Copyright © 2001 by Harcourt, Inc. All rights reserved CHAPTER NINETEEN MANAGING THE PRICING FUNCTION (Part 1 of 2) Text by Profs. Gene Boone & David Kurtz Multimedia Presentation by Prof. Milton Pressley The University of New Orleans

Copyright © 2001 by Harcourt, Inc. All rights reserved CHAPTER OBJECTIVES Compare the alternative pricing strategies and explain when each strategy is most appropriate Describe how prices are quoted Identify the various pricing policy decisions that marketers must make Relate price to consumer perceptions of quality

Copyright © 2001 by Harcourt, Inc. All rights reserved CHAPTER OBJECTIVES Contrast competitive bidding and negotiated prices Explain the importance of transfer pricing Compare the three alternative global pricing strategies Relate the concepts of cannibalization, bundle pricing, and bots to online pricing strategies

Copyright © 2001 by Harcourt, Inc. All rights reserved Pricing Strategies Skimming pricing strategy: pricing strategy involving the use of a high price relative to competitive offerings Skimming strategies are often used by marketers of high- end goods or services Also often used by firms introducing a distinctive good with little or no competition Skimming

Copyright © 2001 by Harcourt, Inc. All rights reserved Figure 19.1: Weber – Distinctive Grills Marketed through a Skimming Pricing Strategy

Copyright © 2001 by Harcourt, Inc. All rights reserved Black & Decker’s ScumBuster: A Cordless Battery-Powered Version of the Common Scrub Brush That Sells for a Fraction of the Cost of the More Convenient and Easy-to-Use ScumBuster Copyright © 2001 by Harcourt, Inc. All rights reserved.

19-7 Montblanc Maintains a High Quality Reputation by Only Allowing Sales Through Authorized Retailers Copyright © 2001 by Harcourt, Inc. All rights reserved.

19-8 Pricing Strategies Skimming allows firms to control demand during the introductory stages of a products life cycle Can be used as a tool for segmenting a product’s market on a price basis Manufacturers who employ a skimming strategy quickly recover research and development costs Skimming

Copyright © 2001 by Harcourt, Inc. All rights reserved Figure 19.2: Lincoln Navigator – Maintaining a High Price in Periods of High Demand

Copyright © 2001 by Harcourt, Inc. All rights reserved Williams-Sonoma, the Gourmet Cookware Cataloger, Found This $379 Dualit Toaster to Be One of Its Best Sellers Copyright © 2001 by Harcourt, Inc. All rights reserved.

19-11 Figure 19.3 – Price Reduction to Increase Market Share

Copyright © 2001 by Harcourt, Inc. All rights reserved Pricing Strategies Penetration pricing policy: pricing strategy involving the use of a relatively low entry price as compared with competitive offerings; based on the theory that this initial low price will help secure market acceptance Designed to generate many trial purchases Skimming Penetration

Copyright © 2001 by Harcourt, Inc. All rights reserved Figure 19.4: Northwest Airlines – Succeeding with a Penetration Pricing Strategy

Copyright © 2001 by Harcourt, Inc. All rights reserved Pricing Strategies Everyday low pricing (EDLP): Pricing strategy of continuously offering low prices rather than relying on such short term price cuts as cents-off coupons, rebates, and special sales Wal-Mart has successfully utilized an EDLP strategy Skimming Penetration

Copyright © 2001 by Harcourt, Inc. All rights reserved Wal-Mart Using the Everyday Low Pricing Strategy Copyright © 2001 by Harcourt, Inc. All rights reserved.

19-16 Wal-Mart’s “Always Low Prices” Catchphrase Reinforces Their Everyday Low Pricing Strategy Copyright © 2001 by Harcourt, Inc. All rights reserved.

19-17 Southwest Airlines, Known for It’s Low Prices, Often Enters New Markets with Incredibly Low Penetration Prices and Then Maintains Market Share With Everyday Low Pricing Strategy Copyright © 2001 by Harcourt, Inc. All rights reserved.

19-18 Pricing Strategies Competitive Pricing Strategy: pricing strategy that de-emphasizes price as a competitive variable by pricing goods at the general level of competitors Firms focus their own marketing efforts on the product, distribution and promotion elements of the marketing mix Skimming Penetration Competitive

Copyright © 2001 by Harcourt, Inc. All rights reserved Figure 19.5: Tektronix – Meeting Competition with a Competitive Pricing Strategy

Copyright © 2001 by Harcourt, Inc. All rights reserved Instead of Low Prices, Dressmart.com Emphasizes Quality and Convenience as Competitive Features Copyright © 2001 by Harcourt, Inc. All rights reserved.

19-21 Quilted Northern Promoting a Product Attribute at a Competitive Price Copyright © 2001 by Harcourt, Inc. All rights reserved.

19-22 Does Cartier Use a Skimming, Penetration, or Competitive Pricing Strategy? Copyright © 2001 by Harcourt, Inc. All rights reserved. Discussion Question

Copyright © 2001 by Harcourt, Inc. All rights reserved Price Quotations List prices: Established prices normally quoted to potential buyers © PhotoDisc

Copyright © 2001 by Harcourt, Inc. All rights reserved Figure19.6: The Take on a $25 T-Shirt

Copyright © 2001 by Harcourt, Inc. All rights reserved Reductions From List Price Market price: Price that an intermediary or final consumer pays for a product after subtracting any discounts, rebates, or allowances from the list price © PhotoDisc

Copyright © 2001 by Harcourt, Inc. All rights reserved Kraft Kraft Offering a Rebate Promotion Copyright © 2001 by Harcourt, Inc. All rights reserved.

19-27 Cash discount: price reduction offered to a consumer, industrial user, or marketing intermediary in return for prompt payment of a bill 2/10 net 30, a common cash discount notation, allows consumers to subtract 2 percent from the amount due if payment is made within 10 days Reductions From List Price Cash Discounts

Copyright © 2001 by Harcourt, Inc. All rights reserved Reductions From List Price Cash Discounts Trade Discounts Trade Discounts (or functional discounts): payment to a channel member or buyer for performing marketing functions; also known as a functional discount

Copyright © 2001 by Harcourt, Inc. All rights reserved Figure19.7: Chain of Trade Discounts

Copyright © 2001 by Harcourt, Inc. All rights reserved Reductions From List Price Cash Discounts Trade Discounts Quantity Discounts Quantity discount: price reduction granted for a large-volume purchase Justified on the grounds that large orders reduce selling expenses, storage, and transportation costs

Copyright © 2001 by Harcourt, Inc. All rights reserved Cumulative quantity discounts reduce prices in amounts determined by purchases over stated time periods Non-cumulative quantity discounts provide one-time reductions in the list price Reductions From List Price Cash Discounts Trade Discounts Quantity Discounts

Copyright © 2001 by Harcourt, Inc. All rights reserved Trade-in: credit allowance given for a used item when a new item is purchased Promotional allowance: advertising or promotional funds provided by a manufacturer to other channel members in an attempt to integrate the promotional strategy within the channel Reductions From List Price Cash Discounts Trade Discounts Quantity Discounts Allowances

Copyright © 2001 by Harcourt, Inc. All rights reserved Figure 19.8: Promotional Pricing – A Competitive Tool for Automobile Dealers

Copyright © 2001 by Harcourt, Inc. All rights reserved Reductions From List Price Rebate: refund for a portion of the purchase price, usually granted by the product’s manufacturer Common in the automobile and personal computer markets Cash Discounts Trade Discounts Quantity Discounts Allowances Rebates

Copyright © 2001 by Harcourt, Inc. All rights reserved High Quality Bedding Manufacturer Sealy Offered Rebates to Consumers to Reverse the Trend of Buying Cheaper Bedding Copyright © 2001 by Harcourt, Inc. All rights reserved.

19-36 Geographic Considerations FOB (free on board) plant or FOB origin: Price quotation that does not include shipping charges Buyer pays all freight charges to transport the product from the manufacturer Freight absorption: system for handling transportation costs under which the buyer may deduct shipping expenses from the costs of goods © PhotoDisc

Copyright © 2001 by Harcourt, Inc. All rights reserved Geographic Considerations Uniform-delivered price: system for handling transportation costs under which all buyers are quoted with the same price, including transportation expenses Zone pricing: system for handling transportation costs under which the market is divided into geographic regions and a different price is set in each region © PhotoDisc

Copyright © 2001 by Harcourt, Inc. All rights reserved As This Chart from the U.S. Postal Service’s Parcel Post Rate Schedule Shows, Rates Depend on Zone Pricing Copyright © 2001 by Harcourt, Inc. All rights reserved.

19-39 Geographic Considerations Basing-point system: system for handling transportation costs used in some industries during the early 20 th century in which the buyer’s costs included the factory price plus freight charges from the basing-point city nearest the buyer © PhotoDisc