CHAPTER 15
STRATEGIC PRICING
METHODS
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-1
Strategic Pricing Methods
LEARNING OBJECTIVES
LO1
Identify three methods that firms use to set their
prices.
LO2
Describe the difference between an everyday low
price strategy (EDLP) and a high/low strategy.
LO3
Explain the difference between a price skimming and
a market penetration pricing strategy.
LO4
Identify tactics used to reduce prices to consumers.
LO5
Identify tactics used to reduce prices to businesses.
LO6
List pricing practices that have the potential to
deceive customers.
15-2
McDonald’s
AP Images
15-3
Pricing Strategies
ValueBased
Competitor-Based
Cost-Based
15-4
Cost-Based Methods
•
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
Ryan McVay/Getty Images
15-5
Competition-Based Methods
 Set prices to signal
information of how
product compares
with competitors
 Premium pricing
AP Photo/Matthias Rietschel
Zillow
15-6
Value-Based Methods
 Setting prices that focus
on the overall value of
the product
 Consumer perceptions
Funny Commercial:
Beauty is Nothing without Brains
Courtesy Rolex USA
15-7
Improvement Value Method
15-8
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?
Courtesy Citizen Watch Company
15-9
CHECK YOURSELF
1. What are the three different strategies for
setting pricing?
2. How can you use value-based strategies for
setting prices?
15-10
Pricing Strategies
Everyday
low
pricing
(EDLP)
High/Low
Pricing
15-11
How to Pick the Right Diamond
15-12
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..
Photodisc Collection/Getty Images
©Lars A Niki
15-13
Consumers’ Use of Reference Prices
Internal
reference
price
External
reference
price
Photodisc Collection/Getty Images
15-14
Reference Pricing
 How do consumers
use reference pricing
when shopping for
clothing?
 How does this ad help
the consumer?
Martin Poole/Getty Images
15-15
New Product Pricing Strategies
Market Penetration Pricing
Price skimming
Courtesy Ford Motor Company.
15-16
CHECK YOURSELF
1. Explain the difference between EDLP and
high/low pricing.
2. What pricing strategies should be considered
when introducing a new product?
15-17
Pricing Tactics
Digital Vision/Getty Images
Digital Vision/Getty Images
Pricing strategy
Pricing tactics
15-18
Pricing Tactics Aimed at Consumers
Mark
downs
Leader
Pricing
Quantity
Discounts
Price
Bundling
Seasonal
Discounts
Leasing
Coupons
Rebates
15-19
Markdowns
 An integral
component of
high/low pricing
strategy
 Enables retailers to
get rid of slow moving
or obsolete
merchandise
PRNewsFoto/Regen, Inc./AP Photo.
 Used to generate
store traffic
15-20
Quantity Discounts for Consumers
Size discount
The more you buy the
cheaper the unit cost
©M Hruby
15-21
Seasonal Discounts
Getty Images
©Brand X
Pictures/PunchStock
Tomi/PhotoLink/Getty Images
©Brand X
Pictures/PunchStock
Encourage consumers to use services or
purchase products year round
15-22
Coupons and Rebates
Coupons
• Retailer handles
Rebate
• Manufacturer issues
http://www.youtube.com/watch?v=gGesAa6vDV8
15-23
Leasing
Why is leasing
popular for cars?
Jaguar Land Rover USA LLC
15-24
Price Bundling
Encourage sales of
slow moving items
Encourage stock up
Encourage trial of new
brand
Incentive to purchase
15-25
Leader Pricing
Enticing
consumers into
the store with
popular
aggressively
priced items
and hoping
they will pick
up other items
while shopping
©M Hruby
15-26
Price Lining
 Marketers establish a price floor and price
ceiling and set prices in between
 Allows for easy comparison
©M Hruby
15-27
Business Pricing Tactics and Discounts
Seasonal
discounts
Cash
discounts
Quantity
discounts
Vendor
Allowances
Uniform
delivered vs.
Zone pricing
15-28
Jacobs Stock Photography/Getty Images
PhotoLink/Getty Images
Seasonal Discounts
Designed to spur buyers
into purchasing merchandise early
15-29
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
©Corbis – All Rights Reserved
15-30
 Advertising allowance
 Slotting allowance
Ryan McVary/Getty Images
 Lowers the final cost
in return for specific
behavior
McGraw-Hill Companies, Inc/
Gary He, photographer
Allowances
15-31
Quantity Discounts
Cumulative
quantity discount
Noncumulative
quantity discount
Ryan McVay/Getty Images
15-32
Uniform Delivered vs.. Zone Pricing
Chuan Khoo/Getty Images
Addresses the impact of shipping, which is often a
major cost for manufacturers
15-33
CHECK YOURSELF
1. What are some consumer-oriented pricing
tactics?
2. What are some B2B-oriented pricing tactics?
15-34
Legal Aspects and Ethics of Pricing
Deceptive or
illegal price
advertising
Predatory
pricing
Legal Aspects and
Ethics of Pricing
Price
discrimination
Price
fixing
15-35
Deceptive or Illegal Price Advertising
Deceptive reference
prices
Loss leader pricing
Bait and switch
©Jeff Greenberg/PhotoEdit, Inc.
15-36
Predatory Pricing
Prices set low with
the intent to drive
competitor out of
business
Illegal
Difficult to prove
©Digital Vision/Getty Images
15-37
Price Discrimination
Is not always illegal
©Tom Prettyman/PhotoEdit
Different rules in the B2B and
B2C markets
Federal law does not apply to
sales to end consumers
15-38
Horizontal price fixing
Stockbyte/Punchstock Images
Jacobs Stock Photography/Getty Images
Price Fixing
Vertical price fixing
15-39
Fraud on eBay
15-40
CHECK YOURSELF
1. What common pricing practices are considered
to be illegal or unethical?
15-41