1. Chapter 11 Pricing Strategies
Idil Yaveroglu
Lecture Notes

2. 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.

3. 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

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

5. 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

6. 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

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

8. 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

9. Price Adjustment Strategies
Discount / allowance
Segmented
Psychological
Promotional
Geographical
International

10. 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

11. 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.

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

13. 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

14. 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

15. 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:
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

16. 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

17. 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

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

19. 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

20. 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.

21. Public Policy and Pricing
Pricing across Channel Levels
Price discrimination
Retail price maintenance
Deceptive pricing
Bogus reference / comparison pricing
Scanner fraud
Price confusion