Chapter 13: Pricing Concepts and setting the Right Price

Selecting a Pricing Strategy

The marketing managers chosen price strategy defines the initial price and gives direction for price
movements over the length of the product life cycle. therefore the price strategy sets a competitive
price e in a specific market segment.

A firms freedom in pricing a new product and devising a price strategy depends on the prevailing
market conditions and the other elements of the marketing mix

 Price Skimming: Denotes a high price in relation to the prices of competing products or brands.
This strategy is for new products when the product is perceived by the target market as having
unique advantages. As the product progresses through its life cycle, the firm may lower its price
to reach larger market segments. Price Skimming works well when the market is willing to buy
the product for its unique advantages even though it carries an above average price. Firms can
also use price skimming effectively when a product or service is well protected legally, or when
it has in some way blocked entry to competitors. Also used when production cannot be
expanded rapidly due to technology difficulties, shortages or constraints imposed by skills and
time required to produce a product. Successful skimming enables managers to recover its
product development costs quickly(rapid inlfow of cash)
 Penetration Pricing: Charging a relatively low price for a product as a way to reach the mass
market as soon as possible. Low price is designed to capture a large share of the substantial
market, resulting in lower production costs. To reach break-even point , it requires higher sales
volumes than those required by a skimming. Penetration Pricing tends to discourage
competition because it creates a barrier to entry to those competitors who cannot contain input
costs to the same extent. Tends to be effective in a price sensitive market
 Status Quo Pricing: Meeting the competition. Charging a price identical or very close to the
competitors price. Its disadvantage is that the strategy may ignore demand or cost - or both. But
meeting the competition may be the safest route to long-term survival if the firm is
comparatively small.

Legality and Ethics of Price Strategies

Some pricing decisions are subject to government regulation. Marketers should know whether there
are laws that may limit their decision making.

 Price Fixing: Agreement between two or more firms on the price they will charge for a product.
Such practices are illegal.
 Predatory Pricing: The practice of charging a very low price for a product with the intention of
driving competitors out of business or out of the market. Once competitors have been driven
out, the firm raises its prices. Also illegal.