McGraw-Hill/Irwin
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Learning Objectives
LEARNING OBJECTIVES

How should firms set their prices?

What psychological factors affect the way consumers make pricing
decisions?

In what conditions should a price skimming or a market penetration
strategy be used?

What tactics do sellers use to reduce prices to retailers? To
consumers?

How can firms avoid legal and ethical problems with pricing issues.
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Payless Shoes
How do you move from
EDLP to higher prices?
Payless Website
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Pricing Strategies
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Cost-Based Methods
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•
Cost-base pricing
methods start with
cost
•
All costs calculated on
a per unit basis
•
Assumes costs don’t
vary for different
levels of production
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Compared to other pricing methods,
cost-based pricing:
A.
creates greater improvement value.
B.
is less likely to result in price fixing.
C.
has greater influence on reference prices.
D.
results in higher profit margins.
E.
is relatively simple.
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Competitor-Based Methods

Set prices to signal
information of how
product compares with
competitors

Premium pricing
Zillow Website
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Value-Based Methods

Setting prices that
focus on the overall
value of the product

Consumer perceptions
Mercedes-Benz Commercial
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14-8
One of the difficulties associated with ___________ is
it necessitates a great deal of consumer research to be
implemented successfully.
A.
improvement value
B.
premium
C.
consumer-based
D.
reference-based
E.
value-based pricing
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Improvement Value Method
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Costs of Ownership Method

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?
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Check Yourself
1.
What are the three different strategies for
setting pricing?
2.
How can you use value-based strategies
for setting prices?
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Psychological Factors Affecting
Value-Based Pricing Strategies
Reference
pricing
Everyday low
pricing
(EDLP)
Psychology
pricing
strategies
Odd prices
Price-quality
relationship
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How to Pick the Right Diamond
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Consumers’ Use of Reference Prices
Internal
reference
price
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External
reference
price
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Reference Pricing

How do consumers use
reference pricing when
shopping for cars?

How does this ad help
the consumer?
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A __________ is an example of an
external reference price.
A.
improvement value price
B.
odd-even price
C.
consumer’s perception of what a price
should be
D.
“regular price” or “original price”
E.
cost of ownership price
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Everyday Low Pricing vs..
High/Low Pricing
Create value in different ways
EDLP saves search costs of finding lowest overall prices
High/low provides the thrill of the chase for the lowest price
High/low pricing
Everyday low pricing (EDLP)
vs..
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Odd Prices

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
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The Price-Quality Relationship

Most inexperienced
consumers use price as an
indicator of quality

Price becomes crucial when
consumers have little
knowledge about certain
products/brands
Wine ranges in price from under $5 a bottle to over $100K a bottle.
How do you know which to choose?
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Check Yourself
1.
What are some psychological factors that
affect pricing decisions?
2.
Explain the difference between EDLP and
High/Low pricing?
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New Product Pricing
Price skimming
Penetration Pricing
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Check Yourself
1.
What are alternative pricing strategies to
consider in introducing a new product?
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Marketers use a price skimming strategy
to:
A.
recoup high research and development
costs.
B.
to signal high quality.
C.
to limit demand.
D.
test consumers’ price sensitivity.
E.
all of the above.
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Pricing Tactics
Pricing strategy
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Pricing tactics
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Business to Business Pricing Tactics
and Discounts
Seasonal
discounts
Cash
discounts
Quantity
discounts
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Allowances
Uniform
delivered vs.
Zone pricing
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Seasonal Discounts
Designed to spur buyers into purchasing
merchandise early
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Cash 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
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Allowances

Lowers the final cost in
return for specific
behavior

Advertising allowance

Slotting allowance
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Quantity Discounts
Cumulative
quantity
discount
Noncumulative
quantity
discount
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Uniform Delivered vs.. Zone Pricing
Addresses the impact of shipping, which is
often a major cost for manufacturers
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Pricing Tactics Aimed at Consumers
Price
bundling
Price
Leader
lining
pricing
Pricing
Tactics For
Consumers
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Price Lining

Marketers establish a price floor and price ceiling
and set prices in between

Allows for easy comparison
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Price Bundling
Encourage sales of
slow moving items
Encourage stock up
Encourage trial of
new brand
Incentive to
purchase
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Leader Pricing
Enticing consumers
into the store with
popular
aggressively priced
items and hoping
they will pick up
other items while
shopping
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Consumer Price Reductions
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Markdowns

An integral component of high/low pricing
strategy

Enables retailers to get rid of slow moving or
obsolete merchandise

Used to generate store traffic
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Quantity Discounts for Consumers
Size discount
The more you buy the
cheaper the unit cost
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Seasonal Discounts
Encourage consumers to use services or
purchase products year round
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Coupons and Rebates
Coupons
Retailer
handles
Rebate
Manufacturer
issues
Local Car Dealer Commercial
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Leasing
Why is leasing popular
for cars?
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Check Yourself
1.
What are some consumer-oriented pricing
tactics?
2.
What are some retailer-oriented pricing
tactics?
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Legal Aspects and Ethics of Pricing
Deceptive or
illegal price
advertising
Predatory
pricing
Legal Aspects
and Ethics of
Pricing
Price
discrimination
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Price
fixing
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Deceptive or Illegal Price Advertising
Deceptive
reference prices
Loss leader pricing
Bait and switch
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Predatory Pricing
Prices set low with the
intent to drive
competitor out of
business
Illegal
Difficult to prove
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Price Discrimination
Is not always illegal
Different rules in the B2B
and B2C markets
Federal law does not apply
to sales to end consumers
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Price Fixing
Horizontal price
fixing
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Vertical price fixing
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Fraud on eBay
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Check Yourself
1.
What common pricing practices are
considered to be illegal or unethical?
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Glossary
A cumulative quantity discount uses the amount
purchased over a specified time period and
usually involves several transactions.
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Glossary
Horizontal price fixing occurs when competitors
that produce and sell competing products collude,
or work together, to control prices, effectively
taking price out of the decision process for
consumers.
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Glossary
Price skimming is a strategy that occurs in many
markets, and particularly for new and innovative
products or services, and involves consumers
being willing to pay a higher price to obtain the
new product or service.
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Glossary
A reference price is the price against which buyers
compare the actual selling price of the product
and that facilitates their evaluation process.
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Glossary
With a uniform delivered pricing tactic, the shipper
charges one rate, no matter where the buyer is
located.
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Glossary
Vertical price fixing occurs when parties at
different levels of the same marketing channel
collude to control the prices passed on to
consumers.
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