Chapter Eleven
Pricing Strategies
Chapter 11- slide 1
Pricing Strategies
Topic Outline
• New-Product Pricing Strategies
• Product Mix Pricing Strategies
• Price Adjustment Strategies
• Price Changes
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Chapter 11- slide 2
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New-Product Pricing Strategies
Pricing Strategies
• Market-skimming
pricing
• Market-
penetration pricing
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Chapter 11- slide 3
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New-Product Pricing Strategies
Market-skimming pricing is a strategy with high
initial prices to “skim” revenue layers from the
market
• Product quality and image must support the price
• Buyers must want the product at the price
• Costs of producing the product in small volume
should not cancel the advantage of higher prices
• Competitors should not be able to enter the market
easily
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Chapter 11- slide 4
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New-Product Pricing Strategies
Pricing Strategies
Market-penetration 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
• Price sensitive market
• Inverse relationship of production and
distribution cost to sales growth
• Low prices must keep competition out of the
market
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Chapter 11- slide 5
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Product Mix Pricing Strategies
Pricing Strategies
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Chapter 11- slide 6
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Pricing Strategies
Product line pricing takes into account the cost
differences between products in the line,
customer evaluation of their features, and
competitors’ prices
Optional-product pricing takes into account
optional or accessory products along with the
main product
Captive-product pricing involves products that must be used
along with the main product
Two-part pricing involves breaking the price into:
– Fixed fee
– Variable usage fee
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Chapter 11- slide 7
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Product Mix Pricing Strategies
Pricing Strategies
Captive-product pricing
involves products that
must be used along with
the main product
Two-part pricing involves
breaking the price into:
– Fixed fee
– Variable usage fee
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Chapter 11- slide 8
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Price Mix Pricing Strategies
Pricing Strategies
By-product pricing refers to products with
little or no value produced as a result of
the main product. Producers will seek
little or no profit other than the cost to
cover storage and delivery.
Product bundle pricing combines several
products at a reduced price
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Chapter 11- slide 9
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Price Mix Pricing Strategies
Pricing Strategies
Product bundle pricing combines several
products at a reduced price
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Chapter 11- slide 10
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Price-Adjustment Strategies
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Chapter 11- slide 11
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Price-Adjustment Strategies
Pricing Strategies
Discount and allowance pricing reduces
prices to reward customer responses such
as paying early or promoting the product
• Discounts
• Allowances
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Chapter 11- slide 12
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Price-Adjustment Strategies
Pricing Strategies
Segmented pricing is used when a
company sells a product at two or more
prices even though the difference is not
based on cost
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Chapter 11- slide 13
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Price-Adjustment Strategies
Pricing Strategies
Segmented Pricing
To be effective:
• Market must be segmentable
• Segments must show different degrees of
demand
• Watching the market cannot exceed the extra
revenue obtained from the price difference
• Must be legal
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Chapter 11- slide 14
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Price-Adjustment Strategies
Pricing Strategies
Psychological pricing occurs when sellers consider
the psychology of prices and not simply the
economics
Reference prices are prices that buyers carry in
their minds and refer to when looking at a given
product
– Noting current prices
– Remembering past prices
– Assessing the buying situations
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Chapter 11- slide 15
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Price-Adjustment Strategies
Pricing Strategies
Promotional pricing is when prices are temporarily
priced below list price or cost to increase demand
• Loss leaders
• Special event pricing
• Cash rebates
• Low-interest financing
• Longer warrantees
• Free maintenance
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Chapter 11- slide 16
Publishing as Prentice Hall
Price-Adjustment Strategies
Pricing Strategies
Risks of promotional pricing
• Used too frequently, and copies by
competitors can create “deal-prone”
customers who will wait for promotions
and avoid buying at regular price
• Creates price wars
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Chapter 11- slide 17
Publishing as Prentice Hall
Price-Adjustment Strategies
Pricing Strategies
Geographical pricing is used for customers in
different parts of the country or the world
• FOB-origin pricing
• Uniformed-delivered pricing
• Zone pricing
• Basing-point pricing
• Freight-absorption pricing
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Chapter 11- slide 18
Publishing as Prentice Hall
Price-Adjustment Strategies
Pricing Strategies
• FOB-origin (free on board) pricing means
that the goods are delivered to the carrier
and the title and responsibility passes to
the customer
• Uniformed-delivered pricing means the
company charges the same price plus
freight to all customers, regardless of
location
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Chapter 11- slide 19
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Price-Adjustment Strategies
Pricing Strategies
• Zone pricing means that the company sets
up two or more zones where customers
within a given zone pay a single total price
• Basing-point pricing means that a seller
selects a given city as a “basing point” and
charges all customers the freight cost
associated from that city to the customer
location, regardless of the city from which
the goods are actually shipped
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Chapter 11- slide 20
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Price-Adjustment Strategies
Pricing Strategies
• Freight-absorption pricing means the
seller absorbs all or part of the actual
freight charge as an incentive to attract
business in competitive markets
• Dynamic pricing is when prices are
adjusted continually to meet the
characteristics and needs of the individual
customer and situations
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Chapter 11- slide 21
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Price-Adjustment Strategies
Pricing Strategies
Dynamic pricing is when prices
are adjusted continually to
meet the characteristics and
needs of the individual
customer and situations
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Chapter 11- slide 22
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Price-Adjustment Strategies
Pricing Strategies
International pricing is when prices are set in a
specific country based on country-specific factors
• Economic conditions
• Competitive conditions
• Laws and regulations
• Infrastructure
• Company marketing
objective
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Chapter 11- slide 23
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Price Changes
Initiating Pricing Changes
• Price cuts
• Price increases
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Chapter 11- slide 24
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Price Changes
Initiating Pricing Changes
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Chapter 11- slide 25
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Price Changes
Buyer Reactions to Pricing Changes
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Chapter 11- slide 26
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Price Changes
Responding to Price Changes
Questions
– Why did the competitor change the price?
– Is the price cut permanent or temporary?
– What is the effect on market share and profits?
– Will competitors respond?
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Chapter 11- slide 27
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Price Changes
Responding to Price Changes
Solutions
– 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
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Chapter 11- slide 28
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Price Changes
Responding to Price Changes
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Chapter 11- slide 29
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Public Policy and Pricing
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. Many laws
govern the rules of fair play in pricing.
• The Monopolies and Restrictive Trade
Practices (MRTP) Act, 1969
• The Competition Act, 2002
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Chapter 11- slide 30
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Public Policy and Pricing
Salient features of the Competition Act:
• anti-competitive agreements
• prohibition of abuse of dominant
positions by an enterprise
• regulation of combinations such as
acquisitions, mergers, joint ventures,
takeovers, and amalgamations
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Chapter 11- slide 31
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Public Policy and Pricing
• Under the MRTP Act, acts such as
misleading consumers about the prices at
which goods and services are available in
the market and false offers of bargain prices
are considered to be unfair trade practices
• The Consumer Protection Act, 1986
(amended in 2002), also safeguards the
interests of consumers
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Chapter 11- slide 32
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Public Policy and Pricing
Predatory pricing, or selling and providing
services with the intention of reducing
competition or eliminating competitors, is
not permissible under the MRTP Act or
the Competition Act.
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Chapter 11- slide 33
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Public Policy and Pricing
With advancements
in technology,
additional concerns,
such as scanner
fraud, are on the
rise.
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Chapter 11- slide 34
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All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher. Printed in the United States of America.
Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Copyright © 2010 Pearson Education, Inc.
Chapter 11- slide 35
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