Chapter Eleven: Pricing Strategies

Chapter Eleven
Pricing Strategies
Copyright © 2009 Pearson Education, Inc.

Chapter 11- slide 1
Publishing as Prentice Hall
Find mark-up price, unit cost and expected
unit sales if
• Fixed cost= $ 320,000

• Variable cost = $12
• Break even volume = 32,000

Chapter 11- slide 2
Chapter 11- slide 3
Chapter 11- slide 4
Pricing Strategies
Topic Outline
1. New-Product Pricing Strategies

2. Product Mix Pricing Strategies
3. Price Adjustment Strategies
4. Price Changes
5. Public Policy and Pricing

Chapter 11- slide 5
1. New-Product Pricing
Strategies
A. Market-skimming pricing
B. Market-penetration pricing

Chapter 11- slide 6
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

Chapter 11- slide 7
Conditions apply before skimming
• Market skimming makes sense only under
certain conditions. First, the product’s quality
and image must support its higher price, and
enough buyers must want the product at that
price. Second, the costs of producing a
smaller volume cannot be so high that they
cancel the advantage of charging more.
• Finally, competitors should not be able to
enter the market easily and undercut the high
price.

Chapter 11- slide 8
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
Chapter 11- slide 9
Conditions apply before
Penetration
• Several conditions must be met for this low-price
strategy to work. First, the market must be highly
price sensitive so that a low price produces
more market growth. Second, production and
distribution costs must decrease as sales
volume increases. Finally, the low price must
help keep out the competition, and the
penetration pricer must maintain its low-price
position. Otherwise, the price advantage may be
only temporary.

Chapter 11- slide 10
2. Product Mix Pricing
Strategies
Optional- Captive-
Product
product product
line pricing
pricing pricing
Product
By-product
bundle
pricing
pricing

Product Mix Pricing Strategies

Product Mix Pricing Strategies
3. 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

Price Mix Pricing Strategies
4. By-product pricing Setting a price for by products to

help offset the costs of disposing of them and help
make the main product’s price more competitive.
• Turning trash into cash.

Price Mix Pricing Strategies
5. Product bundle pricing combines several products

at a reduced price
For example, fast-food restaurants bundle a burger,

fries, and a soft drink at a “combo” price. Microsoft
Office is sold as a bundle of computer software,
including Word, Excel, PowerPoint, and Outlook.

3. Price-Adjustment Strategies
• Setting the base price for a product is only the start.

The company must then adjust then price to account
for customer and situational differences.
• Companies usually adjust their basic prices to

account for various customer differences and
changing situations.

3. Price-Adjustment Strategies
Discount and
Segmented
allowance
pricing
pricing
Psychological Promotional
pricing pricing
Geographic Dynamic International

pricing pricing pricing

Price-Adjustment Strategies
Discount and allowance pricing reduces prices to reward

customer responses such as paying early or promoting the
product
1. Discounts: A straight reduction in price on purchases during a

stated period of time or of larger quantities.
2. Allowances: Promotional money paid by manufacturers to

retailers in return for an agreement to feature the
manufacturer’s products in some way.

Types of discounts
1. Cash discount (“2/10, net 30,”)
2. Quantity discount (Buy large volume)
3. Functional discount (also called a trade discount):

When trade-channel members do selling, storing, and record
keeping.
4. Seasonal discounts: Price reduction to buyers who buy

merchandise or services out of season.

Types of Allowance
• Trade-in allowances are price reductions given for

turning in an old item when buying a new one. Trade-
in allowances are most common in the automobile
industry
• Promotional allowances are payments or price

reductions that reward dealers for participating in
advertising and sales-support programs.

Pricing Strategies
Segmented pricing: Selling a product or

service at two or more prices based on
differences in customers, products, time,
and locations not differences in costs.

Types of Segmented pricing
1. Customer-segment pricing
2. Product form pricing
3. Location-based pricing
4. Time-based pricing

Customer-segment pricing
• Here different customers pay different prices for the
same product or service.
• For example, museums, movie theaters, and retail

stores may charge lower prices for students and
senior citizens.
• Kohl’s (Department store company at US) offers a 15 percent

discount every Wednesday to “customers aged 60 or above.”
• Walgreens holds periodic Senior Discount Day events, offering

20 percent price reductions to AARP members (38mi
Americans).

Product form pricing
• Under product form pricing, different versions of the

product are priced differently but not according to
differences in their costs. For instance, a round-trip
economy seat on a flight from New York to London
might cost $1,100, whereas a business-class seat on
the same flight might cost $3,400 or more.

Location-based and Time-
based pricing
• Using location-based pricing, a company charges
different prices for different locations, even though
the cost of offering each location is the same.
• E.g. State universities charge higher tuition for out-of-
state students.
•
• Finally, using time-based pricing, a firm varies its
price by the season, the month, the day, and even
the hour.
• E.g. Advance booking of mobile or car or movie ticket

Be careful
• Companies must also be careful not to treat

customers in lower price tiers as second-
class citizens. Otherwise, in the long run, the
practice will lead to customer resentment and
ill will.
• E.g. Passengers in lower-priced coach seats

feel that they’re being ignored or treated
poorly.
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
A lawyer charges $50 per hour and
other charges $500 per hour.
Who’s the better lawyer?

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 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
Cont…
• Price says something about the product. For
example, many consumers use price to judge quality.
A $100 bottle of perfume may contain only $3 worth
of scent, but some people are willing to pay the $100
because this price indicates something special.
• Consumers usually perceive higher-priced products

as having higher quality.

Pricing Strategies
Promotional pricing is when prices are temporarily
priced below list price or cost to increase demand
• Loss leaders (sell at low price)
• Special event pricing (Black Friday)
• Low-interest financing
• Longer warrantees
• Free maintenance
• Limited-time offers, such as online flash sales, can
create buying urgency and make buyers feel lucky to
have gotten in on the deal.

Loss leader strategy prices

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
• Create price war (can’t buy until promotions)
• Constantly reduced prices can erode a
brand’s value in the eyes of customers.
Pricing Strategies
Geographical pricing is used for customers in

different parts of the country or the world
• FOB pricing
• Uniformed-delivery pricing
• Zone pricing
• Basing-point pricing
• Freight-absorption pricing

Pricing Strategies
• FOB (free on board) pricing means that
the goods are delivered and customer paid
the fair based on his location.
• Uniformed delivery pricing is opposite of

FOB pricing. It means the company charges
the same price plus freight to all customers,
regardless of location

• Zone pricing (between FOB and UDP) means
that the company sets up two or more zones
where customers within a given zone pay a
single total price (Zone A, Zone B, and C)
• 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
• E.g. Sabzi or Khajoor Mandi
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

Pricing Strategies
Dynamic pricing is when prices are

adjusted continually to meet the
characteristics and needs of the
individual customer and situations
Inverse of Fixed-price policy

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 Eleven

Copyright © 2009 Pearson Education, Inc.

• Fixed cost= $ 320,000

Copyright © 2010 Pearson Education, Inc.

1. New-Product Pricing Strategies

Copyright © 2010 Pearson Education, Inc.

Copyright © 2010 Pearson Education, Inc.

Copyright © 2010 Pearson Education, Inc.

Copyright © 2010 Pearson Education, Inc.

Copyright © 2010 Pearson Education, Inc.

Copyright © 2010 Pearson Education, Inc.

Copyright © 2010 Pearson Education, Inc.

3. Captive-product pricing involves products

Copyright © 2010 Pearson Education, Inc.

4. By-product pricing Setting a price for by products to

• Turning trash into cash.

Copyright © 2010 Pearson Education, Inc.

5. Product bundle pricing combines several products

For example, fast-food restaurants bundle a burger,

Copyright © 2010 Pearson Education, Inc.

• Setting the base price for a product is only the start.

• Companies usually adjust their basic prices to

Copyright © 2010 Pearson Education, Inc.

Geographic Dynamic International

Copyright © 2010 Pearson Education, Inc.

Discount and allowance pricing reduces prices to reward

1. Discounts: A straight reduction in price on purchases during a

2. Allowances: Promotional money paid by manufacturers to

Copyright © 2010 Pearson Education, Inc.

1. Cash discount (“2/10, net 30,”)

2. Quantity discount (Buy large volume)

3. Functional discount (also called a trade discount):

4. Seasonal discounts: Price reduction to buyers who buy

Copyright © 2010 Pearson Education, Inc.

• Trade-in allowances are price reductions given for

• Promotional allowances are payments or price

Copyright © 2010 Pearson Education, Inc.

Segmented pricing: Selling a product or

Copyright © 2010 Pearson Education, Inc.

Copyright © 2010 Pearson Education, Inc.

• For example, museums, movie theaters, and retail

• Kohl’s (Department store company at US) offers a 15 percent

• Walgreens holds periodic Senior Discount Day events, offering

Copyright © 2010 Pearson Education, Inc.

• Under product form pricing, different versions of the

Copyright © 2010 Pearson Education, Inc.

Copyright © 2010 Pearson Education, Inc.

• Companies must also be careful not to treat

• E.g. Passengers in lower-priced coach seats

Who’s the better lawyer?

Copyright © 2010 Pearson Education, Inc.

• Reference prices are prices that buyers carry in

• Consumers usually perceive higher-priced products

Copyright © 2010 Pearson Education, Inc.

Copyright © 2010 Pearson Education, Inc.

Copyright © 2010 Pearson Education, Inc.

Risks of promotional pricing

Geographical pricing is used for customers in

Copyright © 2010 Pearson Education, Inc.

• Uniformed delivery pricing is opposite of

Copyright © 2010 Pearson Education, Inc.

• Basing point pricing means that a seller

• Freight absorption pricing means the