pricing strategies of products

Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved.

Alternative

Pricing Strategies

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MUKESH ROR

Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 19-2

Flow of presentation Flow of presentation

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.


Pricing StrategiesPricing Strategies

Skimming pricing strategySkimming pricing 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


Price Reductions to Increase Market Share


Penetration pricing strategyPenetration pricing strategy: 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 acceptance

Everyday low pricingEveryday low 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 sales


Competitive Pricing StrategyCompetitive Pricing Strategy: 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


Price QuotationsPrice Quotations

List pricesList prices: Established prices normally quoted to potential buyers

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


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


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


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


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


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


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.


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


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

Unit pricingUnit pricing: pricing policy in which prices are stated in terms of a recognized unit of measurement or a standard numerical count

Price FlexibilityPrice Flexibility: pricing policy that permits variable prices for goods and services

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


Promotional pricingPromotional pricing: pricing policy in which a lower than normal price is used as a temporary ingredient in the marketing strategyLoss 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 pricesLeader pricingLeader pricing


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


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


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


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.


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


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

Copyright © 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved.

conclusionconclusion

One of the four major elements of the marketing mix is price. Pricing is an important strategic issue because it is related to product positioning. Furthermore, pricing affects other marketing mix elements such as product features, channel decisions, and promotion.

While there is no single recipe to determine pricing, the following is a general sequence of steps that might be followed for developing the pricing of a new product

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pricing strategies of products

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