Part 4
PRODUCT AND PRICE
DECISIONS
Dr. Chen, Principle of Marketing
10: Product, Branding, and
Packing Concepts
11: Business Markets and Buying
Behavior
12: Developing and Managing
Prices
13: Marketing Channels and
Supply-Chain Management
14: Retailing, Direct Marketing,
and Wholesaling
Dr. Chen, Principle of Marketing
Chapter 12
Pricing Concepts and
Management
Professor Jason C. H. Chen, Ph.D.
School of Business Administration
Gonzaga University
Spokane, WA 99258
chen@jepson.gonzaga.edu
Dr. Chen, Principle of Marketing
Marketing Applications
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 2. Price skimming and penetration pricing are
strategies that are commonly used to set the base
price of a new product. Which strategy is more
appropriate for the following products? Explain.
 Short airline flights between cities in Florida
 A Blu-ray player
 A backpack or book bag with a lifetime warranty
 Season tickets for a newly franchised NBA
basketball team
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Short airline flights; A Blu-ray player; A backpack or book bag with a lifetime
warranty; Season tickets for a newly franchised NBA basketball team
Pricing Strategies Matrix
short airline flights
backpack with a lifetime warranty
PRICE
High
Skimming
Premium
Blu-ray players
Economy
Penetration
new NBA team season tickets
Low
Low
QUALITY
Figure: Pricing Strategies Matrix
Dr. Chen, Principle of Marketing
High
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 Price skimming is charging the highest possible price
that buyers who most desire the product will pay. It is
most appropriate for short airline flights and the
backpack with a lifetime warranty because these
products offer additional utility to consumers.
 Penetration pricing is setting prices below those of
competing brands to penetrate a market and gain a
significant market share quickly. It is most appropriate
for Blu-ray players and new NBA team season tickets
because these products need to gain market share
quickly in order to survive in the market.
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Pricing Strategies Matrix
 Economy pricing

keep costs low and the service basic (no frills), set price low
 Penetration pricing

looking for market share, set price low
 Skim pricing

no competition, go after price-insensitive customers, set price
high
 Premium pricing

unique product, set price high
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 3. Price lining is used to set a limited number of prices for
selected lines of merchandise. Visit a few local retail stores to
find examples of price lining. For what types of products and
stores is this practice most common? For what types of
products and stores is price lining not typical or feasible?

 In general, price lining simplifies customers’ decision making
by holding constant one key variable in the final selection of
style and brand within a line. If the prices are attractive,
customers will concentrate their purchases without responding
to slight changes in price.
 The most common types of products that have price lining are
clothing and some types of food (regular vs. organic
groceries). However, it is not common for high-priced items.
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Internet Exercise
 T-Mobile

 T-Mobile has attempted to position itself as
a low-cost cellular phone service provider.
A person can purchase a calling plan, a
cellular phone, and phone accessories at its
website. Visit the T-Mobile website at
www.t-mobile.com.
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 1. How many different calling plans are
available in your area?

 Students’ answers will vary based on their
locations and T-Mobile’s coverage.
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 2. What type of pricing strategy is T-Mobile using on
its rate plans in your area?

 The most common pricing strategies are differential
pricing, new-product pricing, product-line pricing,
psychological pricing, professional pricing, and
promotional pricing.
 T-Mobile typically uses bait pricing with the intent of
selling other high-priced products and services later,
but students may find other examples. The company
also uses bundle pricing to get customers to buy
packages of services.
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Video Case 12.1
 PRICING AT THE FARMERS’
MARKET
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 Summary

 This case examines the issues associated with direct selling
and pricing for farmers at local markets. Selling directly to
the public enables farmers to build relationships with local
shoppers and encourage repeat buying week after week as
different items are harvested. It also allows farmers to
realize a larger profit margin than if they sold to wholesalers
and retailers because there are no intermediaries. In
addition, consumers are willing to pay a higher price for
top-quality local products, and even more for products that
have been certified organic by a recognized authority.
However, competition between farmers, markets, and
traditional grocery stores is a factor that influences pricing.
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 1. In the pursuit of profits, how might Urban Farmz
use a combination of cost-based, demand-based,
and competition-based pricing for the products it
sells? Explain your answer.

 Encourage students to be creative. Cost-based pricing
adds a dollar amount or percentage to the cost of the
product. Demand-based pricing is based on the level
of demand for the product.
 Competition-based pricing is influenced primarily by
competitors’ prices. Urban Farmz should be using all
of these strategies and tailoring them to specific
products.
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 2. Urban Farmz wants to price the organic soap at $15.95
per bar, while the soap maker prices the same soap at $14
per bar. What perceptions do you think consumers will
have of each price? What recommendations do you have
regarding this price difference?

 Consumers may have different perceptions—they may
believe that the Urban Farmz bar is fairly priced since they
can buy it directly without ordering it online, or they may
believe that Urban Farmz is adding an unfair market.
 However, given the requests of the soap maker, Urban
Farmz should charge the higher price. Consumers may not
want to buy online or pay for shipping, and Urban Farmz
will still make a profit.
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 3. Would you recommend that Urban Farmz use
promotional pricing at the farmers’ markets
where it regularly sells its products? If so, which
techniques would you suggest, and why?

 Generally, Urban Farmz should not use
promotional pricing because it sends a signal to
consumers about the quality of their unique
products. However, bulk discounts or similar
promotions may help stimulate business.
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