Developing Pricing

Strategies and Programs

Dr. Poonam Madan
Gillette Commands a
Price Premium
 Price
• If effective product development, promotion,
and distribution sow the seed of business
success, effective pricing is the harvest.
 Price
• All for-profit organizations and many non-
profit organizations set prices on their goods
or services.
• In the entire marketing mix, price is the one
element that produces revenue;
• The others produce costs.
• Price is also one of the most flexible elements:
• It can be changed quickly, unlike product
features and channel commitments
 Synonyms for Price
• Rent • Special assessment
• Tuition • Bribe
• Fee • Dues
• Fare • Salary
• Rate • Commission
• Toll • Wage
• Premium • Tax
• Honorarium
 Price
• The amount of money charged for a product or
services, or the sum of the values that
consumers exchange for the benefits of having
or using the product or service
• We need to set price when we have a new
product, or when we enter a new market with
an existing product
• How?
– Need to decide what position you want your
product to be in (see quality-price relationship—
next slide)
 Price-Quality Strategies

• Philip Kotler identified 9 price-quality

strategies
High Price Low Price
High Quality High Super
Premium
Value Value

Over Mid Good

Charging Value Value

False
Rip-off Economy
Economy
Low Quality
 Price - Quality Strategies
Price
High Medium Low

High Premium High Super

Value Value Value
Product Quality

Medium
Med Overcharging
Value
Good-Value

False
Rip-Off Economy
Low Economy
Tiers in Pricing
 Factors Affecting Price Decisions

Internal Factors External Factors

Nature of the market

Marketing Objectives Pricing and demand
Marketing Mix Strategy
Costs
Decisions Competition
Other environmental
Organizational
factors (economy,
considerations
resellers, government)

CHPT: 14-11
 Factors affecting Pricing Decisions
INTERNAL FACTORS EXTERNAL FACTORS
• Nature of the market
• Marketing Objective and demand
• Marketing Mix Strategy • Competition
• Cost • Other environmental
• Organizational factors
consideration
Major Considerations in Setting Price

CHPT: 14-13
 Steps in Setting Price
Select the price objective

Determine demand

Estimate costs

Analyze competitor price mix

Select pricing method

Select final price

Step 1: Selecting the Pricing
Objective
• Survival
• Maximum current
profit
• Maximum market
share
• Maximum market
skimming
• Product-quality
leadership
 Internal Factors Affecting Pricing
Decisions: Marketing Objectives

Survival
Low Prices to Cover Variable Costs and
Some Fixed Costs to Stay in Business.

Current Profit Maximization

Choose the Price that Produces the
Marketing Maximum Current Profit, Etc.

Objectives Market Share Leadership

Low as Possible Prices to Become
the Market Share Leader.

Product Quality Leadership

High Prices to Cover Higher
Performance Quality and R & D.
CHPT: 14-16
 External Factors Affecting Pricing
Decisions

Market and
Demand

Competitors’ Costs,
Prices, and Offers

Other External Factors

Economic Conditions
Competitor Costs
Reseller Needs
This ad by LCI International accuses its competitors of using
unfair practices in pricing, hiding fees incurred by rounding up. Government Actions
Why is LCI focusing on
this practice?

Hidden fees, defined as

Social Concerns
“cramming” by the
FCC, are the number
one source of billing
complaints among
long-distance
customers. CHPT: 14-17
 SETTING THE PRICE
Step 1: Selecting the Pricing Objective
A company can pursue any of five major objectives through pricing:
• ➤ Survival.
This is a short-term objective that is appropriate only for companies that
are plagued with overcapacity, intense competition, or changing
consumer wants. As long as prices cover variable costs and some
fixed costs, the company will be able to remain in business.
➤ Maximum current profit.
To maximize current profits, companies estimate the demand and costs
associated with alternative prices and then choose the price that
produces maximum current profit, cash flow, or return on investment.
However, by emphasizing current profits, the company may sacrifice
long-run performance by ignoring the effects of other marketing-mix
variables, competitors’ reactions, and legal restraints on price.
➤ Maximum market share.
Firms such as Texas Instruments choose this objective because they believe that higher sales volum
will lead to lower unit costs and higher long-run profit. With this market-penetration pricing, the
firms set the lowest price, assuming the market is price sensitive. This is appropriate when
(1) themarket is highly price sensitive, so a low price stimulates market growth;
(2) production and distribution costs fall with accumulated production experience;
and (3) a low price discourages competition.
➤ Maximum market skimming.
Many companies favour setting high prices to “skim” the market. This objective makes sense under
the following conditions: (1) A sufficient number of buyers have a high current demand;
(2) the unit costs of producing small volume are not so high that they cancel the advantage of
charging what the traffic will bear;
(3) the high initial price does not attract more competitors to the market; and
(4) the high price communicates the image of a superior product.
➤ Product-quality leadership.
companies such as Maytag that aim to be product-quality leaders will offer premium products at
premium prices. Because they offer top quality plus innovative features that deliver wanted benefits
these firms can charge more. Maytag can charge $800 for its European-style washers—double wha
most other washers cost—because, as its ads point out, the appliances use less water and electricity
and prolong the life of clothing by being less abrasive. Here, Maytag’s strategy is to encourage
buyers to trade up to new models before their existing appliances wear out
Step 2: Determining Demand

Price Sensitivity

Estimating
Demand Curves

Price Elasticity
of Demand
•Each price will lead to a different level of demand and have a
different impact on a company’s marketing objectives. The normally
inverse relationship between price and demand is captured in a
demand curve as shown in Figure 14.1 on the next slide. The higher
the price, the lower the demand. For prestige goods, the demand
curve sometimes slopes upward.

•Most companies attempt to measure their demand curves using

several different methods. For example, surveys can explore how
many units consumers would buy at different proposed prices. Price
experiments can vary the prices of different products in a store or
charge different prices for the same product in similar territories to
see how the change affects sales. Statistical analysis of past prices,
quantities sold, and other factors can reveal their relationships.
Figure 14.1 Inelastic and
Elastic Demand
 Step 2: Determining Demand
• Each price will lead to a different level of demand and,
therefore, will have a different impact on a company’s
marketing objectives.
• The relationship between alternative prices and the
resulting current demand is captured in a demand curve.
• Normally, demand and price are inversely related: The
higher the price, the lower the demand.
• In the case of prestige goods, however, the demand curve
sometimes slopes upward because some consumers take
the higher price to signify a better product.
• Still, if the price is too high, the level of demand may fall.
Step 3: Estimating Costs

Types of Costs
Accumulated
Production
Activity-Based
Cost Accounting
Target Costing
 Cost Terms and Production
• Fixed costs
• Variable costs
• Total costs
• Average cost
• Cost at different
levels of production

Copyright © 2011 Pearson Education, Inc.  Publishing as Prentice Hall 14-25

 Types of Costs
Fixed Costs Variable Costs
(Overhead)
Costs that don’t Costs that do vary
vary with sales or directly with the
production levels. level of production.

Executive Salaries Raw materials

Rent

Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production
 Step 3: Estimating Costs
Types of Costs
A company’s costs take two forms—fixed and variable.
• Fixed costs (also known as overhead) are costs that do not vary with
production or sales revenue, such as payments for rent, heat, interest, salaries,
and other bills that must be paid regardless of output.
•In contrast, variable costs vary directly with the level of production. For
example, each calculator produced by Texas Instruments (TI) involves a cost
of plastic, micro processing chips, packaging, and the like. These costs tend to
be constant per unit
produced, but they are called variable because their total varies with the
number of units produced.
•Total costs consist of the sum of the fixed and variable costs for any given
level of production.
•Average cost is the cost per unit at that level of production; it is equal to
total costs divided by production. Management wants to charge a price that
will at least cover the total production costs at a given level of production.
 Figure 14.2 Cost Per Unit at
Different Levels of Production

Copyright © 2011 Pearson Education, Inc.  Publishing as Prentice Hall 14-28

Figure 14.4 The Three Cs Model
for Price-Setting
 The Three C’s Model
for Price Setting

Low Price Costs Competitors’ Customers’ High Price

prices and assessment
No possible prices of of unique No possible
profit at substitutes product demand at
this price features this price
•To price intelligently, management needs to know how its costs vary with
different levels of production. Take the case in which a company such as TI has
built a fixed-size plant to produce 1,000 hand calculators a day. The cost per
unit is high if few units are produced per day. As production approaches 1,000
units per day, the average cost falls because the fixed costs are spread over
more units. Short-run average cost increases after 1,000 units, however,
because the plant becomes inefficient. Workers must line up for machines,
getting in each other’s way, and machines break down more often. This is
shown in Figure 14.2a. If TI believes it can sell 2,000 units per day, it should
consider building a larger plant. The plant will use more efficient machinery
and work arrangements, and the unit cost of producing 2,000 calculators per
day will be lower than the unit cost of producing 1,000 per day. This is shown
in the long-run average cost curve (LRAC) in Figure 14.2b. In fact, a 3,000-
capacity plant would be even more efficient according to Figure 14.2b, but a
4,000-daily production plant would be less so because of increasing
diseconomies of scale: There are too many workers to manage, and paperwork
slows things down. Figure 14.2b indicates that a 3,000-daily production plant is
the optimal size if demand is strong enough to support this level of production.
 Activity-Based
Cost Accounting
• To estimate the real profitability of dealing with
• different retailers, the manufacturer needs to use activity-based
cost (ABC) accounting instead of standard cost accounting.

• ABC accounting tries to identify the real costs associated with

serving different customers. Both the variable costs and the
overhead costs must be tagged back to each customer.
• Companies that fail to measure their costs correctly are not
measuring their profit correctly, and they are likely to
misallocate their marketing effort.
• Identifying the true costs arising in a customer relationship
also enables a company to explain its charges better to the
customer.
 Accumulated
Production
• The decline in the average cost with
accumulated production experience is called
• the experience curve or learning curve.
 Figure 14.3 Cost per Unit as a
Function of Accumulated
Production

Copyright © 2011 Pearson Education, Inc.  Publishing as Prentice Hall 14-34

 Target Costing

• Many Japanese firms use a method called target

• costing.
• First, they use market research to establish a new
product’s desired functions, then they determine
the price at which the product will sell given its
appeal and competitors’ prices. They deduct the
desired profit margin from this price, and this
leaves the target cost they must achieve.
 Target Costing

Copyright © 2011 Pearson Education, Inc.  Publishing as Prentice Hall 14-36

Step 5: Selecting aPricing Method
• Markup pricing (Cost-based pricing/Cost
plus pricing)
• Target-return pricing (Break-even pricing)
• Perceived-value pricing (Value based Pricing
/ Market based pricing)
• Value pricing
• Going-rate pricing (Competition based
pricing)
• Auction-type pricing
• Affordability based pricing
 Markup pricing
(Cost-based pricing/Cost plus pricing)
• The simplest pricing method is cost-plus pricing,
adding a standard markup to the cost of the product
• The most elementary pricing method is to add a
standard mark-up to the product’s cost.
• Construction companies do this when they submit job
bids by estimating the total project cost and adding a
standard mark-up for profit.
• Similarly, lawyers and accountants typically price by
adding a standard mark-up on their time and costs.
• – Markup Pricing
• Unit Cost = variable cost + (fixed cost/unit
sales)
• – Markup price
• Markup price= unit cost/ (1 – desired return on
sales)
 Markup pricing
(Cost-based pricing/Cost plus pricing)

Certainty About
Costs
Simplest
Ethical
Cost-Plus
Factors Pricing
Pricing is Pricing is an
Situational Method
Simplified Unexpected
Approach That
Adds a
Price Competition Standard
Is Minimized Attitudes
Markup to the Ignores
Costofof the Current
Others Demand &
Product.
Much Fairer to Competition
Buyers & Sellers
CHPT: 14-40
 Target-Profit Pricing
(Target-Return Pricing /Break-even pricing)

• Another cost-oriented pricing approach is break-even

pricing (target profit pricing), setting the price to break
even on the costs of making and marketing a product; or
setting the price to make a target profit during a given time
period. The firm tries to determine the price at which it
will break even or make the target profit it is seeking.
Such pricing is used by General Motors, which prices
automobiles to achieve a 15 to 20 percent profit on its
investment. This pricing method is also used by public
utilities, which are constrained to make a fair return on
their investment.
•  
• Target-return price =
• unit cost + (desired return X investment
capital)/unit sales
• The formula for determining the break-even volume in units is:
• Break-even point (in units) =  ___________total fixed costs___
                                                     price per unit – variable cost per unit

  
• The formula for determining the break-even volume in units with a
target profit is:
 
• Break-even point                = ______total fixed costs + target profit__
• (in units with target)                      price per unit – variable cost per
unit
 

• Note: Fixed costs are costs of production that do not change with the

number of units produced. Variable costs are the costs of production
(raw and processed materials, parts, and labor) that are tied to, and
vary depending on, the number of units produced.
 Figure 14.5 Break-Even Chart
for Determining Target-Return
Price and Break-Even Volume
Figure 14.6 Break-Even Chart
 Customer Perceptions of Value
A price

Understanding how
much value consumers
place on the benefits
they receive from the
product and setting a
price that captures that
value
 Perceived-Value Pricing
• An increasing number of companies are basing their
prices on the product’s perceived value. 
• Value-based pricing is setting the price based on
buyers’ perceptions of value rather than on the
seller’s cost.
• They see the buyers’ perceptions of value, not the
seller’s cost, as the key to pricing.
• Then they use the other marketing-mix elements,
such as advertising, to build up perceived value in
buyers’ minds.
 Tiffany’s
Price-Quality Relationship
 Cost-Based Versus Value-Based
Pricing
Cost-Based Pricing Value-Based Pricing

Product Customer

Cost Value

Price Price

Value Cost

Customers Product
CHPT: 14-49
 Value Pricing
• Value pricing is a method in which the company charges a fairly
low price for a high quality offering. Value pricing says that the
price should represent a high-value offer to consumers.
• Value pricing is not a matter of simply setting lower prices on one’s
products
• compared to those of competitors. It is a matter of reengineering the
company’s operations to become a low-cost producer without
sacrificing quality, and lowering prices significantly to attract a
large number of value-conscious customers. An important type of
value pricing is everyday low pricing (EDLP), which takes place at
the retail level.
• Retailers such as Wal-Mart and Amazon.com use EDLP pricing,
posting a constant, prices on an everyday basis but then runs
frequent promotions in which prices are temporarily lowered below
the EDLP level.
• Value Pricing
– • Everyday low pricing (EDLP)
– • High-low pricing
Competition-Based Pricing

Setting Prices

Going-Rate
Company Sets Prices Based on What
Competitors Are Charging.

? Sealed-Bid
?
Company Sets Prices Based on
What They Think Competitors
Will Charge. CHPT: 14-52
 Going-Rate Pricing
• Consumers will base their judgments of a product’s value on the prices
that competitors charge for similar products.
• One form of competition-based pricing (Setting prices based on the
prices that competitors charge for similar products.) is going-rate
pricing, basing the price largely on competitors’ prices, with less
attention paid to its own costs or to demand. 
• In going-rate pricing, the firm bases its price largely on competitors’ prices.
• The firm might charge the same, more, or less than its major competitor's)
charges.
• In oligopolistic industries that sell a commodity such as steel, paper, or fertilizer,
firms normally charge the same price.
• The smaller firms “follow the leader,” changing their priceswhen the market
leader’s prices change rather than when their own demand or costs change
 Sealed-Bid Pricing
• Competitive-oriented pricing is common when
firms submit sealed bids for jobs
• In bidding, each firm bases its price on
expectations of how competitors will price
rather than on a rigid relationship to the firm’s
own costs or demand
Auction-Type Pricing

English

Dutch

Sealed-Bid
 Step 6: Selecting the Final Price
• Impact of other marketing activities
• Company pricing policies
• Gain-and-risk sharing pricing
• Impact of price on other parties
 Step 6: Selecting the Final Price
The previous pricing methods narrow the range
from which the company selects its final price.
In selecting that price, the company must
consider additional factors: psychological
pricing, the influence of other marketing-mix
elements on price, company pricing policies,
and the impact of price on other parties.
 Market and Demand Factors
Affecting Pricing Decisions
Pricing in Different Types of Markets

Pure Competition
Many Buyers and Sellers Pure Monopoly
Who Have Little Single Seller
Effect on the Price

Monopolistic Oligopolistic
Competition Competition
Many Buyers and Sellers Few Sellers Who Are
Who Trade Over a Sensitive to Each Other’s
Range of Prices Pricing/ Marketing
Strategies
CHPT: 14-58
New-Product Pricing
Strategies

• Market-skimming
pricing
• Market-
penetration pricing
New Product Pricing Strategies

Market Skimming Market Penetration

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

• Use Under These

Market Skimming
 Setting a High Price for a
New Product to “Skim”
Maximum Revenues from
the Target Market.
 Results in Fewer, But
More Profitable Sales.
Conditions:
– Product’s Quality and Image
Must Support Its Higher Price.
– Costs Can’t be so High that They
Cancel the Advantage of
Charging More.
– Competitors Shouldn’t be Able
to Enter Market Easily and
Undercut the High Price.

CHPT: 14-61
 New-Product Pricing
Strategies
Market-skimming pricing is a strategy for setting a high
price for a new product to skim maximum revenues
layer by layer from the segments willing to pay the high
price, the company make fewer but more profitable
sales.
• Product quality and image must support the price
• Buyers must want the product at the price
• Costs of producing the product in small volume should not
cancel the advantage of higher prices
• Competitors should not be able to enter the market easily
 Market-skimming pricing
• For example when Sony introduced the world
first high definition television (HDTV) to the
Japanese market , the high tech sets cost
43,000$ . These televisions were purchased
only by customers who really wanted the new
technology and afford to pay high prices.
 New Product Pricing Strategies
• Use Under These
Conditions:
– Market Must be Highly Price-
Sensitive so a Low Price
Produces More Market Growth.
– Production/ Distribution Costs
Must Fall as Sales Volume
Increases.
– Must Keep Out Competition &
Maintain Its Low Price Position
or Benefits May Only be
Temporary.
Market Penetration
 Setting a Low Price for a
New Product in Order to
“Penetrate” the Market
Quickly and Deeply.
 Attract a Large Number of
Buyers and Win a Larger
Market Share.
CHPT: 14-64
 New-Product Pricing
Strategies
Market-penetration pricing sets a low initial price
in order to penetrate the market quickly and
deeply to attract a large number of buyers quickly
to gain market share
• Price sensitive market
• Production and distribution costs must fail as
sales volume increases.
• Low prices must keep competition out of the
market
 Market-penetration pricing
• For example , Dell used penetration pricing to
enter the personal computer market, selling
high quality computer products through lower
cost direct channels.
Product Mix-Pricing Strategies:
Product Line Pricing

• Involves setting price steps

between various products
in a product line based on:
– Cost differences between
products,
– Customer evaluations of different
features, and
– competitors’ prices.

CHPT: 14-67
Product Mix Pricing Strategies
Pricing Strategies
 Product Mix Pricing Strategies
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
 Product Mix Pricing Strategies

Product line pricing takes into account the

cost differences between products in the
line, customer evaluation of their features,
and competitors’ prices
* For example channel offers 20 different
collections of bags of all shapes and sizes
at price that range from under $50 to more
than $1,250.
 Product Mix Pricing
Strategies
• Optional-product pricing takes into account
optional or accessory products along with the
main product
• For example : a car buyer may choose to order
a GPS navigation system & Bluetooth wireless
communication.
• Refrigerators come with optional ice maker
Product Mix Pricing Strategies

• Captive-product pricing
involves products that
must be used along with
the main product
• Examples of Captive
products are razor blade
cartridges , Gillette once
you bought the razor, you
are committed to buying
replacement cartridges at
$25 an eight pack
Product Mix- Pricing Strategies

• Optional-Product
– Pricing optional or accessory
products sold with the main
product. i.e camera bag.

• Captive-Product
– Pricing products that must be
used with the main product. i.e.
film.

CHPT: 14-73
 Product Mix Pricing
Strategies
• Two-part pricing involves breaking the price into:
– Fixed fee
– Variable usage fee
– For example : Jawwal company charge a flat rate for a
basic calling plan, then charge for minutes over what the
plan allows.
The service firm must decide how much to charge for the
basic service and how much for the variable usage.
– Another example is when you visit a park , you pay a
ticket charge + fee for food and additional features
 Price Mix Pricing Strategies

• By-product pricing refers to products with

little or no value produced as a result of the
main product. Producers will seek little or no
profit other than the cost to cover storage and
delivery.
• petroleum products often results in by-
products.
 Price Mix Pricing Strategies

Product bundle pricing combines several

products at a reduced price
For example : fast food restaurants bundle a
burger , fries and a soft drink at a combo
price
 Product Mix- Pricing
Strategies

• By-Product • Product-Bundling
– Pricing low-value by- – Combining several
products to get rid of products and offering
them and make the main the bundle at a reduced
product’s price more price.
competitive. – i.e. theater season
– i.e. sawdust, Zoo Doo tickets.

CHPT: 14-77
Price-Adjustment Strategies
 Price-Adjustment
Strategies
• 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, Basing-Point, &
Freight-Absorption.

International Pricing • Adjusting Prices for International

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

Discount and allowance pricing reduces prices

to reward customer responses such as paying
early or promoting the product
• Discounts
• Allowances
Price Discounts and Allowances
• Discount
• Quantity discount
• Functional discount
• Seasonal discount
• Allowance
 Price-Adjustment Strategies
Price Discounts and Allowances

Quantity discount: The more you buy, the cheaper it

becomes-- cumulative and non-cumulative.
Trade discounts” functional”: 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)
 Price-Adjustment Strategies
Price Discounts and Allowances

Quantity discount: The more you buy, the cheaper it

becomes-- cumulative and non-cumulative.
Trade discounts” functional”: 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)
Discount and Allowance Pricing

A d ju s tin g B as ic Pr ic e to R e w ar d C u s to m e rs
F o r C e rta in R e sp o n s es

C a s h Dis count S e as ona l D isc ount

Q ua ntity D is c ount Tra de -In Allow ance

Func tional Dis c ount P rom otiona l Allow a nce

CHPT: 14-84
 Psychological Pricing

• Considers the psychology of

prices and not simply the
economics.
• Customers use price less when
they can judge quality of a
product.
• Price becomes an important
Valu
e
$22 quality signal when customers
Sale .00
can’t judge quality; price is used
$14
.9 9 to say something about a
product.
CHPT: 14-85
 Psychological Pricing

• Most Attractive?
A $2.19 • Better Value?
32 oz.
• Psychological reason
to price this way?
B $1.99
26 oz.

Assume Equal Quality

• Psychological pricing occurs when sellers consider the
psychology of prices and not simply the economics” the price
is used to say something about the product”
• Reference prices are prices that buyers carry in their minds
and refer to when looking at a given product
– Noting current prices
– Remembering past prices
– Assessing the buying situations
– For example : a company could display its product next to
more expensive ones in order to imply that it belongs in the
same class
 Promotional Pricing

Loss Leaders Temporarily Pricing

Products Below List
Special-Event Pricing Price to Increase
Short-Term Sales
Cash Rebates
Through:
Low-Interest Financing

Longer Warranties
Free Merchandise
Discounts
CHPT: 14-88
Geographical pricing is used for customers
in different parts of the country or the world
• FOB pricing
• Uniformed-delivery pricing
• Zone pricing
• Basing-point pricing
• Freight-absorption pricing
 Geographical Pricing
• Pricing varies by location

Copyright © 2011 Pearson Education, Inc.  Publishing as Prentice Hall 14-90

 Differentiated Pricing
• Customer-segment pricing
• Product-form pricing
• Image pricing
• Channel pricing
• Location pricing
• Time pricing
• Yield pricing

Copyright © 2011 Pearson Education, Inc.  Publishing as Prentice Hall 14-91

 Discriminatory Pricing

Customer Segment

Product-form

Location

Time
Promotional pricing is when prices are temporarily
priced below list price or cost to increase demand
• Loss leaders
• Special event pricing
• Cash rebates
• Low-interest financing
• Longer warrantees
• Free maintenance
 Price-Adjustment
strategies
Promotional Pricing
• Loss-leader pricing: supermarkets and department stores
often drop the price on well known brands to stimulate
additional store traffic
• Special-event pricing: sellers well establish special pricing in
certain seasons to draw in more customers
• Cash rebates: companies offer cash rebates to encourage
purchase of the manufacturers products within a specified time
period
• Low-interest financing: the company can offer customers
low-interest financing
 Price-Adjustment
strategies

• Longer payment terms: sellers especially mortgage banks

and auto companies stretch loans over longer periods and thus
lower the monthly payment
• Warranties and service contracts: companies can promote
sales by adding a free or low cost warranty or service contract
 Promotional Pricing Tactics
• Loss-leader pricing
• Special-event pricing
• Cash rebates
• Low-interest financing
• Longer payment terms
• Warranties and service contracts
• Psychological discounting
Price-Adjustment Strategies

Segmented pricing is used

when a company sells a
product at two or more
prices even though the
difference is not based on
cost
 Segmented pricing
a) Customer segment pricing: different customers pay
different prices for the same product or service . For ex.
Museums charge a lower admission for students .
b) Product from pricing: different versions of the product are
priced differently but not according to differences in their
costs
c) Location pricing: company charges different prices for
different locations
d) Time pricing : a firm varies it prices by the season , the
month , the day and even the hour
 Price-Adjustment Strategies
Pricing Strategies
Segmented Pricing

To be effective:
• Market must be segmentable
• Segments must show different degrees of
demand
• Watching the market cannot exceed the extra
revenue obtained from the price difference
• Must be legal
 Price-Adjustment Strategies
Pricing Strategies

• FOB (free on board) pricing means that

the goods are delivered to the carrier and
the title and responsibility passes to the
customer
• Uniformed-delivery pricing means the
company charges the same price plus
freight to all customers, regardless of
location
 Price Adjustment Strategies
Pricing Strategies

• Zone pricing means that the company sets up

two or more zones where customers within a
given zone pay a single total price
• Basing-point pricing means that a seller
selects a given city as a “basing point” and
charges all customers the freight cost
associated from that city to the customer
location, regardless of the city from which the
goods are actually shipped
 Price-Adjustment Strategies
Pricing Strategies

• Freight-absorption pricing means the seller

absorbs all or part of the actual freight charge
as an incentive to attract business in
competitive markets
 Price-Adjustment Strategies
Pricing Strategies

Dynamic pricing is when prices

are adjusted continually to
meet the characteristics and
needs of the individual
customer and situations

Ex. Alaska airlines creates

unique prices and
advertisements for people as
they surf the web
 Price-Adjustment Strategies
Pricing Strategies

International pricing is when prices are set in a specific

country based on country-specific factors
• Economic conditions
• Competitive conditions
• Laws and regulations
• Infrastructure
• Company marketing
objective
 International pricing
• For example : Boeing sells its jetliners at about
the same price everywhere, whether in the
United states , Europe or the third world
• A pair of Levi’s selling for $30 in Canada
might go for $ 63 in Tokyo and $ 88 in Paris
 Price Changes
Initiating Pricing Changes

• Price cuts
( to boost sales
and shares)
• Price increases
Price Changes
Initiating Pricing Changes
 Price Changes
Buyer Reactions to Pricing Changes
Price Changes
Responding to Price Changes
 Price-Reaction Program for
Meeting a Competitor’s Price Cut
Hold our price
Has competitor No at present level;
cut his price? continue to watch
competitor’s
Yes No No price
Is the price Is it likely to be How much has
likely to
significantly Yes aprice
permanent Yes his price been
cut? cut?
hurt our sales?

By less than 2% By 2-4% By more than 4%

Include a Drop price by Drop price to
cents-off coupon half of the competitor’s
for the next competitor’s price
purchase price cut
 Public Policy and Pricing
Pricing Within Channel Levels

Price fixing: Sellers must set prices without

talking to competitors
Predatory pricing: Selling below cost with the
intention of punishing a competitor or
gaining higher long-term profits by putting
competitors out of business , this will protect
small sellers from larger ones
Public Policy and Pricing
Pricing Across Channel Levels

Retail (or resale) price

maintenance is when
a manufacturer
requires a dealer to
charge a specific retail
price for its products
 Public Policy and Pricing
Pricing Across Channel Levels
Deceptive pricing occurs when a seller states prices or
price savings that mislead consumers or are not
actually available to consumers
• Scanner fraud failure of the seller to enter current or
sale prices into the computer system
• Price confusion results when firms employ pricing
methods that make it difficult for consumers to
understand what price they are really paying
 Price War

Price wars are frequent in industries where

• Cost differentiation opportunities exists
• Capital is intensive and products are
homogeneous
Examples: Airfares, Petrol, & Loans e.g.
 Common Pricing Mistakes
• Determine costs and take traditional industry margins
• Failure to revise price to capitalize on market changes
• Setting price independently of the rest of the
marketing mix
• Failure to vary price by product item, market
segment, distribution channels, and purchase
occasion