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11-1

Pricing Products:
Pricing Strategies

Week # 12 & 13

 Copyright 1999 Prentice Hall


Price - Quality Strategies 11-2

Price
Higher Lower

Higher Premium Good-Value


Quality

Strategy Strategy

Overcharging Economy
Lower Strategy Strategy

 Copyright 1999 Prentice Hall


11-3
New Product Pricing Strategies

Market Skimming Market Penetration

>Setting a High > Setting a Low


Price for a New Price for a New
Product to Product in Order
Maximize to Attract a Large
Revenues from Number of Buyers.
the Target Market.
>Results in a Larger
>Results in Fewer, Market Share.
More Profitable
Sales.

 Copyright 1999 Prentice Hall


Product Mix Pricing Strategies 11-4

Product Line Pricing


Setting Price Steps Between Product Line Items
i.e. $299, $399
Optional-Product Pricing
Pricing Optional or Accessory Products
Sold With The Main Product
i.e. Car Options
Product Captive-Product Pricing
Mix Pricing Products That Must Be Used
With The Main Product
Pricing i.e. Razor Blades, Film, Software
Strategies By-Product Pricing
Pricing Low-Value By-Products To Get Rid
of Them
i.e. Lumber Mills, Zoos
Product-Bundle Pricing
Pricing Bundles Of Products Sold Together
i.e. Season Tickets, Computer Makers

 Copyright 1999 Prentice Hall


11-5

• Product line pricing: The process used by retailers of


separating goods into cost categories in order to create various
quality levels in the minds of consumers. Effective product line
pricing by a business will usually involve putting
sufficient price gaps between categories to inform prospective
buyers of quality differentials.
• Optional Product Pricing. Companies will attempt to increase
the amount customers spend once they start to
buy. Optional 'extras' increase the overall price of
the product or service. For example airlines will charge
for optional extras such as guaranteeing a window seat or
reserving a row of seats next to each other.

 Copyright 1999 Prentice Hall


11-6


• Captive- product pricing: Low price are offered for the
core product, but high prices are placed on captive products.
This attracts customers to the core product with a
low price but allows sellers to make a profit off
the captive products, which are necessary to use the product.
• Setting the price for by-products in order to make the price of
the main product more competitive. For example, in producing
processed meats, chemicals, or oil there are often by-
products, which – if they had to be disposed of – would make
the main product uncompetitive.
• For example in the extraction of petrol or in textile industries
which produce the main product also produces the byproduct
like crude oil. The essential or the main product is expensive
while on the other hand the byproduct is less expensive
product.

 Copyright 1999 Prentice Hall


11-7

….

• In a bundle pricing, companies sell a package or set of goods


or services for a lower price than they would charge if the
customer bought all of them separately. Common examples
include option packages on new cars, value meals at
restaurants and cable TV channel plans.

 Copyright 1999 Prentice Hall


11-8
Price-Adjustment Strategies
Price Adjustment Strategies

Discount & Allowance


Reducing Prices to Reward Segmented
Customer Responses such as Adjusting Prices to Allow
Paying Early or Promoting for Differences in Customers,
the Product. Products, or Locations.

Cash Discount Customer

Quantity Discount Product Form

Functional Discount Location

Seasonal Discount Time

Trade-In Allowance

 Copyright 1999 Prentice Hall


11-9

Discounts and allowances

• A cash discount is a deduction allowed by the seller of goods


or by the provider of services in order to motivate the customer
to pay within a specified time. The seller or provider often refers
to the cash discount as a sales discount. The buyer often
refers to the same discount as a purchase discount.
• Functional Discount: Trade discounts, also
called functional discounts, are payments to distribution
channel members for performing some function. Examples of
these functions are warehousing and shelf stocking.
• Quantity Discount' An incentive offered to a buyer that results
in a decreased cost per unit of goods or materials when
purchased in greater numbers. A quantity discount is often
offered by sellers to entice buyers to purchase in larger
quantities.

 Copyright 1999 Prentice Hall


11-10

Continue…

• A seasonal discount is a discount which is offered


on seasonal goods or at particular seasons. For example,
there are discounts on products like chocolates, electronics
etc. which are offered during festive seasons like Eid festival,
New year etc.
• Sales promotion technique in which the buyers are offered a
fixed discount (called trade-in allowance) on the price of a
new model or item in exchange for a older model or item.

 Copyright 1999 Prentice Hall


Price-Adjustment Strategies 11-11

• Adjusting Prices for Psychological


Psychological Pricing Effect.
•Price Used as a Quality Indicator.

• Temporarily Reducing Prices to


Promotional Pricing Increase Short-Run Sales.
• i.e. Loss Leaders, Special-Events

• Adjusting Prices to Account for the


Geographical Pricing Geographic Location of Customers.
• i.e. FOB-Origin, Uniform-Delivered,
Zone Pricing, &
Freight-Absorption.

International Pricing • Adjusting Prices for International


Markets.
• Price Depends on Costs, Consumers,
Economic Conditions & Other Factors.

 Copyright 1999 Prentice Hall


11-12

Promotional Pricing

• Loss leader pricing: A loss leader (also leader) is a pricing


strategy where a product is sold at a price below its market
cost to stimulate other sales of more profitable goods or
services.
• Loss Leader pricing is a common pricing strategy used by
retailers to attract customers. It involves setting
lower price points and reducing typical profit margins to
introduce brands or stimulate interest in the business as a
whole or a particular product line. Products sold in this strategy
are often sold at a loss.
• Special event pricing: To increase sales volume, many
organizations coordinate price with advertising or sales
promotion for seasonal or special situations (Sales). Special
event pricing involves advertised sales or price cutting that is
linked to a holiday, season, or event.

 Copyright 1999 Prentice Hall


11-13

Geographical Pricing

• "FOB price" means that the seller pays for transportation of the
goods to the port of shipment, plus loading costs. The buyer
pays cost of marine freight transport, insurance, unloading,
and transportation from the arrival port to the final destination.
• Free on Board (or Freight on Board). This basically means that
the cost of delivering the goods to the nearest port is included
but YOU, as the buyer, are responsible for the shipping from
there and all other fees associated with getting the goods to
your country/address.
• Freight-Absorption.: A geographic pricing strategy in which a
company absorbs all or part of the freight charges in delivering
the goods in order to capture the business.

 Copyright 1999 Prentice Hall


Initiating and Responding to Price 11-14

Changes
Competitor
Reactions
to Initiating
Price Price Cuts
Changes

Price
Changes
Buyer
Reactions Initiating
to Price
Price Increases
Changes

 Copyright 1999 Prentice Hall


11-15
Price-Adjustment Strategies
Has Competitor Cut No Hold Current Price;
Price? Continue to Monitor
Competitor’s Price.

Will Lower Price


Negatively Affect Our No
Market Share & Profits?

Reduce Price

No Raise Perceived
Can/ Should Effective Quality
Action be Taken?
Yes Improve Quality
& Increase Price

Launch Low-Price
“Fighting Brand”

 Copyright 1999 Prentice Hall


11-16

Steps in Setting Price

Select the price objective

Determine demand

Estimate costs

Analyze competitor price mix

Select pricing method

Select final price


 Copyright 1999 Prentice Hall
11-17

Product – Growth Strategies:

 Copyright 1999 Prentice Hall


11-18

 Copyright 1999 Prentice Hall


11-19

 Copyright 1999 Prentice Hall


11-20

 Copyright 1999 Prentice Hall


11-21

 Copyright 1999 Prentice Hall


11-22

 Copyright 1999 Prentice Hall


11-23

 Copyright 1999 Prentice Hall


11-24

THE COMMUNICATION PROCESS

• Promotional Mix
• Integrated Marketing Communications
(IMC)
• Communication
• Source
• Message
• Channel of Communication
• Receivers
 Copyright 1999 Prentice Hall Slide 18-6
11-25
FIGURE 18-1 The communication process

 Copyright 1999 Prentice Hall Slide 18-7


11-26

THE COMMUNICATION PROCESS

• Encoding and Decoding


 Encoding
 Decoding
 Field of Experience

 Copyright 1999 Prentice Hall Slide 18-8


11-27

THE COMMUNICATION PROCESS

• Feedback
 Feedback Loop
 Response
 Feedback
 Pretesting
• Noise

 Copyright 1999 Prentice Hall Slide 18-10


11-28
FIGURE 18-2 The promotional mix

 Copyright 1999 Prentice Hall Slide 18-15


11-29

Integrated marketing communication

• Integrated Marketing Communications is a simple concept. It


ensures that all forms of communications and messages are
carefully linked together. At its most basic level, Integrated
Marketing Communications, or IMC, as we'll call it, means
integrating all the promotional tools, so that they work together
in harmony.

 Copyright 1999 Prentice Hall


11-30

 Copyright 1999 Prentice Hall


11-31

INTEGRATED MARKETING
COMMUNICATIONS—DEVELOPING
THE PROMOTIONAL MIX

• Channel Strategies
 Push Strategy
 Pull Strategy
• Direct-to-Consumer

 Copyright 1999 Prentice Hall Slide 18-34


11-32
FIGURE 18-5 A comparison of push and
pull promotional strategies

 Copyright 1999 Prentice Hall Slide 18-35


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DEVELOPING AN IMC PROGRAM

• Identifying the Target Audience


• Specifying Promotion Objectives
 Hierarchy of Effects
• Awareness

• Interest

• Evaluation

• Trial

• Adoption

 Copyright 1999 Prentice Hall Slide 18-41


11-34

Distribution Channels

• A distribution channel - set of


independent organizations involved in
the process of making a product or
service available to the consumer or
business user

• Used to move the customer towards the


product or the product to the customer

• Organic development of an industry


 Copyright 1999 Prentice Hall
11-35

Place = Distribution

• The 4Ps
– Product, Price, Place, Promotion

• What the “P” of Price is to Revenue Management, the “P”


of Place is to Distribution

 Copyright 1999 Prentice Hall


11-36

Distribution Channel Functions

• Information: consumer behavior “search


stage”
• Promotion: messaging
• Negotiation: price and other terms
– (how is this done online?
• Physical distribution: think e-tickets?
• Prospecting: finding, communicating,
and tracking prospective buyers

 Copyright 1999 Prentice Hall


11-37
Middlemen

Middlemen A business firm that


renders services directly
related to the sale/purchase
of a product as it flows through
from producer to consumer

You can eliminate middlemen, but not the


essential distribution activities they
perform

 Copyright 1999 Prentice Hall


11-38
Distribution Channels

DISTRIBUTION CHANNELS

People and firms involved


in the transfer of title to a product
as the product moves from producer to
ultimate consumer or business user

Final
Consumer
Producers Middlemen Or
Business
User

 Copyright 1999 Prentice Hall


11-39
Middleman Activities

 Copyright 1999 Prentice Hall


11-40
Major Channels of Distribution

 Copyright 1999 Prentice Hall


11-41
Choice of Channels: Market

Type Number of
of potential
Market customers

Geographic Order
concentration size

 Copyright 1999 Prentice Hall


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Choice of Channels: Product

Perishability

Unit
Value

Technical
Nature

 Copyright 1999 Prentice Hall


11-43
Choice of Channels: Middleman

Services provided by
middlemen

Availability of desired
middlemen

Producer’s and
middlemen’s policies

 Copyright 1999 Prentice Hall


11-44
Choice of Channels: Company

Desire
for channel control

Services provided
by seller

Ability
of management

Financial resources

 Copyright 1999 Prentice Hall


11-45
Intensity of Distribution

 Copyright 1999 Prentice Hall


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Conflict in Channels

Horizontal

Different types
Middlemen
of middlemen
of the same type
on the same level

Retailer Retailer Retailer Retailer

 Copyright 1999 Prentice Hall


11-47
Conflict in Channels

Vertical

Producer
vs.
Wholesaler

Producer
vs.
Retailers

 Copyright 1999 Prentice Hall


11-48

Thanks

 Copyright 1999 Prentice Hall