MKTG 301 -- chapter 11

Market-skimming pricing(initial high price)

setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price; the company makes fewer but more profitable sales eg. Apple. With each new generation of Apple iPhone, iPad, or Mac computer, new models start at a high price then work their way down as newer models are introduced. In this way, Apple skims the maximum amount of revenue from the various segments of the market.

market penetration pricing(low price)

setting a low price for a new product in order to attract a large number of buyers and a large market share The high sales volume results in falling costs, allowing companies to cut their prices even further. Eg. AGIT Global used penetration pricing to quickly build demand for its Wavestorm surf boards:3

captive product pricing

setting a price for products that must be used along with a main product, such as blades for a razor and games for a video-game console Eg. Amazon makes little or no profit on its Kindle readers and tablets. It hopes to more than make up for thin margins through sales of digital books, music, movies, sub-scription services, and other content for the devices. *However, such captive-product costs might make others avoid buying the device in the first place or cause discomfort during use after purchase. In the case of services, captive-product pricing is called two-part pricing. The price of the service is broken into a fixed fee plus a variable usage rate. Thus, at Six Flags and other amusement parks, you pay a daily ticket or season pass charge plus additional fees for food and other in-park features.

competitor reactions to pricing changes

- Why did the competitor change the price? - Is the price cut permanent or temporary? - is the company trying to grab market share? - Is the company doing poorly and trying to increase sales? - Is it a signal to decrease industry prices to stimulate demand? Eg. Price war is never healthy Taco bell started the 99 cent menu, the competitors followed

price discrimination is allowed if the seller:

- can prove that costs differ when selling to different retailers - manufactures different qualities of the same product for different retailers *Price discrimination is legal if your costs are lower. *Walmart sell items with lower prices inn their own stores than on Amazon *The blatant example of price discrimination: Ethnic discrimination

Effective Action Response to price changes

- reduce price to match competition - Maintain price but raise the perceived value through communications - Improve quality and increase price - Launch a lower-price "fighting" brand Fighting brands: appeal to price sensitive consumers and consumers who like store brands Eg. Nordstrom and Nordstrom rack

preconditions for segmented pricing

1) Market must be segmentable 2) Segments must show different degrees of demand 3) Costs of segmenting cannot exceed the extra revenue 4) Must be legal *For segmented pricing to be an effective strategy, certain conditions must exist. The market must be segmentable, and segments must show different degrees of demand. The costs of segmenting and reaching the market cannot exceed the extra revenue obtained from the price difference. Of course, the segmented pricing must also be legal. *Most important, segmented prices should reflect real differences in customers' perceived value. Consumers in higher price tiers must feel that they're getting their extra money's worth for the higher prices paid. Otherwise, segmented pricing practices can cause consumer resent- ment. *For example, buyers reacted negatively when a New York City Department of Consumer Affairs investigation found that women often pay more for female versions of products that are virtually identical to male versions except for gender-specific packaging:8 *Companies must also be careful not to treat customers in lower price tiers as second-class citizens. Otherwise, in the long run, the practice will lead to customer resentment and ill will. For example, in recent years, the airlines have incurred the wrath of frustrated customers at both ends of the airplane. Passengers paying full fare for business- or first-class seats often feel that they are being gouged. At the same time, passengers in lower-priced coach seats feel that they're being ignored or treated poorly. Eg. The DCA compared the prices of male and female versions for nearly 800 products—including children's toys and clothing, adult apparel, personal care products, and home goods. It found that items marketed to girls and women cost an average of 7 percent more than similar items aimed at boys and men. In the hair care category, women paid 48 percent more for products such shampoo, conditioner, and gel; razor cartridges cost women 11 percent more.

product mix pricing

1) Product line pricing: setting prices across an entire product line 2) Optional product pricing: pricing optional or accessory products sold with the main product 3) Captive product pricing: pricing products that must be used with the main product 4) By-product pricing: pricing low-value by-products to get rid of or make money on them 5) Product bundle pricing: pricing bundles of products sold together

Price Adjustment Strategies

1) discount and allowance pricing 2) segmented pricing 3) psychological pricing 4) promotional pricing 5) geographical pricing 6) dynamic pricing 7) international pricing

dynamic pricing

Adjusting prices continually to meet the characteristics and needs of individual customers and situations. Dynamic pricing offers many advantages for marketers. For example, online sellers such as Amazon, L.L.Bean, or Apple can mine their databases to gauge a specific shopper's desires, measure his or her means, check out competitors' prices, and instantaneously tailor offers to fit that shopper's situation and behavior, pricing products accordingly.

product bundle pricing

Combining several products and offering the bundle at a reduced price. Eg. fast-food restaurants bundle a burger, fries, and a soft drink at a "combo" price. - Microsoft Office is sold as a bundle of computer software, including Word, Excel, PowerPoint, and Outlook. - And Comcast, AT&T, Verizon, and other telecommunications companies bundle TV service, phone service, and high-speed internet connections at a low combined price. Price bundling can promote the sales of products consumers might not otherwise buy, but the combined price must be low enough to get them to buy the bundle.

Adverse effect of promotional pricing

During most holiday seasons, for example, it's an all-out bargain war. Marketers carpet-bomb consumers with deals, causing buyer wear-out and pricing confusion. Constantly reduced prices can erode a brand's value in the eyes of customers. And used too frequently, price promotions can create "deal-prone" customers who wait until brands go on sale before buying them. For example, ask most regular shoppers at home goods retailer Bed Bath & Beyond, and they'll likely tell you that they never shop there without a stack of 20-percent-off or 5-dollar-off coupons in hand.

pre conditions for market penetration pricing (low price)

First, the market must be highly price sensitive so that a low price produces more market growth. Second, production and distribution costs must decrease as sales volume increases. Finally, the low price must help keep out the competition, and the penetration pricer must maintain its low-price position. Otherwise, the price advantage may be only temporary.

pre conditions for market skimming(initial high price)

First, the product's quality and image must support its higher price, and enough buyers must want the product at that price. Second, the costs of producing a smaller volume cannot be so high that they cancel the advantage of charging more. Finally, competitors should not be able to enter the market easily and undercut the high price.

FOB origin pricing

Pricing in which goods are placed free on board a carrier; the customer pays the freight from the factory to the destination. At that point, the title and responsibility pass to the customer, who pays the freight from the factory to the destination. Because each customer picks up its own cost, supporters of FOB pricing feel that this is the fairest way to assess freight charges. The disadvantage, however, is that Peerless will be a high-cost firm to distant customers.

uniform delivered pricing

Pricing in which the company charges the same price plus freight to all customers, regardless of their location. Uniform-delivered pricing is the opposite of FOB pricing. Uniform-delivered pricing therefore results in a higher charge to the Atlanta customer (who pays $150 freight instead of $100) and a lower charge to the Compton customer (who pays $150 instead of $250). Although the Atlanta customer would prefer to buy paper from another local paper company that uses FOB-origin pricing, Peerless has a better chance of capturing the California customer.

Zone pricing

Pricing in which the company sets up two or more zones. All customers within a zone pay the same total price; the more distant the zone, the higher the price. Zone pricing falls between FOB-origin pricing and uniform-delivered pricing. The company sets up two or more zones. All customers within a given zone pay a single total price; the more distant the zone, the higher the price. For example, Peerless might set up an East Zone and charge $100 freight to all customers in this zone, a Midwest Zone in which it charges $150, and a West Zone in which it charges $250. In this way, the customers within a given price zone receive no price advantage from the company. For example, customers in Atlanta and Boston pay the same total price to Peerless. The complaint, however, is that the Atlanta customer is paying part of the Boston customer's freight cost.

freight absorption pricing

Pricing in which the seller absorbs all or part of the freight charges in order to get the desired business. the seller who is anxious to do business with a certain customer or geographical area might use freight-absorption pricing. Using this strategy, the seller absorbs all or part of the actual freight charges to get the desired business. The seller might reason that if it can get more business, its average costs will decrease and more than compensate for its extra freight cost. Freight-absorption pricing is used for market penetration and to hold on to increasingly competitive markets.

basing-point pricing

Pricing in which the seller designates some city as a basing point and charges all customers the freight cost from that city to the customer. Using basing-point pricing, the seller selects a given city as a "basing point" and charges all customers the freight cost from that city to the customer location, regardless of the city from which the goods are actually shipped. Eg. Peerless might set Chicago as the basing point and charge all customers $10,000 plus the freight from Chicago to their locations. This means that an Atlanta customer pays the freight cost from Chicago to Atlanta, even though the goods may be shipped from Atlanta. If all sellers used the same basing-point city, delivered prices would be the same for all customers, and price competi- tion would be eliminated.

Allowance Pricing

Promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturer's products in some way. Eg. trade-in allowances are price reductions given for turning in an old item when buying a new one. Trade-in allowances are most common in the automobile industry, but they are also given for other durable goods. Promotional allowances are payments or price reductions that reward dealers for participating in advertising and sales-support programs.

segmented pricing

Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. Eg from class: Regal. Same movie ticket, student discount vs. regular price Eg. Bar. Ladies night, only ladies get discount. Might not be legal in some states. State by State basis Eg. Mini cooper for students only. Eg. Airline and hotels might show different prices for different demographic Segmented pricing takes several forms. Under customer-segment pricing, different customers pay different prices for the same product or service. For example, museums, movie theaters, and retail stores may charge lower prices for students and senior citizens. Kohl's offers a 15 percent discount every Wednesday to "customers aged 60 or better." And Walgreens holds periodic Senior Discount Day events, offering 20 percent price reductions to AARP members and to its Balance Rewards members age 55 and over. "Grab Granny and go shopping!" advises one Walgreens ad. Under product form pricing, different versions of the product are priced differently but not according to differences in their costs. For instance, a round-trip economy seat on a flight from New York to London might cost $1,100, whereas a business-class seat on the same flight might cost $3,400 or more. Although business-class customers receive roomier, more comfortable seats and higher-quality food and service, the dif- ferences in costs to the airlines are much less than the additional prices to passengers. However, to passengers who can afford it, the additional comfort and services are worth the extra charge. Using location-based pricing, a company charges different prices for different locations, even though the cost of offering each location is the same. For instance, state universities charge higher tuition for out-of-state students, and theaters vary their seat prices because of audience preferences for certain locations. Finally, using time-based pricing, a firm varies its price by the season, the month, the day, and even the hour. For example, movie the- aters charge matinee pricing during the daytime, and resorts give weekend and seasonal discounts.

by-product pricing

Setting a price for by-products to help offset the costs of disposing of them and help make the main product's price more competitive. Eg, cheese makers in Wisconsin have discovered a use for their leftover brine, a salt solution used in the cheese-making process. Instead of paying to have it dis- posed of, they now sell it to local city and county highway departments, which use it in conjunction with salt to melt icy roads. In New Jersey, pickle makers sell their leftover brine for similar uses. In Tennessee, distilleries sell off potato juice, a by- product of vodka distillation. And on many highways across the nation, highway crews use a product called Beet Heet, which is made from—you guessed it—beet juice brine by- products. The only side effect of these brine solutions is a slight odor. Says one highway department official about cheese brine, "If you were behind a snow plow, you'd immedi- ately smell it."7

geographical pricing

Setting prices for customers located in different parts of the country or world. Eg. The Peerless Paper Company is located in Atlanta, Georgia, and sells paper products to custom- ers all over the United States. The cost of freight is high and affects the companies from which customers buy their paper. Peerless wants to establish a geographical pricing policy. It is trying to determine how to price a $10,000 order to three specific customers: Customer A (Atlanta), Customer B (Bloomington, Indiana), and Customer C (Compton, California).

product line pricing

Setting the price steps between various products in a product line based on cost differences between the products, customer evaluations of different features, and competitors' prices. Eg. Quicken offers an entire line of financial management software, including Starter, Deluxe, Premier, Home & Business, and Rental Property Manager versions priced at $29.99, $64.99, $94.99, $104.99, and $154.99, respectively. Although it costs Quicken no more to produce the Premier version than the Starter version, many buyers happily pay more to obtain additional Premier features, such as financial-planning, retirement, and investment-monitoring tools. Quicken's task is to establish perceived value differences that support the price differences.

promotional pricing

Temporarily pricing products below the list price, and sometimes even below cost, to increase short-run sales by creating buying excitement and urgency. promotional pricing takes several forms. 1) Discounts from normal prices to increase sales and reduce inventories 2) Special event pricing is used in certain seasons to draw more customers. Eg. TVs and other consumer electronics are promotionally priced in November and December to attract holiday shoppers 3) Limited time offers, such as online flash sales, can create buying urgency and make buyers feel lucky to have gotten in on the deal 4) Cash rebates. Manufacturers sometimes offer cash rebates to consumers who buy the product from dealers within a specified time; the manufacturer sends the rebate directly to the customer. - Eg. Rebates have been popular with automakers and producers of mobile phones and small appliances, but they are also used with consumer packaged goods. - some manufacturers offer low interest financing, longer warranties, or free maintenance to reduce the consumer's "price." This practice has become another favorite of the auto industry - Others might be like Microsoft, who uses promotional pricing to help move customers over humps in the buying decision process. When Microsoft first introduced the Windows 10 operating system, Microsoft ran a trade up promotion offering buyers $200 trade inn on their old devices when purchasing new windows 10 PC. It also offers trade-ins for Apple MacBooks and iMacs

international pricing

involves adjusting prices continually to meet the characteristics and needs of individual customers and situations. travelers are often surprised to find that product price tags vary greatly from country to country. eg. thanks that Chinese import tariffs and consumption taxes, Western luxury goods bought in mainland China carry prices as much as 500 percent higher than in Europe.

retail(or resale) price maintenance

is when a manufacturer requires a dealer to charge a specific retail price for its product, which is prohibited by law. Although the seller can propose a manufacturer's suggested retail price to dealers, it cannot refuse to sell to a dealer that takes independent pricing action, nor can it punish the dealer by shipping late or denying adver- tising allowances. For example, the Florida attorney general's office investigated Nike for allegedly fixing the retail price of its shoes and clothing. It was concerned that Nike might be withholding items from retailers who were not selling its most expensive shoes at prices the company considered suitable. *If the retailers cannot sell out their seasonal products, they would sell the leftovers to Marshalls Or they can destroy them so no one would buy them *If channel have products sold in Costco, Channel would have to control their product prices in Costco as well That's why brands with their own retail stores would be more controllable Selling the excessive inventory to grey markets in lower prices than losing all the inventory that has cash value

deceptive pricing

occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers. - Bogus reference or comparison prices - Scanner fraud and price confusion includes practices such as falsely advertising "factory" or "whole- sale" prices or a large price reduction from a phony high retail "list price." For example, retailers the likes of JCPenney and Kohl's were hit with lawsuits last year alleging that they used inflated original prices. A class-action suit against Macy's accused the retailer of duping customers with a "phantom markdown scheme" and of "purporting to offer steep discounts off of fabricated, arbitrary, and false former or purported original, regular or 'compare at' prices." *The federal trade commission, their main focus is deceptive practices *Eg. P&G used to advertise for its paper towel to be 25 percent more quilt than other brands, which comes out to be deceptive because it doesn't't mean it's 25 percent thicker *Just because it's illegal doesn't mean its enforced

Robinson Patman Act

prevents unfair price discrimination by ensuring that the seller offer the same price terms to customers at a given level of trade.

causes for initiating a price change

price cuts can occur due to: 1) Excess capacity 2) increased market share Price increase can occur due to 1) Cost inflation 2) Increased demand 3) Lack of supply exception: Amazon cuts price just to penetrate market and drive out competition*

public policy and pricing: pricing within channel levels

price fixing: legislation requires sellers to set prices without talking to competitors Predatory pricing: legislation prohibits selling below cost with the intention of punishing a competitor or gaining higher longterm profits by putting competitors out of business *Can't collude with competitors, because it would be price fixing which is illegal *Predatory pricing is when a company use low price to kill competing businesses to get rid of competition. *Lower the price with an int to drive out competitors.

Buyer reactions to pricing changes

price increases: - product is "hot" - Company is greedy Price cuts - new models will be available - Models are not selling well - Quality issues *Companies might shrink the packaging as a way to cut cost

reference prices

prices that buyers carry in their minds and refer to when they look at a given product The reference price might be formed by noting current prices, remembering past prices, or assessing the buying situation. Sellers can influence or use these consumers' reference prices when setting price. For most purchases, consumers don't have all the skill or information they need to figure out whether they are paying a good price. They don't have the time, ability, or inclination to research different brands or stores, compare prices, and get the best deals. Instead, they may rely on certain cues that signal whether a price is high or low. Interestingly, such pricing cues are often provided by sellers, in the form of sales signs, price-matching guarantees, loss-leader pricing, and other helpful hints. Eg. a grocery retailer might place its store brand of bran flakes and raisins cereal priced at $2.49 next to Kellogg's Raisin Bran priced at $3.79. Or a company might offer more expensive models that don't sell very well to make its less expensive but still- high-priced models look more affordable by comparison. Eg. Williams-Sonoma once offered a fancy bread maker at the steep price of $279. However, it then added a $429 model. The expensive model flopped, but sales of the cheaper model doubled.9

optional product pricing

pricing optional or accessory products along with the main product. Eg. a car buyer may choose to order a navigation system and premium entertainment system. Refrigerators come with optional ice makers. And when you order a new laptop, you can select from a bewildering array of processors, hard drives, docking systems, software options, and service plans. Pricing these options is a sticky problem. Companies must decide which items to include in the base price and which to offer as options.

psychological pricing

pricing that considers the psychology of prices and not simply the economics; the price is used to say something about the product consumers usually perceive higher-priced products as having higher quality. When they can judge the quality of a product by examining it or by call- ing on past experience with it, they use price less to judge quality. But when they cannot judge quality because they lack the information or skill, price becomes an important quality signal. Eg. many consumers use price to judge quality. A $100 bottle of perfume may contain only $3 worth of scent, but some people are willing to pay the $100 because this price indicates something special. Eg. who's the better lawyer, one who charges $50 per hour or one who charges $500 per hour? You'd have to do a lot of digging into the respective lawyers' credentials to answer this question objectively; even then, you might not be able to judge accurately. Most of us would simply assume that the higher-priced lawyer is better.