Pricing Products: Pricing Strategies

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• Chapter 11
• Pricing Products Pricing Strategies

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Case StudyKmart

• Once the top discount retailer in the U.S.
• Wal-Mart positioned on price and Target as
  upscale discount
• Kmart tried a value repositioning approach which
  turned to a price war with Wal-Mart

• Kmart failed to deliver on its value proposition
• Forced into bankruptcy and closing of nearly 1/3
  of stores
• Kmart emerged from bankruptcy in May 2003
• How are they positioned now?

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Learning Goals

• Describe the major strategies for pricing
  imitative and new products
• Explain how companies find a set of prices that
  maximize the profits from the total product mix
• Discuss how companies adjust their prices to take
  into account different types of customers and
  situations
• Discuss the key issues related to imitating and
  responding to price changes

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Definitions

• Market-Skimming Pricing
• Setting a high price for a new product to skim
  maximum revenues layer by layer from segments
  willing to pay the high price.
• Market-Penetration Pricing
• Setting a low price for a new product in order to
  attract a large number of buyers and a large
  market share.

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Skimming Pricing Example

• Most consumer electronic products enter at a high
  price with skimming.
• For example, the iPod entered around 259 in
  2004. Check the current price at amazon.com

Click on iPod for website
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Marketing in Action
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Learning Goals

• Describe the major strategies for pricing
  imitative and new products
• Explain how companies find a set of prices that
  maximize the profits from the total product mix
• Discuss how companies adjust their prices to take
  into account different types of customers and
  situations
• Discuss the key issues related to imitating and
  responding to price changes

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Product Mix Pricing Strategies

• Product Line Pricing
• Setting price steps between product line items.
• Price points
• Optional-Product Pricing
• Pricing optional or accessory products sold with
  the main product

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Product Line Pricing

• Oral B has a full line of electric toothbrushes.
  Visit the site to see the products and examine
  attributes which justify price differences

Click on screenshot for website
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Marketing in Action
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Product Mix Pricing Strategies

• Captive-Product Pricing
• Pricing products that must be used with the main
  product
• High margins are often set for supplies
• Services two-part pricing strategy
• Fixed fee plus a variable usage rate

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Captive Product Pricing

• Companies like Gillette will often price the
  razor at or below cost and make the profit on the
  blades

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Marketing in Action
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Product Mix Pricing Strategies

• By-Product Pricing
• Pricing low-value by-products to get rid of them
• Product Bundle Pricing
• Pricing bundles of products sold together

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How does AOL bundle?
Click on screenshot for website
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Marketing in Action
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Learning Goals

• Describe the major strategies for pricing
  imitative and new products
• Explain how companies find a set of prices that
  maximize the profits from the total product mix
• Discuss how companies adjust their prices to take
  into account different types of customers and
  situations
• Discuss the key issues related to imitating and
  responding to price changes

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Price Adjustment Strategies
Strategies

• Types of discounts
• Cash discount
• Quantity discount
• Functional (trade) discount
• Seasonal discount
• Allowances
• Trade-in allowances
• Promotional allowances

• Discount / allowance
• Segmented
• Psychological
• Promotional
• Geographical
• International

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This small inn located in a summer resort uses
seasonal discounts
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Marketing in Action
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Price Adjustment Strategies
Strategies

• Types of segmented pricing strategies
• Customer-segment
• Product-form pricing
• Location pricing
• Time pricing
• Also called revenue or yield management
• Certain conditions must exist for segmented
  pricing to be effective

• Discount / allowance
• Segmented
• Psychological
• Promotional
• Geographical
• International

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Movie theatres, resorts and hotels often use
segmented pricing for children
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Marketing in Action
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Price Adjustment Strategies

• Conditions Necessary for Segmented Pricing
  Effectiveness
• Market must be segmentable
• Segments must show different demand
• Pricing must be legal
• Costs of segmentation cannot exceed revenues
  earned
• Segmented pricing must reflect real differences
  in customers perceived value

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Price Adjustment Strategies
Strategies

• The price is used to say something about the
  product.
• Price-quality relationship
• Reference prices
• Differences as small as five cents can be
  important
• Numeric digits may have symbolic and visual
  qualities that psychologically influence the
  buyer

• Discount / allowance
• Segmented
• Psychological
• Promotional
• Geographical
• International

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Psychological Pricing

• This ad for a luxury priced car attempts to show
  that Mercedes owners form important relationships
  with their cars

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Marketing in Action
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Price Adjustment Strategies
Strategies

• Temporarily pricing products below the list price
  or even below cost
• Loss leaders
• Special-event pricing
• Cash rebates
• Low-interest financing, longer warranties, free
  maintenance
• Promotional pricing can have adverse effects

• Discount / allowance
• Segmented
• Psychological
• Promotional
• Geographical
• International

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Promotional Pricing

• Cell phone marketers will take a loss on the
  phone to use as a promotional discount

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Marketing in Action
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Price Adjustment Strategies

• Promotional Pricing Problems
• Easily copied by competitors
• Creates deal-prone consumers
• May erode brands value
• Not a legitimate substitute for effective
  strategic planning
• Frequent use leads to industry price wars which
  benefit few firms

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Price Adjustment Strategies
Strategies

• Types of geographic pricing strategies
• FOB-origin pricing
• Uniform-delivered pricing
• Zone pricing
• Basing-point pricing
• Freight-absorption pricing

• Discount / allowance
• Segmented
• Psychological
• Promotional
• Geographical
• International

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Price Adjustment Strategies
Strategies

• Prices charged in a specific country depend on
  many factors
• Economic conditions
• Competitive situation
• Laws / regulations
• Distribution system
• Consumer perceptions
• Corporate marketing objectives
• Cost considerations

• Discount / allowance
• Segmented
• Psychological
• Promotional
• Geographical
• International

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Learning Goals

• Describe the major strategies for pricing
  imitative and new products
• Explain how companies find a set of prices that
  maximize the profits from the total product mix
• Discuss how companies adjust their prices to take
  into account different types of customers and
  situations
• Discuss the key issues related to imitating and
  responding to price changes

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Price Changes

• Initiate price cuts when a firm
• Has excess capacity
• Faces falling market share due to price
  competition
• Desires to be a market share leader

• Initiate price increases when a firm
• can increase profit
• faces cost inflation
• faces greater demand than can be supplied

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Price Changes

• Alternatives to Increasing Price
• Explore more cost effective production or
  distribution
• Reduce product size
• Remove features
• Unbundle the product

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Price Changes

• Buyer reactions to price changes must be
  considered.
• Competitors are more likely to react to price
  changes under certain conditions.
• Number of firms is small
• Product is uniform
• Buyers are well informed

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Responding to CompetitorsPrice Changes

• Responding to competitors price changes
• Evaluate the competitors reason for the price
  change
• Evaluate marketplace response to the price change
• Considers own products strategy

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Responding to CompetitorsPrice ChangesFigure
11.1
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Kelloggs Responds to Price Cuts

• In 1995, a government study called Consumers in
  a Box called for lowering of cereal prices.
• Cereal prices had increased faster than most
  other food products.

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Marketing in Action
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Kelloggs Responds to Price Cuts

• In 1996, Kraft announced 20 across the board
  price cut.
• Kelloggs followed with 19 cut.
• Kelloggs also introduced lower price bagged
  cereal.

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Marketing in Action
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Public Policy and Pricing

• Pricing within Channel Levels
• Price-fixing
• Competitors cannot work with each other to set
  prices
• Predatory 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.

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Public Policy and Pricing

• Pricing across Channel Levels
• Price discrimination
• Retail price maintenance
• Deceptive pricing
• Bogus reference / comparison pricing
• Scanner fraud
• Price confusion

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Learning Goals

• Describe the major strategies for pricing
  imitative and new products
• Explain how companies find a set of prices that
  maximize the profits from the total product mix
• Discuss how companies adjust their prices to take
  into account different types of customers and
  situations
• Discuss the key issues related to imitating and
  responding to price changes