Ch. 15

Deceptive Reference Prices

- If the reference price is bona fide, the advertisement is informative. If the reference price has been inflated or is just plain fictitious, however, the advertisement is deceptive and may cause harm to consumers (in general, if a seller is going to label a price as a "regular price", the Better Business Bureau suggests that at least 50 percent of the sales have occurred at that price)

Consumer's Use of Reference Prices

- internal reference price: you know in your gut what something should cost (textbook average is $200) - external reference price

Reference Price

- the price against which buyers compare the actual selling price of the product and that facilitates their evaluation process - the seller labels the reference price as the "regular price" or an "original price." When consumers view the "sale price" and compare it with the provided reference price, their perceptions of the value of the deal will likely increase.

These pricing tactics are specific to shipping, which represents a major cost for many manufacturers

-Zone pricing - Uniform delivered pricing

Two distinct new product pricing strategies are:

1. market penetration pricing and 2. price skimming

Drawbacks of penetration strategy:

1. the firm must have the capacity to satisfy a rapid rise in demand—or at least be able to add that capacity quickly 2. low price does not signal high quality 3. firms should avoid a penetration pricing strategy if some segments of the market are willing to pay more for the product

What are the 3 methods that firms use to set their prices?

Cost Based Competition Based Value Based

New Product Pricing Strategies

Developing pricing strategies for new products is one of the most challenging tasks a manager can undertake; somewhat easier if the product is similar to whats already out on the market

Price bundling

Firms bundle products or services together to encourage customers to stock up so they won't purchase competing brands, to encourage trial of a new product, or to provide an incentive to purchase a less desirable product or service to obtain a more desirable one in the same bundle.

But again, predation is difficult to prove:

First, one must demonstrate intent, that is, that the firm intended to drive out its competition or prevent competitors from entering the market. Second, the complainant must prove that the firm charged prices lower than its average cost, an equally difficult task.

Quantity Discounts

The larger the quantity, the less the cost per ounce, which means the manufacturer is providing a quantity discount.

But, different consumers perceive value differently. So how does a manager use value-based pricing methods?

We consider two key approaches here: 1. the improvement value and 2. the cost of ownership methods

Predatory Pricing

When a firm sets a very low price for one or more of its products with the intent to drive its competition out of business

Price discrimination

When firms sell the same product to different resellers (wholesalers, distributors, or retailers) at different prices

Price Lining

When marketers establish a price floor and a price ceiling for an entire line of similar products and then set a few other price points in between to represent distinct differences in quality

Rebates

a consumer discount in which a portion of the purchase price is returned to the buyer in cash by the manufacturer

Bait and Switch

a deceptive practice because the store lures customers in with a very low price on an item (the bait), only to aggressively pressure these customers into purchasing a higher-priced model (the switch) by disparaging the low-priced item, comparing it unfavorably with the higher-priced model, or professing an inadequate supply of the lower-priced item

Pricing Strategy (long term)

a long-term approach to setting prices broadly in an integrative effort (across all the firm's products) based on the five Cs (company objectives, costs, customers, competition, and channel members) of pricing

Leader Pricing

a tactic that attempts to build store traffic by aggressively pricing and advertising a regularly purchased item, often priced at or just above the store's cost

Lease

a written agreement- consumers pay a fee to purchase the right to use a product for a specific amount of time, but they never own the product

What are commonly used price strategies:

a. everyday low pricing, b. high/low pricing, and c.new product strategies (a. and b. most common)

Seasonal Discount

an additional reduction offered as an incentive to retailers to order merchandise in advance of the normal buying season.

Cash Discount

an additional reduction that reduces the invoice cost if the buyer pays the invoice prior to the end of the discount period

Coupons also may _________,_________, and _________ consumers and therefore do little to increase store loyalty.

annoy, alienate, and confuse

Price Skimming

appeals to these segments of consumers who are willing to pay the premium price to have the innovation first (particularly common in technology markets)

For price skimming to work though, the product or service must be perceived as ........

breaking new ground in some way, offering consumers new benefits currently unavailable in alternative products

Consumers evaluate how much better (or worse) the new cell phone is than an existing product on five dimensions:

clarity, range, security, battery life, and ease of use

a. Everyday Low Pricing Strategy

companies stress the continuity of their retail prices at a level somewhere between the regular, nonsale price and the deep-discount sale prices their competitors may offer

- ______ perceptions

consumer

They also must account for changes in _________, because the way customers perceive value today may not be the way they perceive it tomorrow.

consumer attitudes

Although value-based pricing methods can be quite effective, they also necessitate a great deal of ______ to be implemented successfully.

consumer research

Sometimes, firms employ skimming strategies to test _______

consumer's price sensitivity

Cost base pricing methods start with

cost

Firms using a skimming strategy for new products must face the consequences of ultimately having to lower the price as _______; Margins suffer, and customers who purchased the product or service at ______ may become irritated when the price falls

demand wanes; the higher initial price

1. Cost Based Pricing Method

determines the final price to charge by starting with the cost

Cost of Ownership Method

determines the total cost of owning the product over its useful life; consumers may be willing to pay more for a particular product because, over its entire lifetime, it will eventually cost less to own than a cheaper alternative

Assumes costs dont vary for

different levels of production

Uniform Delivered Pricing

e shipper charges one rate, no matter where the buyer is located, which makes things very simple for both the seller and the buyer.

For a skimming pricing strategy to be successful, competitors cannot be able to

enter the market easily; otherwise, price competition will likely force lower prices and undermine the whole strategy

With cost-based pricing, prices are usually set on the basis of

estimates of average costs

High/low sellers can also create ______ and attract customers through the "get them while they last" atmosphere that occurs during a sale.

excitement

Firms using a market penetration strategy expect the unit cost to drop significantly as the accumulated volume sold increases, an effect known as the

experience curve effect: as sales continue to grow, the costs continue to drop

Slotting allowances

fees paid to retailers simply to get new products into stores or to gain more or better shelf space for their products. Some argue that slotting allowances are unethical because they put small manufacturers that cannot readily afford allowances at a competitive disadvantage. Demanding large slotting allowances could be considered a form of bribery—"paying off" the retailer to get preferential treatment.

2. Competition Based Pricing Method

firms may set their prices to reflect the way they want consumers to interpret their own prices, relative to competitors' offerings. (ex: setting a price very close to a competitor's price signals to consumers that the product is similar, whereas setting the price much higher signals greater features, better quality, or some other valued benefit)

Rebates can be even more _____ than coupons for consumers; a coupon provides instant savings when presented, a rebate promises savings, usually mailed to the consumer at some later date, only if the consumer carefully follows the rules.

frustrating

Enables retailer to

get rid of slow moving or obselete merchandise; used to generate store traffic

- how do marketers justify the high cost of solar energy panels to homeowners?

high price to obtain initially, but cost less to maintenance

Some may start by pricing relatively high to signal _______ to the market. Others may decide to price high at first to _______, which gives them time to build their production capacities.

high quality; limit demand

An integral component of the ______ strategy we described previously, markdowns enable retailers to get rid of slow-moving or obsolete merchandise, sell seasonal items after the appropriate season, and match competitors' prices on specific merchandise

high/low pricing strategy

When pricing a new product, you price it at a ______ level

higher; taking the best customers who have the money and overtime you can reduce the price

- Set prices to signal information of..

how product compares with competitors

Predatory pricing is ______ under both the Sherman Antitrust Act and the Federal Trade Commission Act because it constrains free trade and represents a form of unfair competition. It also tends to promote a _______ market with a few dominant firms (an oligopoly).

illegal; concentrated

Pricing tactics (short term)

in contrast to pricing strategies, offer short-term methods to focus on select components of the five Cs. Generally, a pricing tactic represents either a short-term response to a competitive threat (e.g., lowering price temporarily to meet a competitor's price reduction) or a broadly accepted method of calculating a final price for the customer that is short term in nature

Particularly when used in conjunction with promotions, markdowns can_______ into the store or onto their websites, which many retailers view as half the battle

increase traffic

Retailers use coupons because they can:

induce customers to try products for the first time, convert those first-time users to regular users, encourage large purchases, increase usage, and protect market share against competition

Loss Leader Pricing

leader pricing is a legitimate attempt to build store traffic by pricing a regularly purchased item aggressively but still above the store's cost. "Loss leader pricing" takes this tactic one step further by lowering the price below the store's cost

The goal of this tactic is to encourage consumers to purchase larger quantities each time they buy. In turn, these consumers are ______ and often tend to consume more of the product, depending on the product usage characteristics

less likely to switch brands

After this high-price market segment becomes saturated and sales begin to slow down, companies generally ___________to capture (or skim) the next most price sensitive market segment, which is willing to pay a somewhat lower price

lower the price

Allowances

lowers the final cost to channel members is allowances, such as a. advertising or b.slotting allowances, offered in return for specific behaviors

Manufacturers often encourage retailers to sell their merchandise at a specific price, known as the _______

manufacturer's suggested retail price (MSRP)

What are the pricing strategies aimed at consumers?

markdowns, quantity discounts, seasonal discounts, coupons, rebates, leasing, price bundling, leader pricing, and price lining

You are trying to get _____

market share by offering your product at a low price and over time, you slowly raise the prices after a bunch of people have bought your product

Although firms tend to rely on similar strategies when they can, each product or service requires its own specific strategy, because no two are ever exactly the same in terms of the ______

marketing mix

Horizontal price fixing

occurs when competitors that produce and sell competing products or services collude, or work together, to control prices, effectively taking price out of the decision process for consumers. This practice clearly reduces competition and is illegal

Vertical price fixing

occurs when parties at different levels of the same marketing channel (e.g., manufacturers and retailers) agree to control the prices passed on to consumers.

Coupons

offer a discount on the price of specific items when they're purchased.

Advertising allowances

offers a price reduction to channel members if they agree to feature the manufacturer's product in their advertising and promotional efforts. Advertising allowances are legal as long they are available to all customers and not structured in such a way that they consistently and obviously favor one or a few buyers over others.

In many markets, and particularly for new and innovative products or services, innovators and early adopters are willing to_____ to obtain the new product or service.

pay a higher price

All costs calculated on a

per unit basis

_______ pricing

premium

Seasonal Discounts

price reductions offered on products and services to stimulate demand during off-peak seasons.

When firms sell their products and services directly to consumers, rather than to other businesses, the _______ they use naturally differ.

pricing tactics

The choice of a pricing strategy thus is specific to the _______ and _________

product/service and target market

Market penetration pricing discourages competitors from entering the market because the ________; if the costs to produce the product drop because of the accumulated volume, competitors that enter the market later will face higher unit costs, at least until their volume catches up with the early entrant

profit margin is relatively low

The impact of coupons on ______ is questionable.

profitability

Retailers also use markdowns to _____ merchandise and increase _____

promote;sales

Quantity Discount

provides a reduced price according to the amount purchased. The more the buyer purchases, the higher the discount and, of course, the greater the value.

Although it is always illegal and unethical to lie in advertising, a certain amount of _____is typically allowed, but price advertisements should never deceive consumers to the point of causing ______

puffery; harm

Some firms employ a skimming strategy to try to ____________ they made for the new product.

quickly earn back some of the high research and development investments

Manufacturers set MSRP prices to _______ among retailers, stimulate retailers to provide complementary services, and support the manufacturer's merchandise

reduce retail price competition

By __________, EDLP adds value

reducing consumers' search costs; consumers can spend less of their valuable time comparing prices, including sale prices, at different stores.

Sellers using a high/low pricing strategy often communicate their strategy through the creative use of a ____

reference price

Skimming strategies also face a significant potential drawback of _______________;Therefore, firms must consider the trade-off between _____________ and ____________

relatively high unit costs associated with producing small volumes of products; earning a higher price and suffering higher production costs.

b. High/Low Pricing Strategy

relies on the promotion of sales, during which prices are temporarily reduced to encourage purchases.

Improvement Value Method

represents an estimate of how much more (or less) consumers are willing to pay for a product relative to other comparable products.

Creates value by: EDLP saves _____

search costs of finding the lowest overall prices

What are the pricing tactics employed in B2B settings

seasonal and cash discounts, allowances, quantity discounts, and uniform delivered versus zone pricing

Market Penetration Strategy

set the initial price low for the introduction of the new product or service. Their objective is to build sales, market share, and profits quickly. The low market penetration price is an incentive to purchase the product immediately

Zone pricing

sets different prices depending on a geographical division of the delivery areas.

3. Value Based Pricing Method

setting prices that focus on the overall value of the product offering as perceived by the consumer - Consumers determine value by comparing the benefits they expect the product to deliver with the sacrifice they will need to make to acquire the product

The most common implementation of a quantity discount at the consumer level is _____

size discount

- consumers may be willing to ______ initially if, over the lifetime, the product will eventually _______

spend more; cost less to own

- setting prices that focus on

the overall value of the product

Price fixing

the practice of colluding with other firms to control prices. Price fixing might be either horizontal or vertical. Whereas horizontal price fixing is clearly illegal under the Sherman Antitrust Act, vertical price fixing falls into a gray area

Markdowns

the reductions retailers take on the initial selling price of the product or service

Cost-based methods do not recognize __________ or ____________ play in the marketplace, though

the role that consumers or competitors' prices

A high/low strategy is appealing because it attracts two distinct market segments:

those who are not price sensitive and are willing to pay the "high" price and more price sensitive customers who wait for the "low" sale price.

Non-cumulative quantity discount

though still a quantity discount, is based only on the amount purchased in a single order. It therefore provides the buyer with an incentive to purchase more merchandise immediately. Such larger, less frequent orders can save manufacturers order processing, sales, and transportation expenses

creates value by: High/low provides the ____ for the lowest price

thrill of the chase

Cumulative quantity discount

uses the amount purchased over a specified time period and usually involves several transactions. This type of discount particularly encourages resellers to maintain their current supplier because the cost to switch must include the loss of the discount

The rationale behind this tactic argues:

while in the store to get the great deal on, say, milk, the consumer will also probably pick up other items, which sell at a higher margin. The higher margins and profits on these other items then will more than cover the lower markup on the milk