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

New Product Pricing Strategies Market Skimming Setting a High Price for a New Product to “Skim” Maximum Revenues from the Target Market. Results in Fewer, But More Profitable Sales. Use Under These Conditions: Product’s Quality and Image Must Support Its Higher Price. Costs Can’t be so High that They Cancel the Advantage of Charging More. Competitors Shouldn’t be Able to Enter Market Easily and Undercut the High Price.

New Product Pricing Strategies Use Under These Conditions: Market Must be Highly Price-Sensitive so a Low Price Produces More Market Growth. Production/ Distribution Costs Must Fall as Sales Volume Increases. Must Keep Out Competition & Maintain Its Low Price Position or Benefits May Only be Temporary. Market Penetration Setting a Low Price for a New Product in Order to “Penetrate” the Market Quickly and Deeply. Attract a Large Number of Buyers and Win a Larger Market Share.

Product Mix-Pricing Strategies: Product Line Pricing Involves setting price steps between various products in a product line based on: Cost differences between products, Customer evaluations of different features, and competitors’ prices.

Product Mix- Pricing Strategies Optional-Product Pricing optional or accessory products sold with the main product. i.e camera bag. Captive-Product Pricing products that must be used with the main product. i.e. film.

Product Mix- Pricing Strategies By-Product Pricing low-value by-products to get rid of them and make the main product’s price more competitive. i.e. sawdust, Zoo Doo Product-Bundling Combining several products and offering the bundle at a reduced price. i.e. theater season tickets.

Discount and Allowance Pricing

Segmented Pricing

Psychological Pricing Considers the psychology of prices and not simply the economics. Customers use price less when they can judge quality of a product. Price becomes an important quality signal when customers can’t judge quality; price is used to say something about a product. Value $22.00 Sale $14.99

Promotional Pricing Loss Leaders Special-Event Pricing Cash Rebates Low-Interest Financing Longer Warranties Free Merchandise Discounts Loss Leaders Temporarily Pricing Products Below List Price to Increase Short-Term Sales Through:

Discussion Connections Many other industries have created “deal-prone” consumers through the heavy use of promotional pricing - fast foods, airlines, tires, furniture, 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?

Other Price Adjustment Strategies Geographical Pricing Adjusting Prices to Account for the Geographical Location of Customers. i.e. FOB-Origin, Uniform- Delivery, Zone Pricing, Basing Point, & Freight-Absorption. Adjusting Prices for International Markets. Price Depends on Costs, Consumers, Economic Conditions, Competitive Situations & Other Factors. International Pricing

Initiating Price Changes Price Increases Price Cuts Why? Excess Capacity Falling Market Share Dominate Market Through Lower Costs Why? Cost Inflation Overdemand: Company Can’t Supply All Customer’s Needs

Reactions to Price Changes Being Replaced by Newer Models Price Cuts Are Seen by Buyers As: Number of Firms is Small Product is Uniform Buyers are Well Informed Competitors Reactions When: Current Models Are Not Selling Well Company is in Financial Trouble Quality Has Been Reduced Price Comes Down Further

Assessing/Responding to Competitor’s Price Changes (Fig. 11.1)

Public Policy Issues in Pricing (Fig. 11.2) Manufacturer A Price-fixing Predatory pricing Manufacturer B Retailer 1 Price-fixing Predatory Pricing Retailer 2 Retail price maintenance. Discriminatory Pricing Deceptive Pricing Consumers Deceptive Pricing

Public Policy Issues in Pricing Pricing Within Channel Levels Price Fixing Predatory Pricing Both Are Prohibited by Law

Pricing Across Channel Levels Price Discrimination Ensure Sellers Offers the Same Price Terms to a Given Level Of Trade Resale Price Maintenance Manufacturer Can’t Require Dealers to Charge a Specified Retail Price for Its Product Deceptive Pricing Occurs When a Seller States Prices or Prices Savings that Available To Consumers

Review of Concept Connections Describe the major strategies for pricing imitative and new products. Explain how companies find a set of prices that maximizes the profits from the total product mix. Discuss how 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.