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Chapter 19. Pricing Strategies. Chapter Objectives. Compare the alternative pricing strategies and explain when each strategy is most appropriate. Describe how prices are quoted . Identify the various pricing policy decisions that marketers must make.

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Chapter 19

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chapter 19

Chapter 19

Pricing Strategies

chapter objectives
Chapter Objectives
  • Compare the alternative pricing strategies and explain when each strategy is most appropriate.
  • Describe how prices are quoted.
  • Identify the various pricing policy decisions that marketers must make.
  • Relate price to consumer perceptions of quality.
  • Contrast competitive bidding and negotiated prices.
  • Explain the importance of transfer pricing.
  • Compare the three alternative global pricing strategies.
  • Relate the concepts of cannibalization, bundlepricing, and bots to online pricing strategies.
pricing strategies
Pricing Strategies
  • Skimming pricing strategy [Gouge pricing strategy]: involves the use of a high price relative to competitive offerings
    • Often used by marketers of high-end products
    • Also by firms introducing a distinctive good with little or no competition
    • Allows firms to control demand during the introductory stages of a products life cycle
    • Can be used as a tool for segmenting a product’s market on a price basis
Figure 19.1
    • Distinctive Flat-Screen TVs Marketed with a Skimming Pricing Strategy
    • Distinctive Grills Marketed through a Skimming Pricing Strategy
Lincoln Navigator
    • Maintaining a High Price in Periods of High Demand
Figure 19.3

Price Reductions to Increase Market Share

Penetration 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
    • Designed to generate many trial purchases
Figure 19.4
    • Credit-Card Offers: Penetration Pricing
Everyday 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
    • Wal-Mart
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
Competitive Pricing Strategy: reduces emphasis on price as a competitive variable by pricing goods at the general level of competitors
    • Firms focus their own marketing efforts on the product, distribution and promotion elements of the marketing mix
Figure 19.6
    • American Airlines: Reducing the Emphasis on Price Competition
price quotations
Price Quotations
  • List prices: Established prices normally quoted to potential buyers
    • Gasoline Prices: Where the Money Goes
Market price: Price that an intermediary or final consumer pays for a product after subtracting any discounts, rebates, or allowances from the list price
    • Kraft offering a rebate promotion
Reductions from List Price
    • Cash 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 Discounts: payment to a channel member or buyer for performing marketing functions; also known as a functional discount
Quantity discount: price reduction granted for a large-volume purchase
    • Justified 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
    • Trade-in: credit allowance given for a used item when a new item is purchased
    • Promotional allowance: advertising or promotional funds provided by a manufacturer to other channel members in an attempt to integrate the promotional strategy within the channel
  • Rebates: refund for a portion of the purchase price, usually granted by the product’s manufacturer
Figure 19.9
    • Rebates for Computer-Related Goods
Geographic Considerations
    • FOB (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 absorption: system for handling transportation costs under which the buyer may deduct shipping expenses from the costs of goods
Uniform-delivered price: system for handling transportation costs under which all buyers are quoted with the same price, including transportation expenses
  • Zone 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 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 policies
Pricing Policies
  • Pricing policy: general guidelines based on pricing objectives and intended for use in specific pricing decisions
  • Psychological 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 pricing: pricing policy based on the belief that a price ending with and odd number just below a round number is more appealing
    • John Deere at $1,999 instead of $2000
Unit pricing: pricing policy in which prices are stated in terms of a recognized unit of measurement or a standard numerical count
    • For example, a gallon of milk, or one dozen eggs
Price Flexibility: pricing policy that permits variable prices for goods and services
    • Car dealerships traditionally employ a flexible pricing strategy
Figure 19.10
    • Fractional Ownership of a Personal Jet: Example of Variable Pricing
Product-line pricing: practice of marketing different lines of merchandise at a limited number of prices
    • Hallmark has different prices for its card lines
Promotional 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
Loss 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?
Price-Quality Relationships
    • Without 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
Figure 19.11
    • Rolex Cellini Cellissima Watch: Example of the Price-Quality Relationship
competitive bidding and negotiated prices
Competitive 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 Online
    • Buyers and sellers can communicate and negotiate prices online
the transfer price dilemma
The Transfer Price Dilemma
  • Transfer price: cost assessed when a product is moved from one profit center to another
  • Profit center: any part of an organization to which revenue and controllable costs can be assigned
global considerations and online pricing
Global 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 Strategies
    • Standard 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 Pricing
    • Cannibalization: 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
Figure 19.14
    • Cable TV Companies and Bundle Pricing