Chapter 19Chapter 19

Pricing StrategiesPricing Strategies

19-2

Chapter ObjectivesChapter 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.

19-3

Pricing StrategiesPricing Strategies

Skimming pricing strategy Skimming pricing strategy [Gouge pricing [Gouge pricing strategy]strategy]: involves the use of a high price relative to competitive offeringsOften used by marketers of high-end productsAlso by firms introducing a distinctive good

with little or no competitionAllows firms to control demand during the

introductory stages of a products life cycleCan be used as a tool for segmenting a

product’s market on a price basis

19-4

Figure 19.1Figure 19.1Distinctive

Flat-Screen TVs Marketed with a Skimming Pricing Strategy

19-5

WeberWeberDistinctive Grills Marketed through a Skimming

Pricing Strategy

19-6

Lincoln NavigatorLincoln NavigatorMaintaining a High Price in Periods of High Demand

19-7

Figure 19.3Figure 19.3Price Reductions to Increase Market Share

19-8

Penetration pricing Penetration pricing strategystrategy: 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 acceptanceDesigned to

generate many trial purchases

19-9

Figure 19.4Figure 19.4Credit-Card

Offers: Penetration Pricing

19-10

Everyday low Everyday low pricing (EDLP):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 salesWal-Mart

19-11

Southwest Airlines, Known for It’s Low Prices, Often Enters New Markets with Incredibly Low Penetration Prices and Then Maintains Market Share With Everyday Low Pricing Strategy

19-12

Competitive Pricing Competitive Pricing StrategyStrategy: reduces emphasis on price as a competitive variable by pricing goods at the general level of competitorsFirms focus their

own marketing efforts on the product, distribution and promotion elements of the marketing mix

19-13

Figure 19.6Figure 19.6American

Airlines: Reducing the Emphasis on Price Competition

19-14

Price QuotationsPrice Quotations List pricesList prices: Established prices normally quoted

to potential buyersGasoline Prices: Where the Money Goes

19-15

Market priceMarket price: Price that an intermediary or final consumer pays for a product after subtracting any discounts, rebates, or allowances from the list priceKraft offering a

rebate promotion

19-16

Reductions from List Price Reductions from List Price Cash discountCash 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

19-17

Trade DiscountsTrade Discounts: payment to a channel member or buyer for performing marketing functions; also known as a functional discount

19-18

Quantity discountQuantity discount: price reduction granted for a large-volume purchaseJustified 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

19-19

AllowancesAllowancesTrade-in: credit allowance given for a used

item when a new item is purchasedPromotional allowance: advertising or

promotional funds provided by a manufacturer to other channel members in an attempt to integrate the promotional strategy within the channel

RebatesRebates: refund for a portion of the purchase price, usually granted by the product’s manufacturer

19-20

Figure 19.9Figure 19.9Rebates for Computer-Related Goods

19-21

Geographic Considerations Geographic Considerations FOB (free on board) plant or FOB originFOB (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 absorptionFreight absorption: system for handling transportation costs under which the buyer may deduct shipping expenses from the costs of goods

19-22

Uniform-delivered priceUniform-delivered price: system for handling transportation costs under which all buyers are quoted with the same price, including transportation expenses

Zone pricingZone 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 systemBasing-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.

19-23

Pricing PoliciesPricing Policies

Pricing policyPricing policy: general guidelines based on pricing objectives and intended for use in specific pricing decisions

Psychological pricingPsychological pricing: pricing policy based on the belief that certain prices or price ranges make a good or service more appealing than others to buyers

19-24

Odd pricingOdd pricing: pricing policy based on the belief that a price ending with and odd number just below a round number is more appealingJohn Deere at

$1,999 instead of $2000

19-25

Unit pricingUnit pricing: pricing policy in which prices are stated in terms of a recognized unit of measurement or a standard numerical countFor example, a gallon of milk, or one

dozen eggs

19-26

Price FlexibilityPrice Flexibility: pricing policy that permits variable prices for goods and servicesCar dealerships traditionally employ a

flexible pricing strategy

19-27

Figure 19.10Figure 19.10Fractional

Ownership of a Personal Jet: Example of Variable Pricing

19-28

Product-line pricingProduct-line pricing: practice of marketing different lines of merchandise at a limited number of pricesHallmark has

different prices for its card lines

19-29

Promotional pricingPromotional pricing: pricing policy in which a lower than normal price is used as a temporary ingredient in the marketing strategy“Buy one, get one

free” is a common pricing promotion

19-30

Loss leaderLoss 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

What are some loss leaders in a grocery store?

19-31

Price-Quality RelationshipsPrice-Quality RelationshipsWithout 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

19-32

Figure 19.11Figure 19.11Rolex Cellini

Cellissima Watch: Example of the Price-Quality Relationship

19-33

Competitive Bidding and Negotiated PricesCompetitive 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 OnlineNegotiated Prices OnlineBuyers and sellers can communicate and

negotiate prices online

19-34

Online Auctions: Purest form of negotiated pricing

19-35

The Transfer Price DilemmaThe Transfer Price Dilemma

Transfer priceTransfer price: cost assessed when a product is moved from one profit center to another

Profit centerProfit center: any part of an organization to which revenue and controllable costs can be assigned

19-36

Global Considerations and Online PricingGlobal 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.

19-37

Traditional Global Pricing StrategiesTraditional Global Pricing StrategiesStandard 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

19-38

Characteristics Of Online PricingCharacteristics Of Online PricingCannibalization: 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

19-39

Figure 19.14Figure 19.14Cable TV

Companies and Bundle Pricing

19-40

End of Chapter NineteenEnd of Chapter Nineteen