First and second round

1. Chapter 11
Pricing Products:
Pricing Considerations and
Strategies
1

2. New Product Pricing
Strategies (pp. 399-400)
Use Under These
Market Skimming Conditions:
 Setting a high price to  Product’s quality & image
“skim” maximum support its higher price.
revenues from the  Market not price sensitive.
target market.  Costs of producing small
volumes can’t be so high
 Results in fewer, but that they cancel the
more profitable, sales. advantage of charging
more (i.e., don’t need
 May reduce price later economies of scale).
to attract more price  Competitors shouldn’t be
sensitive markets. able to enter market easily
& undercut the high price.
2

3. New Product Pricing
Strategies (pp. 399-400)
Use Under These
Market Penetration
Conditions:
 Market is large & highly
 Setting a low price in price-sensitive so a low
order to “penetrate” the price produces market
market quickly and growth.
deeply.  Production & distribution
costs must fall as sales
 Attract a large number of volume increases (i.e.,
buyers quickly & win a economies of scale).
larger market share.  Low price can effectively
keep out competition & low
price position can be
maintained.
3

4. Product Mix Pricing
Strategies (pp. 400-403)
Goal – to maximize profit over the product mix:
Product Line Pricing -- Involves setting price steps
between various products in a product line. Based on:
 Cost differences between products, or
 Customer evaluations of different features, or
 Competitors’ prices
(e.g., lawnmowers - $259.95, $299.95, $399.95)
Optional Product Pricing -- Pricing optional or accessory
products sold with the main product.
(e.g., car options)
Captive Product Pricing -- Pricing products that must be
used with the main product.
(e.g., razor blades, toner cartridges)
4

5. Product Mix Pricing
Strategies (pp. 400-403)
Goal – to maximize profit over the product mix:
By-Product Pricing -- Pricing low-value by-products to get
rid of them & reduce costs.
(e.g., wood chips, Zoo Doo)
Product Bundle Pricing -- Combining several products and
offering the bundle at a reduced price.
e.g., season tickets, magazine subscription, computer with software, car
option packages, Costco)
5

6. Price-Adjustment Strategies:
Discount & Allowance (pp. 403-404)
Adjusting the basic price to reward customers,
or to provide incentives for certain responses
(most are for channel members & business buyers)
Cash discount Functional discount
(pay early, e.g., 2/10 net 30) (price to channel members)
Quantity discount Trade-in allowance
(buy more from one seller)
Seasonal discount Promotional allowance
(buy early or out of season) (to help channel members
promote product)
6

7. Example of Functional
Discount (p. 404)
Functional discounts represent product prices charged
channel intermediaries – compensates channel
members (wholesalers & retailers) for stocking & selling
the product
E.g., pricing a book – manufacturing cost ~$2.00
 publisher’s suggested retail price $20.00
(price a consumer pays at a bookstore)
 bookstore (40% discount) 12.00
 wholesaler (55% discount) 9.00
 distributor (65% discount) 7.00
7

8. Price-Adjustment Strategies:
Segmented Pricing (p. 404)
Selling products at different prices
based on differences in demand,
not on differences in cost
Customer segment Location pricing
pricing
Product form pricing
Product - Form Time pricing
8

9. Price-Adjustment Strategies:
Psychological Pricing (pp. 405-407)
Considers the psychology of prices, not
just the economics.
Price is an important quality signal
when customers can’t otherwise judge
quality; price is used to “say
something” about a product.
Reference prices
 Show price comparisons
 Display with more/less expensive alternatives
Odd-pricing, even-pricing
 E.g., $49.99 versus $50.00
9

10. Price-Adjustment Strategies:
Promotional Pricing (p. 408)
Loss leaders Temporarily
pricing products below
Special-event pricing the regular price to
increase short-term
Cash rebates sales
Low-interest financing
Danger – addictive; Longer warranties
over-reliance can damage
Free merchandise
brand equity & train consumers
to be “deal prone”
10

11. Discussion Connections
Many industries have created “deal-prone”
consumers through the heavy use of promotional
pricing – e.g., fast foods, airlines, department
stores, and others.
Pick a company in one of these industries and
suggest ways that it might deal with this
problem.
How does the concept of value relate to
promotional pricing? Does promotional pricing
add to or detract from customer value?
11

12. Initiating Price Changes
(pp. 411-413)
Price Cut Consumer
Reaction:
Why? • Positive; or
•Excess capacity • Being replaced?
• Not selling? Price Increase Consumer
•Falling market • Co. in trouble? Reaction:
share • Quality lower? Why? • Negative
•Strategy to • Prices coming (explain,
down further? •Cost inflation disguise?)
dominate market
through •Over-demand • Positive
lower costs (“hot,”
•Increase profit prestige)
margin
Competitor Response:
Follow? – oligopoly, perfect competition
Position against? – monopolistic competition 12

13. Assessing & Responding to
Competitor’s Price Changes
(Fig. 11.1, pp. 413-414)
Has competitor cut Hold current price;
price? continue to monitor
competitor’s price
Will lower price
negatively affect our
Reduce price
market share & profits?
Raise perceived
Can / should effective quality
action be taken?
Improve quality
& increase price
Launch low-price
“fighting brand”
13

14. Public Policy Issues:
Prohibited Pricing Practices
(Fig. 11.2, pp. 415-420)
Manufacturer A Retailer 1
• Retail price
maintenance Consumers
• Price-fixing
• Discriminatory • Price-fixing
• Predatory pricing • Predatory pricing
pricing
• Deceptive
pricing
Manufacturer B Retailer 2
• Deceptive
pricing
14

15. Public Policy Issues:
Prohibited Pricing Practices
(pp. 415-420)
Within channel levels:
 Price fixing – cannot talk to each other when setting prices
 Predatory pricing – cannot set low prices for purposes of
driving competitors out of market
Across channel levels:
 Retail price maintenance – manufacturer cannot dictate
the price charged by retailers
 Discriminatory pricing – cannot charge different prices to
different intermediaries (except based on actual costs)
 Deceptive pricing – cannot deceive consumers (e.g.,
through bogus reference prices, bait & switch, creating price
confusion, etc.)
15

16. Review of Concept
Connections
Describe the major strategies for pricing new
products.
Explain how companies set prices to maximize
profits from the total product mix.
Discuss the ways companies adjust their prices
to take into account different types of
customers and situations.
Discuss the key issues related to initiating and
responding to price changes.
Identify the key prohibited pricing practices.
16