Chapter 11: Pricing Strategies: Additional Consideration
Printer manufacturers, Amazon Kindle and shaving companies often use "captive" pricing to make profits. How does it work?
- CAPTIVE PRODUCT PRICING: Setting price for main products low but necessary add-ons high, to attract customers with low initial prices, and then profit once they are trapped o EX: Razor blades, video game consoles, amazon kindel
What is "dynamic pricing" and how does Amazon implement it?
- Dynamic pricing is the process of determining pricing based of off demand at any given moment. Recently companies like amazon have come under fire for such aggressive tactics like rapidly changing the prices of any given good throughout a day. For example, a videogame rapidly dropping from $50 to $15 dollars with dips and rises on one black Friday from Amazon trying to compete with best buy and Walmart to have the lowest price on the market.
How are "shipping costs" used in geographic pricing as a tactic to pass along price discounts or increases? Example might be FOB-origin pricing, uniform-delvivered pricing, zone pricing, basing point pricing or freight absorption pricing.
- FREE ON BOARD (FOB) ORIGIN PRICING: Pricing in which goods are placed free on board a carrier; the customer pays the freight from the factory to destination CONSIDERED FAIREST o AKA Consumers pay for the good at the goods own price and value, and pay for shipping so that shipping costs are regulated - UNIFORM DELIVERY PRICING: Manufacturers charge all customers the same price for shipping regardless of their origin - ZONE PRICING: Pricing in which the company sets up 2 or more zones. All prices are the same for all consumers within a certain zone - 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 a customer - FREIGHT ABSORPTION PRICING: Pricing in which the seller absorbs all or part of the freight charges in order to get the desired business o Used for market penetration
An aggressive approach to eliminate competition is "market-penetration pricing". What is the goal and objective of this strategy?
- MARKET PENETRATION PRICING: Setting a low price on a new product in order to attract a large number of buyers and a large market share. Sacrificing high sale profits to better promote and expand a product, resulting in a larger market share. Hunting a whole lot of small fish - Lower prices Higher sales - Conditions for this to work: o Market must be highly price sensitive, high elasticity o Production and distribution costs must both decrease while sales volume increase o Low price must help keep out competition o Providers must keep price low so as to not lose customers
When a company practices "market-skimming" what are they doing?
- 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; the company has fewer but more profitable sales. Only hunting big fish
Laws prohibit "retail price maintenance"--where a manufacturer requires a dealer price a product at a certain level, creating MRSP. What is MRSP and what is Price Discrimination with channels?
- MSRP: Manufacturer's suggested retail price o Retailors oppose this because it displays the production cost of goods, or the amount of money the producer of a product recommends the product be sold for.
Why are international prices hard to determine and what are the factors that go into selling them?
- Markets around the world greatly vary, so producers need to account for that when selling goods. Generally lower cost goods will greatly vary around the world, but incredibly expensive goods like jet airplanes will cost the same regardless of where they are bought - Tariffs are also a large factor, Italian clothing will be significantly cheaper in Italy because of the increase of supply, and removal of shipping and tariff costs.
As manufacturer likes setting a "reference price" as a psychological marker. How do they use it? A "promotional price" is set but there are often restrictions on them...what are they?
- Most people do not know what the costs of production are so they judge goods based off of their prices, reference prices are used in the sense that a person think most options for a product should cost $X - REFERENCE PRICES: Prices that buyers carry in their minds and refer to when they consider a certain product - PROMOTIONAL PRICING: Temporary pricing products below the list price, and sometimes even below costs, to increase short term sales
Pharma pricing model is often criticized. What are the two sides of the argument for why Pharma prices are set the way they are? What is predatory pricing? Price fixing?
- PREDATORY PRICING: Setting prices lower than cost for a small amount of time to drive competition and then raising prices once many competitors are driven out of the market - PRICE FIXING: When competitors collude and agree on a price that simulates monopolistic conditions in the market - Pharma is known for being both an incredibly expensive and profitable industry. Developing new drugs is extremely expensive
When would you use "price-bundling" prices and what are the good and bad points? What is the difference between passing along discounts or rewarding allowances?
- PRODUCT BUNDLE PRICING: Combining several products and offering the bundle at a reduced price a. Progressive insurance, computer software (Microsoft office), AT&T phone/cable/internet - Pros: Draws in consumers to buy products they initially didn't consider - Cons: Losses in profits for producer
What is the Product Line Pricing? Give an Example
- 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 § A company might offer a multitude of membership options ranging in price and features. Bronze $10, Silver $20, Gold $30, Platinum $50
Psychological pricing is used when a store practices "even/odd pricing" What do they do?
- PSYCHOLOGICAL PRICING: Pricing that considers the psychology of pricing and not simply the economics; the price is used to say something about the product -consider the psychology (not just the economics) behind the price; set a price in odd numbers (499 vs 500)
How does a consumer use "showrooming" to get the best price? Why do retailers hate the price?
- ShowRooming is visiting a physical store and using a product to judge it then going online to buy it Retailors spend money on allowing customers to try multiple different products and help them pick the right one, because of showrooming these costs are not paid back because shoppers go to buy their products from their competition
When a company adopts "high/low" pricing (JC Penney) and battles against EDLP pricing (Walmart) how do they compete?
- They make it appear as though they have high quality products by giving an originally high prices, then change to low prices using discounts. EDLP is just constant low pricing -High/Low: start by selling high price then later selling it on clearance or discounted price (JC P.) -Everyday low price (EDLP)-promising a low price without the need for discounts (Walmart)
Lululemon stores take prestige pricing to the limits. What do they do to get value and such high price products?
- They target a group of people who generally will have extra funds for luxuries like high class workout clothes - They make sure their consumers think that the high prices are necessary for profits, by being one of the few suppliers of quality workout clothes - People assume quality from price -selling quality products that create a status symbol -wearing clothes=a sign of healthy lifestyle
Apple Computer gets a strong premium price for their product and rarely discounts. Their competitors like Xiaomi have created a cheaper alternative for their phone. How should Apple counter this type of competition?
Absolutely not, part of the reason the apple price is so high is because people believe that it should be that high, Apple is branded as the futuristic high performing expensive smartphone that should satisfy all a person's needs, by creating a lower value product, the company risks compromising its brand's power
Segmented pricing is used to pass along lower prices by segment, geography, demographic, age group or sex. Is this fair and why do they do it?
Segmented pricing: selling a product or service at two or more prices, where the differences are not based off of production costs
What are the different considerations when one changes, increase or decrease prices from the customer? From the competition? What is the purpose of the "low-price fighter brand"? How are "store brands" used to serve this function?
Store Brands are used as cheaper alternative to the higher quality name brands, attract consumers for low prices -Customer POV- higher price makes the product seem of higher quality -Competition POV-lower price may signal that the company is trying to boost sales or take a larger part of the market -Low-price fighter brand- add a lower-priced item to compete with other firms -store brands--give the fighter brand the low price it needs to be that way
