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Pricing Products: Pricing Strategies. Chapter 11. 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 - PowerPoint PPT Presentation

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  • Pricing Products:

    Pricing StrategiesChapter 11

  • Learning GoalsDescribe the major strategies for pricing imitative and new productsUnderstand how companies find a set of prices that maximize the profits from the total product mixLearn how companies adjust their prices to take into account different types of customers and situationsExplore the key issues related to imitating and responding to price changes

  • DefinitionsMarket-Skimming PricingSetting a high price for a new product to skim maximum revenues layer by layer from segments willing to pay the high price.

    Market-Penetration PricingSetting 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

  • Product Mix Pricing StrategiesProduct Line PricingSetting price steps between product line items. Price pointsOptional-Product PricingPricing optional or accessory products sold with the main productGoal 2: Understand how companies find a set of prices that maximize profits

  • Product Mix Pricing StrategiesCaptive-Product PricingPricing products that must be used with the main product High margins are often set for suppliesServices: two-part pricing strategy Fixed fee plus a variable usage rateGoal 2: Understand how companies find a set of prices that maximize profits

  • Product Mix Pricing StrategiesBy-Product PricingPricing low-value by-products to get rid of themProduct Bundle PricingPricing bundles of products sold togetherGoal 2: Understand how companies find a set of prices that maximize profits

  • Product Mix Pricing StrategiesProduct Line PricingSetting Price Steps Between Product Line Itemsi.e. $299, $399Optional-Product PricingPricing Optional or Accessory ProductsSold With The Main Producti.e. Car OptionsCaptive-Product PricingPricing Products That Must Be Used With The Main Producti.e. Razor Blades, Film, SoftwareBy-Product PricingPricing Low-Value By-Products To Get Rid of Themi.e. Lumber Mills, ZoosProduct-Bundle PricingPricing Bundles Of Products Sold Togetheri.e. Season Tickets, Computer MakersProductMixPricingStrategies

  • Price Adjustment StrategiesDiscount / allowance SegmentedPsychologicalPromotionalGeographicalInternational

    Types of discountsCash discountQuantity discountFunctional (trade) discountSeasonal discountAllowancesTrade-in allowances (old products)Promotional allowances instead of promotional activities

    Strategies Goal 3: Learn how companies adjust their prices

  • Price Adjustment StrategiesDiscount / allowance SegmentedPsychologicalPromotionalGeographicalInternational

    Types of segmented pricing strategies:Customer-segmentProduct-form pricingLocation pricing (different prices)Time pricing seasonallyCertain conditions must exist for segmented pricing to be effective market segmentable ,good demand

    Strategies Goal 3: Learn how companies adjust their prices

  • Price-Adjustment Strategies Price Adjustment StrategiesDiscount & AllowanceReducing Prices to RewardCustomer Responses such asPaying Early or Promotingthe Product.SegmentedAdjusting Prices to Allowfor Differences in Customers,Products, or Locations.Cash DiscountQuantity DiscountFunctional DiscountSeasonal DiscountCustomerProduct FormLocationTimeTrade-In Allowance

  • Price Adjustment StrategiesDiscount / allowance SegmentedPsychologicalPromotionalGeographicalInternational

    The price is used to say something about the product.Price-quality relationshipReference pricesDifferences as small as five cents can be important, numeric digits may have symbolic and visual qualities that psychologically influence the buyer

    Strategies Goal 3: Learn how companies adjust their prices

  • Price Adjustment StrategiesDiscount / allowance SegmentedPsychologicalPromotionalGeographicalInternational

    Temporarily pricing products below the list price or even below costLoss leadersSpecial-event pricingCash rebates (discount)Low-interest financing, longer warranties, free maintenancePromotional pricing can have adverse effects

    Strategies Goal 3: Learn how companies adjust their prices

  • Price Adjustment StrategiesDiscount / allowance SegmentedPsychologicalPromotionalGeographicalInternational

    Types of geographic pricing strategies:FOB-origin pricingUniform-delivered pricingZone pricingBasing-point pricingFreight-absorption pricing

    Strategies Goal 3: Learn how companies adjust their prices

  • Price Adjustment StrategiesDiscount / allowance SegmentedPsychologicalPromotionalGeographicalInternational

    Prices charged in a specific country depend on many factorsEconomic conditionsCompetitive situationLaws / regulationsDistribution systemConsumer perceptionsCorporate marketing objectivesCost considerationsStrategies Goal 3: Learn how companies adjust their prices

  • Price-Adjustment Strategies Adjusting Prices for PsychologicalEffect.Price Used as a Quality Indicator.

    Temporarily Reducing Prices to Increase Short-Run Sales. i.e. Loss Leaders, Special-Events 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. Psychological PricingPromotional PricingGeographical Pricing International Pricing

  • Initiating and Responding to Price ChangesInitiatingPriceIncreasesCompetitorReactionstoPrice Changes Initiating Price CutsBuyer Reactionsto PriceChangesPrice Changes

  • Price ChangesInitiate price cuts when a firm:Has excess capacityFaces falling market share due to price competitionDesires to be a market share leaderInitiate price increases when a firm:can increase profitfaces cost inflationfaces greater demand than can be supplied

    Goal 3: Learn how companies adjust their prices

  • Price ChangesAlternatives to Increasing PriceExplore more cost effective production or distributionReduce product sizeRemove features Unbundle the productGoal 3: Learn how companies adjust their prices

  • Price ChangesBuyer reactions to price changes must be considered. Raised or lowerCompetitors are more likely to react to price changes under certain conditions.Number of firms is smallProduct is uniformBuyers are well informed

    Goal 3: Learn how companies adjust their prices

  • Price ChangesResponding to competitors price changesEvaluate the competitors reason for the price changeEvaluate marketplace response to the price changeConsiders own products strategy

    Goal 4: Explore issues related to imitating and responding to price changes

  • Price ChangesFour options in responding to competitors price changesReduce priceRaise perceived qualityImprove quality and increase priceLaunch low price fighting brand

    Goal 4: Explore issues related to imitating and responding to price changes

  • Public Policy and PricingPricing within Channel LevelsPrice-fixing Competitors can not work with each other to set pricesPredatory 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

  • Price-Adjustment Strategies Hold Current Price;Continue to MonitorCompetitors Price.Reduce PriceRaise PerceivedQualityImprove Quality& Increase PriceLaunch Low-PriceFighting BrandHas Competitor CutPrice?Will Lower Price Negatively Affect OurMarket Share & Profits?Can/ Should EffectiveAction be Taken?YesNoNoNo

    Product-Mix Pricing StrategiesThis CTR corresponds to Table 11-1 on p. 331 and the relates to the material on pp. 331-334.Product-Mix Pricing StrategiesProduct 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.Price Adjustment Strategies IThis CTR corresponds to Table 11-2 on p. 334 and relates to the material on pp. 334-335.Discount and Allowance Pricing. Several forms of discount and allowance pricing are used by marketers: Cash Discount