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Chapter 11 – Pricing strategies
Market-skimming pricing
Setting a high price for a new product to skim maximum revenues layer by later from
the market
Apple uses this strategy
 Iphones are expensive when introduced to the market so that people that
really want it and can afford it will get it
 Then lowers price to attract new buyers
Product’s quality and image must support its higher price
Enough buyers must want the product at that price
Costs of producing a smaller volume cannot be so high that they cancel the
advantage of charging more
Competitors should not be able to enter the market easily and undercut the high
Market-penetration pricing
Companies set a low initial price to penetrate the market quickly and deeply to
attract a large number of buyers quickly and win a large market share
High sales volume results in falling costs allowing companies to cut their prices even
Market must be highly price sensitive so that a low price produces more market
Production and distribution costs must decrease as sales volume increases
Low price must help keep out the competition
The penetration pricer must maintain its low-price position
Product line pricing
Companies usually develop product lines rather than single products
Management must determine the price steps to set between the various products in
a line
Price steps should take into consideration cost differences between products in the
Should account for differences in customer perceptions of the value of different
Product mix pricing
Optional product pricing
Offering to sell optional or accessory products along with the main product
Example: Bluetooth or GPS in cars
Companies must decide which items to include in the base price and which to offer
as options
Captive product pricing
Companies that make products that must be used along with a main product
Example: razor blade cartridges, videogames and printer cartridges
Producers of the main products often price them low and set high mark-ups on the
However, finding the right balance between the main product and captive product
prices can be tricky
Consumers trapped into buying expensive captive products may come to resent the
brand that ensnared them
 Called two-part pricing: broken into a fixed fee + a variable usage rate
By product pricing
Producing products and services often generates by-products
If they have no value and if getting rid of them is costly, this will affect pricing of the
main product
Company seeks a market for these by-products to help off-set the costs of disposing
of them and help make the price of the main product more competitive
Product bundle pricing
Sellers often combine several products and offer the bundle at a reduced price
Promote the sales of products consumers might not otherwise buy, but the
combined price must be low enough to get them to buy the bundle
Discount and Allowance Pricing
Most companies adjust their basic price to reward customers for certain responses
such as the early payment of bills, volume purchases and off-season buying
Can take many forms
Cash discount: a price reduction to buyers who pay their bills promptly
Quantity discount: price reduction to buyers who buy large volumes
Functional discount: to trade channel members who perform certain
functions such as selling, storing and record keeping
Seasonable discount: price reduction to buyers who buy merchandise or
services out of season
Trade-in all allowances: price reductions given for turning in an old item
when buying a new one
Promotional allowances: payments or price reductions to reward dealers for
participating in advertising and sales support programs
Segmented pricing
Companies will often adjust their basic prices to allow for differences in customers,
products and locations
Company sells a product or service at 2 or more prices, even though the difference in
prices is not based on differences in costs
Customer segment pricing
 Different customers pay different prices for the same product or services
Product form pricing
 Different versions of the product are priced differently but not according to
differences in their costs
Location based pricing
 Company charges different prices for different locations
Time based pricing
 A firm varies its price by the season, the month, the day or even the hour
Market must be segmentable
Segments must show a different degree of demand
Costs of segmenting and reaching the market cannot exceed the extra revenue
obtained from the price difference
Should reflect real differences in customers’ perceived value
 Consumers in higher price tiers must feel that they are getting their extra
money’s worth for the higher prices paid
Company must be careful not to treat customers in lower price tiers as
second-class citizens
Psychological pricing
Sellers consider the psychology of prices not simply the economics
Consumers usually perceive higher-priced products as having higher quality
Reference prices
 Prices that buyers carry in their minds and refer to when looking at a given
 Might be formed by noting current prices, remembering past prices or
assessing the buying situation
 Sellers can influence those reference prices when setting price
Promotional pricing
Companies will temporarily price their products below list price and sometimes even
below cost to create buying excitement and urgency
Discounts from normal prices to increase sales and reduce inventories
Special event pricing in certain seasons to draw more customers
Cash rebates to consumers who buy the product from dealers within a specified
time; the manufacturer sends the rebate directly to the customer
Low-interest financing, longer warranties, free maintenance
Used too frequently and copied by competitors
Can copy “deal prone”  customers who wait until brands go on sale before buying
Constantly reduce prices can give a negative brand image
Geographical Pricing
FOB Origin pricing
 Goods are placed free on board a carrier
 The title and responsibility pass to the customer
 Costumers pay the shipping costs from the factory to the destination
Uniform delivered pricing
 Opposite of FOB
 Charges the same price + shipping costs to all customers regardless of their
 Shipping costs are set a the average shipping cost
Zone pricing
 Company sets up 2 or more zones
 All customers within a zone pay a single total price
 The more distant the zone, the higher the price
Basing-point pricing
 Seller selects a given city as a basing point and charges all customers the
shipping cost from that city to the customer location regardless of the city
from which the goods are actually shipped
Freight-absorption pricing
 Seller absorbs all or part of the actual freight charges to get the desired
 Seller might reason that if it can get more business its average costs will
Dynamic pricing
Adjusting prices continually to meet the characteristics and needs of individual
customers and situations
Offers many advantages for marketers and customers
 Can adapt their prices based on customers’ needs and wants
 Plenty of database to compare prices and products from different vendors
Consumers can negotiate prices at online auction sites and exchanges
It adjusts prices according to market forces
Often works to the benefit of the customer
Marketers need to be careful not to use dynamic pricing to take advantage of certain
customer groups, damaging important customer relationships
International pricing
Must decide what prices to charge in the different countries in which they operate
Companies can set a uniform worldwide price
Depends on many factors including
 economic conditions
 competitive situations
 laws and regulations
 development of the wholesaling and retailing system
 consumer perceptions and preferences
Different marketing objectives  changes in pricing strategy
Costs play an important role in setting international prices
Price escalation  differences in selling strategies or market conditions
Initiating price changes
Initiating price cuts
 Excess capacity
 Falling demand
 May lead to price war
Initiating price increases
 Improve profits
 Cost inflation
 Over demand
 Must keep a sense of fairness
 Companies should tell customers why prices have increased
Competitor reactions to price changes
 Most likely to react when the number of firms involved is small
 When the product is uniform
 When the buyers are all well informed about products and prices
Responding to price changes
How should a firm respond to a price change by a competitor?
Assessing and responding to competitor price changes:
price competition is a core element of our free-market economy
Companies usually are not free to charge whatever prices they wish
Pricing within channel levels
Sellers must set prices without talking to competitors  price collusion is suspected
Prohibited from using predatory pricing (selling below cost with the intention of
punishing a competitor or gaining higher long-run profits by putting competitors out
of business
Protects small sellers from larger ones who might sell items below cost temporarily
or in a specific locale to drive them out of business
Bigger problem: determine what contributes predatory pricing behaviour
 Selling below cost to unload excess inventory isn’t
 Selling below cost to drive out competitors is
Pricing across channel levels
The Robinson-Patman Act ensures that sellers offer the same price terms to
customers at a given level of trade
Seller can also discriminate in its pricing if the seller manufactures different qualities
of the same product for different retailers
Seller has to prove that these differences are proportional
Law also prohibits retail price maintenance:
 Manufacturer cannot require dealers to charge a specified retail price for its
 Cannot refuse to sell to a dealer that takes independent pricing action nor
can it punish the dealer by shipping late or denying advertising allowances
Deceptive pricing occurs when a seller states prices or price savings that mislead
consumers or are not actually available to consumers
Scanner fraud