1. Chapter 14 Pricing Strategies and Tactics
Sommers  Barnes
Ninth Canadian Edition
Presentation by
Karen A. Blotnicky
Mount Saint Vincent University, Halifax, NS
Copyright © 2001 by McGraw-Hill Ryerson Limited

2. Chapter Goals To gain an understanding of:
Price competition and value pricing
Pricing strategies for market entry: skimming and penetration pricing
Price discounts and allowances
Geographic pricing strategies
Special strategies including one-price, flexible-price, price lining, resale price maintenance, leader pricing, everyday low price, odd pricing
Legal issues associated with pricing

3. Pricing Strategy
how does a company decide what price to charge for its products and services?
what is “the price” anyway? doesn’t price vary across situations and over time?
some firms have to decide what to charge different customers and in different situations
they must decide whether discounts are to be offered, to whom, when, and for what reason

4. Price vs. Nonprice Competition
In price competition, a seller regularly offers products priced as low as possible and accompanied by a minimum of services.
In nonprice competition, a seller has stable prices and stresses other aspects of marketing.
With value pricing, firms strive for more benefits at lower costs to consumer.
With relationship pricing, customers have incentives to be loyal-- get price incentive if you do more business with one firm.

5. Nonprice Competition
some firms feel price is the main competitive tool, that customers always want low prices
other firms are looking for ways to add value, thereby being able to avoid low prices
sometimes prices have to be changed in response to competitive actions
many firms would prefer to engage in nonprice competition by building brand equity and relationships with customers

6. Relationship Pricing
Uses price as a method to build long-term relationships with the best customers
Focuses on giving better deals to better customers
Goal is to price relative to the value of the customer to the firm, while building loyalty and stimulating repeat buying

7. The Price Determination Process
In pricing, an organization first must decide on its pricing goal.
The next step is to set the base price for a product.
The final step involves designing pricing strategies that are compatible with the rest of the marketing mix.
Many strategic questions must be answered:
Will our company compete on the basis of price or other factors?
What kind of discount schedule (if any) should be adopted?

8. SELECT PRICING OBJECTIVE
The Process: An Illustration
SELECT PRICING OBJECTIVE
SELECT METHOD OF DETERMINING THE BASE PRICE:
Cost-plus
pricing
Price based on
both demand
and costs
Price set in
relation to
market alone
DESIGN APPROPRIATE STRATEGIES:
Price vs. nonprice
competition
Skimming vs.
penetration
Discounts and allowances
Freight payments
One price vs.
flexible price
Psychological pricing
Leader pricing
Everyday low vs.
high-low pricing
Resale price
maintenance

9. Market Entry Pricing Strategies
Market-Skimming Pricing: Setting a high initial price for a new product.
Works if product is new, distinctive and desired
Early in Product Life Cycle, when demand inelastic
Protected by entry barriers, e.g. patents
Market-Penetration Pricing: Setting a low initial price for a new product.
Works if large market, elastic demand
Economies of scale are possible
Fierce competition

10. Discounts and Allowances
Quantity discount: The more you buy, the cheaper it becomes-- cumulative and non-cumulative.
Trade discounts: Reductions from list for functions performed-- storage, promotion.
Cash discount: A deduction granted to buyers for paying their bills within a specified period of time, (after first deducting trade and quantity discounts from the base price)

11. Calculating a Cash Discount
3/10, NET 30
Percentage to be
deducted if bill is
paid within specified
time
Number of days from
date of invoice in
which bill must be
paid to receive cash
discount
Number of days from
date of invoice after
which bill is overdue
1/7, NET 30

12. Other Discounts and Allowances
Seasonal Discounts
Forward Dating
Promotional Allowances

13. The Competition Act
Predatory pricing: Selling at unreasonably low prices to lessen competition.
Price discrimination: The use of different prices for different customers.
It is illegal if a price advantage is granted to one, but not another, where both compete and the articles are similar.
Granting promotional allowances must be done on a proportionate basis to all customers.

14. Geographic Pricing Strategies
F.O.B. Point-of-Production pricing: Price quoted at factory-- buyer pays transportation.
Uniform delivered pricing: Same delivered price quoted to all; works if transportation costs small.
Zone-delivered pricing: Set same price within several zones, e.g. Maritimes, Quebec.
Freight-absorption pricing: Seller absorbs transport cost to penetrate market.

15. Special Pricing Strategies
firms may adopt a one-price strategy or charge different prices to different customers
flexible pricing strategies: shoppers may pay different prices if they buy the same quantity

16. Psychology of Pricing
the psychology of pricing suggests that price will convey a message about the product or service being sold
leader pricing
bait pricing
prestige pricing
price lining involves setting prices at a small number of fixed levels within a retail store
odd pricing is often used to suggest a bargain, while even pricing is used more in prestige, fashion stores

17. Questionable Pricing Practices
resale price maintenance involves a supplier requiring that intermediaries sell a product at a certain price: illegal in Canada, firms are allowed to specify a “suggested” retail price
some firms reduce prices, possibly even below cost, to attract customers; this form of “loss-leader” pricing is not illegal unless it persists for a long time with the goal of eliminating competition (predatory pricing)

18. Everyday Low Price (EDLP) vs. High/Low Pricing
In EDLP pricing, a retailer charges a constant, low price with no temporary discounts. For example: Wal-Mart, Price Club, and Saturn.
In high-low pricing, a retailer charges higher prices but then runs frequent promotions in which prices are temporarily lowered.