1. Chapter Twelve
Pricing Strategies

2. Chapter Objectives
Define pricing and examine the external and internal influences on pricing decisions
Examine the different price objectives
Address the various pricing strategies
Address strategic marketing applications in relation to pricing
Address strategies that companies to use change prices

3. Influences on Pricing Decisions
External influences
Consumer influences
Economic influences
Intermediaries’ influences
Competitive influences
Government influence
Internal influences

4. External Influences on Price
Consumer Influence
Law of Demand: Consumers purchase more products at lower prices than at higher prices. Companies can influence demand, e.g., by promoting. The price is equal to a consumers willingness to pay. (WTP)
Price
Price D' D
When increasing promotion
Quantity Demanded
Quantity Demanded

5. External Influences on Price: Economic Influences on Costs and Price
Economic Factors:
Inflation
Recession
Interest Rates
Taxes
Cost of producing a product
influence
Change Pricing decisions

6. External Influences on Price: Intermediaries’ Influences on Price
Intermediaries are trying to have some level of control over their own mark-up. The following are ways to accomplish it:
Just-in-Time delivery methods
Quick Response Inventory Systems
Electronic Data Interchange
Goal is to lower inventory carrying costs and accelerate the flow of products.

7. External Influences on Price: Competitive Influences on Price
Companies need to consider the competitive environment and the firm’s position relative to competitors when making pricing decisions.
A company can only control the price
at the beginning of the product life
cycle, or when it is the market leader.
During the maturity stage companies normally start competing on price and profits go down.

8. External Influences on Price: Government’s Influence on Price
The government has enacted legislation to protect competitors, channel members, and consumers from unfair pricing strategies.
Policies
Price discrimination Predatory pricing
Price fixing Bait-and-Switch
Resale price maintenance etc.

9. Internal Influences on Price
Depending on the size, the organizational structure, and the industry focus, either the company owner, the brand managers, or a board of executives make the pricing decisions.
Fixed Costs,Variable Costs:
Total Costs = Fixed + Variable Costs
(At a particular level of production)

10. Setting Pricing Objectives
Pricing objectives have to be set in line with company goals.
Profit-based pricing
Sales-based pricing
Status Quo pricing*
Others* e.g., survival, cash flow, social, image

11. Pricing Strategies Cost-based pricing Demand-based pricing
Competition-based pricing
Combination pricing

12. Cost-Based Pricing Markup pricing Breakeven pricing
Cost-plus pricing
Markup pricing
Breakeven pricing
Target profit pricing

13. Demand-Based Pricing*
Demand-based pricing: Considers customer’s perceptions of value, rather than the seller’s cost, as the fundamental component of the pricing decision
a.k.a. Psychological pricing
Reference price
Prestige pricing
Odd-Even pricing
“What the market will bear”

14. Competition-Based Pricing
Price can be above, below,
or equal to competition.
Best for brands in similar
markets, similar demand
patterns, and similar costs.
Price leadership (oligopoly markets)
Bid-pricing
(note “Demand-Backward Pricing*”)

15. Combination Pricing Often used in practice Typical scenario:
-Cost-based often use to
establish price floor
-Use demand and competition pricing strategies to estimate price
-Use markup to calculate actual selling price

16. Strategic Marketing Applications*
Price variability and marketing strategy
New product pricing
Product and pricing
Promotion and pricing
Place and pricing

17. Price Variability and Marketing Strategy
Customary pricing
Flexible pricing
No-haggle pricing (Everyday low prices*)
Price discounting*
Quantity
Trade
Seasonal
Promotional/Advertising
Cash
Allowances* (e.g., Trade-in, Rebate)

18. New Product Pricing Initial Pricing Strategies
Penetration Pricing: Initially price the product below competition to quickly gain market share
Skimming Pricing: Product priced above competition (high perceived quality and high profit-margins)
Introductory Pricing*: Very short term deep price reduction to induce trial
Initial Price Setting*
List prices
Keystone and variations

19. The Product and Pricing
Product line pricing
Accessory pricing
Captive-product
(Complementary*) pricing
Bundling
Transfer pricing*

20. Promotion and Pricing Multiple-unit pricing Promotional pricing
Loss-leader pricing
Comparison pricing*

21. Place and Pricing Distribution and Pricing
Geographic pricing*
FOB Origin
FOB Destination, i.e., Delivered Pricing
Uniform (Single Zone)
Zone (Multiple Zone)