Three main types of pricing strategies
Cost based, Value based, Competitor based
Cost based methods
Determine the final price by starting with cost. Do not recognize the role of of the consumer, or competitor’s. All costs calculated on a per unit basis., Assume costs don’t vary for different levels of production
Competitor based methods
Set prices to signal how prices compare to competition., Often used to gain market share or to exploit a cost advantage they have achieved. Price Wars however lead to an empty victory. Also includes the concept of Premium pricing
Premium pricing (Competitor based methods)
Setting price above competitors to get those consumers who shop for the best
Setting prices that focus on the overall value of the product
Based on Consumer perceptions. Include the Improvement Value Method and the Cost of ownership method.
Improvement Value Method (Value-Based Methods)
Represents an estimate of how much more (or less) consumers are willing to pay for a product relative to other comparable products.
Cost of Ownership (Value-Based Methods)
Consumers may be willing to spend more initially if, over the lifetime, the product will eventually cost less to own
How do marketers justify the high cost of solar energy panels to homeowners?
Psychological factors affecting value based pricing
Reference pricing, Everyday low pricing (EDLP), Odd prices, Price-quality relationship
reference price (Psychological factors affecting value based pricing)
price is the price against which buyers compare the actual selling price of the product and that facilitates their evaluation process.
Everyday low price (Psychological factors affecting value based pricing)
stresses the continuity of the retail price at a level somewhere between the regular, nonsale price and the deep-discount sale prices their competitors may offer.
= reduces customers’ search costs and thus adds value; consumers can spend less of their valuable time comparing prices.
High/Low Prices (Psychological factors affecting value based pricing)
relies on the promotion of sales, during which prices are temporarily reduced to encourage purchases.
Odd prices (Psychological factors affecting value based pricing)
Odd prices may be so traditional that sellers are afraid to round them off
They may suggest a good deal
They may also suggest low quality
The Price-Quality Relationship (Psychological factors affecting value based pricing)
Most inexperienced consumers use price as an indicator of quality
Price becomes crucial when consumers have little knowledge about certain products/brands
The two main New Product Pricing Strategies
Price Skimming, Market Penetration Pricing
Price Skimming (New Product Pricing Strategies)
High initial price for quick ROI
Price insensitivity by the market
Encourages competitors to enter market
Situations where Price Skimming is successful (New Product Pricing Strategies)
Inelastic demand, Unique advantages/Superior product, Legal Protection of Product, Technological Breakthrough, Blocked Entry to Competitors
Market Penetration Pricing (New Product Pricing Strategies)
Low initial price with elastic demand
Attempts to reach mass market
Volume for lower production costs
Effective in price-sensitive market
Meaning of pricing strategy
long term approach to setting prices broadly in an integrative effort (across all of a firm’s products) based on all of the five C’s
Meaning of pricing Tactics
Offer short term methods to focus on a select component of the five C’s such as a competitive threat (5cs competitor’s) or perhaps reducing price in a recession to focus on the customer (5cs customer)
Business to Business Pricing Tactics and Discounts
Seasonal Discounts, Allowances, Cash Discounts, Quality Discounts, Uniform delivered vs. Zone pricing
Seasonal Discounts (Business to Business Pricing Tactics and Discounts)
additional reduction to get retailers to buy merchandise ahead of the normal buying season. (i.e Buy air conditioners before April 1 and get a discount)
Cash Discounts (Business to Business Pricing Tactics and Discounts)
Reduced invoice cost if buyer pays prior to the end of the discount period
Encourages buyers to pay before the discount period ends
Seller benefits either way
Allowances (Business to Business Pricing Tactics and Discounts)
Lowers the final cost in return for specific behavior
Advertising allowance (Business to Business Pricing Tactics and Discounts)
offers a price reduction to channel members if they agree to feature manufacturer’s products in an advertisement.
Slotting allowance (Business to Business Pricing Tactics and Discounts)
fees paid to retailers, simply to get new products into the stores or to gain more or better shelf space for their products.
Quantity Discounts (Business to Business Pricing Tactics and Discounts)
Provides a reduced price according to the amount purchased. Cumulative quality discounts, and Noncumulative quality discounts
Cumulative quality discounts (Business to Business Pricing Tactics and Discounts)
Use the amount purchased over a specified time period and usually involve several transactions
noncumulative quantity discounts (Business to Business Pricing Tactics and Discounts)
Discount based on the amount purchased in a single order, as opposed to a period of several order’s cumulative discount)
Uniform Delivered Vs. Zone Pricing (Business to Business Pricing Tactics and Discounts)
Pricing tactics that are specific to shipping Which represents a major cost for many manufacturers
Uniform Delivered pricing (Business to Business Pricing Tactics and Discounts)
Shipper charges one rate, no matter where the buyer is located, Which makes things simpler for both the seller and the buyer
Zone Pricing (Business to Business Pricing Tactics and Discounts)
Shipping rates are set based on geographical location. Each customer within a zone is charged the same rate.
Pricing Tactics aimed at customers
Price bundling, Price lining, Leader pricing
Price Lining (Pricing Tactics aimed at customers)
Marketers establish a price floor and price ceiling for an entire line of similar products and set prices in between
Allows for easy comparison
Price Bundling (Pricing Tactics aimed at customers)
Bundles together poor selling with high selling items in an overall discount, in order to move the low sellers. Encourage sales of slow moving items. Encourage customer’s stock up to prevent them from purchasing from competition, Encourages trial of new brand, Incentive to purchase
Leader Pricing (Pricing Tactics aimed at customers)
Enticing consumers into the store with popular aggressively priced items and hoping they will pick up other items while shopping
Types of Consumer Price Reductions
Markdowns, Quantity Discounts for Customer’s, Seasonal Discounts, Coupons, Rebates, Leasing
Markdowns (Types of Consumer Price Reductions)
An integral component of high/low pricing strategy
Enables retailers to get rid of slow moving or obsolete merchandise
Used to generate store traffic
Quantity Discounts for Customer’s (Types of Consumer Price Reductions)
most common is the size discount, for example if there are three sizes of a product, you will receive a discount on the whole by purchasing the largest size.
Seasonal Discounts (Types of Consumer Price Reductions)
Price Reductions offered on products and services to stimulate demand (for customers) during off-peak seasons.
Rebates (Types of Consumer Price Reductions)
Provide another form of discounts for consumers off the final selling price. Instead however the manufacturer instead of the retailer issues a refund as a portion of the purchase price returned to the buyer in the form of cash. Has a greater “hassle factor” than a coupon. As much as 90% of customer’s fail to redeem them.
Leasing (Types of Consumer Price Reductions)
Consumers pay a fee to purchase the right to use a product for a specified period of time, they never own the product they are just renting it.
Coupons (Types of Consumer Price Reductions)
Offer a discount on specific items when they are purchased. Issued by manufacturers, and retailers in newspapers etc.
Legal Aspects and Ethics of Pricing
Deceptive or illegal price advertising, Predatory
pricing, Price discrimination, Loss Leader Pricing
Deceptive Reference Price (Legal Aspects and Ethics of Pricing)
Sellers use a deceptive and inflated “regular price” to make a sale price seem especially attractive.
Loss Leader Pricing (Legal Aspects and Ethics of Pricing)
Lowers price below a stores cost, often times done to hurt competition
Bait and Switch (Legal Aspects and Ethics of Pricing)
Advertising a low price item, and then pressuring a customer to purchase a higher priced item by disparaging the lower priced one. Or saying the the lower price item is out of stock.
Predatory Pricing (Legal Aspects and Ethics of Pricing)
Setting prices extremely low in order to drive competition out of business
Price Discrimination (Legal Aspects and Ethics of Pricing)
Mandates that in general prices be charged consistently the same to different groups. Is not always illegal based on the circumstances. Different rules in the B2B and B2C markets. Federal law does not apply to sales to end consumers
Price Fixing (Legal Aspects and Ethics of Pricing)
The practice of colluding with other firms to control prices.Horizontal Price Fixing and Vertical Price fixing.
Horizontal Price Fixing (Legal Aspects and Ethics of Pricing)
When competitors who produce and sell competing products, collude or work together to control prices, effectively taking price out of the equation for consumers Illegal under federal anti trust law.
Vertical Price Fixing (Legal Aspects and Ethics of Pricing)
Occurs when parties at different levels of the same marketing channel collude to control the prices passed on to consumers. (e.g. manufacturers and retailers). Not always illegal.
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