Chapter 11 Pricing Strategies Idil Yaveroglu Lecture Notes

Price Skimming vs. Penetration 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.

Skimming Pricing Strategy Price Skimming Penetration Pricing Strategy Skimming Pricing Strategy Decline Maturity Growth Introduction High initial price for quick ROI Inelastic demand Price insensitivity by the market

Price Skimming Year Price 1906 1912 1925 $825 $575 $290 Ford T Model

Penetration Pricing Strategy Price Penetration Skimming Pricing Strategy Penetration Pricing Strategy Decline Maturity Growth Introduction Low initial price with elastic demand Volume for lower production costs Imminent competition

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 Eg. Cars and accessories, Computer and extras etc. 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 Eg. Disneyland

Captive Product Pricing Companies like Gillette will often price the razor at or below cost and make the profit on the blades

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 Discount / allowance Segmented Psychological Promotional Geographical International

Discounts and Allowances Discounts: Straight reduction in price on purchases during a certain time period Cash discount Quantity discount Functional (trade) discount Seasonal discount Allowances: Reward price deductions in return for an agreement to pay early or other. Trade-in allowances Promotional allowances

Segmented Pricing Strategies Types of segmented pricing strategies: Customer-segment Product-form pricing Winnie the pooh versions Location pricing Out of state tuition Time pricing Resorts Referred to as yield management when used for fixed capacity Airlines, cruises, hotels etc.

Movie theatres, resorts and hotels often use segmented pricing for children

Psychological Pricing 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 Quality Relationship Low cost focus Differentiation focus/ quality price unique Lower Prices Higher Prices Customers uncertain about brand quality prior to purchase look to price Customers look to price in high risk purchases

Odd-Even Pricing Odd Even Pricing (Psychological Pricing): The practice of setting prices a few dollars or cents below an even number Odd-number prices imply bargain Eg. Gasoline prices: 1.4599 Oil Change $19.99 Car Wash $9.99 Even-number prices imply quality Eg. Rolex watch for $450 Ralph Lauren Romance Perfume $65 Organic Chips $3.00

Promotional Pricing Temporarily pricing products below the list price or even below cost Loss leaders Pricing a few items low to lure customers Special-event pricing Seasonal items priced low Cash rebates For purchases completed within a time frame Low-interest financing, longer warranties, free maintenance Promotional pricing can have adverse effects

Promotional Pricing 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

Dynamic Pricing Adjusting prices continually to meet the characteristics and needs of individual customers and situations Eg. Amazon, Dell

Price Changes Initiate price cuts when a firm: Has excess capacity Faces falling market share due to price competition Desires to be a market share leader Initiate price increases when a firm can increase profit faces cost inflation faces greater demand than can be supplied

Public Policy and Pricing Pricing within Channel Levels Price-fixing Competitors cannot 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 Scanner fraud Price confusion