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Principles of Contemporary Marketing Kurtz & Boone Chapter 19 Pricing Strategies CHAPTER 19 Pricing Strategies Chapter Objectives 1. Compare the alternative pricing strategies and explain when each strategy is most appropriate. 2. Describe how prices are quoted. 3. Identify the various pricing policy decisions marketers must make. 4. Relate price to consumer perceptions of quality. Copyright © 2012 by South Western, a division of Cengage Learning. All rights reserved. CHAPTER 19 Pricing Strategies Chapter Objectives 5. Contrast competitive bidding and negotiated prices. 6. Explain the importance of transfer pricing. 7. Compare the three alternative global pricing strategies. 8. Relate the concepts of cannibalization, bundle pricing, and bots to online pricing strategies. Copyright © 2012 by South Western, a division of Cengage Learning. All rights reserved. CHAPTER 19 Pricing Strategies Pricing Strategies o Skimming pricing strategy - The use of a high price relative to competitive offerings o Penetration pricing strategy - The use of a relatively low entry price compared with competitive offerings, based on the theory that this initial low price will help secure market acceptance o Competitive pricing strategy - Designed to deemphasize price as a competitive variable by pricing a good or service at the level of comparable offerings Copyright © 2012 by South Western, a division of Cengage Learning. All rights reserved. CHAPTER 19 Pricing Strategies Price Quotations o List price - Established price normally quoted to potential buyers o Reductions from list price o Market price - Price a consumer or marketing intermediary actually pays for a product after subtracting any discounts, allowances, or rebates from the list price Copyright © 2012 by South Western, a division of Cengage Learning. All rights reserved. CHAPTER 19 Pricing Strategies Reductions from List Price o Cash discount o Trade discount o Quantity discount o Allowances o Rebates Copyright © 2012 by South Western, a division of Cengage Learning. All rights reserved. CHAPTER 19 Pricing Strategies Copyright © 2012 by South Western, a division of Cengage Learning. All rights reserved. CHAPTER 19 Pricing Strategies Geographic Considerations o FOB pricing o Uniform-delivered pricing o Zone pricing o Basing-point pricing Copyright © 2012 by South Western, a division of Cengage Learning. All rights reserved. CHAPTER 19 Pricing Strategies Psychological Pricing o Pricing policy based on the belief that certain prices or price ranges make a good or service more appealing than others to buyers o Includes prestige pricing o Odd pricing - Setting prices at odd numbers just under round numbers o Unit pricing - Prices stated in terms of some recognized unit of measurement or a standard numerical count Copyright © 2012 by South Western, a division of Cengage Learning. All rights reserved. CHAPTER 19 Pricing Strategies Price Flexibility o Pricing policy permitting variable prices for goods and services o One-price policies suit mass-selling marketing programs o Variable pricing is more likely to be applied in marketing programs based on individual bargaining Copyright © 2012 by South Western, a division of Cengage Learning. All rights reserved. CHAPTER 19 Pricing Strategies Product-Line Pricing o Practice of setting a limited number of prices for a selection of merchandise and marketing different product lines at each of these price levels o Helps retailers differentiate product lines o Allows customers to focus on desired prices ranges o Retailers may have difficulty making price changes on individual items as necessary Copyright © 2012 by South Western, a division of Cengage Learning. All rights reserved. CHAPTER 19 Pricing Strategies Promotional Pricing o Pricing policy in which a lower-than-normal price is used as a temporary ingredient in a firm’s marketing strategy o Example: “Buy one pair, get the second pair for one cent” sale o Must be managed carefully because customers may come to expect them and wait for them Copyright © 2012 by South Western, a division of Cengage Learning. All rights reserved. CHAPTER 19 Pricing Strategies Loss Leaders and Leader Pricing o Loss leader - Product offered to consumers at less than cost to attract them to stores in the hope that they will buy other merchandise at regular prices o Leader pricing - Variant of loss-leader pricing in which marketers offer prices slightly above cost to avoid violating minimum-markup regulations and earn a minimal return on promotional sales Copyright © 2012 by South Western, a division of Cengage Learning. All rights reserved. CHAPTER 19 Pricing Strategies Price-Quality Relationships o Price affects consumer perception of quality o Customers often associate prestige with high prices o Many consumers are willing to pay more for ecofriendly products o Consumers have maximum and minimum price limits Copyright © 2012 by South Western, a division of Cengage Learning. All rights reserved. CHAPTER 19 Pricing Strategies Competitive Bidding and Negotiated prices o Competitive bidding - Inviting potential suppliers to quote prices on proposed purchases or contracts o Negotiating prices online o Online auctions are the purest form of online bidding o Example: eBay Copyright © 2012 by South Western, a division of Cengage Learning. All rights reserved. CHAPTER 19 Pricing Strategies The Transfer Pricing Dilemma o Transfer price - The price for moving goods between profit centers o Profit centers - Any part of the organization to which revenue and controllable costs can be assigned o Governments monitor transfer pricing because it can be used by companies to avoid paying taxes on profits Copyright © 2012 by South Western, a division of Cengage Learning. All rights reserved. CHAPTER 19 Pricing Strategies Traditional Global Pricing Strategies o Standard worldwide pricing - Can succeed if foreign marketing costs remain low or if their prices reflect average unit costs o Dual pricing - Distinguishing prices for domestic and export sales o Market-differentiated pricing - Setting prices according to local market conditions Copyright © 2012 by South Western, a division of Cengage Learning. All rights reserved. CHAPTER 19 Pricing Strategies The Cannibalization Dilemma o Cannibalization - Loss of sales of an existing product due to competition from a new product in the same line o Example: Wal-Mart recently introduced a “Site to Store” feature to its Web site Copyright © 2012 by South Western, a division of Cengage Learning. All rights reserved. CHAPTER 19 Pricing Strategies Use of Shopbots o Search programs that act as comparison shopping agents; also called bots o Force online marketers to keep prices low Copyright © 2012 by South Western, a division of Cengage Learning. All rights reserved. CHAPTER 19 Pricing Strategies Bundle Pricing o Offering two or more complementary products and selling them for a single price o Prevalent in the telecommunications industry o Consumers may resist the practice of bundling claiming they are being forced to pay for products they don’t want o Example: Cable television industry, which resists selling channels individually Copyright © 2012 by South Western, a division of Cengage Learning. All rights reserved.