Chapter Twenty

Pricing Strategies and Tactics

 Objectives

 Identify various pricing strategies

 Discuss differential pricing strategies
 Describe skimming and penetration pricing
 Demonstrate competition’s effect on pricing
 Discuss inflation’s effect on pricing
 Discuss product-line pricing strategies
 Explore psychological aspects of price
 Demonstrate geography’s influence on pricing
 Discuss varied pricing tools
 Overview legal restrictions on pricing
 Identify a major ethical issue related to price
 Pricing Strategies

 Differential pricing strategies

 Competitive pricing strategies
 Product-line pricing strategies
 Psychological and image pricing strategies
 Distribution-based pricing strategies
 Differential pricing
strategies
$24.95
 Different buyers pay
$2
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 Differential Pricing
Strategies

Types:
$24.95

 Variable Pricing $2
2.
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 Second-Market Discounting

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 Periodic discounting

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 Random discounting
 Price Skimming

 Pricing
high, usually at the
beginning of a product’s life
Examples:
 personal computers

 CDs

 electronics
 Competitive Pricing
Strategies

Types:
 Meeting competition
 Undercutting competition
 Price leadership
 Follow the leader
 Penetration pricing
 Predatory pricing
 Traditional
 Inflationary
 Penetration Pricing

 Lowintroductory price to
establish product quickly in
market
When to use:
 Elastic demand
 Economies of scale
 Threat of strong competition
 Product-Line Pricing
Strategies

Captive pricing

Leader and Bait pricing

Price lining $45.99 $39.99 $24.99 $19.99

Price-bundling & Multi-unit

 Psychological & Image
Pricing

Reference Pricing $1.87 Prestige Pricing

$4.95
$9.99
Regular price: $45
$175
$25
Now Only:
$1000
Odd/Even Pricing
 Distribution-Based Pricing

 F.O.B
X
 Delivered
X  Zone
 Uniform
 Basing-point
 Markups

Manufacturer Wholesaler Retailer

Cost $20.00 Cost $25.00 Cost $29.41

20% markup $ 5.00 15% markup $ 4.41 41% markup $20.59
Selling price $25.00 Selling price $29.41 Selling price $50.00
 Establishing Exact Prices

Markup on Cost-Plus
Selling Price Method
and on Cost
Break-even
Analysis

Target Return Average

Pricing Cost
 Establishing Exact Prices

Markup on Selling Price or Costs:

Amount added on
------------------------ = % markup
Selling price
Cost-Plus Method:
Cost + Amount added on = Price
 Establishing Exact Prices

Average-cost method:
All costs
Average cost
------------------------ =
of a single unit
# Units produced

Target Return Pricing:

Fixed costs + Target return
Price
-------------------------------------- =
per unit
Units to be sold
 Break-Even Analysis

Total Revenues
Cost &Revenue ($)

fit
ro
P Profit
s s Total Costs
Lo
Break-
even Fixed Costs
Loss point

Units produced & sold

 Price Adjustments

 Cash discounts
 Trade discounts
 Quantity discounts
 Seasonal discounts
 Chain discounts
 Promotional allowances
Pricing and the Law

ROBINSON-PATMAN ACT OF 1936

Discriminatory prices illegal unless….
 Charged to meet competition
 Justified by cost savings
Pricing and the Law

Fair Trade Practices Act

and their repeal in 1975
 States: manufacturers may
fix final selling price
 Federal gov’t: illegal if
good sold in different state
 Pricing and Ethical issues

Are corporate social

policy and corporate
profit motive
compatible?
 Review

 Identify various pricing strategies

 Discuss differential pricing strategies
 Describe skimming and penetration pricing
 Demonstrate competition’s effect on pricing
 Discuss inflation’s effect on pricing
 Discuss product-line pricing strategies
 Explore psychological aspects of price
 Demonstrate geography’s influence on pricing
 Discuss varied pricing tools
 Overview legal restrictions on pricing
 Identify a major ethical issue related to price