pricing strategies

Lecture 12

Pricing strategiesPricing strategies

Pricing strategiesPricing strategies

GeographicalGeographical GeographicalGeographical

DiscountDiscount DiscountDiscount

PromotionalPromotional PromotionalPromotional Product-mix Product-mix Product-mix Product-mix

New-productNew-product New-productNew-product

DiscriminatoryDiscriminatory DiscriminatoryDiscriminatory

GEOGRAPHICAL PRICINGGEOGRAPHICAL PRICING• FOB ORIGIN PRICING - the goods are placed free on

board a carrier, at which point the title and responsibility passes to the customer, who pays the freight from the factory to the destination.

• UNIFORM DELIVERED PRICING - the company charges the same price plus freight to all customers regardless of their location. (=postage stamp pricing)

• ZONE PRICING - the company establishes two or more zones. All customers within a zone pay the same total price; and this price is higher in the more distant zones.

• BASING-POINT PRICING - allows the seller to designate some city as a basing point and charge all customers the freight cost from that city to the customer location regardless of the city from which the goods are actually shipped.

• FREIGHT ABSORPTION PRICING - the seller who is anxious to do business with a particular customer geographical area might absorb all or part of the actual freight charge in order to get the business. Freight absorption pricing is used for market penetration and also to hold on to increasingly competitive markets.

DISCOUNT PRICING AND DISCOUNT PRICING AND ALLOWANCESALLOWANCES

• CASH DISCOUNTS - a cash discount is a price reduction to buyers who pay their bill promptly

• QUANTITY DISCOUNTS - is a price reduction to buyers who buy large volumes

• FUNCTIONAL DISCOUNTS - are offered by the manufacturer to trade channel members who perform certain functions such as selling, storing, and record keeping.

• ALLOWANCES - are other types of reductions from the list price.

Cash discountsDirect payment mechanisms• Companies may offer a price reduction to

those customers who pay their bills using a direct debit system.

• For example, in the United Kingdom the utility providers offer discounts to customers who opt for direct debit payments.

• This allows the utility company to withdraw a set amount directly from the customer's bank account on a specific day each month or quarter of the year.

• This reduces potential delays for the utility company receiving payment (subject to there being sufficient funds in the customer's bank or credit card account), and provides an incentive to the customer to adopt a direct payment method.

•The principle that manufacturer prices are at their cheapest when large quantities are produced (economies of scale)

•Money is received quickly•Removing chances for the competition (in bulk purchase)

•Adding benefits for the customer

Trade-in allowances• A company may offer a prospective

buyer a price reduction for trading in an old item when a new one is purchased.

• This approach has been used extensively in the car retail business. Car owners trade in their used car for another used car, or a new one. The dealer offers owners a trade-in priсе for their old car, and this is offset against the price of the new purchase.

PROMOTIONAL PRICINGPROMOTIONAL PRICING

• (pricing below the list price and below cost)

• Pricing a few products as loss leaders to attract customers so that they will buy other things at normal markups.

• Special-event pricing in certain seasons to draw in more customers

• Offering cash rebates to consumers who buy the product from dealers within a specified time period.

• Psychological discounting - the seller puts an artificially high price on a product and offers it at substantial savings

Special event pricing• This is a special price set for a product, product

range or service for a limited time frame and event.

• For example, a supplier or retailer might celebrate an anniversary, and advertise special discounts for the anniversary week or month. These could be based upon, for example:

• The length of the anniversary, such as '25 per cent off all products to celebrate our 25 years in business'

• The prices for similar products when the retailer first opened.

•High fixed costs•The relevant application of seasons and

timings•Benefit to both the producer and the

customer

•Geo-demographics•The same products or services being

sold in the same position at different prices geographically

Special event pricing

Special-event pricingDifferential pricing

This is normally a price reduction for buyers who purchase the product or service out of its normal seasonal pattern. Here are a few examples:

• Winter fashions are discounted just prior to the arrival of the spring/summer collections.

• Garden furniture and barbecues may be discounted during the autumn/winter period. Retailers use this type of discounting to move old stock in preparation for the arrival of new lines.

• Holiday companies use differential pricing during peak and off-peak seasons. For example, a vacation in southern Spain will be cheaper in April/May when the weather is milder than in July/August when it is usually hot and dry - ideal for beach and sun lovers. Hotels may charge a premium rate not only during the summer months but also at special times of the year such as Christmas and New Year.

Special-event pricing

Book early discount• Travel companies use this

technique to sell holidays several months beforehand.

• A holiday booked for July but paid for in January may command a significant discount.

Psychological pricing

• It could be argued that all pricing relies on a combination of economics and psychology.

• While pricing may be rooted in economics in terms of supply and demand, it is often from the psychological perspective that we decide to make the purchase.

Psychological pricingPrestige pricing• The word 'prestige' symbolizes reputation, glamour,

respect, power and influence. These are not only 'value-driven' phrases but clearly psychological ones as well. Therefore products or services that exemplify such characteristics need to reflect these in the price. Indeed prestige pricing can often be used to create an 'extreme image' of the product or service, which defines it within its prescribed segment of the marketplace. It also significantly differentiates it from other general market segments.

• Russian caviar. In many countries caviar has a prestige value and so carries an associated high price.

• Luxury sports cars. Whether these are Aston Martins or Ferraris, their prestige value is reflected in their pricing.

• Certain types of drinks. For instance fine cham pagne or Napoleon Cognacs may be priced at €500 or more a bottle.

• A five-star hotel.

Psychological discountingOdd-even pricing• Here the product is priced at an odd number

rather than being rounded up to a whole or even number, for example a CD priced at UK£4.99 rather than UK£5.00.

• While it is obvious it is only one penny cheaper, the perception is that it is cheaper. Consumers may focus more on the '4' or even the '99' rather than rounding up the number.

• This method of psychological pricing may well entice the consumer to buy more products in the price range.

Psychological discounting: Psychological discounting: BUY ONE GET ONE FREEBUY ONE GET ONE FREE

• This is also known as a BOGOF promotion, and is generally used in the retail sector as a means of promoting own-label brands.

• Originally it was limited to two identical items such as two bars of soap.

• Increasingly it has been broadened to include a range of products, but generally they are all own-label brands.

• Companies that use BOGOF promotions tend to set specific time frames, for example, 'for two weeks only'.

• This is a further psychological incentive to prospective buyers.

Buy one get one freeBuy one get one freeThere are several variations on this theme:• Three for the price of two, which as the title

suggests is a greater value incentive to the purchaser. The retailer may use this option as a means of reducing a stock inventory.

• Lower price item reduced: when two items are bought from a particular range the lower-priced item is discounted. The objective here is to create an incentive for the buyer to try another product within the product range.

• Free product with every purchase: this can be used as a co-branding exercise where the company links up with a related product: for example, a toothpaste manufacturer co-brands with one that produces toothbrushes. Although the toothbrush is free it provides the manufacturer with a promotional outlet which may lead to increasing purchases

Bundling or the all-inclusive concept

• Here several products or services are offered as a package at a single price.

• Vacations, computers, restaurant menus and DVD box sets are four common examples of where companies use bundling techniques.

• Generally the all-inclusive concept goes much further and covers practically everything a hotel or resort has to offer, including all drinks, taxes, transfers from and to airport to hotel and sports.

• A result of such a price package, in most cases, is money being eliminated from the holiday experience and the visitor knowing in advance what their holiday is likely to cost, except for personal expenses, such as telephone calls, laundry, car hire, dining off-property and shopping.

DISCRIMINATORY PRICINGDISCRIMINATORY PRICINGModification of the basic price to accommodate differences in customers, products, locations:

Takes place on the:1. Customer basis - different customers pay

different amounts for the same product or service

2. Product-form basis - different versions of the product are priced differently but not proportionately to their respective costs

3. Place basis - different locations are priced differently

4. Time basis - prices are varied seasonally, by the day, and even by the hour

NEW PRODUCT PRICINGNEW PRODUCT PRICINGPRICING AN INNOVATIVE PRODUCT:Market-skimming pricing1. sufficient number of buyers have a high current

demand;2. the unit costs of producing a small volume are not so

much higher that they cancel the advantage of charging what the traffic will bear; the high initial price will not attract more competitors;

3. the high price supports the image of a superior product.Market penetration pricing1. the market is highly price-sensitive, and a low price

stimulates more market growth;2. production and distribution costs fall with accumulated

production experience;3. a low price discourages actual and potential

competition,

Price skimming • The objective here is to charge a higher than

normal price for a specific time frame.• Assuming that the product or service demonstrates

volume sales, the difference between the normal price and the higher price can be 'skimmed off'.

• A company may choose price skimming during the introductory and early growth stages of the product's life cycle.

• This is because the product or service may be price inelastic.

• A company is unlikely to be able to maintain a price skimming strategy for a significant length of time.

• If the product is based on a new technology, once that technology is established and can be imitated there will be new entrants to the market place.

Penetration pricing

• The overall objective of penetration pricing is to find a way of accessing a market by cutting through existing pricing structures or strategies.

• Penetration pricing can be used to achieve the following aims:• Entry into an existing market through the

introduction and maintenance of very low prices set against the average price for that product or service.

• The development of a new low-price segment, often within the existing marketplace.

• The acquisition of increased market share over the medium and longer term.

Pricing an imitative new product

• A company that plans to develop an imitative new product faces a product-positioning problem. It must decide where to position the product on quality and price.

• The table 1 shows nine possible price/quality strategies.

Price/quality High Medium Low

High Premium strategy

Penetration strategy

Superb-value strategy

Medium Overcharging strategy

Average strategy

Good value strategy

Low Rip-off strategy

Borax strategy

Cheap value strategy

Pricing an imitative new product

PRODUCT MIX MARKETINGPRODUCT MIX MARKETING

The logic of setting a price is The logic of setting a price is different in four situations:different in four situations:

• product-line pricing • optional product pricing• captive product pricing • byproduct pricing

Product-line pricing• Companies normally develop product lines rather

than single products. • The relationship between the price of the new product

and other products in the company's product line.• A company that produces and markets several similar

products will need to consider the effect of the new product on existing ranges.

• Pricing the product too low, for example, may cannibalize sales from the company's existing ranges as well as from competitors.

• While this might in the short term be good for the new product, it will have a financial impact on existing trusted brands. In the longer term this could be damaging to the company, especially if the new product begins to lose ground in the marketplace.

Optional product pricing• Many companies offer to sell optional or

accessory products along with their main product.

• The automobile buyer can order electric window controls, defoggers, and light dimmers.

• However, pricing these options is a sticky problem. Automobile companies have to decide which items to build into the price and which ones to offer as options.

• General Motors' normal pricing strategy is to advertise a stripped-down model for $6,000 to pull people into the showrooms and devote most of the showroom space to displaying loaded cars at $8,000 or $9,000.

Captive product pricing• Companies in certain industries produce

products that must be used with the main product.

• Examples of captive products are razor blades and camera: film.

• Manufacturers of the main products (razors and cameras) often price them low and set high markups on the supplies.

• Thus Kodak prices its cameras low because it makes its money on selling film. Those camera makers who do not sell film have to price their cameras higher in order to make the same overall profit.

Byproduct pricing• In producing processed meats, petroleum

products, and other chemicals, there are often byproducts.

• If the byproducts have no value and disposing of them is in fact costly, this will affect the pricing of the main product.

• The manufacturer will seek a market for these byproducts and should accept any price that covers more than the cost of storing and delivering them.

• This will enable the seller to reduce the main product's price to make it more competitive.

INTERNATIONAL PRICINGINTERNATIONAL PRICING

• There are many issues to consider when pricing products and services across international boundaries. As a result companies may adopt a variety of pricing mechanisms for international business.

• It is important to remember that these mechanisms are not set in stone and thus can be changed depending on the circumstances facing the company.

INTERNATIONAL INTERNATIONAL PRICINGPRICING

Standard worldwide pricing• This is a pricing tactic that can be used to

cover all international markets. • It is determined by averaging the unit cost,

made up of fixed, variable and export-related costs (including special packaging, insurance, warehousing and tariff charges - refer to Incoterms and other charges as stated earlier).

• Generally, this has been considered a theoretical model. However, with the development of European Monetary Union, it may be possible for companies operating in this zone to create standard pricing for some products.


Dual pricing mechanism• In dual pricing domestic and international prices

are differentiated. Two approaches or methods can be used to calculate the international price: the cost-plus method and marginal cost method.• Cost-plus: this is a full allocation of both domestic

and international costs, and includes an effective margin. However, there are two key problems with such a method. First, it can make the product too expensive for the intended market. To overcome this obstacle, companies often build in a degree of flexibility. This usually comes in the form of discounts to meet local market conditions. Second, the company can under price the product or service. In addition to the potential loss of revenues, buyers may perceive the product or service as inferior because of its low price.


Dual pricing mechanism • Marginal cost: here the company

considers the direct costs of producing, marketing and selling the product for export. The fixed costs of plant, equipment, research and development, domestic overheads and domestic marketing costs are not included. As a result, the company can lower prices if it believes it needs to be more competitive (purely on price) within the market.

MARKET PRICING• In such cases, companies price their products

and services appropriately for specific individual markets.

• Such price discrimination involves charging a price each market will accept. The determinants are reflected in the company and its products, the market and external factors.

• These factors vary to a greater or lesser extent from one country to another. These dynamics are often reflected in the pricing policies of multinational companies.

ETHICAL AND ILLEGAL PRICING ISSUES

• Pricing tactics are not without the need for serious ethical consideration. Every one of us makes transactions in order to obtain and consume products and services.

• In each and every case we are seeking both perceived and real value for the money exchanged. We want to know that we have paid the right price for the product or service.

• Unfortunately, we are all - individuals and companies alike -susceptible to being cheated by unethical business practices.

ETHICAL AND ILLEGAL PRICING ISSUES: DUMPING

• Companies may decide to 'dump' their products on the market by pricing them below their marginal cost. This implies that the seller is making a loss on each transaction. This tactic has been used to penetrate difficult or highly competitive markets, and thus increase market share.

• Once the company has gained market entry and established a position, it can increase prices and/or introduce newer products into that market.

• While it could be argued that the customer is benefiting in the short term, there are long-term implications.

ETHICAL AND ILLEGAL PRICING ISSUES: DUMPING

• Dumping has been made illegal in many countries, including the European Union, because it is anticompetitive. If a company can gain significant market share by dumping its products, it could reduce the effectiveness of the competitive environment.

• Some rivals might be forced to seek alternative markets or cease operations. In the longer term this is detrimental to customers because the element of choice is either restricted or removed altogether.


Price fixing - cartel operations• A cartel is where groups of competing

companies or countries agree on a set price for a product or service. The world's leading cartel is the Organization of Petroleum Exporting Countries (OPEC).

• Formed in I960, this is a cartel of 13 oil-producing nations which meet regularly to coordinate both the level of production and the price per barrel of crude oil originating from them.

• While it could be argued that the formation of OPEC was a justifiable response to the dominance of Western oil producers, contemporary cartel operations cannot provide that justification.


Bait and switch• According to Hoyer and Maclnnis (1997), this is a

tactic used to draw a customer into a store by advertising a product at a particularly low price (the 'bait').

• Once potential customers are in the store a sales person attempts to persuade them to trade up to a higher-priced product (the 'switch').

• Sales staff uses several techniques to persuade customers to buy the higher-priced product.

• For instance, they might claim the advertised product is out of stock, such was the demand for it. Of course, the product advertised might not have existed in the first place, or there might be no difference in quality between it and the 'trade-up' product. Clearly, the aim is to get the customer to spend more through the use of deceptive tactics. Such actions may well be illegal as well as unethical.

Pricing constraints are factors that limit the latitude of prices a firm may set. Pricing constraints include:

• demand for the product class, product, and brand• newness of the product: stage in the product life

cycle• single product versus a product line• cost of producing and marketing the product• cost of changing prices and time period they apply• competitor prices• type of competitive markets

• pure monopoly• oligopoly• monopolistic competition• monopoly

REACTIONS TO PRICE CHANGES

Any price change can provoke a response from customers, competitors, suppliers, and

even government.

We will look at the response from customers and

competitors

Customers' Reactionsto Price changes

A price cut can be interpreted in different ways:

• The item is about to be replaced by a new item is faulty and is not selling well;

• The firm is in financial trouble; the come down even further; the quality has been reduced.

Customers' Reactionsto Price changes

A price increase, which would normally deter sales, may carry some positive things to customers:

• The item is "hot" and represents an unusually good value.

• Customers are most price sensitive to products that cost a lot or are bought infrequently. They hardly notice higher prices on low-cost items that they buy infrequent.

Competitors' Reactions to Price changes

•Competitors are most likely to react where the number of firms are few, the product is homogeneous, and buyers are highly informed.

Anticipating competitors’ reactions

• One way is to assume that the competitor reacts in a set way to price changes.

• The other is to assume that the competitor treats each price change as a fresh challenge and reacts according to self-interest at the time. • In this case, the company will have to figure out

what lies in the competitor's self-interest. • It will need to research the competitor's current

financial situation, recent sales, customer loyalty, and corporate objectives.

• If the competitor has a market-share objective, it is likely to match the price change.

• If it has a profit-maximization objective, it may react by increasing the advertising budget or improving product quality.

RESPONDING TO COMPETITORS' PRICE CHANGES

• If the competitor raises its price in a homogeneous product market, the other firms might not match it, unless the price increase will benefit the industry as a whole.

• By not matching it, the leader will have to rescind the increase.


• In nonhomogeneous product markets, a firm has more latitude. The firm needs to consider the following issues:

• (1) Why did the competitor change the price? Is it to steal the market, to utilize excess capacity, to meet changing cost conditions, or to lead an industrywide price change?

• (2) Does the competitor plan to make the price change temporary or permanent?

• (3) What will happen to the company's market share and profits if it does not respond? Are other companies going to respond?

• (4) What are the competitor's and other firms' responses likely to be to each possible reaction?

Market leader responding strategies

• Market leaders frequently face aggressive price cutting by smaller firms trying to build market share.

• Using price, Fuji attacks Kodak, Bic attacks Gillette, and Compaq Hacks IBM.

• Brand leaders also face lower-priced private store brands. The brand leader can respond in several ways:

The leader might maintain its price and profit margin, believing that:

• (1) it would lose too much profit if it reduced its price,

• (2) it would not lose much market share, and • (3) it could regain market share when necessary. • The leader believes that it can hold on to good

customers and give up the poorer ones. • However, the argument against price maintenance

is that the attacker gets more confident, the leader's sales force gets demoralized, and the leader loses more share than expected.

• The leader panics, lowers price to regain share, and finds that regaining its market position is more difficult and costly than expected.

Maintain priceMaintain price

Maintain price and add value

• The leader could improve its product, services, and communications. The firm may find it cheaper to maintain price and spend money to improve perceived quality than to cut price and operate at a lower margin.

Seduce price• The leader might drop its price to

match the competitor's price. It might do so because

• (1) its costs fall with volume,• (2) it would lose market share

because the market is price sensitive, and

• (3) it would be hard to rebuild market share once it is lost. This action will cut profits in the short run.

Increase price and improve quality

• The leader might raise its price and introduce new brands to bracket the attacking brand.

Launch a low-price fighter line

• Add lower-price items to the line or create a pirate lower-price brand.

• Miller Beer launched a lower-priced beer brand called Red Dog.


• The best response varies with situation. The company has to consider the product’s stage in the life cycle, its importance in the company's portfolio, the competitor's intentions and resources, the market's price and quality sensitivity, the behaviour of costs with volume, and the company's alternative opportunities.

Thank you for Thank you for attention!attention!

pricing strategies

Education