MGMT 120
Principles of Marketing
Lecture 17:
Pricing Strategy 1
Paying @ the Gas Station
• Observations
– Gas prices increase every Friday, or just before long weekends.
– Every station in town seems to charge the same price.
• Possible reasons
– Price fixing?
– Competitive market / demand / cost?
• What’s in that $2.00 per gallon in California?
– Crude oil: $0.55
– Refining and marketing of the gasoline: $.43
– Dealer cost and profits: $0.07
– Tax~$0.95
What’s Happened to the Gas Stations?
Reports prepared by the federal departments concluded:
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The industry had a poor public image, but
No conspiracy of fixing prices was found.
Pricing Objectives
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Profit oriented
– Target return
– Maximize profits>> PROFIT= (p-c)*q
MGMT 120 Lecture Notes
©Professor Freddy Lee
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Misconception: profit maximization = high price
Sales oriented
– Dollar sales
– Sales volume
– Market share
Bottom line: Sales ≠ Profits
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Status quo pricing
– Avoid price competition
– “Meet competition”
– Nonprice competition
Target
Return
Profit
Oriented
Pricing
Objectives
Sales
Oriented
Maximize
Profits
Dollar or Unit
Sales Growth
Growth in
Market Share
Meeting
Competition
Status Quo
Oriented
Nonprice
Competition
Most Firms Set Specific Pricing Policies to Reach Objectives
One-Price Policy
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Flexible-Price Policy
The same for everyone
OR
Frequently purchased items
Convenient
Low cost
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Different customers,
different prices
Databases make it easier
Salespeople can adjust
prices
Too much cutting can hurt
profits
Maintains goodwill
MGMT 120 Lecture Notes
©Professor Freddy Lee
Pricing over PLC - New Products
Imitative products
– A clear “reference point”
– Positioning and pricing strategies
Attack!
Price
Higher
Higher
Lower
Premium strategy
Quality
Economy strategy
Lower
Avoid!
“Really” new products
• Market skimming pricing
• Set a high price to achieve high profits
• Fewer but more profitable sales
• Reduction of price overtime
– Market penetration pricing
• Set a low price to attract a large number of buyers
• “Entry barrier”
• Introductory Price dealing
MGMT 120 Lecture Notes
©Professor Freddy Lee
Skimming vs Penetration Pricing
Pricing in Competition
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Pure competition – Airlines Industry
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Monopolistic competition
Oligopoly
– Status quo pricing: “conscious parallel action” – Cell Phone plans, Gasoline
– Differentiation enables segment-based pricing
– Avoiding the commodity market
Price Variations
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Discount and allowance
Coupons and Rebates
Geographical pricing
Segmented pricing
Psychological pricing
Promotional pricing
International pricing
Discount and Allowance
• Cash discount
– Framing – cash vs credit card
– To encourage quick payment of bills
– e.g., “2/10, net 30”
• Quantity discount
– A price reduction to buyers who buy in large volume
– Cumulative/non cumulative
– Constraints by the Competition Act
• Equally available to all customers
MGMT 120 Lecture Notes
©Professor Freddy Lee
• Must not exceed cost savings associated with large quantities
Discount and Allowance
• Functional discount (i.e., trade discount)
– Offered to trade channel members
– Same discount to those in the same channel Eg: 5% if buy online
• Seasonal discount
– To encourage purchase out of season Eg: Summer sale for spring products
• EDLP vs Hi-Lo.
• Allowance
– Advertising allowance
– Stocking allowance (shelf space)
– Push money allowance (prizes)
– Trade-in allowance
Geographical Pricing
• FOB (free on board), FAS (Free alongside Ship)
– Customers are responsible for different freight fees
– Geographically separated markets
• Ex Works (Goods at Seller’s premises only)
• Uniform delivered pricing
– Customers pay the same: price plus freight
• Zone pricing
– Combining FOB and uniform delivered pricing
• Freight-absorption pricing (CIF (Cost, Insurance, Freight)
Segmented Pricing
• Sell at two or more prices, but the price difference is not based on cost difference
• Formats
– Customer-segment pricing (Seniors)
– Product-form pricing (Movietickets.com)
– Location pricing (Gasoline)
– Time pricing (Airline Tickets)
Psychological Pricing
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Beyond economics
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Odd/Even:
Price-quality perception
– $2.50 vs $2 dimsum
$300 versus $299.95
Reference prices
– Perception of “savings”
• “Double tagging”
• Misleading comparison price
MGMT 120 Lecture Notes
©Professor Freddy Lee
– “Loss aversion” and the value function.
International Pricing
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Adapts to local environment
Currency concerns
Dumping
– Charges less than cost or less than that in the home market
– Anti-dumping
Legal Issues
• Price fixing
– Competitors collude to raise, lower, or stabilize prices
– Illegal
• Price discrimination – Robinson-Patman Act
– Meet competition OK
– Cost differences OK
• Predatory pricing
– To drive competitors out of the market - Walmart
• Phony List price
Ethical Issues
MGMT 120 Lecture Notes
©Professor Freddy Lee