Chapter 11
Pricing Strategies
New Product Pricing Strategies
Market Skimming • Use Under These
Conditions:
Setting a High Price for a
• Product’s Quality and
New Product to “Skim”
Image Must Support Its
Maximum Revenues
Higher Price.
layer by layer from the
segments willing to pay • Costs Can’t be so High
the high price. that They Cancel the
Advantage of Charging
Results in Fewer, But More.
More Profitable Sales. • Competitors Shouldn’t
be Able to Enter Market
Easily and Undercut the
High Price.
New Product Pricing Strategies
Market Penetration • Use Under These Conditions:
• Market Must be Highly
Setting a Low Price for Price-Sensitive so that a
a New Product in Low Price Produces More
Order to “Penetrate” Market Growth.
the Market Quickly • Production/ Distribution
and Deeply. Costs Must Fall as Sales
Volume Increases.
Attract a Large
Number of Buyers and • Must Keep Out
Win a Larger Market Competition & Maintain
Share. Its Low Price Position or
Benefits May Only be
Temporary.
Product Mix Pricing Strategies
Strategy Description
Product Line Setting price steps between line items
Pricing
Optional Product Pricing optional or accessory products
Pricing
Captive Product Pricing products that must be used
Pricing with the main product
By-Product Pricing Pricing low value by-products to get
rid of them
Product Bundle Pricing bundles of products sold
Pricing together
Product Mix-Pricing Strategies:
Product Line Pricing
• Involves setting price steps
between various products in
a product line based on:
• Cost differences between
products,
• Customer evaluations of
different features, and
• competitors’ prices.
Product Mix- Pricing Strategies
• Optional-Product
• Pricing optional or accessory products sold
with the main product.
• Decide which to offer with base price and
which to provide as option
• Captive-Product
• Pricing products that must be used with the
main product.
• Producers often have the base item marked
low but the supplies marked high
• The essence is to capture the customer
Product Mix- Pricing Strategies
• By-Product
• Pricing low-value by-products to get rid of
them and make the main product’s price more
competitive.
• Applicable when
• By products have little or no value
• Are expensive to store and dispose
• Companies should settle for a price that covers
the cost
• Product-Bundling
• Combining several products and offering the
bundle at a reduced price.
Price-Adjustment Strategies
Strategy Description
Discount & Allowance Pricing Reducing prices to reward customer
responses eg. Pay early or at a time, or
promote
Segmented Pricing Adjusting prices to allow for differences in
segments
Psychological Pricing Adjusting prices for psychological effect
Promotional Pricing Temporally reduce prices for short run sales
Geographic Pricing Adjust for geographic location
Dynamic Pricing Adjusting prices to continuously meet the
needs of individual customers & situations
International Pricing Adjusting Prices for International Markets
Discount & Allowance Pricing
• Cash Discount: on time
• Quantity Discount: on quantity
• Functional Discount: on performance
• Seasonal Discount: to balance seasonal demands
Segmented Pricing
• Difference in price is not because of difference in cost.
• To be effective
• The market must be segmentable.
• Segments must have different degrees of demand.
• The prices should reflect the customer’s perceived value.
Customer Segment Location pricing
Product-Form Time Pricing
Customer segment
Segmented Pricing
Segmented Pricing
Product form Location pricing
Segmented Pricing
Time pricing
Psychological Pricing
• Many consumers use price to judge quality.
• When consumers cannot judge due to lack of information or skill, price
becomes an indicator of quality.
• Reference Prices
• Product placement and visibility
• Sale signs
• Prices ending in 99
• Signpost Pricing
• Price Matching guarantees
Psychological Pricing
• Considers the psychology of prices and
not simply the economics.
Odd pricing
Promotional Pricing
• Companies temporarily price their products
below list price to create urgency and excitement.
• If used too frequently, the brand loses the novelty
and also, no one would buy them at regular price
anymore.
• However, since it’s the easiest thing to do, to
increase short run sales, it is quite addictive.
Geographical Pricing
• FOB origin pricing – customer pays the freight from the factory to the destination
• Uniform Delivered Pricing: company charges the same price plus freight for all
customers, regardless of their location
• Zone Pricing: pricing in which the company sets up two or more zones. All customers
within a zone pay the same total price; the more distant the zone, the higher the price
• Basing-Point Pricing: pricing in which the seller designates some city as a basing point
and charges all customers the freight cost from the city to the customer
• Freight Absorption Pricing: Absorb all or part of the cost to penetrate the market or get
desired sales
Dynamic Pricing and Personalized Pricing
• Adjust prices continuously to
meet the characteristics and
needs of customers.
• Particularly effective for
internet marketing.
• Opposite of maintaining fixed
price policies.
International Pricing
• Uniform worldwide price
• Most companies have to
change their pricing
• PEST, infrastructure, laws
• Consumer perceptions
• Price escalation
Price Changes
• Initiating Price cuts
• Excess capacity
• Falling demand
• Dominate market through lower costs
• Initiating Price Increases
• Cost inflation
• Over-demand
• Must be supported by communication
• Use low visibility price moves
• However, whenever possible, company should look for other alternatives without
raising prices
