Chapter 11
Pricing Strategies
Idil Yaveroglu
Lecture Notes
Price Skimming vs. Penetration

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.

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.
Price Skimming
Skimming
Pricing
Strategy
Penetration
Pricing Strategy
Maturity
Growth
Introduction



High initial price for quick ROI
Inelastic demand
Price insensitivity by the market
Decline
Price Skimming
Year
Price
1906
1912
1925
$825
$575
$290
Ford T Model
Price Penetration
Penetration
Pricing
Strategy
Skimming Pricing
Strategy
Maturity
Growth
Introduction



Low initial price with elastic demand
Volume for lower production costs
Imminent competition
Decline
Product Mix Pricing Strategies

Product Line Pricing

Setting price steps between product line items.


Optional-Product Pricing



Price points
Pricing optional or accessory products sold with the main
product
Eg. Cars and accessories, Computer and extras etc.
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
Eg. Disneyland
Captive Product Pricing
Companies like Gillette will often price the razor
at or below cost and make the profit on the
blades
Product Mix Pricing Strategies

By-Product Pricing
 Pricing

low-value by-products to get rid of them
Product Bundle Pricing
 Pricing
bundles of products sold together
Price Adjustment Strategies
Discount / allowance
 Segmented
 Psychological
 Promotional
 Geographical
 International

Discounts and Allowances
 Discounts:
Straight reduction in price on purchases
during a certain time period
 Cash
discount
 Quantity discount
 Functional (trade) discount
 Seasonal discount
 Allowances:
Reward price deductions in return for an
agreement to pay early or other.
 Trade-in allowances
 Promotional
allowances
Segmented Pricing Strategies

Types of segmented pricing
strategies:


Customer-segment
Product-form pricing


Location pricing


Out of state tuition
Time pricing


Winnie the pooh versions
Resorts
Referred to as yield management
when used for fixed capacity

Airlines, cruises, hotels etc.
Movie
theatres,
resorts and
hotels often
use
segmented
pricing for
children
Psychological Pricing





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
Price Quality Relationship
Low cost focus
Differentiation
focus/ quality
price
unique
Lower Prices
Higher Prices
Customers uncertain about brand quality prior to
purchase look to price
 Customers look to price in high risk purchases

Odd-Even Pricing

Odd Even Pricing (Psychological Pricing): The
practice of setting prices a few dollars or cents
below an even number
 Odd-number
prices imply bargain
Gasoline prices: 1.4599
 Oil Change $19.99
 Car Wash $9.99
 Eg.
 Even-number
 Eg.
prices imply quality
Rolex watch for $450
 Ralph Lauren Romance Perfume $65
 Organic Chips $3.00
Promotional Pricing

Temporarily pricing products below the list price or
even below cost

Loss leaders


Special-event pricing



Seasonal items priced low
Cash rebates


Pricing a few items low to lure customers
For purchases completed within a time frame
Low-interest financing, longer warranties, free
maintenance
Promotional pricing can have adverse effects
Promotional Pricing
Promotional Pricing Problems
 Easily
copied by competitors
 Creates deal-prone consumers
 May erode brand’s value
 Not a legitimate substitute for effective strategic
planning
 Frequent use leads to industry price wars which
benefit few firms
Dynamic Pricing

Adjusting prices continually to meet the
characteristics and needs of individual customers
and situations

Eg. Amazon, Dell
Price Changes

Initiate price cuts
when a firm:
 Has
excess capacity
 Faces falling market
share due to price
competition
 Desires to be a market
share leader

Initiate price
increases when a
firm
 can
increase profit
 faces cost inflation
 faces greater demand
than can be supplied
Public Policy and Pricing

Pricing within Channel Levels
 Price-fixing

Competitors cannot 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.
Public Policy and Pricing

Pricing across Channel Levels
 Price
discrimination
 Retail price maintenance
 Deceptive pricing



Bogus reference / comparison pricing
Scanner fraud
Price confusion