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Chapter 12: Pricing Strategies

Objectives

•Learn the major strategies for pricing imitative and new products.

•Understand how companies find a set of prices that maximizes the profits from the total product mix.

•Learn how companies adjust their prices to take into account different types of customers and situations.

•Know the key issues related to initiating and responding to price changes.

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Case Study
mLife: AT&T Wireless
•Price is #1 factor influencing choice of cellular companies •Prices in wireless industry dropped 25% in three years •Few companies were profitable	•mLife ad campaign attempted to build the AT&T wireless brand so consumers would consider value rather than just price •Campaign met with strong initial success

Definitions

•Market-Skimming Pricing

§Setting a high price for a new product to skim maximum revenues layer by layer from segments willing to pay the high price.

•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

•Product Line Pricing

§Setting price steps between product line items.

Price points

•Optional-Product Pricing

§Pricing optional or accessory products sold with the main product

Product Mix Pricing Strategies

•Captive-Product Pricing

§Pricing products that must be used with the main product

High margins are often set for supplies

§Services: two-part pricing strategy

Fixed fee plus a variable usage rate

Product Mix Pricing Strategies

•By-Product Pricing

§Pricing low-value by-products to get rid of them

•Product Bundle Pricing

§Pricing bundles of products sold together

Price Adjustment Strategies
Strategies •Discount / allowance •Segmented •Psychological •Promotional •Geographical •International	•Types of discounts §Cash discount §Quantity discount §Functional (trade) discount §Seasonal discount •Allowances §Trade-in allowances §Promotional allowances

Price Adjustment Strategies
Strategies •Discount / allowance •Segmented •Psychological •Promotional •Geographical •International	•Types of segmented pricing strategies: §Customer-segment §Product-form pricing §Location pricing §Time pricing •Also called revenue or yield management •Certain conditions must exist for segmented pricing to be effective

Price Adjustment Strategies
Conditions Necessary for Segmented Pricing Effectiveness
•Market is segmentable •Lower priced segments are not able to resell •Competitors can not undersell segments charging higher prices	•Pricing must be legal •Costs of segmentation can not exceed revenues earned •Segmented pricing must reflect real differences in customers’ perceived value

Price Adjustment Strategies
Strategies •Discount / allowance •Segmented •Psychological •Promotional •Geographical •International	•The price is used to say something about the product. §Price-quality relationship §Reference prices §Differences as small as five cents can be important §Numeric digits may have symbolic and visual qualities that psychologically influence the buyer

Price Adjustment Strategies
Strategies •Discount / allowance •Segmented •Psychological •Promotional •Geographical •International	•Temporarily pricing products below the list price or even below cost •Loss leaders §Special-event pricing §Cash rebates §Low-interest financing, longer warranties, free maintenance •Promotional pricing can have adverse effects

Price Adjustment Strategies
Promotional Pricing Problems
•Easily copied by competitors •Creates deal-prone consumers •May erode brand’s value	•Not a legitimate substitute for effective strategic planning •Frequent use leads to industry price wars which benefit few firms

Price Adjustment Strategies
Strategies •Discount / allowance •Segmented •Psychological •Promotional •Geographical •International	•Types of geographic pricing strategies: §FOB-origin pricing §Uniform-delivered pricing §Zone pricing §Basing-point pricing §Freight-absorption pricing

Price Adjustment Strategies
Strategies •Discount / allowance •Segmented •Psychological •Promotional •Geographical •International	•Prices charged in a specific country depend on many factors §Economic conditions §Competitive situation §Laws / regulations §Distribution system §Consumer perceptions §Cost considerations

Price Changes

•Initiating Price Cuts is Desirable When a Firm:

§Has excess capacity
§Faces falling market share due to price competition
§Desires to be a market share leader

Price Changes

•Price Increases are Desirable:

§If a firm can increase profit, faces cost inflation, or faces greater demand than can be supplied.

•Methods of Increasing Price

•Alternatives to Increasing Price

§Reducing product size, using less expensive materials, unbundling the product.

Price Changes

•Buyer reactions to price changes must be considered.

•Competitors are more likely to react to price changes under certain conditions.

§Number of firms is small
§Product is uniform
§Buyers are well informed

Price Changes

•Respond To Price Changes Only If:

§Market share / profits will be negatively affected if nothing is changed.

§Effective action can be taken:

Reducing price
v Raising perceived quality
v Improving quality and increasing price
v Launching low-price “fighting brand”

Public Policy and Pricing

•Pricing within Channel Levels

§Price-fixing

Competitors can not work with each other
to set prices

§Predatory pricing

Firms may not sell below cost with the intention of punishing a competitor or gaining higher long-run profits or running a competitor out of business.

Public Policy and Pricing

•Pricing across Channel Levels

§Price discrimination
§Retail price maintenance
§Deceptive pricing
Bogus reference / comparison pricing
v Scanner fraud
v Price confusion

Chapter 12: Pricing Strategies

Study Guide

Concepts Check

Study Guide

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Chapter Outline

Video Case

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Chapter 12: Pricing Strategies

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