Pricing Strategies: Additional Considerations

Chapter : 11
by Anam Siddiqi
Learning Objectives

11-2 Explain how companies

11-1 Describe the major
find a set of prices that
strategies for pricing new
maximizes the profits from
products.
the total product mix.

11-3 Discuss how companies 11-4 Discuss the key issues

adjust their prices to related to initiating and
consider different types of responding to price
customers and situations. changes.
 Learning
Objective 1
11-1: Describe the major
strategies for pricing new
products.
1. New Product Pricing Strategies

A. MARKET-SKIMMING B. MARKET- PENETRATION

PRICING (PRICE SKIMMING) PRICING
 a. Market-skimming pricing (price skimming):

• 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.
Conditions for Price Skimming:
• Product quality and image must support the
price
• Buyers must want the product at the price
• The costs of producing a smaller volume
cannot be so high that they cancel the
advantage of charging more
• Competitors should not be able to enter the
market easily
 • Setting a low price for a new product in order to attract many buyers and a large market
share.
Conditions for Market Penetration Pricing:
b. Market- • Price sensitive market so that a low price produces more market growth

Penetration • Inverse relationship of production and distribution cost to sales growth

• Low prices must keep competition out of the market , and the penetration price must
Pricing: maintain its low-price position. Otherwise, the price advantage may be only temporary
Examples: IKEA, Netflix
Learning Objective 2
11-2 Explain how companies find a
set of prices that maximizes the
profits from the total product mix
 2. Product Mix Pricing Strategies

b. Optional- c. Captive-
a. Product
product product
line pricing
pricing pricing

e. Product
d. By-product
bundle
pricing
pricing
 2. Product Mix Pricing
Strategies
a) 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. E.g., Hotel room
rates, Car models etc.
b) Optional-product pricing : The pricing of
optional or accessory products along
with a main product. E.g., car sound
system or GPS navigation system.
 2. Product Mix Pricing Strategies

c) Captive-product pricing: Setting a price for products that must be

used along with a main product, such as Printer cartridges, coffee
pods and games for a videogame console.
d) By-product pricing:
• Producing products and services often generates by-products.
• If the by-products have no value and if getting rid of them is costly, this
will affect the pricing of the main product.
• Using by-product pricing, 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. E.g., Fashion and
construction etc.
2. Product Mix
Pricing Strategies
e) Product bundle pricing: Combining
several products and offering the
bundle at a reduced 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.
• For example, fast-food restaurants
bundle a burger, fries, and a soft drink
at a “combo” price
Learning Objective 3

11-3 Discuss how companies adjust their prices to take

into account different types of customers and situations.
 3. Price-Adjustment Strategies

a. Discount c. d.
b. Segmented
and allowance Psychological Promotional
pricing
pricing pricing pricing

g.
e. Geographic f. Dynamic
International
pricing pricing
pricing
 a. Discount and allowance pricing reduces prices to reward customer
responses such as paying early, volume purchases, and off-season
buying.
3. Price- • Discounts (motivate sales)
Adjustment • Allowances (motivate payments)
Strategies b. Segmented pricing: Selling a product or service at two or more prices,
where the difference in prices is not based on differences in costs.
3. Price-Adjustment
Strategies
b. Segmented pricing:

Types:
i. Customer segment pricing e.g., Museums,
restaurants
ii. Product form segment pricing e.g., VIP,
economy class at airlines
iii. Location based pricing, e.g., International
students, cinema or airline seats
iv. Time based pricing varies by season, time,
day, hour etc. e.g., hotels give seasonal or
weekend discounts
Segmented Pricing

• To be effective:
• Market must be possible to segment it
• Segments must show different degrees
of demand
• Costs of segmenting and reaching the
market cannot exceed the extra revenue
obtained from the price difference.
• Must be legal
3. Price-Adjustment Strategies

c. Psychological pricing: Pricing that considers the

psychology of prices and not simply the economics; the
price is used to say something about the product.

Reference prices: Prices that Noting current prices

buyers carry in their minds and Remembering past prices
refer to when they look at a Assessing the buying
given product. situations
3. Price-
Adjustment
Strategies
d. Promotional pricing is when prices are
temporarily priced below list price or
cost to increase demand
• Discounts
• Special event pricing
• Limited time offer sales
• Cash rebates
• Low-interest financing
• Longer warrantees
• Free maintenance
2. Price-Adjustment 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

It erode value of the brand in the eyes of the customers

Creates price wars

 e. Geographical pricing : Setting

3. Price- prices for customers located in

different parts of the country or
world.

Adjustment f. Dynamic pricing: Adjusting prices

continually to meet the

Strategies characteristics and needs of

individual customers and situations.
 g. International pricing is when prices are set in
a specific country based on country-specific

3. Price- factors
• Economic conditions
• Competitive conditions

Adjustment • Laws and regulations

• Infrastructure

Strategies • Consumer preferences and perceptions

• Company marketing objective
3. Price-Adjustment Strategies
 Learning Objective 4
• 11-4 Discuss the key issues
related to initiating and
responding to price changes.
 Price cuts occur due to:

• Excess capacity
4.Price Changes • Decreased demand
• Strong price competition
Initiating
Pricing
Changes Price increase from:

• Cost inflation
• Increased demand
• Lack of supply
 4. Price Changes
Buyer Reactions to Price Changes

• Product is “exclusive”
Price increases • Company greed

• New models will be available

Price cuts • Models are not selling well
• Quality issues
 4. Price Changes
Competitor Reactions to Price Changes

➢Competitors can interpret a company price cut in many ways.

• 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.
• It might think that the company wants the whole industry to cut prices to
increase total demand.
• The company must assess each competitor’s likely reaction.
• If all competitors behave alike, this amounts to analyzing only a typical
competitor.
• In contrast, if the competitors do not behave alike—perhaps because of
differences in size, market shares, or policies—then separate analyses are
necessary.
4. Price Changes
Responding to Competitor 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?
 Solutions:
• Reduce price to match
4. Price competition
Changes • Maintain price but raise the
perceived value through
communications
Responding to • Improve quality and increase
Competitor price
price changes • Launch a lower-price “fighting”
brand
4. Price Changes

Responding to
Competitor price
changes