Chapter 14

Pricing Strategies and

Tactics
Sommers  Barnes
Ninth Canadian Edition

Presentation by
Karen A. Blotnicky
Mount Saint Vincent University, Halifax, NS

Copyright © 2001 by McGraw-Hill Ryerson Limited

Chapter Goals
To gain an understanding of:
• Price competition and value pricing
• Pricing strategies for market entry: skimming
and penetration pricing
• Price discounts and allowances
• Geographic pricing strategies
• Special strategies including one-price, flexible-
price, price lining, resale price maintenance,
leader pricing, everyday low price, odd pricing
• Legal issues associated with pricing

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Pricing Strategy
• how does a company decide what price to
charge for its products and services?
• what is “the price” anyway? doesn’t price
vary across situations and over time?
• some firms have to decide what to charge
different customers and in different
situations
• they must decide whether discounts are to
be offered, to whom, when, and for what
reason
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Price vs. Nonprice
Competition
• In price competition, a seller regularly offers
products priced as low as possible and
accompanied by a minimum of services.
• In nonprice competition,
competition a seller has stable
prices and stresses other aspects of
marketing.
• With value pricing,
pricing firms strive for more
benefits at lower costs to consumer.
• With relationship pricing, customers have
incentives to be loyal-- get price incentive if
you do more business with one firm.
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Nonprice Competition
• some firms feel price is the main competitive
tool, that customers always want low prices
• other firms are looking for ways to add value,
thereby being able to avoid low prices
• sometimes prices have to be changed in
response to competitive actions
• many firms would prefer to engage in
nonprice competition by building brand
equity and relationships with customers

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Relationship Pricing
• Uses price as a method to build
long-term relationships with the
best customers
• Focuses on giving better deals to
better customers
• Goal is to price relative to the value
of the customer to the firm, while
building loyalty and stimulating
repeat buying
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The Price Determination
Process
• In pricing, an organization first must decide on its
pricing goal.
• The next step is to set the base price for a product.
• The final step involves designing pricing strategies
that are compatible with the rest of the marketing
mix.
• Many strategic questions must be answered:
• Will our company compete on the basis of price
or other factors?
• What kind of discount schedule (if any) should
be adopted?
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 The Process: An Illustration
SELECT PRICING OBJECTIVE

SELECT METHOD OF DETERMINING THE BASE PRICE:

Cost-plus Price based on Price set in

pricing both demand relation to
and costs market alone

DESIGN APPROPRIATE STRATEGIES:

Price vs. nonprice Freight payments Leader pricing

competition One price vs. Everyday low vs.
Skimming vs. flexible price high-low pricing
penetration Psychological pricing Resale price
Discounts and allowances maintenance
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Market Entry
Pricing Strategies
• Market-Skimming Pricing:
Pricing Setting a high initial
price for a new product.
• Works if product is new, distinctive and desired
• Early in Product Life Cycle, when demand
inelastic
• Protected by entry barriers, e.g. patents
• Market-Penetration Pricing: Setting a low initial
price for a new product.
• Works if large market, elastic demand
• Economies of scale are possible
• Fierce competition
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Discounts and Allowances
• Quantity discount: The more you buy,
the cheaper it becomes-- cumulative and
non-cumulative.
• Trade discounts: Reductions from list
for functions performed-- storage,
promotion.
• Cash discount: A deduction granted to
buyers for paying their bills within a
specified period of time, (after first
deducting trade and quantity discounts
from the base price)
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 Calculating a Cash Discount
3/10,
3/10, NET
NET30
30

Number
Number of
of days
days from
from
Percentage
Percentageto tobebe date
dateofofinvoice
invoiceinin Number
Numberof ofdays
daysfrom
from
deducted if bill is
deducted if bill is which
which bill
bill must
must be
be date
dateof
ofinvoice
invoiceafter
after
paid
paidwithin
withinspecified
specified paid to receive cash
paid to receive cash which
whichbill
billis
isoverdue
overdue
time
time discount
discount

1/7,
1/7,NET
NET30
30

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Other Discounts and Allowances

• Seasonal Discounts
• Forward Dating
• Promotional Allowances

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The Competition Act
• Predatory pricing: Selling at unreasonably
low prices to lessen competition.
• Price discrimination: The use of different
prices for different customers.
• It is illegal if a price advantage is granted to
one, but not another, where both compete and
the articles are similar.
• Granting promotional allowances must be
done on a proportionate basis to all
customers.

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Geographic Pricing
Strategies
• F.O.B. Point-of-Production pricing: Price
quoted at factory-- buyer pays
transportation.
• Uniform delivered pricing: Same delivered
price quoted to all; works if transportation
costs small.
• Zone-delivered pricing: Set same price
within several zones, e.g. Maritimes,
Quebec.
• Freight-absorption pricing: Seller absorbs
transport cost to penetrate market.
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Special Pricing Strategies
• firms may adopt a one-price strategy or
charge different prices to different
customers
• flexible pricing strategies: shoppers may
pay different prices if they buy the same
quantity

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Psychology of Pricing
• the psychology of pricing suggests that price will
convey a message about the product or service
being sold
• leader pricing
• bait pricing
• prestige pricing
• price lining involves setting prices at a small
number of fixed levels within a retail store
• odd pricing is often used to suggest a bargain,
while even pricing is used more in prestige, fashion
stores

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Questionable Pricing Practices
• resale price maintenance involves a
supplier requiring that intermediaries sell
a product at a certain price: illegal in
Canada, firms are allowed to specify a
“suggested” retail price
• some firms reduce prices, possibly even
below cost, to attract customers; this form
of “loss-leader” pricing is not illegal unless
it persists for a long time with the goal of
eliminating competition (predatory
pricing)
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Everyday Low Price (EDLP)
vs. High/Low Pricing
In EDLP pricing,
pricing a retailer charges a
constant, low price with no temporary
discounts. For example: Wal-Mart, Price
Club, and Saturn.

In high-low pricing,
pricing a retailer charges higher
prices but then runs frequent promotions in
which prices are temporarily lowered.

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