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Chapter 11
Pricing Strategy
Key Terms
Demographic Factors, Prestige Pricing, Odd Pricing, Bundle
Pricing, Mark-up Pricing, Cost-plus Pricing, Rate-of-return
Pricing, Perishability, Distinctiveness, Stage in the Product Life
Cycle, Skimming Policy, Penetration Policy, Going-rate Pricing,
Sealed-bid Pricing, Price Fixing, Deceptive Pricing, Price
Discrimination, Promotional Pricing, Value Pricing, Quantity
Discounts, Promotional Allowances, Slotting Allowances
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Demographic Considerations
 Number of potential buyers
 Location of potential buyers
 Position of potential buyers
 Expected consumption rates of potential buyers
 Economic strength of potential buyers
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Psychological Considerations
 Related to pricing is concerned with consumer's
perception on price changes
 Types of psychological pricing strategies
 Prestige pricing – High price is charged to create a
signal that the product is exceptionally fine
 Odd pricing or odd even pricing – Prices are set a
few dollars or a few cents below a round number
 Bundle pricing – Several products are sold together
at a single price to suggest good value
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Price Elasticity
 Price elasticity – A measure of consumers’ price
sensitivity
 Estimated by dividing relative changes in the quantity
sold by the relative changes in price
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Supply Influences on Pricing
Decisions
 Pricing objectives – Should be derived from overall
marketing objectives, which in turn should be
derived from corporate objectives
 Common objectives
 Pricing to achieve a target return on investment
 Stabilization of price and margin
 Pricing to achieve a target market share
 Pricing to meet or prevent competition
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Supply Influences on Pricing
Decisions
 Cost Considerations in Pricing
 Markup pricing – Percentage is added to the
retailer’s invoice to determine final price
 Cost-plus pricing – Costs of producing a product plus
desired profit are added to achieve price
 Rate-of-return or target pricing – Adding desired rate
of return on investment to total costs
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Retail Pricing Strategies: EDLP or
High/Low?
 Advantages of EDLP
 Assures customers of low prices.
 Reduces advertising and operating expenses.
 Reduces stockouts and improves inventory
management.
 Advantages of High/Low pricing
 Increases profits through price discrimination.
 Sales create excitement.
 Sells merchandise.
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Product Considerations in Pricing
Perishability – Discounting the products as they
approach being no longer fit for sale
 Distinctiveness – Classified in terms of distinction
 Branding and brand equity of products are commonly
made distinctive in customers’ minds
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Product Considerations in Pricing
 Life cycle – Stage of the life cycle that a product is in
can have important implications
 Two approaches to pricing
 Skimming price policy – Seller changes a relatively high
price on a new product
 Penetration price policy – Seller charges a relatively low
price on a new product
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Environmental Influences on
Pricing Decisions
 Factors to consider
 Number of competitors
 Market shares, growth, and profitability of competitors
 Strengths and weaknesses of competitors
 Likely entry of new firms into the industry
 Degree of vertical integration of competitors
 Number of products sold by competitors
 Cost structure of competitors
 Historical reaction of competitors to price changes
 Going-rate pricing – Pricing at competition
 Sealed-bid pricing – Pricing below competition
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Environmental Influences on Pricing
Decisions
 Price fixing is illegal
 Deceptive pricing practices – Outlawed under Section 5
of the Federal Trade Commission Act
 Price discrimination that lessens competition or is
deemed injurious to it is outlawed by the RobinsonPatman Act
 Promotional pricing such as cooperative advertising
and price deals are not illegal
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A General Pricing Model
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A General Pricing Model
 Set Pricing Objectives
 Pricing process begins with a clear statement of the
pricing objectives
 Guide pricing strategy and should be designed to
support overall marketing strategy
 Efforts to set prices must be coordinated with other
functional areas
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A General Pricing Model
 Evaluate Product – Price Relationships
 Priced relatively high – Offers value in the form of high
quality, special features, or prestige
 Priced at about average – Offers value in the form of
good quality for a reasonable price
 Priced relatively low – Offers value in the form of
acceptable quality at a low price
 Value pricing – Setting prices so that targeted
customers will perceive products to offer greater value
than competitive offerings
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A General Pricing Model
 Analyze Profit Potential
 Quantity discounts – Discounts for purchasing large
number of units
 Promotional allowances – Form of price reductions in
exchange for the channel member performing various
promotional activities
 Slotting allowances – Payment to retailers to get them
to stock items on their shelves
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A General Pricing Model
 Set Initial Price Structure
 Considers price to various channel members, as well as
the recommended price to final consumers or
organizational buyers
 Change Price as Needed
 Channel members may bargain for greater margins
 Competitors may lower their prices
 Costs may increase with inflation
 In the long term, price structures tend to increase for
most products as production and marketing costs
increase
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Eight Tips for Improving a Company’s
Pricing Strategy
 Base pricing strategies on sound research in order to
understand relevant price factors
 Continuously monitor pricing decisions because they
often help define company image
 Remember that consumers have trouble recognizing
subtle price differences
 Remember that consumers evaluate prices
comparatively
 They often use a sense of what they think the item
should cost as a benchmark
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Eight Tips for Improving a Company’s
Pricing Strategy
 Recognize that buyers typically have a range of
acceptable prices defined by upper and lower limits
 Understand the importance of relative price to buyers
– the relationship between a price and your
competitors’ price
 Understand the importance of price information and it
effects on differentiating products within a product line
 Recognize that price elasticity vary – it is easier to
lose customers to price increases than gain them from
price decreases
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