Pricing Strategies and Tactics

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 priceµ 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 a seller has stable competition, prices and stresses other aspects of marketing. ‡ With value pricing firms strive for more pricing, 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 METHOD OF DETERMINING THE BASE PRICE: Cost-plus pricing Price based on both demand and costs Price set in relation to market alone

DESIGN APPROPRIATE STRATEGIES: Price vs. nonprice competition Skimming vs. penetration Discounts and allowances Freight payments One price vs. flexible price Psychological pricing
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Leader pricing Everyday low vs. high-low pricing Resale price maintenance
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Market Entry Pricing Strategies
‡ Market-Skimming Pricing Setting a high initial MarketPricing: 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 Marketprice 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 discounts: for functions performed-- storage, promotion. ‡ Cash discount: A deduction granted to discount: 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, NET 30

Percentage to be deducted if bill is paid within specified time

Number of days from Number of days from date of invoice in date of invoice after which bill must be paid to receive cash which bill is overdue discount

1/7, NET 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 Point-ofquoted 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 Zonewithin several zones, e.g. Maritimes, Quebec. ‡ Freight-absorption pricing: Seller absorbs Freighttransport cost to penetrate market.
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Special Pricing Strategies
‡ firms may adopt a one-price strategy or onecharge 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 ´suggestedµ retail price ‡ some firms reduce prices, possibly even below cost, to attract customers; this form ´lossof ´loss-leaderµ 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 a retailer charges a pricing, constant, low price with no temporary discounts. For example: Wal-Mart, Price Club, and Saturn. In high-low pricing a retailer charges higher highpricing, prices but then runs frequent promotions in which prices are temporarily lowered.
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