Chapter Eleven: Pricing Strategies

Roadmap: Previewing the Concepts

• Understanding customer value perceptions and company costs is crucial when setting
prices.

• Identify and define internal and external factors influencing pricing decisions.

• Describe major pricing strategies for imitative and new products.

• Explain how companies maximize profits from the total product mix through pricing.

• Discuss how companies adjust prices for different customers and situations.

• Address key issues in initiating and responding to price changes.

Case Study: Toys 'R' Us - Pricing for Success

Period Key Points

1970s - Toys 'R' Us dominates as a toy retail category killer. - Offers greater product selection and lower prices than small competitors. -
(Past) Experiences explosive growth.

Late - Wal-Mart uses toys as a loss leader , pricing lower than Toys 'R' Us. - Wal-Mart becomes the largest toy retailer.
1990s

Present - Toys 'R' Us attempts price matching but fails, losing sales, profit, and market share. - New ownership closes stores, cuts costs, and
avoids price wars. - Focus shifts to top-selling, higher-margin, exclusive items , store atmosphere, shopper experience, and customer
service.

What Is a Price?

• Narrow Definition: The amount of money charged for a product or service.

• Broad Definition: The sum of all values consumers exchange for the benefits of having or
using the product or service.

Major Considerations in Setting Price

• Customer perceptions of value

• Other internal and external considerations:

• Marketing strategy, objectives, and mix

• Nature of the market and demand

• Competitors' strategies and prices

Customer Value Perceptions

• Customer-oriented pricing:

• Understand how much value consumers place on product benefits.

• Set prices to capture that perceived value.

• Value-based pricing:

• Price based on buyers' perceptions of value, not on seller's cost.

• Includes:

• Good value pricing: Offering the right combination of quality and good service at
a fair price.

• Value-added pricing: Adding value to the product to justify a higher price.

Internal Factors Affecting Pricing Decisions

Factor Description

Company and - Fixed Costs: Costs that do not vary with production or sales level. - Variable Costs: Costs that vary directly with
Product Costs production level.

Marketing - Company must decide on product strategy. - General pricing objectives include: - Survival - Current profit maximization -
Objectives Market share leadership - Product quality leadership

Organizational - Decide who within the organization sets prices. - Varies by company size and type.
Considerations

External Factors Affecting Pricing Decisions

• Competitors' strategies and prices:

• How does the market offering compare?

• Strength and pricing strategies of competitors.

• Influence of competition on price sensitivity.

• Other external factors (not detailed in text but implied as important).

New-Product Pricing Strategies

Market - Set a high price to "skim" revenues layer by layer. - - Product quality and image support higher price. - Low volume costs do not
Skimming Fewer but more profitable sales. negate high price benefits. - Competitors cannot easily enter and undercut
price.

Market - Set a low initial price to penetrate market quickly - Market is highly price sensitive. - Costs fall as sales volume increases. -
Penetration and deeply. - Attracts many buyers and gains market Need to keep competition out or effects are temporary.
share.

Product Mix Pricing Strategies

• Product line pricing: Setting price steps between products based on cost differences,
customer evaluations, and competitors' prices.

• Optional-product pricing: Pricing optional or accessory products sold with the main
product (e.g., ice maker with refrigerator).

• Captive-product pricing: Pricing products that must be used with the main product (e.g.,
replacement cartridges for razors).

• By-product pricing: Pricing low-value by-products to dispose of them (e.g., animal manure).

• Product bundle pricing: Pricing bundles of products sold together (e.g., software, monitor,
PC, printer).

Price Adjustment Strategies

• Discount and allowance pricing:

• Discounts: Cash, quantity, functional, seasonal.

• Allowances: Trade-in, promotional.

• Segmented pricing: Selling at two or more prices not based on cost differences.

• Types: Customer-segment, product-form, location, time.

• Psychological pricing:

• Considers consumer psychology, not just economics.

• Higher prices often perceived as higher quality.

• Price less important when quality can be judged directly.

• Promotional pricing:

• Examples: Low-interest financing, cash rebates, special-event pricing, longer

• Types: FOB-origin, uniform-delivered, zone, basing-point, freight-absorption.

• Dynamic pricing:

• Continuously adjusting prices to meet individual customer and situational needs.

• International pricing:

• Influenced by economic conditions, competition, laws, wholesaling/retailing systems,

Initiating and Responding to Price Changes

Price Change Type Reasons/Conditions

Price Cuts - Excess capacity - Falling market share - Strategy to dominate market through lower costs

Price Increases - Cost inflation - Overdemand

Responses to Price Description

Buyer reactions How customers respond to price changes.

Competitor reactions How competitors respond to price changes.

Firm responses - Reduce price to match competition. - Raise perceived quality. - Improve quality and increase price. - Launch a
low-price "fighting brand".

Rest Stop: Reviewing the Concepts

1. Importance of understanding customer value perceptions and company costs in pricing.

2. Identification and definition of internal and external factors affecting pricing.

3. Description of major pricing strategies for imitative and new products.

4. Explanation of how companies maximize profits from the total product mix.

5. Discussion on how companies adjust prices for different customers and situations.

6. Key issues in initiating and responding to price changes.