Pricing
Strategies
Chapter 12
Objectives
Learn the major strategies for
pricing imitative and new
products.
Understand how companies find
a set of prices that maximizes
the profits from the total
product mix.
12- 1
Objectives
Learn how companies adjust
their prices to take into
account different types of
customers and situations.
Know the key issues related
to initiating and responding to
price changes.
12- 2
c
AT&T Wireless
Price is #1 factor
influencing choice
of cellular
companies
Prices in wireless
industry dropped
25% in three years
Few companies
were profitable
mLife ad campaign
attempted to build the
AT&T wireless brand
so consumers would
consider value rather
than just price
Campaign met with
strong initial success
12- 3
Definitions
Market-Skimming Pricing
 Setting a high price
for a new product to
skim maximum
revenues layer by
layer from segments
willing to pay the
high price.
12- 4
Definitions
Market-Penetration Pricing
Setting a low price
for a new product
in order to attract
a large number of
buyers and a large
market share.
12- 5
Which pricing
strategy does
Dell appear to
use?
12- 6
Product Mix
Pricing Strategies
Product Line Pricing
 Setting price steps between
product line items.

Price points
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Product Mix
Pricing Strategies
Optional-Product Pricing
 Pricing optional or
accessory products sold
with the main product
 Supplemental software,
digital cameras, and
printers sold with a new
PC are examples
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Product Mix
Pricing Strategies
Captive-Product Pricing
 Pricing products that must
be used with the main
product
 High margins are often
set for supplies
 Services: two-part pricing
strategy
 Fixed fee plus a
variable usage rate
12- 9
Discussion Question
Country clubs are an
example of entities
that use a two-part
pricing strategy.
Name some other
examples.
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Product Mix
Pricing Strategies
By-Product
Pricing
 Pricing of
low-value
by-products
to get rid of
them
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Product Mix
Pricing Strategies
Product Bundle
Pricing
 Pricing bundles of
products sold
together
 Common in fast
food industry
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Price Adjustment Strategies
Strategies
Discount /
allowance
Segmented
Psychological
Promotional
Geographical
International
Types of discounts
 Cash discount
 Quantity discount
 Functional (trade)
discount
 Seasonal discount
Allowances
 Trade-in allowances
 Promotional
allowances
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Discussion Question
Hotels offer seasonal
discounts during slow
sales periods.
What are some other
examples of products
or services that could
benefit from a seasonal
pricing strategy?
12- 14
Price Adjustment Strategies
Strategies
Discount /
allowance
Segmented
Psychological
Promotional
Geographical
International
Types of segmented
pricing strategies:




Customer-segment
Product-form pricing
Location pricing
Time pricing
Also called revenue or
yield management
Certain conditions
must exist for
segmented pricing to
be effective
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Price Adjustment Strategies
Conditions Necessary for
Segmented Pricing Effectiveness
Market can be
segmented
Lower priced segments
are not able to resell to
higher priced segments
Competitors can not
undersell segments
charging higher prices
Pricing must be legal
Costs of segmentation
can not exceed
revenues earned
Segmented pricing
must reflect real
differences in buyers’
perceived value
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Price Adjustment Strategies
Strategies
Discount /
allowance
Segmented
Psychological
Promotional
Geographical
International
The price is used to
say something about
the product.
 Price-quality relationship
 Reference prices
 Differences as small as
five cents can be
important
 Numeric digits may have
symbolic and visual
qualities that
psychologically
influence the buyer
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12- 18
Price Adjustment Strategies
Strategies
Discount /
allowance
Segmented
Psychological
Promotional
Geographical
International
Temporarily pricing
products below the list
price or even below
cost
Loss leaders
 Special-event pricing
 Cash rebates
 Low-interest financing,
longer warranties, free
maintenance
Promotional pricing
can have adverse
effects
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Price Adjustment Strategies
Promotional Pricing Strategies
Easily copied by
competitors
Creates deal-prone
consumers
May erode the
brand’s value
Not a substitute for
effective strategic
planning
Frequent use leads
to industry price
wars which benefit
only a few firms
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Discussion Question
How might Home Depot
use various promotional
pricing tactics to engage
shoppers, while
minimizing the potential
negative consequences?
For example, what
products would work well
as loss leaders?
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Price Adjustment Strategies
Strategies
Discount /
allowance
Segmented
Psychological
Promotional
Geographical
International
Types of
geographic pricing
strategies:
 FOB-origin pricing
 Uniform-delivered
pricing
 Zone pricing
 Basing-point pricing
 Freight-absorption
pricing
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Price Adjustment Strategies
Strategies
Discount /
allowance
Segmented
Psychological
Promotional
Geographical
International
Prices charged in a
specific country
depend on many
factors






Economic conditions
Competitive situation
Laws / regulations
Distribution system
Consumer perceptions
Cost considerations
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Figure 12-1:
Assessing & Responding to
Competitor’s Price Changes
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BusinessNow
Metreo Video Clip
Whether or not to
match competitor’s
pricing in an attempt
to win a sale is a
question faced by
many B2B marketers.
Click the picture above to play video
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Price Changes
Initiating Price Cuts is Desirable
When a Firm:
 Has excess
capacity
 Faces falling market
share due to price
competition
 Desires to be a
market share leader
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Price Changes
Price Increases
are Desirable:
 If a firm can
increase profit,
faces cost
inflation, or faces
greater demand
than can be
supplied.
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Price Changes
Methods of Increasing Price
 Eliminating discounts
 Adding higher-priced units to the
product line
Alternatives to Increasing Price
 Reducing product size
 Using less expensive materials
 Unbundling the product
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Price Changes
Buyer
reactions to
price
changes
must be
considered.
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Price Changes
Competitors are more likely to
react to price changes under
certain conditions.
 Number of firms is small
 Product is uniform
 Buyers are well informed
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Price Changes
Respond To Price Changes Only If:
 Market share / profits will be negatively
affected if nothing is changed.
 Effective action can be taken:
Reducing price
 Raising perceived quality
 Improving quality and increasing price
 Launching low-price “fighting brand”

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Scott Towels is a
good example of a
fighting brand. The
value-priced brand
costs less than
P&G’s Bounty but
delivers high
customer
satisfaction.
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Figure 12-2:
Public Policy Issues
in Pricing
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Public Policy and Pricing
Pricing within Channel Levels
 Price-fixing

Competitors can not work with each
other to set prices
 Predatory pricing

Firms may not sell below cost with the
intention of punishing a competitor or
gaining higher long-run profits or
running a competitor out of business.
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Public Policy and Pricing
Pricing across Channel Levels
 Price discrimination
 Retail price maintenance
 Deceptive pricing
Bogus reference / comparison pricing
 Scanner fraud
 Price confusion

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