at which a business is selling
related products
e.g. Group of apparel $ 39.88
or Group of shoes $ 59.95
This simplifies buying decision

iii) Odd Pricing

Setting prices at uneven of odd amounts e.g. 49 cents or $19.95

It suggests lower prices and a good strategy for companies

emphasizing low prices.
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iv) Leader Pricing and Unfair Pricing Acts

Cut price on a few items to attract customers (often retailers do

that)

Price of items cut are called as leader and if it is priced below

cost, its called as loss leader

Leader shall be well known and highly advertised product

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v) High Low Pricing an Everyday Low Pricing
Regular price is High price and Sale price is Low Price
Frequent price reduction combined with aggressive promotion
Over 60% transactions in departmental stores involve sale
Criticism is customer wait for sale and it is misleading for
customers

Every Day Low Pricing (EDLP) involves consistently low prices

and few if any temporary price reduction. Reasons of includes
a) Average Selling price is higher than high low pricing so
increased profits
b) Better negotiation of price with suppliers
c) Lower expenses (low advertisements) CHP: 13
v) Resale Price Maintenance
Manufacturers control the price at middleman level
Done in order to protect brand image, less discounts (more
profits to middleman)
A variation is suggested retail price where retailers have a right
to sell the product for less or more than the suggested price by
manufactures.
vi) Reactive and Proactive Changes
Small companies are more reluctant to raise prices as
compared to large companies
Price reduction is done to sell excess inventory or introduce a
product or maintain market share CHP: 13
The End

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