1. Pricing Products: Pricing Strategies
Chapter 11

2. Learning Goals
Describe the major strategies for pricing imitative and new products
Understand how companies find a set of prices that maximize the profits from the total product mix
Learn how companies adjust their prices to take into account different types of customers and situations
Explore the key issues related to imitating and responding to price changes

3. Definitions Market-Skimming Pricing Market-Penetration 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.
Goal 1: Describe the major strategies for pricing imitative and new products

4. 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
Goal 2: Understand how companies find a set of prices that maximize profits

5. Product Mix Pricing Strategies
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
Goal 2: Understand how companies find a set of prices that maximize profits

6. 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
Goal 2: Understand how companies find a set of prices that maximize profits

7. Product Mix Pricing Strategies
Product Line Pricing
Setting Price Steps Between Product Line Items
i.e. $299, $399
Optional-Product Pricing
Pricing Optional or Accessory Products
Sold With The Main Product
i.e. Car Options
Product Mix Pricing Strategies
Product-Mix Pricing Strategies
This CTR corresponds to Table 11-1 on p. 331 and the relates to the material on pp
Captive-Product Pricing
Pricing Products That Must Be Used
With The Main Product
i.e. Razor Blades, Film, Software
By-Product Pricing
Pricing Low-Value By-Products To Get Rid
of Them
i.e. Lumber Mills, Zoos
Product
Mix
Pricing
Strategies
Product-Mix Pricing Strategies
Product Line Pricing. Companies usually develop product lines rather than single products. In product line pricing, management must decide on the price steps to set between each product in the line. Companies often use price points to target distinctive combinations of product features and value represented by a particular price.
Optional-Product Pricing. Under this strategy, the company offers a base product and prices differently for each combination of additional features or options added to the base product as desired by the customer. Automobile pricing is famous -- or infamous -- for this practice. But many manufacturers use optional-product pricing, such as personal computer makers.
Captive-Product Pricing. Under this strategy, producers price products that must be used with a main product. The text describes razor blades as an example. The razor is priced low while high markups are attached to the price of the blades.
Discussion Note: Students should distinguish captive pricing from optional pricing on the basis of need versus convenience. When Apple Computer prices its keyboards separately from its computers, it is practicing captive-product pricing. When it offers additional RAM beyond the included board memory, it is practicing optional-product pricing.
By-Product Pricing. Waste from production and distribution may be marketable as by-products. Selling by-products allows producers to lower prices and costs on their main products. Otherwise, the prices of main products must cover the disposable or storage of by- products.
Product-Bundle Pricing. This strategy combines several products and offers them at a reduced price from the cost of each product purchased separately. Season tickets and group rates are examples.
Product-Bundle Pricing
Pricing Bundles Of Products Sold Together
i.e. Season Tickets, Computer Makers

8. Price Adjustment Strategies
Types of discounts
Cash discount
Quantity discount
Functional (trade) discount
Seasonal discount
Allowances
Trade-in allowances (old products)
Promotional allowances instead of promotional activities
Discount / allowance
Segmented
Psychological
Promotional
Geographical
International
Goal 3: Learn how companies adjust their prices

9. Price Adjustment Strategies
Types of segmented pricing strategies:
Customer-segment
Product-form pricing
Location pricing (different prices)
Time pricing seasonally
Certain conditions must exist for segmented pricing to be effective market segmentable ,good demand
Discount / allowance
Segmented
Psychological
Promotional
Geographical
International
Goal 3: Learn how companies adjust their prices

10. Price-Adjustment Strategies
Price Adjustment Strategies I
This CTR corresponds to Table 11-2 on p. 334 and relates to the material on pp
Price-Adjustment Strategies
Discount & Allowance
Reducing Prices to Reward
Customer Responses such as
Paying Early or Promoting
the Product.
Segmented
Adjusting Prices to Allow
for Differences in Customers,
Products, or Locations.
Price Adjustment Strategies
Companies typically adjust their prices to account for various customer differences and changing situations:
Cash Discount
Customer
Discount and Allowance Pricing. Several forms of discount and allowance pricing are used by marketers:
Cash Discounts. These are price reductions to buyers who pay bills promptly.
Quantity Discounts. These refer to price reductions per unit on large volumes.
Functional Discounts. These are granted to channel members who perform various marketing functions.
Seasonal Discounts. These are granted to buyers who purchase merchandise out of season.
Allowances. These are discounts such as trade-ins for turning in old items on new purchases or promotional allowances for participating in seller sponsored advertising can also lower buyer prices.
Segmented Pricing. Segmented pricing refers to pricing differences not based on costs and takes several forms:
Customer-segment pricing. These target a specific segment, as in senior citizen discounts.
Product-form pricing. This varies costs on versions of a product by features but not production costs.
Location pricing. This stems from preferences where different locations have different perceived values, such as seating in a theater.
Time pricing. This refers to price breaks given at times of lower demand.
Quantity Discount
Product Form
Functional Discount
Location
Seasonal Discount
Time
Trade-In Allowance

11. Price Adjustment Strategies
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
Discount / allowance
Segmented
Psychological
Promotional
Geographical
International
Goal 3: Learn how companies adjust their prices

12. Price Adjustment Strategies
Temporarily pricing products below the list price or even below cost
Loss leaders
Special-event pricing
Cash rebates (discount)
Low-interest financing, longer warranties, free maintenance
Promotional pricing can have adverse effects
Discount / allowance
Segmented
Psychological
Promotional
Geographical
International
Goal 3: Learn how companies adjust their prices

13. Price Adjustment Strategies
Types of geographic pricing strategies:
FOB-origin pricing
Uniform-delivered pricing
Zone pricing
Basing-point pricing
Freight-absorption pricing
Discount / allowance
Segmented
Psychological
Promotional
Geographical
International
Goal 3: Learn how companies adjust their prices

14. Price Adjustment Strategies
Prices charged in a specific country depend on many factors
Economic conditions
Competitive situation
Laws / regulations
Distribution system
Consumer perceptions
Corporate marketing objectives
Cost considerations
Discount / allowance
Segmented
Psychological
Promotional
Geographical
International
Goal 3: Learn how companies adjust their prices

15. Price-Adjustment Strategies
Adjustment Strategies - II
This CTR corresponds to Table 11-2 on p. 334 and relates to the discussion on pp
Psychological Pricing
Promotional Pricing
Adjusting Prices for Psychological
Effect.
Price Used as a Quality Indicator.
Geographical Pricing
Temporarily Reducing Prices to
Increase Short-Run Sales.
i.e. Loss Leaders, Special-Events
Psychological Pricing. A key component in psychological pricing is the reference price consumers carry in their mind when considering sellers prices.
Promotional Pricing. Promotional prices are temporary reductions below list and sometimes below costs, used to attract customers:
Loss leaders. These may be offered below costs to attract attention to an entire line.
Special event. This type of pricing may be used during slow seasons.
Cash rebates or low financing. These “extras” may bring in customers “on the brink” and help them to decide to finally purchase.
Geographical Pricing. Several forms of geographical pricing are common:
FOB-Origin. Free On Board has customer pay freight.
Uniform Delivered. Here the company charges the same price to all.
Zone. Zone uses different areas pay different prices on freight but all customers within the same area pay the same freight charges.
Basing-Point. Under this system, all customers charged freight from a specified billing location.
Freight-Absorption. Here the seller pays all or part of the shipping costs to get the desired business.
International Pricing. Firms may charge the same price throughout the world, especially for high-ticket, high-tech products like jetliners. Or it may offer different prices based upon differing taxes, tariffs, distribution, and promotion costs.
International Pricing
Adjusting Prices to Account for the
Geographic Location of Customers.
i.e. FOB-Origin, Uniform-Delivered,
Zone Pricing, Basing-Point, &
Freight-Absorption.
Adjusting Prices for International
Markets.
Price Depends on Costs, Consumers,
Economic Conditions & Other Factors.

16. Initiating and Responding to Price Changes
This CTR relates to the material on pp
Competitor
Reactions to
Price
Changes
Initiating
Price Cuts
Initiating Price Changes
Price changes may be initiated for several reasons, including:
Price Cuts. Reasons for cutting prices may stem from overcapacity, falling market share, or attempts to dominate the market through lower costs.
Price Increases. Inflation is a major source of price increases but so is the tendency to speculate on inflationary trends and raise prices beyond the rate of inflation. Over demand may also cause prices to rise. Higher prices can also increase profit margins.
Buyer Reactions to Price Changes. Buyer reactions usually respond directly to price changes but not always. Usually lower prices pleases consumers, higher prices do not. But sometimes higher prices support quality improvements and lower prices mean company or product problems. Whether the buyer is correct or not in these perceptions will not immediately change their inclination to act on them.
Competitor Reactions to Price Changes. Competitors most often react in industries with a small number of firms, uniform products in the market, and buyers are well informed. Competitive reactions may be similar price changes or increased non price competition. Companies should anticipate probable competitive moves prior to initiating price changes.
Price Changes
Buyer
Reactions to
Price
Changes
Initiating
Price
Increases

17. 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
Goal 3: Learn how companies adjust their prices

18. Price Changes Alternatives to Increasing Price
Explore more cost effective production or distribution
Reduce product size
Remove features
Unbundle the product
Goal 3: Learn how companies adjust their prices

19. Price Changes
Buyer reactions to price changes must be considered. Raised or lower
Competitors are more likely to react to price changes under certain conditions.
Number of firms is small
Product is uniform
Buyers are well informed
Goal 3: Learn how companies adjust their prices

20. Price Changes Responding to competitors’ price changes
Evaluate the competitor’s reason for the price change
Evaluate marketplace response to the price change
Considers own product’s strategy
Goal 4: Explore issues related to imitating and responding to price changes

21. Price Changes Four options in responding to competitors’ price changes
Reduce price
Raise perceived quality
Improve quality and increase price
Launch low price “fighting brand”
Goal 4: Explore issues related to imitating and responding to price changes

22. Public Policy and Pricing
Pricing within Channel Levels
Price-fixing
Competitors can not 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

23. Price-Adjustment Strategies
Has Competitor Cut
Price?
Price-Adjustment Strategies
Hold Current Price;
Continue to Monitor
Competitor’s Price. No
Will Lower Price
Negatively Affect Our
Market Share & Profits?
Reduce Price No
Can/ Should Effective
Action be Taken?
Raise Perceived
Quality
Improve Quality
& Increase Price No
Launch Low-Price
“Fighting Brand”
Yes