CH 11 Pricing Strategies Additional Considerations

pricing structure ---------------------------------------------- This pricing structure changes over time as products move through their life cycles

A company sets not a single price but rather a ..... that covers its entire mix of products.

discount -are another type of reduction from the list price ------------------------------------------ - a cash discount, a price reduction to buyers who pay their bills promptly ----------------A typical business example is "2/10, net 30," which means that although payment is due within 30 days, the buyer can deduct 2 percent if the bill is paid within 10 days. -A quantity discount is a price reduction to buyers who buy large volumes. -A seller offers a functional discount (also called a trade discount) to trade-channel members who perform certain functions, such as selling, storing, and record keeping. -A seasonal discount is a price reduction to buyers who buy merchandise or services out of season.

A straight reduction in price on purchases during a stated period of time or of larger quantities -is temporary and it is used to generate demand by rewarding the customer

Dynamic pricing ----------------------------------------------- A fixed-price policy—setting one price for all buyers—is a relatively modern idea that arose with the development of large-scale retailing at the end of the nineteenth century. Today, most prices are set this way. However, with advances in digital technologies, many companies are now reversing the fixed-pricing trend.

Adjusting prices continually to meet changing conditions and situations in the marketplace. ------------------------------------------- Services ranging from retailers, airlines, and hotels to sports teams change prices on the fly to optimize sales according to changes in demand, costs, or competitor pricing, adjusting what they charge for specific items on a daily, hourly, or even continuous basis.

Dynamic and personalized pricing

Adjusting prices continually to meet the characteristics and needs of individual customers and situations

International pricing

Adjusting prices for international markets

Personalized pricing ------------------------------------------ These days, online offers and prices might well be based on what specific customers search for and buy, how much they pay for other purchases, what neighborhood they live in, and whether they might be willing and able to spend more. For example, a consumer from a snooty zip code area who recently went online to purchase a first-class ticket to Paris or customize a new Mercedes coupe might later get a higher quote on a new Bose Wave Radio. By comparison, a friend from a less affluent area with a more modest online search and purchase history might receive an offer of 5 percent off and free shipping on the same radio.

Adjusting prices in real time to fit individual customer needs, situations, locations, and buying behaviors. --------------------------------------------- It seems that every seller knows what prices competitors are charging and customers are paying—for anything and everything it sells, minute by minute, and down to the penny.

Product bundle pricing ----------------------------------- part of product mix pricing 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.

Combining several products and offering the bundle at a reduced price. ------------------------------------------------- Pricing bundles of products sold together For example, fast-food restaurants bundle a burger, fries, and a soft drink at a "combo" price

price adjustment strategies ----------------------------------------- --discount and allowance pricing --segmented pricing -- psychological pricing ---In promotional pricing ---geographical pricing --dynamic and personalized pricing ---international pricing

Companies apply a variety of ...... to account for differences in consumer segments and situations.

pricing structure ------------------------------------- Pricing is a dynamic process. Pricing strategies usually change as a product passes through its life cycle.

Companies design a ...... that covers all their products. They change this structure over time and adjust it to account for different customers and situations

market-skimming pricing

In pricing innovative new products, a company can use ......... by initially setting high prices to "skim" the maximum amount of revenue from various segments of the market.

market-penetrating pricing

Or it can use ......... by setting a low initial price to penetrate the market deeply and win a large market share.

FOB-origin pricing -under geographical pricing ------------------------------------ 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.

Pricing in which goods are placed free on board a carrier; the customer pays the freight from the factory to the destination.

Uniform-delivered pricing -under geographical pricing --------------------------------------------------- is the opposite of FOB pricing The freight charge is set at the average freight cost. Suppose this is $150. 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).

Pricing in which the company charges the same price plus freight to all customers, regardless of their location.

Zone pricing -under geographical pricing --------------------------------------------------- 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.

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.

Freight-absorption pricing ------------------------------------------------ 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.

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

Basing-point pricing -under geographical pricing --------------------------------------------------- For example, 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 competition would be eliminated.

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. -regardless of the city from which the goods are actually shipped.

Psychological pricing --------------------------------------- For example, consumers usually perceive higher-priced products as having higher quality. When they can judge the quality of a product by examining it or by calling 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..

Pricing that considers the psychology of prices and not simply the economics; the price is used to say something about the product. ----------------------------------------------------------- Adjusting prices for psychological effect

Discount and allowance pricing

Reducing prices to reward customer responses such as volume purchases, paying early, or promoting the product -------------------------------------------- Most companies adjust their basic price to reward customers for certain responses, such as paying bills early, volume purchases, and off-season buying

Treating customers fairly and making certain that they fully understand prices and pricing terms are an important part of building strong and lasting customer relationships.

Reputable marketers go beyond what is required by law.

Segmented pricing --------------------------------------------- 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, people in the military, and senior citizens 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 $500, whereas a business-class seat on the same flight might cost $6,000 or more. 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 theaters charge matinee pricing during the daytime, and resorts give weekend and seasonal discounts. ----------------------------------------------------------------------- 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 resentment. Companies must also be careful not to treat customers in lower price tiers as second-class citizens

Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. ---------------------------------------------------------- Adjusting prices to allow for differences in customers, products, or locations

Market-skimming pricing (price skimming) ---------------------------------------------- Companies bringing out a new product face the challenge of setting prices for the first time. They can choose between two broad strategies: market-skimming pricing and market-penetration pricing. ------------------------------------------------------------------ Market skimming makes sense only under certain conditions. -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. -Can only do this if you have first-mover advantage and have small volume

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.

Market-penetration pricing -------------------------------------------- Or a firm might use penetration pricing to win customers initially and then turn them into loyal long-term customers. ------------------------------------------------ Several conditions must be met for penetration pricing to work. -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. -------------------------------- You cant keep your prices low because then you wont be meeting your costs and its not sustainable

Setting a low price for a new product in order to attract a large number of buyers and a large market share. ---------------------------------- -pricing sets a low initial price in order to penetrate the market quickly and deeply to attract a large number of buyers quickly to gain market share

By-product pricing ----------------------------------- part of product mix 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. the company seeks a market for these by-products to help offset the costs of disposing of them and help make the price of the main product more competitive. ----------------------------------------------------- Pricing low-value by-products to get rid of or make money on them ex) chicken feet

Captive-product pricing ----------------------------------- part of product mix pricing 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.

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. --------------------------------------------------- Pricing products that must be used with the main product Examples are razor blade cartridges, printer cartridges, single-serve coffee pods, e-books, and video games

Geographical pricing

Setting prices for customers located in different parts of the country or world. ----------------------------------------------------------- Adjusting prices to account for the geographic location of customers

psychological pricing ---------------------------------------- - price adjustment strategy

Sometimes companies consider more than economics in their pricing decisions, using ............. to better communicate a product's intended position

Promotional pricing Promotional pricing, however, can have adverse effects. During most holiday seasons, for example, it's an all-out bargain war. Marketers bombard 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. ------------------------------------------------ may simply offer discounts from normal prices to increase sales and reduce inventories. Sellers also use special-event pricing in certain seasons to draw more customers. Thus, TVs and other consumer electronics are promotionally priced in November and December to attract holiday shoppers into the stores. Limited-time offers, such as online flash sales, can create buying urgency and make buyers feel lucky to have gotten in on the deal. Manufacturers sometimes offer cash rebates to consumers who buy the product from dealers within a specified time 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.

Temporarily pricing products below the list price, and sometimes even below cost, to increase short-run sales. —to create buying excitement and urgency -------------------------------------------------------- Temporarily reducing prices to spur short-run sales

As the competitive environment changes, the company considers when to initiate price changes and when to respond to them.

The company adjusts product prices to reflect changes in costs and demand and account for variations in buyers and situations.

potentially damaging pricing practices within a given level of the channel (price-fixing and predatory pricing) and across levels of the channel (retail price maintenance, discriminatory pricing, and deceptive pricing)

The major public policy issues in pricing include

If a swift reaction is desirable, the firm should preplan its reactions to different possible price actions by competitors. When facing a competitor's price change, the company might: -sit tight, -reduce its own price, -raise perceived quality, -improve quality and raise price, -or launch a low-price fighter brand. --------------------such fighter brands can tarnish the image of the main brand. In addition, although they may attract budget buyers away from lower-priced rivals, they can also take business away from the firm's higher-margin brands.

There are also many factors to consider in responding to a competitor's price changes. The company that faces a price change initiated by a competitor must try to understand the competitor's intent as well as the likely duration and impact of the change.

Buyer reactions to price changes are influenced by the meaning customers see in the price change. Competitors' reactions flow from a set reaction policy or a fresh analysis of each situation. ----------------------------------------------------------- A price increase, which would normally lower sales, may have some positive meanings for buyers. For example, what would you think if Rolex raised the price of its latest watch model? On the one hand, you might think that the watch is even more exclusive or better made. On the other hand, you might think that Rolex is simply being greedy by charging what the traffic will bear. Similarly, consumers may view a price cut in several ways. For example, what would you think if Rolex were to suddenly cut its prices? You might think that you are getting a better deal on an exclusive product. More likely, however, you'd think that quality had been reduced, and the brand's luxury image might be tarnished. A brand's price and image are often closely linked. A price change, especially a drop in price, can adversely affect how consumers view the brand. ------------------- Competitors are most likely to react when the number of firms involved is small, when the product is uniform, and when the buyers are well informed about products and prices. It might think the company is trying to grab a larger market share or that it's doing poorly and trying to boost its sales. Or it might think that the company wants the whole industry to cut prices to increase total demand. However, waiting too long to act might let the competitor get stronger and more confident as its sales increase.

When a firm considers initiating a price change, it must consider customers' and competitors' reactions. There are different implications to initiating price cuts and initiating price increases. ---------------------------------------------- Several situations may lead a firm to consider cutting its price. One such circumstance is excess capacity. Another is falling demand in the face of strong price competition or a weakened economy. In such cases, the firm may aggressively cut prices to boost sales and market share A major factor in price increases is cost inflation. Rising costs squeeze profit margins and lead companies to pass cost increases along to customers. Another factor leading to price increases is over-demand: When a company cannot supply all that its customers need, it may raise its prices, ration products to customers, or both.

product mix

When the product is part of a ....., the firm searches for a set of prices that will maximize the profits from the total mix.

In promotional pricing ---------------------------------------- - price adjustment strategy

a company offers discounts or temporarily sells a product below list price as a special event, sometimes even selling below cost as a loss leader -temporary decrease to increase sales

retail (or resale) price maintenance

a manufacturer cannot require dealers to charge a specified retail price for its product. -is when a manufacturer requires a dealer to charge a specific retail price for its products --------------------------------------------- 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 advertising allowances.

new product pricing, product mix pricing, price adjustments, initiating and reacting to prices changes, and pricing and public policy

additional pricing considerations—

dynamic and personalized pricing ---------------------------------------- - price adjustment strategy

companies adjust prices continually to meet the characteristics and needs of individual customers and situations. -time of day or type of day changes the pricing. Pricing and consumer resentment. ex) disney world lowering the price when there weren't many people and that caused anger

product line pricing, optional-product pricing, captive-product pricing, by-product pricing, and product bundle pricing.

five product mix pricing situations

Price competition

is a core element of our free-market economy. In setting prices, companies usually are not free to charge whatever prices they wish. Marketers must heed federal, state, and local laws govern pricing. In addition, companies must consider broader societal pricing concerns. The most important pieces of legislation affecting pricing are the Sherman Act, the Clayton Act, and the Robinson-Patman Act, initially adopted to curb the formation of monopolies and regulate business practices that might unfairly restrain trade. Because these federal statutes can be applied only to interstate commerce, some states have adopted similar provisions for companies that operate locally.

potentially damaging pricing practices within a given level of the channel (price-fixing and predatory pricing) and across levels of the channel (retail price maintenance, discriminatory pricing, and deceptive pricing)

major public policy issues in pricing

international pricing ---------------------------------------- - price adjustment strategy

means that the company adjusts its price to meet different conditions and expectations in different world markets.

Deceptive pricing ------------------------------------- -Scanner fraud failure of the seller to enter current or sale prices into the computer system -Price confusion results when firms employ pricing methods that make it difficult for consumers to understand what price they are really paying ---------------------------------------- Other deceptive pricing issues include scanner fraud and price confusion. The widespread use of scanner-based computer checkouts has led to increasing complaints of retailers overcharging their customers. Most of these overcharges result from poor management, such as a failure to enter current or sale prices into the system. Other cases, however, involve intentional overcharges.

occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers. -------------------------------------------- This might involve bogus reference or comparison prices, as when a retailer sets artificially high "regular" prices and then announces "sale" prices close to its previous everyday prices. For example, luxury apparel and accessories retailer Michael Kors recently settled a class action lawsuit alleging that it used ..... at its outlet stores. The retailer was charged with tagging products with false "manufacturer's suggested retail prices" to make its supposed discounted prices more appealing when, in fact, the products were sold only in the outlet stores

-Discount and allowance pricing - segmented pricing - psychological pricing - promotional pricing - geographical pricing - dynamic and personalized pricing - international pricing

price adjustments

reference prices - part of psychological pricing ------------------------------------------------------- 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 example, 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. 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 on every item they buy. 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.

prices that buyers carry in their minds and refer to when they look at a given product

allowance -are another type of reduction from the list price -------------------------------------------------------- -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.

promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturer's products in some way -an exchange (automobile and mobile phones)

Robinson-Patman Act ----------------------------------------- -Can't sell at different prices in different neighborhoods since they cant drive to the other -Offering the same product in two locations for radically different prices -Protect vulnerable demographics

seeks to prevent unfair price discrimination by ensuring that sellers offer the same price terms to customers at a given level of trade. ------------------------------------------------------------ For example, every retailer is entitled to the same price terms from a given manufacturer, whether the retailer is REI or a local bicycle shop. However, price discrimination is allowed if the seller can prove that its costs are different when selling to different retailers—for example, that it costs less per unit to sell a large volume of bicycles to REI than to sell a few bicycles to the local dealer. -If the seller manufactures different qualities of the same product for different retailers. The seller has to prove that these differences are proportional.

Price fixing

sellers must set prices without talking to competitors

predatory pricing ----------------------------------- Selling below cost to unload excess inventory is not considered predatory; selling below cost to drive out competitors is.

selling below cost with the intention of punishing a competitor or gaining higher long-run profits by putting competitors out of business.

Product line pricing ----------------------------------- part of product mix 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 -------------------------------------------- Setting prices across an entire product line

product line pricing

the company decides on price steps for the entire set of products it offers

optional products (optional or accessory products included with the main product), -(automobiles - water country (you can pay a bit more to go all season or more and then you can go to both parks) captive products (products that are required for use of the main product), by-products (waste or residual products produced when making the main product), and product bundles (combinations of products at a reduced price).

the company must set prices for

Optional-product pricing ----------------------------------- part of product mix pricing

the pricing of optional or accessory products sold with the main product ----------------------------------------------- For example, a car buyer may choose to order a remote engine start system and premium sound system. Refrigerators come with optional ice makers.

segmented pricing ---------------------------------------- - price adjustment strategy

where the company sells a product at two or more prices to accommodate different customers, product forms, locations, or times. -perfume is listed for one price in one location and then differs at another location. Some are justified and others feel they are discriminated against since its two different prices for people who look a bit different

geographical pricing ---------------------------------------- - price adjustment strategy

whereby the company decides how to price to near or distant customers.

One is discount and allowance pricing ---------------------------------------- - price adjustment strategy

whereby the company establishes cash, quantity, functional, or seasonal discounts, or varying types of allowances.