Marketing Chapter 14: Strategic Pricing Methods

Premium pricing

Deliberately setting a price above the competitors' prices to catch consumers who always shop for the best and consumers with inelastic demand

Internal reference price

Price information stored in memory, the last price paid or what the consumer expects to pay for a good

Inelastic market

Price insensitive

The Role of Price in the Marketing Mix

Price is usually tanked as one of the most important factors in purchase decisions and is the only marketing mix element that generates revenue

Cost-based method

-start with cost -all costs calculated on a per unit basis -add a percentage amount to unit cost to derive the price -don't take consumers or competitors into account -assumes costs don't vary for different levels of production

Reference price

Price against which buyers compare the actual selling price of the product

Markdowns (price reductions)

Reductions of the initial selling price An integral component of high/low price strategy Enable retailers to get rid of slow moving or obsolete merchandise Used to generate store traffic

Psychological Factors Affecting Value-Based Pricing Strategies

Reference pricing, Everyday low pricing, Odd prices, Price-quality relationship

High/low pricing

Relies on sales promotions and temporarily reduces prices to encourage purchases Provides the thrill of the chase for the lowest prices

Coupons

Retailer handles, prompt consumers to try a product, reward loyal customers, or encourage repurchase

External reference price

Seller provides a higher price to compare the selling price "regular/original price"

Competitor-based pricing

Setting prices to influence consumer perceptions of themselves and competitors (similar, greater features, better quality)

Price skimming

Appeals to consumers who are willing to pay a premium price to get the innovation first Product or service must be perceived as breaking new ground offering new benefits unavailable in alternative products Some consumers may feel cheated when the prices drop

Seasonal Discounts

Attempt to stimulate demand during off-peak seasons, encourage consumers to buy after the season so sellers can get rid of leftover merchandise, encourage consumers to use services or purchase products year round

Penetration pricing

Builds share, and profit by setting a low initial price Firms must have the capacity to satisfy a rapid demand increase Lower price does not signal high quality If some consumers are willing to pay more for the product, this strategy is not ideal

Price bundling

Bundling a slow selling product with a faster moving item, selling more than one product at a single lower price

Cost of Ownership Method

Consumers may be willing to pay more for a particular product if it is better than a cheaper alternative that needs replacing sooner, over the lifetime the product will eventually cost less to own, the value often depends on how often consumers use the product

Everyday Low Pricing

Continuous retail prices at a level between regular and discount sale prices; not every product is low-priced, but on average, the total purchase will be lower. Saves search costs of finding lowest overall prices

Leader pricing

Enticing customers into the store with the popular aggressively priced item and hoping they will pick up other items while shopping Aim: build store traffic by aggressively pricing a regularly purchased item (often at or just above the store's costs)

Improvement Value Method

Estimates how much more (or less) consumers will pay for a product relative to comparable products (i.e. surveys)

The Price-Quality Relationship

Lacking experience, consumers use price as an indicator of quality For products/brands that consumers have little knowledge about, price becomes crucial

Quantity Discounts for Consumers

Larger quantities usually mean lower prices per ounce, the more you buy the cheaper the unit cost, encourages consumers to purchase larger quantities each time they buy

Rebate

Manufacturer issues, return a portion of the purchase price to the buyer

Price Lining

Marketers establish floor and ceiling prices and set prices within that range to represent distinct quality levels, allows for easy comparison

Price Elasticity of the demand

Measures how changes in a price affect the quantity of the product demanded

Price

Overall sacrifice a consumer is willing to make to acquire a specific product or service

Price signals

Prices set too low may signal poor quality while price set too high might signal low value

Odd prices

Prices that end in odd numbers, may suggest a good deal, may suggest low quality to some consumers, odd prices may be so traditional that sellers are afraid to round them off

Pricing Strategies

Specific to the offering and to the market, each product/service requires its own specific strategy

Elastic market

price sensitive