pricing strategies and tactics

8/3/2019 Pricing Strategies and Tactics

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PricingPricing Strategies and TacticsStrategies and Tactics

Prof. Rushen Chahal


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Pricing StrategyPricing Strategy

y how does a company decide what price tocharge for its products and services?

y what is the price anyway? doesnt price vary

across situations and over time?y some firms have to decide what to charge

different customers and in different situations

y they must decide whether discounts are to be

offered, to whom, when, and for what reason

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Price vs. NonpricePrice vs. Nonprice

CompetitionCompetition

y In price competition,price competition, a seller regularly offersproducts priced as low as possible andaccompanied by a minimum of services.

y

In nonprice competitionnonprice competition, a seller has stable pricesand stresses other aspects of marketing.

y With value pricingvalue pricing, firms strive for more benefitsat lower costs to consumer.

y

With relationship pricing,relationship pricing, customers haveincentives to be loyal-- get price incentive if youdo more business with one firm.

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Nonprice CompetitionNonprice Competition

y some firms feel price is the main competitive

tool, that customers always want low prices

y other firms are looking for ways to add value,

thereby being able to avoid low pricesy sometimes prices have to be changed in

response to competitive actions

y many firms would prefer to engage in nonpricenonprice

competitioncompetition by building brand equity and

relationships with customers

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Relationship PricingRelationship Pricing

y Uses price as a method to build long-term relationships with the bestcustomers

y Focuses on giving better deals to bettercustomers

y Goal is to price relative to the value of

the customer to the firm, while buildingloyalty and stimulating repeat buying

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The Price DeterminationThe Price Determination

ProcessProcessy In pricing, an organization first must decide on its

pricing goal.

y The next step is to set the base price for a product.

y

The final step involves designing pricing strategies thatare compatible with the rest of the marketing mix.

y 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?

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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. nonpricecompetition

Skimming vs.

penetration

Discounts and allowances

Freight paymentsOne price vs.

flexible price

Psychological pricing

Leader pricingEveryday low vs.

high-low pricing

Resale price

maintenance

The Process: An Illustration


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Market EntryMarket Entry

Pricing StrategiesPricing Strategiesyy MarketMarket--Skimming PricingSkimming 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

yy MarketMarket--Penetration PricingPenetration Pricing: Setting a low initial pricefor a new product.

Works if large market, elastic demand

Economies of scale are possible

Fierce competition

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Discounts and AllowancesDiscounts and Allowances

yy Quantity discount:Quantity discount: The more you buy, thecheaper it becomes-- cumulative and non-cumulative.

yy

Trade discountsTrade discounts:: Reductions from list forfunctions performed-- storage, promotion.

yy Cash discountCash discount:: A deduction granted tobuyers for paying their bills within a

specified period of time, (after firstdeducting trade and quantity discounts fromthe base price)

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3/10, NET 303/10, NET 30

1/7, NET 301/7, NET 30

Percentage to be

deducted if bill ispaid within specified

time

Percentage to be

deducted if bill ispaid 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 in

which bill must be

paid to receive cash

discount

Number of days from

date of invoice after

which bill is overdue

Number of days from

date of invoice after

which bill is overdue

Calculating a Cash Discount


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Other Discounts and AllowancesOther Discounts and Allowances

ySeasonal Discounts

yForward DatingyPromotional Allowances

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The Competition ActThe Competition Act

yy Predatory pricing:Predatory pricing: Selling at unreasonablylow prices to lessen competition.

yy Price discrimination: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 thearticles are similar.

y

Granting promotional allowances must be doneon a proportionate basis to all customers.

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Geographic PricingGeographic Pricing

StrategiesStrategies

yy F.O.B. PointF.O.B. Point--ofof--Production pricing:Production pricing: Price quotedat factory-- buyer pays transportation.

yy Uniform delivered pricing:Uniform delivered pricing: Same delivered price

quoted to all; works if transportation costssmall.

yy ZoneZone--delivered pricing:delivered pricing: Set same price withinseveral zones, e.g. Maritimes, Quebec.

y

FreightFreight--absorption pricing:absorption pricing: Seller absorbstransport cost to penetrate market.

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Special Pricing StrategiesSpecial Pricing Strategies

y firms may adopt a oneone--price strategyprice strategy or charge

different prices to different customers

yy flexible pricing strategies:flexible pricing strategies: shoppers may pay

different prices if they buy the same quantity

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Psychology of PricingPsychology of Pricing

y the psychologypsychology of pricing suggests that price will

convey a message about the product or service

being sold

leader pricing bait pricing

prestige pricing

yy price liningprice lining involves setting prices at a small

number of fixed levels within a retail storeyy odd pricingodd pricing is often used to suggest a bargain,

while even pricing is used more in prestige,

fashion stores14 -15


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Questionable Pricing PracticesQuestionable Pricing Practices

yy resale price maintenanceresale price maintenance involves a supplierrequiring that intermediaries sell a product ata certain price: illegal in Canada, firms areallowed to specify a suggested retail price

y some firms reduce prices, possibly even belowcost, to attract customers; this form of lossloss--leaderleader pricing is not illegal unless it persistsfor a long time with the goal of eliminatingcompetition (predatory pricing)

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In EDLP pricingEDLP pricing, a retailer charges aconstant, low price with no temporary

discounts. For example: Wal-Mart, PriceClub, and Saturn.

In highhigh--low pricinglow pricing, a retailer charges higher

prices but then runs frequent promotions inwhich prices are temporarily lowered.

Everyday Low Price (EDLP)vs. High/Low Pricing

pricing strategies and tactics

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