1. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Part 7: Pricing Decisions 18.Price Concepts and Approaches 19.Pricing Strategies

2. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Chapter 19 Pricing Strategies

3. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-3 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 that marketers must make. 4.Relate price to consumer perceptions of quality. 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.

4. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-4 Pricing Strategies Skimming pricing strategy Skimming pricing strategy: involves the use of a high price relative to competitive offerings Often used by marketers of high-end products Also by firms introducing a distinctive good with little or no competition 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

5. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-5 Figure 19.3 Figure 19.3 Price Reductions to Increase Market Share

6. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-6 Penetration pricing strategy Penetration pricing strategy: involves 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 Everyday low pricing 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

7. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-7 Competitive Pricing Strategy Competitive Pricing Strategy: reduces emphasis on 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

8. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-8 Price Quotations List prices List prices: Established prices normally quoted to potential buyers Market 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

9. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-9 Reductions from List Price Reductions from List Price Cash discount 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

10. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-10 Trade Discounts Trade Discounts: payment to a channel member or buyer for performing marketing functions; also known as a functional discount

11. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-11 Quantity discount Quantity discount: price reduction granted for a large-volume purchase Justified on the grounds that large orders reduce selling expenses, storage, and transportation costs 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

12. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-12 Allowances Allowances 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 Rebates Rebates: refund for a portion of the purchase price, usually granted by the product’s manufacturer

13. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-13 Geographic Considerations Geographic Considerations FOB (free on board) plant or FOB origin 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 Freight absorption: system for handling transportation costs under which the buyer may deduct shipping expenses from the costs of goods

14. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-14 Uniform-delivered price Uniform-delivered price: system for handling transportation costs under which all buyers are quoted with the same price, including transportation expenses Zone pricing 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 Basing-point system Basing-point system: system for handling transportation costs in which the buyer’s costs included the factory price plus freight charges from the basing-point city nearest the buyer. Seeks to equalize competition between distant marketers.

15. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-15 Pricing Policies Pricing policy Pricing policy: general guidelines based on pricing objectives and intended for use in specific pricing decisions Psychological pricing Psychological pricing: pricing policy based on the belief that certain prices or price ranges make a good or service more appealing than others to buyers

16. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-16 Odd pricing Odd pricing: pricing policy based on the belief that a price ending with and odd number just below a round number is more appealing Unit pricing Unit pricing: pricing policy in which prices are stated in terms of a recognized unit of measurement or a standard numerical count Price Flexibility Price Flexibility: pricing policy that permits variable prices for goods and services Product-line pricing Product-line pricing: practice of marketing different lines of merchandise at a limited number of prices

17. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-17 Promotional pricing Promotional pricing: pricing policy in which a lower than normal price is used as a temporary ingredient in the marketing strategy Loss leader 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  Leader pricing

18. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-18 Price-Quality Relationships Price-Quality Relationships Without other cues, price serves as an important indicator of a product’s quality to buyers Customers often view price as an indicator of a product’s overall quality and may be willing to pay a higher price

19. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-19 Competitive Bidding and Negotiated Prices Many purchases are made through competitive bidding, a process in which potential suppliers and manufacturers are invited to quote prices on proposed purchases or contracts Negotiated Prices Online Negotiated Prices Online Buyers and sellers can communicate and negotiate prices online

20. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-20 The Transfer Price Dilemma Transfer price Transfer price: cost assessed when a product is moved from one profit center to another Profit center Profit center: any part of an organization to which revenue and controllable costs can be assigned

21. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-21 Global Considerations and Online Pricing International markets are subject to external influences such as regulatory limitations, trade restrictions, competitor’s actions, economic events, and the global status of the industry The effect the exchange rate can have on international trade can be significant. It is important that pricing of products take exchange rates into account.

22. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-22 Traditional Global Pricing Strategies Traditional Global Pricing Strategies Standard Worldwide: Pricing strategy in which exporters set standard worldwide prices for products, regardless of their target markets Dual Pricing: Pricing strategy that distinguishes between domestic and export sales, and maintains a distinct set of prices for each Market Differentiated: Flexible pricing strategy that sets prices according to local marketplace and economic conditions

23. Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-23 Characteristics Of Online Pricing Characteristics Of Online Pricing Cannibalization: Loss of sales of an existing product due to competition from a new product in the same line Shopping Bots: Search engines which act as comparison shopping agents Bundle pricing: Offering two or more complementary products and selling them for a single price