PRICING STRATEGIES MARKETING MIX

PRODUCT – Designing, naming and packaging goods and/or

LESSON#1: INTRODUCTION: PRICING AS AN ELEMENT services that satisfy customer needs.
OF MARKETING MIX PRICING – Determining what must be provide by a customer
in return for the product.
Marketing consists of the full range of activities involved in PROMOTION – Communicating about the product and/or the
facilitating commercial exchanges and having all of these organization that produces it.
activities be guided by a concern for customer needs. DISTRIBUTION – Efforts to make the product available at the
times and places that customer want.
COMMERCIAL EXCHANGE - This is where a seller provides
a product to a buyer in return for something in exchange. How Pricing is different from the three marketing mix?
PRODUCT - Tangible or intangible
CONSUMER – BUSINESS CUSTOMER
- An individual who purchases a product for his or her
own use
- An individual or group who purchases the product in
order to resell it or for other business purposes.

THE COMMERCIAL EXCHANGE

PRICING AND THE MARKETING CONCEPT

 The feeling of a price being substantially higher than the
customer’s expectations (sometimes referred to as “sticker
shock”)
 The feeling that a price is unfair or is higher than can be
justified
 Customers perceiving they are receiving a discount, or a
price lower than their expectations

Free Market Economy – no government intervention EARLY PRICING PRACTICES

Capital Economy/Keynesian Theory – with government
intervention by John keys The oldest records of prices ever found are clay
Price - Which is given in return for a product in a commercial tablets with pictographic symbols found in a town known as
exchange. Uruk, in what was ancient Sumer and what is now southern
Iraq. These price records are from 3300 BC—they’ve survived
1. Price - Most goods 5,300 years. The documents—records of payment for barley
2. Tuition - College courses, education and wheat, for sheep, and for beer—are really receipts. “Uruk
3. Rent - Use of a place to live or use of equipment for a was a large city, at a minimum 40,000 people,” says
period of time UCLA professor Robert Englund, one of the few
4. Interest - Use of money experts on the Uruk documents. “So some of the quantities are
5. Fees - Professional services, for lawyers, doctors, very high—hundreds of thousands of pounds of barley, for
consultants instance.” But here’s the really remarkable thing. The earliest
6. Premium - Insurance Uruk tablets aren’t just the oldest pricing record ever found.
7. Fare - Transportation: air, taxi, bus They are the oldest examples of human writing yet discovered.
8. Toll - Use of a road or a bridge or long- distance In other words, when humans first took stylus to wet clay, the
phone rates first things that they were compelled to record were … prices
9. Salary - Work of managers However, many of these presented certain difficulties.
10. Wages - Work of hourly workers In his book The Wealth of Nations, Adam Smith gives an
11. Commission - Sales effort example of this: The man who wanted to buy salt, for example,
and had nothing but cattle to give in exchange for it, must have
PRICE – is the amount a customer is willing to pay for a been obliged to buy salt to the value of a whole ox, or a whole
product or service. sheep, at a time. He could seldom buy less than this, because
COST - the expense incurred for making a product or service what he was to give for it could seldom be divided without loss.
that is sold by a company. … Over time, it became clear that the best medium of
exchange is one that is finely divisible, such as the metals of
Marketing Activities various weights used in coins. This use of coins and notes to
are those actions an organization can take for the purpose of represent them led to national systems of money, such as
facilitating commercial exchanges. dollars, yen, or euros.
THREE CATEGORIES OF PRICING ISSUES:
1. BUYER- SELLER INTERACTIVITY
2. PRICE STRUCTURE
3. PRICE FORMAT
1. BUYER- SELLER INTERACTIVITY IN DETERMINING
PRICES
- A customer arrives at the seller’s stall in the local
marketplace and examines the merchandise. When he finds
something he wants, the customer asks the seller, “How
much?” The seller then states an asking price, which is higher
than his reservation price, the lowest price at which he would
sell the item: “23 ducats.” The customer then states his initial
offer. This, of course, is lower than the customer’s reservation
price (the highest price that the customer would pay for the
item): “I can’t pay more than 14.” The seller and the customer
would then try to arrive at an amount they can both agree on
by haggling, a process involving some number of prices and
offers and statements supporting the validity of each. “This
item is really of the very highest quality,” the seller might argue,
“but since I’m in a good mood today, I’ll let you have it for 21.”
The customer might respond, “I’ve seen items at least as good
as this in other shops, but since I’m here, I’ll give you 16.”
Interactive Price - price arrived at by the buyer–seller
interactions of negotiation or the interactions of auction bidding
Fixed Price - price that they actually expected to receive and
sticking to it.
2. PRICE STRUCTURE
Although there are benefits to moving from negotiated prices to
fixed prices, there are also disadvantages. One strength of
interactive pricing is that it makes it easy for the seller to
charge different prices to different buyers.
For example, when prices are negotiated individually, a
customer willing to pay a particularly high price could be
charged, say, $200 for an item without interfering with the
seller’s ability to charge more typical customers a lower price,
say, $125 for the same item. The practice of charging different
customers different prices for the same item is known as price
segmentation.
3.PRICE FORMAT
For example, early fixed prices tended to be round numbers,
such as $1.00, $5.00, or $2.50. However, by 1880 retail
advertisements began to appear showing items priced at a
penny or two below the round number . The practice of pricing
an item just below a round number does not substantially affect
the level of a price, but it does affect how that price level is
expressed. The form of expression of a price is known as the
price format.
Price format also involves the question of how many
numbers are required to express an item’s price.
For example, a price advertisement could directly show the
price of a mushroom and pepperoni pizza, or it could express
that price as a base price plus an additional amount for the two
toppings
PRICING ACTIVITY
The activity of making decisions about prices consists of two
general components. One component is price setting, which
consists of decisions about individual prices. These decisions
concern the price of a specific item to a specific customer or
market in the current marketing environment or situation at
hand. The other component of the pricing activity is
establishing pricing policy, which involves decisions that
guide and regulate the setting of individual prices
PARTICIPANTS IN THE PRICING ACTIVITY
◉ In a department store, it is usually the merchandise buyer
who will do most of the price setting for the items he or
she buys to be sold in the store.
◉ In many large consumer products organizations, a brand’s
product manager will have much of the responsibility for
setting the prices of a brand.
◉ In companies that sell to business customers, salespeople
and their managers play a crucial role in the negotiation
processes by which prices are determined.
◉ In service industries, such as airlines and hotels, there will
often be pricing departments with specialists trained in
revenue management, a set of complex price-setting
techniques that are frequently used in these industries.
ORGANIZATIONS OF PRICING ACTIVITIES
◉ It is possible for a large company to experience problems
in the effective implementation of pricing decisions.
◉ A business organizations should take steps to help insure
that everyday pricing decisions fit with the organization’s
strategies and long-term interests.
◉ Business organization to follow the marketing concept and
effectively focus on satisfying customer needs, marketing
activities need to be well-coordinated with each other and
with the other functions of the organization.
LESSON 2
COST-PLUS PRICING
• Is a pricing strategy that adds a markup to a product’s
original unit cost to determine the final selling price.
• it is calculated based on just two things:
1. Your cost of production
2. Your desired profit margin
How to use the cost-plus pricing formula?
Costs + Profit Margin = PRICE
PROS AND CONS OF COST-PLUS PRICING
PROS: CONS:
1. Simple to use 1. Inefficient
2. Predictably covers 2. Ignores market
costs conditions
3. Easy to justify 3. Doesn’t show value
 Use market research to estimate how customers weigh money
PROS: CONS: against their preferences & feelings for the differentiating
1. Fast implementation for 1. Makes it too easy to factors.
just about any product disengage from your The Potential of Customer Based Pricing
2. Easy to calculate price after it’s been set
3. Predictable profit that 2. Lacks connection with
1. When a Product’s is Lower than its Reference Value
always covers the value your product
production costs provides to customers 2. Using Price to Guide Product Development
4. Customers understand 3. Offers no incentive to 3. Different Customer Values for Different Market
the justification for your maximize profits thru Segments.
selling price expansion revenue or 4. Customer Needs as Drivers for Initial Price
adjustments
4. Makes it difficult to
Understanding Customer Needs
change price when
necessary. 1. When customers are not fully informed, providing
meaningful information is a clear alternative to
lowering price as means of dealing with customer
CUSTOMER-VALUE-BASED PRICING price resistance.
2. Understand the customer’s needs well enough to fully
- Price-setting process can begin with thinking about the appreciate the implications of differences between a
customer’s needs and the ability of the seller’s product to product and its next closest substitute.
satisfy those needs.
- a strategy of setting prices primarily based on consumer’s STRATEGIC PRICING
perceived value of a product or service.
What does strategy means?
Estimating the Value to the Customer In terms of strategic pricing, the objective is profitability, but
achieving profitability requires managing more than price
VTC – value created by the product, distribution, and levels, it requires ensuring that products and services include
promotion elements of the marketing. A key technique of just for those features that customers are willing to pay for,
customer –based pricing is to be able to arrive an estimate of without those that unnecessarily drive up cost by more than
this value in monetary terms. they add to value.
It requires translating the differentiated benefits your company
Four Steps of Value to the Customer Estimation offers into customer perceptions of a fair price premium for
those benefits. It requires creativity in how you collect
1. Identify the price of the competing product that the revenues so that customers who get more value from your
customer views as the best substitute. This is the differentiation pay more for it. It requires varying price to use
reference value. fixed costs optimally and to discourage behavior that drives
2. Identify all factors that differentiate your product from this excessive service costs. It sometimes requires building
competing product. These are the differentiating factors. capabilities to mitigate the behavior of aggressive competitors.
3. Determine the monetary value to the customer of each of
these differentiating factors. These are the positive and THREE PRINCIPLES:
negative differentiation values. 1. VALUE- BASED – means that differences in pricing
4. Sum the reference value and the differentiation values to across customers and changes over time reflect
determined the total value to the customer, the maximum differences or changes in the value to customers.
that someone fully informed of the product’s benefits 2. PROACTIVE – means that companies anticipate
would be willing to pay for the product. disruptive events and develop strategies in advance
to deal with them.
DEFINITION OF TERMS 3. PROFIT- DRIVEN – means that company evaluates
its success at price management by what it earns
Differentiating Factors – the factors that differentiate your relative to alternative investments rather than by the
product from this next closest substitute. revenue it generates relative to its competitors.
Reference Value – the price of this alternative product.
Positive Differentiation Value – if your products is superior to STRATEGIC PRICING PYRAMID
the next closest substitute on a factor
Negative Differentiation Value – if your product is inferior to
the next closest substitute on a factor.

Two Approaches to Determine Differentiation Values

To translate the factor into monetary terms by identifying
additional expenditures &/or savings that result from the factor.
LESSON 3: PRICE & VALUE CREATION
THE SOURCE OF PRICING ADVANTAGE
• An in-depth understanding of how your products create
value for customers is the key that unlocks your
organization’s ability to improve pricing performance by
enabling managers across the organization to make more
profitable business choices.
• Success requires effective processes to collect data, to
estimate customer value, and to get that information into
the hands of decision-makers.
• It requires new skills and tools to help managers make
better pricing strategy choices in real time as they confront
ever-shifting customer needs and competitive actions.
• It requires an organizational commitment to ensure that
pricing decisions are made with an unswerving focus on
long-term profitability.
THE ROLE OF VALUE IN PRICING
What does value refer?
Value refers to overall satisfaction that a customer receives
from using a product or service offering.
Use value – the utility gained from the product.
Consumer Surplus – the difference between the use value of
a product and its market price
The value at the heart of pricing strategy is not use value, but
is what economists call exchange value or economic value.
Economic value accounts for the fact that the value one can
capture for commodity attributes of an offer is limited to
whatever competitors charge for them. Only the part of
economic value associated with differentiation, which we call
differentiation value can potentially be captured in the price.
Differentiation value comes in two forms: monetary and
psychological.
 Monetary Value - represents the total cost savings or
income enhancements that a customer accrues as a result
of purchasing a product.
 Psychological Value – refers to the many ways that a
product creates innate satisfaction for the customer.
TOTAL ECONOMIC VALUE is calculated as the price of the
customer’s best alternative (the reference value) plus the worth
of whatever differentiates the offering from the alternative (the
differentiation value).
NBCA
One of the most critical factors driving customer choice and
willingness-to-pay is the set of alternative products under
consideration for purchase. From the marketer’s perspective,
these products represent the “NEXT BEST COMPETITIVE
ALTERNATIVES”.
 Reference Value – economic value estimation by
determining the competitor charges.
 Differentiation value – the net benefits that your
product or service delivers to customer over and
above those provided by the competitive reference
product.
ASSESSING VALUE TO THE CUSTOMER
TYPES OF PRODUCT CHARACTERISITCS:
1. Core-Quality Characteristics – characteristics that affect
the products ability to accomplish what is considered by
customers to be its primary purpose or function.
2. Features and Styling Characteristics – these
characteristics contribute to benefits beyond the product’s
primary function. This category include aspects sometimes
referred as “bells and whistles”
3. Reputation and Support Service Characteristics –
characteristics that support a product’s primary and secondary
benefits that could be characteristics of the selling company
rather than only the product itself.
TYPES OF CUSTOMER NEEDS:
1. NEED FOR OBJECTIVE PERFORMANCE
◦ Objective Performance – the product performance that
is important to the buyer is objectively measureable. It
involves results that are a matter of observable facts, as
opposed to a matter of opinion.
◦ Subjective Performance – involves results that can be
directly evaluated only by the person consuming the
product.
2. HEDONIC AND AESTHETIC PERFORMANCE NEEDS –
products and products characteristics that are valued for
the hedonic and aesthetic pleasures they create that
satisfy customers.
The more sensual pleasures for food and drink referred to
“hedonic”.
Pleasure of music, art, literature, and the performing arts
referred to as “aesthetic”
3. NEED FOR SOCIAL PERFORMANCE – product
characteristics valued by a customer for their expected
effects on the customer’s social image.
4. NEED FOR PERFORMANCE RELIABILITY – the
customer’s desires to avoid the expenses and anxieties of
product inconsistency or failure.
5. NEED FOR PRODUCT CONVENIENCE – product
characteristics that reduce the effort involved in receiving
the product’s benefits
HOW TO ESTIMATE ECONOMIC VALUE
COMPETITIVE REFERENCE PRICES
Identifying the next best competitive alternative to your product
and gathering accurate reference prices, while conceptually
simple, offers a number of challenges that often trip up pricing
strategies.
What could be the challenges in establishing reference prices?
ESTIMATING MONETARY VALUE
Total Monetary Value – the sum of reference value and the
differentiation value
1. Consider only the value of the difference between your
product and the next best competitive alternative (NBCA)
product.
2. Measure the differentiation value either as costs saved to
achieve a particular level or benefit or as extra benefits
achieved for an identical cost.
3. Do not assume that the percentage increase in value is
simply proportional to the percentage increase in the
effectiveness of your product.
ESTIMATING PSYCHOLOGICAL VALUE
Psychological value drivers such as satisfaction and security,
by virtue of their subjective nature, do not lend themselves to
estimation via qualitative research techniques like in-depth
interviewing. Instead, pricing researchers must rely on a variety
of quantitative techniques to estimate the worth of a product’s
differentiated features.
Conjoint Analysis – technique developed in the late 1970s
and early 1980s that can discern the hidden values that
customers place on product features. The most commonly
used of the survey methods is conjoint analysis, which is also
known as trade-off analysis
Conjoint analysis involves carrying out a study where a set of
possible alternative products are presented or described to
respondents and the respondents are asked to rate, rank, or
choose among these alternative products
LESSON 4: ANALYSIS OF PRICING STRUCTURES
TACTICS FOR PRICING DIFFERENTLY ACROSS
SEGMENTS
As was mentioned in a company’s price structure consists of
the pattern of the prices it charges its customers. One aspect
of price structure concerns the different prices that a company
may charge for the same product. A second aspect of a
company’s price structure concerns the array of prices charged
for the different products sold by the company. Because there
are often interrelationships between a seller’s various products,
the pricing of these products should take such relationships
into account.
Market – defined as all customers and potential customer for a
product.
Market Segment – group of buyers and potential buyers within
a market who have similar characteristics.
Factors Causing Pricing Differences Between Market
Segments
1. The product’s value to the customer (VTC)
2. The costs to the seller of providing the product
3. The customers’ price sensitivity or responsiveness to
price changes.
PRICE SEGMENTATION
The practice of a seller charging different market segments
different prices for the same product.
Two Difficulties Of Accomplishing
Price Segmentation
1) One cannot expect customers to voluntarily identify
themselves as willing pay prices that are higher than
those paid by other customers.
2) Arbitrage – this is the practice of buying a product at a
low price in order to sell to others at a higher price.
Price-Segmentation Fence – is a criterion that customers
must meet to qualify for a lower price.
This criterion could be a characteristic of the customer, such
as the customer’s age.
Two Goals of Price Segmentation Fence
1) The fence divides the market so that those customers for
whom a high price is appropriate are on one side and
 those customer for whom a low price is appropriate are on
the other.
2) The second goal is to minimize the degree to which the
fence can be crossed.
SIX MAJOR TYPES OF PRICE SEGMENTATION FENCES
1) Customer characteristics
2) Purchase Quantity
3) Product Features
4) Design of product bundles
5) Time of purchase or use
6) Place of purchase or use.
PRICE SEGMENTATION BY CUSTOMER
CHARACTERISTICS
When a product’s price differs depending on an observable
characteristic of a customer, then this is being used as a price
segmentation fence.
Give examples of observable characteristics of a customer?
Commercial Status – the customer characteristic used for a
price segmentation fence.
What could be the possible constraints on the use of
customer characteristics?
• limited opportunities to practice price segmentation.
• is likely to create questions of price fairness.
• price segmentation as “price discrimination”.
• use of a characteristics such as gender, race, religion, or
ethnic is likely to violate customer sensitivities and should
be really avoided. Customer characteristics such as age,
student, status, and commercial status is considered
generally acceptable.
Price Segmentation in Negotiation
When prices are set through negotiation, the seller has a
greater ability to use customer characteristics as price-
segmentation fences because it is difficult for customers to
recognize that this is being done.
PRICE SEGMENTATION BY PURCHASE QUANTITY
One purchase-situation characteristic that is widely used as a
price-segmentation fence is the quantity that the customer
purchases. The best price for those customers who buy larger
quantities of a product is often lower than that for those
customers who buy smaller quantities of the product. When
this is so, it makes sense for the seller to offer a lower per-unit
price to the customers who buy larger quantities. This lower
per-unit price is often termed a quantity discount.
Ways to offer lower prices to customers who buy larger
quantities of a product:
1. An order-size discount – gives customers who purchase
larger amounts at one time a lower per unit price.
2. A cumulative-purchase discount – gives customers who
have many purchases from the seller a lower price for new
purchases than customers who have done less business with
the seller. It is often take the form of a frequent-user program.
3. Fixed –charge pricing – gives open access to a product to
customers who pay a single price. The effect of this is that
customers who make more use of the product pay a lower per
portion or per use price than those who make less of the
product.
4. Two-part pricing – involves both a fixed charge and a per-
unit charge,
What Could Be The Possible Constraints On The Use Of
Purchase Quantity
• it needs to be structured to prevent from being defeated by
arbitragers.
• it needs to be structured to discourage purchasing
alliances, or association between group of buyers of a
product.
• Segmentation-fence patches – repair the “holes” in the
fences that allow high-price segment customers to buy at
low-price segment prices.
• issue of legality.
PRICE SEGMENTATION BY PRODUCT FEATURES
If customers who value a basic product more than others also
tend to choose a certain luxury feature of that product, then it
might make sense for the seller to charge a higher price for the
basic product to customers who buy the luxury feature. In that
case, the buyers of the luxury feature could be said to be
paying a feature-dependent premium for the basic product,
because the higher price they pay for the basic product is
caused by their choice of the luxury feature. When product
features are used for price segmentation, it is the choice of the
feature that becomes the fence enabling the seller to charge
different customers different prices for the same basic product.
If customers who value a basic product more than others also
tend to choose a certain luxury feature of that product, then it
might make sense for the seller to charge a higher price for the
basic product to customers who buy the luxury feature. In that
case, the buyers of the luxury feature could be said to be
paying a feature-dependent premium for the basic product,
because the higher price they pay for the basic product is
caused by their choice of the luxury feature. When product
features are used for price segmentation, it is the choice of the
feature that becomes the fence enabling the seller to charge
different customers different prices for the same basic product.
Product Enhancing Features: When the price-segmentation
goal is to charge a higher price for the basic product to a
segment that has a higher valuation of that product, then it
would be appropriate to consider using as a price-
segmentation fence a feature that enhances the product.
Product- Diminishing Features When the price-segmentation
goal is to charge a lower price for the basic product to a
segment that has a lower valuation of that product, then it
would be appropriate to consider using as a price-
segmentation fence a feature that diminishes the product. In • Telecommunication services
this case, the buyers of the product with the feature that companies • Retail banking
diminishes it could be said to be receiving a feature-dependent • Hotels • Haircutting shops
discount. To be effective in price segmentation, a product- • Movie theaters
• Restaurants
• Bars, night clubs
diminishing feature should make the product less than fully • Resorts • Lawn care companies
acceptable to the customers in the market segment that pays • Health club
the high price. • Transportation

PRICE SEGMENTATION BY DESIGN OF PRODUCT PEAK-LOAD PRICING AS PRICE SEGMENTATION

BUNDLES
A bundle is any set of products that are offered together as a
package. The careful design of product bundles can
accomplish price segmentation in a way that is slightly different
than that of the previous two types of price-segmentation
fences. Quantity discounts (which are sometimes considered a
type of product bundle) accomplish price segmentation
because some customers choose to buy the higher quantities
and others do not. Feature-dependent premiums and discounts
accomplish price segmentation because some customers
choose the product-enhancing or product-diminishing features
and others do not. However, the design of bundles can
accomplish price segmentation even if all customers choose to
purchase the product bundle.
The key to designing a product bundle to accomplish price
segmentation is to identify a set of products that show a VTC
“crossover” between at least two important market segments
CHOOSIANG A PRICE SEGMENT FENCE
Because of issues regarding customer judgments of price
fairness, it is important to be familiar with price segmentation
fences that do not involve a customer’s characteristics.
Purchase-situation characteristics such as the quantity
purchased or choice of product features or bundles can serve
very effectively as price segmentation fences. If designed
carefully, quantity discounts, feature-dependent premiums or
discounts, and product bundles can create the conditions
where different groups of customers pay different prices for
essentially the same product.
It should also be noted that a company’s price structure may
well involve the use of more than one price segmentation
fence.
TIME OF PRODUCT USE AS A PRICE-SEGMENTATION
FENCE
Perishability – services that are unsold at one time cannot be
stored for sale at another time.
Peak- Load Pricing - when the demand fluctuations occur
during predictable periods, seller of services often develop a
price structure such that their prices are higher during the time
periods of peak demand.
Note: Peak-load pricing can involve units of time. The price
differences could be between times of the day, days of the
week, seasons of the year, or by the timing of special events.
Types of Companies Using Peak-Load Pricing
1. Value to the customer
2. Costs
3. Price Sensitivity
Note: If we consider customers in the off-peak segment of the
market, each of these three factors could contribute to a
product’s best price being lower than that for peak-period
customers. Off-peak customers are likely to value the product
less than do peak-period customers.
If each time-period-defined market segment has a different
best price, then, in practical terms, these best prices may be
arrived at by successively considering small price increases or
decreases until there are no longer any that would produce
higher profits.
Relevant Costs in Peak-Load Pricing
 CAPACITY COSTS – the costs of maintaining or adding
capacity, are relevant for pricing decisions during peak-
demand.
This means that evaluation of possible price decreases during
peak-demand must include consideration of the incremental
fixed costs of adding capacity. This leads to high breakeven
sales increases for such prospective price decreases, and a
lower likelihood of the price decrease being profitable. Thus,
peak-period prices will tend to stay high.
 OPERATING COSTS – Off peak prices are driven by
operating costs, which will usually be only the variable
costs for providing the service.
Consideration of price decreases during off-peak periods
should not take into account any of the fixed costs that are
incurred to support peak-period demand.
This leads to relatively low breakeven sales increases for such
prospective price decreases and a higher likelihood of the price
decrease being profitable. As a result, prices during off-peak
periods will tend to be low.
 PEAK REVERSAL – occurs when a lower price in the off-
peak periods stimulates so much demand that the off-peak
time become the peak times.
Time of Product Purchase as a
Price-Segmentation Fence
1. Those that occur periodically
2. Those that occur irregularly
3. Those that involve making the purchase earlier than other
customers
4. Those that involve making the purchase later than other
customers

• Electric utilities • Tax- preparation PERIODIC DISCOUNTS

High/Low Pricing - time of purchase is used as a price-
segmentation fence by offering items at recurring discounts
that are more or less predictable over time.
There is an alternation of high-price periods with low-price
periods.
During the high periods, the item is sold at what is framed as
its “regular price”
During the low-price periods, the item is sold at a discount from
the regular price, which is often refereed as a “sale price”
Factors Determining the Success of High/Low Pricing
EDLP (Everyday low pricing) – a technique that setting of a
consistent price that is somewhere between the two price level
of the competitor who is using high/low pricing.
Two factors that are important for making high/low pricing
successful:
1. The regular price of high/low pricing can help set a high-
quality image for the merchandise.
2. Whereas EDLP retailers can offer the low-VTC customer
the convenience of not having to wait for a relatively low
price, the high/low retailer can offer the excitement of
obtaining a perceived gain.
PROMOTIONAL DISCOUNTS
PROMOTIONAL DISCOUNTS – Are simple price decreases,
often referred as “Sales”.
TRADE PROMOTIONS – promotional discounts to product
resellers, such as wholesalers and retailers
How a Discount can Communicate
A source, in this case the seller, desires to communicate an
intended message to the receiver, in this case the customer or
potential customer. A temporary low price can provide a means
for this communication by leading the receiver to take a target
action that will have the effect of getting across the intended
message. A common target action is the purchase of the
product.
The target action could also be the consumer’s purchase of
more units of a product than usual. This action is often referred
to as “pantry loading.”
Targeting the Poorly Informed Segment
It is likely that the well-informed consumer has already
purchased the product (perhaps picking it up right after he
learned about it) and wasn’t planning to purchase again until
the original purchase wore out or was used up. If the
occurrence of a promotional discount is unpredictable and of
short duration, it is unlikely to be offered at just the right time
for the well-informed consumer to buy. By contrast, it could be
expected that almost none of the poorly informed consumers
will have already purchased the product and would thus all be
in a position to respond to the suddenly occurring incentive of
an attractive price.
By this logic, a discount must be unpredictable and of short
duration to be an efficient means of communicating about a
product. The longer or more repeatedly a promotional discount
is offered, the weaker is its ability to serve as a fence that
keeps the well-informed consumers away from the low price.
When unwise managers overuse promotional discounts, the
price reductions could become a different type of discount,
such as a periodic discount, which may not be appropriate for
the product in question. Even worse, an overused promotional
discount could lower the consumer’s internal reference price
for the product, and, in effect, become a permanent price
decrease.
Trade Promotions
 The discount will be passed along to the consumer to
create a consumer promotional discount.
Such consumer pass-through would occur, for example, when
a product’s temporary low price to a retailer would lead the
retailer to put the product on sale.
 The temporary discount leads a reseller to buy more of a
product and thus discover that it is possible to quickly
move such a larger product inventory.
LATE-PURCHASE DISCOUNTS
Retailers commonly use a late-purchase price-segmentation
fence by offering markdowns.
MARKDOWNS – also known as “clearance prices”, they are
used to stimulate sales of items that are slow-moving obsolete,
shopworn, or at the end of their season.
SHIPPING COSTS FOR INDUSTRIAL PRODUCTS
FOB-Origin Pricing – “free on board”, which means free of the
seller’s responsibility – where it is produced.
DELIVERED PRICING
- The price that the seller quotes to the customer includes the
transportation of the product to the customer’s location.
- It gives the seller a greater degree of pricing control.
- It involves using location as price-segmentation fence.
FOB destination – If the seller chooses to quote a single
product price that includes shipping.
Alternatively, the seller could quote a price for the product
along with separate freight charge to cover shipping.
Basing-Point Pricing – the freight charges quoted to the
buyer are the costs of shipping the product from a place other
than the producer’s location.
Industrial Price Zones –are contiguous areas within which all
FOB-destination prices or freight charges would be equal.
ABSORPTION OF SHIPPING COSTS
The use of delivered pricing helps make it possible for a seller
to address a common problem resulting from high shipping
costs. Shipping costs can make it difficult for a seller to
successfully compete at the more distant customer locations
FREIGHT ABSORPTION PRICING – where a company may
set delivered prices that do not fully cover the costs of shipping
the product. The seller absorbs part of the freight shipping
costs.
UNIFORMED DELIVERED PRICE – shipping in the product’s
price and charge the same price, regardless of the location. It
is sometimes called “postage-stamp pricing”, because it has
been used by the U.S Postal Service.
- It is common in consumer products sold by mail order and
online.
RETAIL PRICE ZONES
ZONE PRICING – Geographic price segmentation in retailing.
(Also called variable pricing or local pricing).
CONVENIENCE-BASED PRICE ZONES – Its goal is to
capture the value created by locating an outlet in places that
are easily accessible to customers as they pursue activities
that bring up the need for the outlet’s products.
NOTE: Higher prices for products sold at convenient locations
are appropriate not only because the convenience gives the
products a higher VTC but also because selling at convenient
locations is likely to involve higher costs.
PRICE ZONES BASED ON OTHER FACTORS
1. Customer Price Sensitivity – Customer’s income level
2. Intensity of the competition.
3. Consumer’s ability to engage in price information search in
order to take advantage of the price competition that does
exist.
CONSTRAINTS ON ZONE PRICING
1. Difficulty of managing price zones - The use of price
zones greatly increases the complexity of pricing
databases and other systems needed to manage prices
across a retail chain. Managing price zones can be
particularly costly in product categories such as clothing,
where prices are marked on each item
2. Conflicts with advertised prices – “Free standing
inserts” - These inserts can be easily varied between the
newspaper’s delivery locations. Retailers can also avoid
the difficulties created by price advertising by simply
refraining from using zone pricing on the particular items
that are being advertised.
3. Conflicts with internet pricing - Displaying prices on
Internet sites also presents a problem for zone pricing.
This not only increases consumer awareness of zone
pricing but also undermines it unless the online price is as
high as that in any of the zones.
PRICING IN INTERNATIONAL COMMERCE
A product may have a different best price in different countries
because of any or all of the three factors that determine best
price:
1. VTC
2. COSTS
3. PRICE SENSITIVITY
BUYING POWER – combination of their income and wealth
differs greatly between countries.
GRAY MARKET COMMERCE
- this is the practice of selling products through unauthorized
international distribution channels.
- is not illegal in most countries, but is unauthorized and
ethically questionable.
- also called “parallel importing”
BLACK MARKET- refers to commerce that is illegal.
CONSTRAINTS ON INTERNATIONAL PRICE
SEGMENTATION
GOVERNMENT ACTIONS:
1. Price Controls – the government mandating of maximum
prices. Price controls apply equally to local and foreign
countries.
2. Protective Tariffs – these are schedules of import taxes
known as duties, that are designed to protect the local
sellers of a product against low priced competition from
foreign producers.
3. Dumping – judged to occur when an imported product is
sold at a price that harms local competitors and is lower
than the imported product’s price in the producing country.
GEOGRAPHY OF CYBERSPACE
The vast computer network known as the Internet is also often
referred to as “cyberspace,” which indicates that it is
comprehended as a realm with a spatial aspect. Each
webpage is a specific location in this space, all of the pages of
a company’s website are an area in this space, and the
websites of similar types of companies comprise a region in
this space. Given this, the website where a customer commits
to a purchase could be considered the cyberspace location of
his or her purchase. Selling the same item for different prices
when purchased at different Internet locations would constitute
using the Internet place of purchase as a price segmentation
fence.
BRANDED SITE – the internet location of a product’s
manufacturer or of an online retailer.
SHOPPING SITE – prices of many sellers of an item in a
format that facilitates price comparison. Visitors to shopping
sites are more price-sensitive than visitors to branded sites,
retailers or manufacturers who sell directly to consumers.