Chapter 6

Pricing: understanding and capturing customer value

Chapter 7
Pricing strategies
 What is Price?

🠶 The amount of money charged for a product or service

or the sum of the values that customers exchange for the
benefits of having or using the product or service.

🠶 What problems do companies face in setting price for

products and services?
 Value based pricing strategies
🠶 Value based pricing: setting prices based on buyers’
perceptions of value rather than on the sellers’ cost.

🠶 Good value pricing: offering just the right combinations of

quality and good service at a fair price.

🠶 Value added pricing: attaching value added features and

services to differentiate a company's offers and charging
higher prices.

🠶 EDLP: Every Day Low Pricing

 Cost based pricing
🠶 Cost based pricing: setting prices based on the cost for producing,
distributing and selling the product plus a fair rate of return for
effort and risk.

🠶 Fixed costs: costs that do not vary with production or sales level.

🠶 Variable costs: costs that vary directly with the level of production.

🠶 Total costs: the sum of the fixed and variable costs for any given
level of production.
 New product pricing strategies

1. Market skimming pricing: setting a high price for new products to

skim maximum revenues layer by layer from the segments willing
to pay the high price, the company makes fewer but profitable
sales.

2. Market penetration pricing: setting a low price for a new product

in order to attract a large number of buyers and a large market
share.
 Product mix pricing strategies

1. Product line pricing: setting the price steps between various products
in a product line based on cost differences between the products,
customer evaluation of different features and competitors' prices.

2. Optional product pricing: the pricing of optional or accessory

products along with a main product.
Product mix pricing strategies
3. Captive product pricing: setting a price for products that must be used
along with a main product.

4. Product bundle pricing: combining several products and offering the

bundle at a reduced price.

5. By product pricing: setting a price for by products in order to make the

main product’s price more competitive.
 Price adjustment strategies

⚫ Discount: a straight reduction in price on purchases during a

stated period of time.

1. Cash discount
2. Quantity discount
3. Functional discount (functional discounts, are payments to distribution
channel members for performing some function, I.e.): Shipping, storing etc)

4. Seasonal discount
Price adjustment strategies

Allowance: promotional money paid by manufacturers to retailers in

return for an agreement to feature the manufacturer's products in
some way.

1. Trade in allowance
2. Promotional allowance
 Price adjustment strategies

⚫ Segmented pricing: selling a product or service at two or more

prices, where the difference in prices is not based on difference
in costs.

1. Customer segment pricing

2. Product form pricing
3. Location based pricing
4. Time based pricing
 Price adjustment strategies
🠶 Psychological pricing: a pricing approach to make the product look
less expensive to consumers than the reality, psychologically.

🠶 Promotional pricing: temporarily pricing products below the list price,

and sometimes even below cost to increase short run sales.

🠶 Dynamic and internet pricing: adjusting prices continually to meet the

characteristics and needs of individual customers and situations. This
is especially prevalent online.

🠶 International pricing: companies that market their products

internationally must decide what prices to charge in different
countries. It could be a uniform worldwide price or it could be country
specific based on local market conditions and cost considerations.
 Price adjustment strategies
🠶 Geographical pricing: setting prices for customers located in
different parts of the country or world.

🠶 FOB origin pricing: a geographical pricing strategy in which goods

are placed free on board a carrier; the customer pays the freight
from the factory to the destination.

🠶 Uniform-delivered pricing: a geographical pricing strategy in which

the company charges the same price plus freight to all customers;
regardless of their location.

🠶 Zone pricing: a geographical pricing strategy in which the company

sets up two or more zones. All customers within a zone pay the
same total price; the more distant the zone, the higher the price.
 Price adjustment strategies

🠶 Basing-point pricing: a geographical pricing strategy

in which the seller designates some city as a basing
point and charges all customers the freight cost from
that city to the customer.

🠶 Freight-absorption pricing: a geographical pricing

strategy in which the seller absorbs all or part of the
actual freight charges in order to get the desired
business.